AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 20, 1996
REGISTRATION NO. 333-02393
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
STRATEGIC DISTRIBUTION, INC.
(Exact name of registrant as specified in its charter)
-------------------
<TABLE>
<S> <C> <C>
DELAWARE 5085 22-1849240
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation) Classification Code Number) Identification No.)
</TABLE>
-------------------
12136 WEST BAYAUD, SUITE 320
LAKEWOOD, COLORADO 80228
(303) 234-1419
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
-------------------
THEODORE R. RIEPLE
PRESIDENT
STRATEGIC DISTRIBUTION, INC.
12136 WEST BAYAUD, SUITE 320
LAKEWOOD, COLORADO 80228
(303) 234-1419
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-------------------
COPIES TO:
<TABLE>
<S> <C>
NEIL NOVIKOFF, ESQ. STUART BRESSMAN, ESQ.
WILLKIE FARR & GALLAGHER ANDREWS & KURTH L.L.P.
ONE CITICORP CENTER 425 LEXINGTON AVENUE
153 EAST 53RD STREET NEW YORK, NEW YORK 10017
NEW YORK, NEW YORK 10022 (212) 850-2800
(212) 821-8000
</TABLE>
-------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
-------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
STRATEGIC DISTRIBUTION, INC.
CROSS REFERENCE SHEET
Cross-reference sheet furnished pursuant to Item 501(b) of Regulation S-K
showing location in the Prospectus of information required by Items of Form S-1.
<TABLE>
<CAPTION>
ITEM IN FORM S-1 LOCATION IN PROSPECTUS
------------------------------------------- -------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus... Facing Page; Cross Reference Page; Outside
Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus............................ Inside Front and Outside Back Cover Pages;
Available Information
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges............. Prospectus Summary; Investment
Considerations
4. Use of Proceeds............................ Prospectus Summary; Use of Proceeds
5. Determination of Offering Price............ Not Applicable
6. Dilution................................... Not Applicable
7. Selling Security Holders................... Principal and Selling Stockholders
8. Plan of Distribution....................... Outside Front Cover Page; Underwriting
9. Description of Securities to be
Registered............................... Prospectus Summary; Description of Capital
Stock
10. Interests of Named Experts and Counsel..... Experts
11. Information with Respect to the
Registrant............................... Prospectus Summary; Investment
Considerations; Use of Proceeds; Dividend
Policy; Capitalization; Selected
Historical and Pro Forma Consolidated
Financial Data; Management's Discussion
and Analysis of Financial Condition and
Results of Operations; Business;
Management; Certain Transactions;
Description of Capital Stock; Shares
Eligible for Future Sale; Legal Matters
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.............................. Not Applicable
</TABLE>
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MAY 20, 1996
[LOGO]
PROSPECTUS
, 1996
8,200,000 SHARES
STRATEGIC DISTRIBUTION, INC.
COMMON STOCK
Of the 8,200,000 shares (the "Shares") of common stock, par value $0.10 per
share (the "Common Stock"), offered hereby (the "Offering"), 7,000,000 shares
are being sold by Strategic Distribution, Inc. (the "Company") and 1,200,000
shares are being sold by certain stockholders of the Company. See "Principal and
Selling Stockholders." The Company will not receive any proceeds from the sale
of the Shares by such selling stockholders.
The Common Stock is listed on the Nasdaq National Market under the symbol
"STRD" . On May 17, 1996, the last reported sale price for the Common Stock as
reported by Nasdaq was $8 3/4 per share. See "Price Range of Common Stock."
SEE "INVESTMENT CONSIDERATIONS" BEGINNING ON PAGE 7 FOR CERTAIN INFORMATION
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS PROCEEDS
TO THE DISCOUNTS AND TO THE TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share............. $ $ $ $
Total(3).............. $ $ $ $
-------------------------------------------------------------------------------------------
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting expenses of the Offering estimated at $625,000, payable by
the Company.
(3) The Company and a stockholder of the Company have granted to the
Underwriters a 30-day option to purchase up to 630,000 and 600,000 shares of
Common Stock, respectively, on the same terms and conditions set forth
above, solely to cover over-allotments, if any. If the Underwriters exercise
only a portion of the over-allotment option, the first 600,000 shares will
be purchased from such stockholder and any remaining shares will be
purchased from the Company. If the Underwriters' over-allotment option is
exercised in full, the total Price to the Public, Underwriting Discounts and
Commissions and Proceeds to the Company will be $ , $ and
$ , respectively, and the proceeds to such stockholder will be
$ . See "Underwriting."
The Shares are offered by the several Underwriters, subject to prior sale,
when, as and if delivered to and accepted by the Underwriters and subject to
various prior conditions, including their right to reject orders in whole or in
part. It is expected that delivery of the Shares will be made in New York, New
York on or about , 1996.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SCHRODER WERTHEIM & CO.
HANIFEN, IMHOFF INC.
<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.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET SYSTEM
OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
In-Plant Store is a registered servicemark of Strategic Distribution, Inc.
On-Site Store, Value Managed Supply, Value Management Study and ISACS are
servicemarks of Strategic Distribution, Inc.
3
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus and is qualified in its entirety by the more detailed
information and financial statements, and notes thereto, contained elsewhere in
this Prospectus. Unless otherwise indicated, the information in this Prospectus
assumes no exercise of the Underwriters' over-allotment option. Prospective
investors are urged to read this Prospectus in its entirety. Unless otherwise
indicated, all information in this Prospectus gives effect to the three percent
(3%) Common Stock dividend paid on December 29, 1995 to stockholders of record
on December 18, 1995.
THE COMPANY
The Company provides proprietary industrial supply procurement solutions to
industrial sites, primarily through its In-Plant Store(R) program. The Company
sells a broad range of industrial supplies, which include maintenance, repair
and operations ("MRO") items, replacement parts and selected classes of
production materials. Industrial supplies are generally items which are low in
price, but are critical to the production process and have historically been
characterized by high procurement costs due to inherent inefficiencies in
traditional industrial supply distribution methods. The Company's In-Plant
Store(R) program, in which large industrial sites outsource the procurement of
industrial supplies to the Company, substantially eliminates these
inefficiencies by reducing both the process and product costs associated with
industrial supply procurement. The Company's In-Plant Store(R) program also
helps customers achieve operational improvements, such as reduced plant
down-time resulting from unavailable parts and manufacturing process
improvements due to better tracking of critical parts. The Company believes that
its In-Plant Store(R) program is superior to both traditional and other
alternative methods of industrial supply distribution.
The Company believes that increased recognition of the inefficiencies
associated with the traditional industrial supply distribution process has
rapidly increased the demand for the Company's In-Plant Store(R) program in
recent years. From January 1994 to April 1996, the number of In-Plant Store(R)
sites operated by the Company increased from 13 to 44. Twenty of these sites
were added from March 1995 to April 1996. In addition, the Company recently
announced the signing of an agreement with a single customer to implement eight
additional In-Plant Store(R) facilities during 1996.
The In-Plant Store(R) program is a comprehensive outsourcing service through
which the Company manages all aspects of industrial supply procurement at a
customer's industrial site. Prior to the implementation of an In-Plant Store(R),
the industrial site would typically obtain industrial supplies from as many as
500 traditional industrial distributors. Through the In-Plant Store(R) program,
the Company becomes responsible for servicing all of its customer's industrial
supply needs by establishing a dedicated, fully integrated store within the
customer's plant. The customer, in turn, purchases virtually all of its
industrial supplies from the In-Plant Store(R). The Company staffs the In-Plant
Store(R) with its own highly trained industrial procurement professionals,
installs proprietary software designed specifically for industrial procurement
and helps determine optimal inventory levels based on the supply needs of each
site. Upon implementation, the In-Plant Store(R) purchases, receives,
inventories and issues industrial supplies directly to plant personnel, delivers
ongoing technical support and provides the customer with a comprehensive invoice
twice per month thereby reducing the administrative burden of traditional
industrial supply. The In-Plant Store(R) generates system-wide savings generally
ranging from 15% to 25% of customers' annual industrial supply purchase costs.
The total United States market for the categories of industrial supplies
offered by the Company is estimated to be approximately $225 billion annually.
Of this total, it is estimated that approximately $20 billion to $30 billion of
industrial supplies are purchased annually by the 15,000 largest industrial
plants in the United States. These plants represent potential customers for the
Company's In-Plant Store(R) program. The Company believes that very few of these
15,000 plants have outsourced their
4
<PAGE>
industrial supply procurement. The Company's In-Plant Store(R) customers span a
broad range of industries, including the automotive, chemicals, construction,
food processing, power generation and natural resource extraction industries,
and the In-Plant Store(R) program is suitable for virtually any industry that
uses industrial supplies. The Company's existing customers include Allied Signal
Inc., The Black and Decker Corporation, Bridgestone/Firestone, Inc., Onan
Corporation, Homelite Inc., Hoechst Celanese Corporation, NACCO Materials
Handling Group Inc. and Westinghouse Electric Corporation.
In addition to its In-Plant Store(R) program, the Company offers several
other proprietary industrial supply procurement solutions aimed at specific
types of customers. Through its Value Managed SupplySM program, the Company is
able to provide some of the features of the In-Plant Store(R) to customers which
are too small to support an In-Plant Store(R) or are not prepared to outsource
completely their industrial supply procurement. For industrial activities such
as construction projects and plant turnarounds, the Company offers its
proprietary On-Site StoreSM program in which customers temporarily outsource the
management of industrial supply procurement to the Company. The Company offers
its Value Managed SupplySM and On-Site StoreSM programs through its network of
branches which also provide traditional industrial supply services to customers
in markets that have historically been underserved by other industrial supply
distributors. The Company also offers other selected outsourcing services for
industrial customers, including the management of industrial laundry, process
control maintenance and plant logistics. The Company delivers the Value Managed
SupplySM program, the On-Site StoreSM program, other outsourcing services and
traditional distribution to over 19,000 customers through a network of 32
branches and ten sales and service offices located throughout the United States
and in Mexico.
The Company's principal executive offices are located at 12136 West Bayaud,
Suite 320, Lakewood, Colorado 80228, and the Company's telephone number is (303)
234-1419.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.......... 7,000,000 shares
Common Stock offered by the Selling
Stockholders............................... 1,200,000 shares(1)
Total.................................. 8,200,000 shares
Common Stock to be outstanding after the
Offering................................... 28,765,957 shares(2)
Use of Proceeds.............................. To repay bank indebtedness, for working
capital, including the opening of In-Plant
Store(R) facilities, for general corporate
purposes and for the possible acquisition of
companies engaged in the business of
providing industrial supply services. See
"Use of Proceeds."
Nasdaq Symbol................................ STRD
</TABLE>
------------
(1) Does not include up to 600,000 shares of Common Stock which may be offered
by a stockholder of the Company upon exercise of the Underwriters'
over-allotment option. See "Principal and Selling Stockholders" and
"Underwriting."
(2) Excludes (i) 2,976,093 shares of Common Stock at March 31, 1996 which were
reserved for issuance under the Company's 1990 Incentive Stock Option Plan
and certain other stock option agreements, 1,727,188 of which were subject
to currently exercisable options and 429,983 of which were subject to
options that were not currently exercisable, and (ii) warrants to purchase
38,625 shares of Common Stock outstanding at March 31, 1996. See Note 14 of
Notes to the Company's Financial Statements included elsewhere in this
Prospectus.
6
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
The following summary consolidated financial and operating data should be
read in conjunction with the Consolidated Financial Statements and Notes thereto
of the Company and the other selected historical and pro forma consolidated
financial data set forth elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------- -----------------------
PRO FORMA(1)
1993 1994 1995 1995 1995 1996
---------- ---------- ---------- ------------ ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................... $37,098 $77,613 $117,493 $120,265 $25,396 $33,316
Income (loss) from
continuing operations.... 202 2,235 1,004 429 540 (1,966)(2)
Income from discontinued
operations(3)............ 100 -- -- -- -- --
Net income (loss).......... 302 2,235 1,004 429 540 (1,966)(2)
PER SHARE DATA:
Primary:
Income (loss) from
continuing operations.. 0.02 0.13 0.05 0.02 0.02 (0.09)(2)
Income from discontinued
operations(3).......... -- -- -- -- -- --
Net income (loss)........ 0.02 0.13 0.05 0.02 0.02 (0.09)(2)
Fully diluted--
Net income (loss)........ 0.02 0.13 0.04 0.02 0.02 (0.09)(2)
AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING.. 12,684,911 16,993,971 21,689,653 21,689,653 21,661,222 21,740,823
OTHER DATA:
Number of operational
In-Plant Store(R)
FACILITIES(4)............. -- 17 31 31 24 37
NUMBER OF IN-PLANT STORE(R)
CUSTOMERS(4)............. -- 12 21 21 14 23
NUMBER OF BRANCHES(4)...... 23 26 32 32 26 32
REVENUES FROM IN-PLANT
STORE(R) FACILITIES...... -- $31,931 $ 53,895 $ 53,895 $ 11,126 $ 16,805
REVENUES FROM
BRANCHES(5).............. $37,098 $45,682 $ 63,598 $ 66,370 $ 14,270 $ 16,511
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------
DECEMBER 31, AS
1995 ACTUAL ADJUSTED(6)
------------ ------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................................... $ 23,599 $19,650 $66,190
Total assets....................................... 48,051 48,881 95,421
Long-term debt obligations......................... 5,903 4,162 1,452
Stockholders' equity............................... 27,391 25,518 74,768
</TABLE>
------------
(1) Includes the applicable pro forma effect of adjustments in 1995 for the
acquisition of American Technical Services Group, Inc. ("ATSG") as if such
acquisition occurred on January 1 , 1995. See Pro Forma Statement of Income
for the year ended December 31, 1995 set forth in the Company's Financial
Statements included elsewhere in this Prospectus.
(2) Includes a restructuring charge of $920,000.
(3) Relates to the Company's discontinuance of its information services
business, which constituted the Company's business prior to July 1, 1990.
(4) As of the end of the period.
(5) Includes all revenues other than those from the Company's In-Plant Store(R)
PROGRAM.
(6) Adjusted to give effect to the sale by the Company of the Shares offered by
the Company hereby (based upon an assumed offering price of $7.50 per share)
and the application of the net proceeds therefrom as described under "Use of
Proceeds."
7
<PAGE>
INVESTMENT CONSIDERATIONS
Each prospective investor should carefully consider all information
contained in this Prospectus and should give particular consideration to the
following factors before deciding to purchase the Shares offered hereby.
MANAGEMENT OF GROWTH
The Company plans substantial expansion in the number of In-Plant Store(R)
facilities which it operates. While the Company believes that there will be
significant demand for its In-Plant Store(R) program, there can be no assurance
that such program will be broadly accepted or that the rate of acceptance will
be consistent with the Company's operating strategy. The opening of a large
number of In-Plant Store(R) facilities will require the Company to hire and
train qualified personnel, to expand its management infrastructure and to invest
substantial amounts of capital. Although the Company has successfully opened 31
In-Plant Store(R) facilities since January 1994, there can be no assurance that
the Company will be able to open additional In-Plant Store(R) facilities, to
hire sufficient qualified personnel, to expand the required control systems or
to secure the capital necessary to accomplish its expansion plans. In addition,
the Company has added, and intends to continue to add, to its personnel in order
to prepare its administrative infrastructure to accommodate future growth. The
cost of such infrastructure is anticipated to depress earnings in the near term,
and if anticipated growth is not attained, future earnings may not be achieved.
The Company may also expand through acquisitions. Although the Company
evaluates business opportunities on a regular basis, there can be no assurance
that the Company will be successful in identifying suitable acquisition
candidates on acceptable terms. In addition, there can be no assurance that
acquired operations will be effectively and profitably integrated into the
Company or that any future acquisitions will not have a material adverse effect
on the Company's operating results, particularly during the period immediately
following such acquisition. Although the Company is continually evaluating
possible acquisitions, it is not currently engaged in any negotiations with
respect thereto.
TERMINATION OF CONTRACTS
The Company's customers generally may terminate the In-Plant Store(R)
agreement for any reason upon 90 days' prior written notice. The termination of
one or more significant contracts could have a material adverse effect on the
Company's operating results. See "Business--In Plant Store(R) Program-- The
In-Plant Store(R) Supply Agreement."
COMPETITION
The Company's business is highly competitive. The Company competes with a
wide variety of traditional industrial supply distributors in each of the
Company's geographic markets. Most of such distributors are small enterprises
selling to customers in a limited geographic area. The Company also competes
with several integrated direct mail suppliers and large warehouse stores, some
of which have significantly greater financial resources than the Company. The
primary areas of competition include price, breadth and quality of product lines
distributed, ability to fill orders promptly, technical knowledge of sales
personnel and, in certain product lines, service and repair capability. The
Company believes that its ability to compete effectively is dependent upon its
ability to deliver value-added procurement solutions to its customers through
its In-Plant Store(R), On-Site StoreSM and Value Managed SupplySM programs, to
respond to the needs of its customers through quality service and to be price-
competitive. The Company believes that other companies, some of which may have
greater resources than the Company, may develop and implement programs which
offer services similar to, and which compete with, the Company's In-Plant
Store(R) program. See "Business--Competition."
8
<PAGE>
DEPENDENCE ON KEY PERSONNEL
The Company's success depends largely on the efforts and abilities of
certain key management employees. The loss of the services of one or more of
such key personnel could have a material adverse effect on the Company's
business and financial results.
CONTROL BY PRINCIPAL STOCKHOLDERS
Following the Offering, the officers and directors of the Company will
beneficially own in the aggregate approximately 34.9% of the outstanding shares
of Common Stock (approximately 32.1% if the Underwriters' over-allotment option
is exercised in full). Because of such share ownership, these stockholders will
continue to have a significant influence on the election of members of the
Company's Board of Directors and the determination of other corporate actions.
See "Principal and Selling Stockholders."
DIVIDEND POLICY
The Company intends to retain its earnings, if any, for use in the
development and expansion of its business and does not presently intend to pay
cash dividends to the holders of Common Stock. Payment of dividends is within
the sole discretion of the Board of Directors and subject to certain limitations
imposed by Delaware law. In addition, the Company's bank credit agreement limits
the Company's ability to pay cash dividends to its stockholders. See "Dividend
Policy."
SHARES ELIGIBLE FOR FUTURE SALE; POTENTIAL FOR ADVERSE EFFECT ON STOCK PRICE
Sales of substantial amounts of Common Stock in the public market following
the Offering could have an adverse effect on the market price of the Common
Stock. Of the 28,765,957 shares of Common Stock to be outstanding after the
Offering, the Company estimates that 16,017,444 shares, including the 8,200,000
shares of Common Stock to be sold in the Offering, will be freely tradeable
without restriction and 12,748,513 shares of Common Stock will be eligible for
sale pursuant to the provisions of Rule 144 under the Securities Act. See
"Shares Eligible for Future Sale" and "Underwriting."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 7,000,000 shares of
Common Stock offered hereby by the Company (based upon an assumed offering price
of $7.50 per share and after payment of underwriting discounts and commissions
and estimated expenses of the Offering) are estimated to be $49,250,000
($53,738,750 if the Underwriters' over-allotment option is exercised in full).
The net proceeds to the Company from the Offering will be used to repay bank
indebtedness, for working capital, including the opening of In-Plant Store(R)
facilities, for general corporate purposes and for the possible acquisition of
companies engaged in the business of providing industrial supply services. On
March 31, 1996, approximately $2.7 million was borrowed, at the prime rate
(8.25%), under the Company's bank credit agreement. The credit facility expires
on January 31, 2000. Although the Company is continually evaluating possible
acquisitions, it is not currently engaged in any negotiations with respect
thereto.
Pending application of the proceeds as described above, the Company intends
to invest such proceeds in short-term interest-bearing securities. The Company
will not receive any proceeds from the sale of shares of Common Stock by the
Selling Stockholders.
DIVIDEND POLICY
The Company has paid no cash dividends on its Common Stock during the fiscal
years ended December 31, 1994 and December 31, 1995 and presently does not
intend to declare any cash dividends on the Common Stock in the foreseeable
future. The payment of cash dividends in the future will depend on the Company's
earnings, financial condition and capital needs and on other factors deemed
relevant by the Board of Directors. It is the current policy of the Board of
Directors to retain earnings to finance the operations and expansion of the
Company's business. The Company's bank credit agreement restricts the Company's
ability to pay cash dividends to its stockholders.
9
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1996 (i) the actual
capitalization of the Company and (ii) the capitalization of the Company as
adjusted for the sale by the Company of 7,000,000 shares of Common Stock offered
hereby based upon an assumed offering price of $7.50 per share and the
application of the net proceeds thereof as described under "Use of Proceeds."
MARCH 31, 1996
------------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
Current portion of long-term debt................ $ 147 $ 147
------- -----------
------- -----------
Long-term obligations:
Note payable................................... $ 2,710 $ --
Long-term debt................................. 1,452 1,452
------- -----------
Total long-term obligations.................. 4,162 1,452
------- -----------
Stockholders' equity:
Preferred stock, par value $0.10 per share.
Authorized: 500,000 shares; issued and
outstanding: none............................ -- --
Common stock, par value $0.10 per share.
Authorized: 25,000,000 shares(1); 21,765,957
shares issued and outstanding; 28,765,957
shares issued and outstanding as
adjusted(2).................................. 2,177 2,877
Additional paid-in capital....................... 33,949 82,499
Accumulated deficit.............................. (10,558) (10,558)
Note receivable from sale of stock............... (50) (50)
------- -----------
Total stockholders' equity................... 25,518 74,768
------- -----------
Total capitalization......................... $29,680 $ 76,220
------- -----------
------- -----------
------------
(1) Authorized Common Stock does not give effect to the amendment to the
Company's Restated Certificate of Incorporation which increased the
authorized Common Stock from 25,000,000 shares to 50,000,000 shares and
which became effective on April 8, 1996.
(2) Excludes (i) 2,976,093 shares of Common Stock at March 31, 1996 which were
reserved for issuance under the Company's 1990 Incentive Stock Option Plan
and certain other stock option agreements, 1,727,188 of which were subject
to currently exercisable options and 429,983 of which were subject to
options that were not currently exercisable, and (ii) warrants to purchase
38,625 shares of Common Stock outstanding at March 31, 1996. See Note 14 of
Notes to the Company's Financial Statements included elsewhere in this
Prospectus.
10
<PAGE>
PRICE RANGE OF COMMON STOCK
The Common Stock is quoted on the Nasdaq National Market ("NNM") under the
symbol "STRD". Prior to October 6, 1994, the Common Stock traded on the Nasdaq
SmallCap Market. Prior to March 16, 1994, the Common Stock was not regularly
quoted on any national market quotation system.
The following table sets forth the high and low sale prices of the Common
Stock on the NNM or the Nasdaq SmallCap Market, as the case may be, in 1994 and
1995 for the periods indicated. These prices have not been adjusted to reflect
the three percent (3%) Common Stock dividend paid on December 29, 1995 to
stockholders of record on December 18, 1995.
HIGH LOW
---- ----
Fiscal Year Ended December 31, 1994:
First Quarter...................................... $ 5 1/4 $ 3 3/4
Second Quarter..................................... 5 3 3/4
Third Quarter...................................... 5 3 3/4
Fourth Quarter..................................... 5 1/8 3
Fiscal Year Ended December 31, 1995:
First Quarter...................................... $ 5 $ 3 3/4
Second Quarter..................................... 4 15/16 3 1/16
Third Quarter...................................... 6 3/8 4 1/16
Fourth Quarter..................................... 7 7/8 5 5/8
Fiscal Year Ending December 31, 1996:
First Quarter...................................... $ 8 1/4 $ 5 5/8
Second Quarter (through May 17, 1996).............. 8 7/8 5 3/4
On May 17, 1996, the last reported sale price for the Common Stock as
reported by Nasdaq was $8 3/4 per share. As of March 31, 1996, there were
approximately 1,500 holders of record of the Common Stock.
11
<PAGE>
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical and pro forma
consolidated financial data for the periods indicated. Such data is qualified by
reference to, and should be read in conjunction with, the Company's Financial
Statements and the notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
The statement of operations data for the years ended December 31, 1991,
1992, 1993, 1994 and 1995 and the balance sheet data as of December 31, 1991,
1992, 1993, 1994 and 1995 are derived from the Company's audited consolidated
financial statements. The Company's consolidated financial statements as of
December 31, 1994 and 1995 and for the years ended December 31, 1993, 1994 and
1995 have been audited by KPMG Peat Marwick LLP, independent certified public
accountants, as indicated in their report thereon which appears elsewhere in
this Prospectus. The information for the three months ended March 31, 1995 and
1996 has been derived from the Company's unaudited financial statements. In the
opinion of management, such unaudited consolidated financial statements include
all adjustments (consisting only of normal, recurring accruals) necessary for a
fair presentation of financial position and results of operations. The pro forma
and as adjusted data are provided for informational purposes only and the pro
forma data should not be construed to be indicative of what results would have
been, or what results may be in the future, had the transaction referred to
therein been consummated as of the beginning of the year presented.
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------------------------------- ----------
PRO FORMA(1)
1991 1992 1993 1994 1995 1995 1995
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................... $25,987 $31,025 $37,098 $77,613 $117,493 $120,265 $25,396
Gross profit............... 6,965 8,293 10,161 18,228 25,898 26,262 5,853
Operating income (loss).... (317) 327 639 2,202 1,959 1,386 903
Income (loss) from
continuing operations.... 404(3) 63 202 2,235 1,004 429 540
Income from discontinued
operations(4)............ 100(5) 165 100 -- -- -- --
Net income (loss).......... 554(3) 228 302 2,235 1,004 429 540
PER SHARE DATA:
Primary:
Income (loss) from
continuing operations... 0.03(3) 0.01 0.02 0.13 0.05 0.02 0.02
Income from discontinued
operations(4).......... 0.01 0.01 -- -- -- -- --
Net income (loss)........ 0.04(3) 0.02 0.02 0.13 0.05 0.02 0.02
Fully Diluted--
Net income (loss)........ 0.04(3) 0.02 0.02 0.13 0.04 0.02 0.02
AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING... 12,488,873 12,541,784 12,684,911 16,993,971 21,689,653 21,689,653 21,661,222
OTHER DATA:
Number of operational
In-Plant Store(R)
FACILITIES(6)............... -- -- -- 17 31 31 24
NUMBER OF IN-PLANT STORE(R)
CUSTOMERS(6)............. -- -- -- 12 21 21 14
NUMBER OF BRANCHES(6)...... 13 20 23 26 32 32 26
REVENUES FROM IN-PLANT
STORE(R) FACILITIES...... -- -- -- $31,931 $53,895 $53,895 $11,126
REVENUES FROM
BRANCHES(7).............. $25,987 $31,025 $37,098 $45,682 $63,598 $66,370 $14,270
<CAPTION>
1996
<S> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................... $33,316
Gross profit............... 7,083
Operating income (loss).... (1,877)(2)
Income (loss) from
continuing operations.... (1,966)(2)
Income from discontinued
operations(4)............ --
Net income (loss).......... (1,966)(2)
PER SHARE DATA:
Primary:
Income (loss) from
continuing operations... (0.09)(2)
Income from discontinued
operations(4).......... --
Net income (loss)........ (0.09)(2)
Fully Diluted--
Net income (loss)........ (0.09)(2)
AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING... 21,740,823
OTHER DATA:
Number of operational
In-Plant Store(R)
FACILITIES(6).......... 37
NUMBER OF IN-PLANT STORE(R)
CUSTOMERS(6)............. 23
NUMBER OF BRANCHES(6)...... 32
REVENUES FROM IN-PLANT
STORE(R) FACILITIES...... $16,805
REVENUES FROM
BRANCHES(7).............. $16,511
</TABLE>
(Footnotes on following page)
12
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------------------------------------- ----------------------
AS
ADJUSTED(8)
1991 1992 1993 1994 1995 1996 1996
------ ------- ------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................ $3,854(9) $ 4,464 $ 4,978 $17,902 $23,599 $19,650 $66,190
Total assets............................... 9,056 13,003 14,926 37,408 48,051 48,881 95,421
Long-term debt obligations................. 3,253(9) 4,882 5,949 1,618 5,903 4,162 1,452
Stockholders' equity....................... 2,738 3,116 3,448 24,721 27,391 25,518 74,768
</TABLE>
------------
(1) Includes the applicable pro forma effect of adjustments in 1995 for the
acquisition of ATSG as if such acquisition occurred on January 1, 1995. See
Pro Forma Statement of Income for the year ended December 31, 1995 set forth
in the Company's Financial Statements included elsewhere in this Prospectus.
(2) Includes a restructuring charge of $920,000.
(3) Includes $1,000,000 of proceeds from a key-man life insurance policy.
(4) Relates to the Company's discontinuance of its information services
business, which constituted the Company's business prior to July 1, 1990.
(5) Net of $50,000 in income taxes.
(6) As of the end of the period.
(7) Includes all revenues other than those from the Company's In-Plant Store(R)
PROGRAM.
(8) Adjusted to give effect to the sale by the Company of the Shares offered by
the Company hereby (based upon an assumed offering price of $7.50 per share)
and the application of the net proceeds therefrom as described under "Use of
Proceeds."
(9) Current portion of note payable to bank in 1991 of $3,083,000 has been
excluded from working capital and included in long-term debt obligations.
This debt was subsequently refinanced.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company provides proprietary industrial supply procurement solutions to
industrial sites, primarily through its In-Plant Store(R) program. The Company
became a provider of industrial supply services in July 1990. The Company
conducts its operations primarily through its four subsidiaries, SafetyMaster
Corporation ("SafetyMaster"), acquired on July 9, 1990, Lewis Supply (Delaware),
Inc. ("Lewis Supply"), acquired on August 28, 1992, Industrial Systems
Associates, Inc. ("ISA"), acquired on January 4, 1994, and American Technical
Services Group, Inc. ("ATSG"), acquired on May 12, 1995. In addition, Lewis
Supply acquired the Industrial Supplies Division of Lufkin Industries, Inc. (the
"Lufkin Division") on June 16, 1994. For more information concerning these
entities, see the Company's Financial Statements and the notes thereto included
elsewhere in this Prospectus.
RESULTS OF OPERATIONS
The following table of revenues and percentages sets forth selected items of
the results of operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ --------------------
1993 1994 1995 1995 1996
------- ------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues................................. $37,098 $77,613 $117,493 $ 25,396 $ 33,316
------- ------- -------- -------- --------
100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................ 72.6 76.5 78.0 77.0 78.7
Gross profit............................. 27.4 23.5 22.0 23.0 21.3
Selling, general and administrative
expenses............................... 25.7 20.7 20.3 19.4 24.1
Restructuring charge..................... -- -- -- -- 2.8
Operating income (loss).................. 1.7 2.8 1.7 3.6 (5.6)
Interest (income) expense, net........... 1.2 0.9 0.1 -- 0.3
Income (loss) before income taxes........ 0.5 1.9 1.6 3.6 (5.9)
Income tax expense (benefit)............. -- (1.0) 0.7 1.5 --
Income (loss) from continuing
operations............................. 0.5 2.9 0.9 2.1 (5.9)
Income from discontinued operations...... 0.3 -- -- -- --
Net income (loss)........................ 0.8 2.9 0.9 2.1 (5.9)
</TABLE>
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31, 1995
Revenues for the three months ended March 31, 1996 increased 31.2% to
$33,316,372 from $25,396,090 for the three months ended March 31, 1995. During
the three months ended March 31, 1996, $16,804,823 of revenues were from
In-Plant Store(R) facilities and $16,511,549 were from branches (including sales
and service locations). During the three months ended March 31, 1995,
$11,126,084 of revenues were from In-Plant Store(R) facilities and $14,270,006
were from branches (including sales and service locations). Internal growth,
primarily from implementation of new In-Plant Store(R) facilities, accounted for
66.2% of the increase. The balance of the increase came from the inclusion of
the results of operations of ATSG for the three months ended March 31, 1996. One
In-Plant Store(R) customer (with which the Company operates under four separate
contracts) represented approximately 12.3% of revenues for the three months
ended March 31, 1995 but less than 10.0% of revenues for the three months ended
March 31, 1996. Another In-Plant Store(R) customer (with which the Company
operates under four separate contracts) represented approximately 11.5% of
revenues for the three months ended March 31, 1996.
14
<PAGE>
Cost of sales as a percentage of revenues increased to 78.7% for the three
months ended March 31, 1996 from 77.0% for the three months ended March 31,
1995. The increase resulted from the higher percentage of sales from In-Plant
Store(R) facilities which have lower margins than the branches.
Selling, general and administrative expenses as a percentage of revenues
increased to 24.1% for the three months ended March 31, 1996 from 19.4% for the
three months ended March 31, 1995. The increase resulted primarily from expenses
incurred by the Company in connection with its expansion of the In-Plant
Store(R) program.
On March 18, 1996, the Company announced the merger of SafetyMaster and
Lewis Supply. In connection with the merger, the Company recorded a
restructuring charge aggregating $920,000 for employee termination benefits,
asset write-offs and lease payments. The restructuring charge was equal to 2.8%
of revenues for the three months ended March 31, 1996.
Interest expense, net increased by $94,177 to $89,069 for the three months
ended March 31, 1996 from interest income, net of $5,108 for the three months
ended March 31, 1995. The increase in interest expense, net resulted primarily
from borrowings incurred to finance the working capital requirements of new
In-Plant Store(R) facilities.
Income tax expense decreased by $368,000 to $0 for the three months ended
March 31, 1996. An income tax benefit was not recorded for the three months
ended March 31, 1996 because the Company does not believe that it is more likely
than not that the benefit will be realized during the current year.
The net loss for the three months ended March 31, 1996 was $1,965,692
compared to net income of $539,687 for the three months ended March 31, 1995,
primarily as a result of the items previously discussed.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues for the year ended December 31, 1995 increased 51.4% to
$117,493,338 from $77,613,379 in 1994. During 1995, $53,895,081 of revenues were
from In-Plant Store(R) facilities and $63,598,257 were from branches (including
sales and service locations). During 1994, $31,931,587 of revenues were from
In-Plant Store(R) facilities and $45,681,792 were from branches (including sales
and service locations). Internal growth, primarily from implementation of new
In-Plant Store(R) facilities, accounted for 78.4% of the increase. The balance
of the increase came from the inclusion of the results of operations of ATSG
from the date of the acquisition of ATSG through December 31, 1995. One In-Plant
Store(R) customer (with which the Company operates under four separate
contracts) represented approximately 10% and 15% of the revenues for the years
ended December 31, 1995 and 1994, respectively.
Cost of sales as a percentage of revenues increased to 78.0% for the year
ended December 31, 1995 from 76.5% in 1994. The increase resulted primarily from
higher percentage of sales from In-Plant Store(R) facilities which have lower
margins than the branches.
Selling, general and administrative expenses as a percentage of revenues
decreased to 20.3% for the year ended December 31, 1995 from 20.7% in 1994. The
improvement resulted primarily from the higher percentage of sales from In-Plant
Store(R) facilities which have lower levels of selling, general and
administrative expenses than the branches. The improvement was partially offset
by expenses incurred by the Company in connection with its expansion of the
In-Plant Store(R) program.
Interest expense, net decreased by $637,029 to $98,006 for the year ended
December 31, 1995 from $735,035 in 1994. The decrease in interest expense, net
resulted primarily from the repayment of the Company's bank indebtedness in the
amount of approximately $13,300,000 with net proceeds from the sale of 5,750,000
shares of Common Stock on October 13, 1994.
Income tax expense increased by $1,625,000 to $857,000 for the year ended
December 31, 1995 from an income tax benefit of $768,000 in 1994. The tax
benefit in 1994 resulted from a reevaluation,
15
<PAGE>
based on expected future taxable income resulting from 1994 acquisitions, of the
realizability of future income tax benefits arising from the utilization of a
net operating loss carryforward and other deferred tax assets. At December 31,
1995, no valuation allowance related to the utilization of the net operating
loss carryforward was provided because the Company believes that it is more
likely than not that sufficient taxable income will be generated to allow for
the realization of the future tax benefits.
Net income for the year ended December 31, 1995 was $1,003,926, compared to
net income of $2,234,820 in 1994, primarily as a result of the items previously
discussed.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Revenues for the year ended December 31, 1994 increased 109.2% to
$77,613,379 from $37,097,753 in 1993. During 1994, $31,931,587 of revenues were
from In-Plant Store(R) facilities and $45,681,792 were from branches. During
1993, all revenues were from branches. The inclusion of the results of
operations of ISA and the Lufkin Division for the year ended December 31, 1994
accounted for 77.1% and 15.4%, respectively, of the increase; the balance was
from internal growth at the branches. One In-Plant Store(R) customer (with which
the Company operates under four separate contracts) represented approximately
15% of the revenues for the year ended December 31, 1994.
Cost of sales as a percentage of revenues increased to 76.5% for the year
ended December 31, 1994 from 72.6% in 1993. The primary reason for the increase
was the impact of the acquisition of ISA, whose In-Plant Store(R) facilities
have lower margins than the Company's branches.
Selling, general and administrative expenses as a percentage of revenues
decreased to 20.7% for the year ended December 31, 1994 from 25.7% in 1993. The
improvement resulted primarily from the impact of the acquisition of ISA, whose
In-Plant Store(R) facilities have lower levels of selling, general and
administrative expenses than the branches.
Interest expense, net increased by $297,713 to $735,035 for the year ended
December 31, 1994 from $437,322 in 1993. The increase resulted primarily from
additional borrowings incurred to finance the acquisitions of ISA and the Lufkin
Division, as well as higher interest rates. Included in interest expense, net
was interest income earned from the net proceeds of the sale of 5,750,000 shares
of Common Stock on October 13, 1994. The Company used net proceeds from such
sale to repay approximately $13,300,000 of bank debt, thereby reducing interest
expense for the remainder of the year.
The tax benefit in 1994 resulted from a reevaluation, based on expected
future taxable income resulting from 1994 acquisitions, of the realizability of
future income tax benefits arising from the utilization of a net operating loss
carryforward and other deferred tax assets. At December 31, 1994, no valuation
allowance related to the utilization of the net operating loss carryforward was
provided because the Company believes that it is more likely than not that
sufficient taxable income will be generated to allow for the realization of the
future tax benefits.
Income from discontinued operations, which was 0.3% of revenues for the year
ended December 31, 1993, related to the Company's previous decision to dispose
of its information services business and represented current valuations of
certain lease obligations.
Net income for the year ended December 31, 1994 was $2,234,820, compared to
net income of $301,599 in 1993, primarily as a result of the items previously
discussed.
LIQUIDITY AND CAPITAL RESOURCES
Effective as of December 31, 1995, the Company entered into a new revolving
bank credit agreement providing for maximum outstanding borrowings of
$20,000,000. These borrowings bear interest at the prime rate (8.25% as of March
31, 1996) and/or a Eurodollar rate, with a 1/4% commitment fee on the unused
portion of the credit available. The credit facility expires on January 31,
16
<PAGE>
2000. At March 31, 1996, $2,710,000 was borrowed, at an interest rate of 8.25%,
under the credit facility. The amount which the Company may borrow under the
credit facility is based upon eligible accounts receivable, which were
approximately $18,900,000 at March 31, 1996. The credit facility contains
customary financial and other covenants and is collateralized by substantially
all of the assets, as well as the pledge of the capital stock, of the Company's
subsidiaries.
On October 13, 1994, the Company sold 5,750,000 shares of Common Stock in an
underwritten public offering. The net proceeds to the Company were $15,405,500,
of which approximately $13,300,000 was used to repay the Company's bank
indebtedness.
The net cash provided by operating activities was $2,509,498 for the three
months ended March 31, 1996 compared to $288,628 for the three months ended
March 31, 1995. The increase resulted primarily from a decrease in accounts
receivable and an increase in accounts payable and accrued expenses, which were
partially offset by an increase in inventories and the change from net income to
a net loss.
The net cash used in operating activities was $5,319,122 for the year ended
December 31, 1995, compared to $3,932,668 for the year ended December 31, 1994.
The increase resulted primarily from an increase in accounts receivable and
inventories and a decrease in net income, which were partially offset by
increases in deferred taxes, accounts payable and accrued expenses.
The Company believes that cash on hand, cash generated from operations and
cash from the Company's bank credit facility will generate sufficient funds to
permit the Company to meet its liquidity needs for the foreseeable future,
including the costs to be incurred by the Company in connection with the
anticipated expansion of the In-Plant Store(R) program.
The Company has stated its intention to seek further acquisition
opportunities. If the Company is able to identify satisfactory acquisitions, the
source of funds for such acquisitions is anticipated to be internally generated
cash and cash from future borrowings or sales of equity securities, although
there is no guarantee that the Company would be successful in raising funds from
such sources.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
This statement, effective commencing in 1996, establishes accounting standards
for the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used, and for long-lived assets
and certain identifiable intangibles to be disposed of. The initial adoption of
this standard will not have a material impact on the Company's financial
position and results of operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." As allowable by SFAS No. 123, the Company will not recognize
compensation cost for stock-based compensation arrangements, but rather will
disclose in the notes to the financial statements the impact on net income and
earnings per share as if the fair value based compensation cost had been
recognized commencing in 1996.
INFLATION
The Company believes that any impact of general inflation has not had a
material effect on its results of operations. The Company's current policy is to
attempt to reduce any impact of inflation through price increases and cost
reductions.
SEASONALITY
The Company does not believe that its business is seasonal in nature.
17
<PAGE>
BUSINESS
GENERAL
The Company provides proprietary industrial supply procurement solutions to
industrial sites, primarily through its In-Plant Store(R) program. The Company
sells a broad range of industrial supplies, which include MRO items, replacement
parts and selected classes of production materials. Industrial supplies are
generally items which are low in price, but are critical to the production
process and have historically been characterized by high procurement costs due
to inherent inefficiencies in traditional industrial supply distribution
methods. The Company's In-Plant Store(R) program, in which large industrial
sites outsource the procurement of industrial supplies to the Company,
substantially eliminates these inefficiencies by reducing both the process and
product costs associated with industrial supply procurement. The Company's
In-Plant Store(R) program also helps customers achieve operational improvements,
such as reduced plant down-time resulting from unavailable parts and
manufacturing process improvements due to better tracking of critical parts. The
Company believes that its In-Plant Store(R) program is superior to both
traditional and other alternative methods of industrial supply distribution.
The Company believes that increased recognition of the inefficiencies
associated with the traditional industrial supply distribution process has
rapidly increased the demand for the Company's In-Plant Store(R) program in
recent years. From January 1994 to April 1996, the number of In-Plant Store(R)
sites operated by the Company increased from 13 to 44. Twenty of these sites
were added from March 1995 to April 1996. In addition, the Company recently
announced the signing of an agreement with a single customer to implement eight
additional In-Plant Store(R) facilities during 1996.
The In-Plant Store(R) program is a comprehensive outsourcing service through
which the Company manages all aspects of industrial supply procurement at a
customer's industrial site. Prior to the implementation of an In-Plant Store(R),
the industrial site would typically obtain industrial supplies from as many as
500 traditional industrial distributors. Through the In-Plant Store(R) program,
the Company becomes responsible for servicing all of its customer's industrial
supply needs by establishing a dedicated, fully integrated store within the
customer's plant. The customer, in turn, purchases virtually all of its
industrial supplies from the In-Plant Store(R). The Company staffs the In-Plant
Store(R) with its own highly trained industrial procurement professionals,
installs proprietary software designed specifically for industrial procurement
and helps determine optimal inventory levels based on the supply needs of each
site. Upon implementation, the In-Plant Store(R) purchases, receives,
inventories and issues industrial supplies directly to plant personnel, delivers
ongoing technical support and provides the customer with a comprehensive invoice
twice per month, thereby reducing the administrative burden of traditional
industrial supply. The In-Plant Store(R) generates system-wide savings generally
ranging from 15% to 25% of customers' annual industrial supply purchase costs.
The total United States market for the categories of industrial supplies
offered by the Company is estimated to be approximately $225 billion annually.
Of this total, it is estimated that approximately $20 billion to $30 billion of
industrial supplies are purchased annually by the 15,000 largest industrial
plants in the United States. These plants represent potential customers for the
Company's In-Plant Store(R) program. The Company believes that very few of these
15,000 plants have outsourced their industrial supply procurement. The Company's
In-Plant Store(R) customers span a broad range of industries, including the
automotive, chemicals, construction, food processing, power generation and
natural resource extraction industries, and the In-Plant Store(R) program is
suitable for virtually any industry that uses industrial supplies. The Company's
existing customers include Allied Signal Inc., The Black and Decker Corporation,
Bridgestone/Firestone, Inc., Onan Corporation, Homelite, Inc., Hoechst Celanese
Corporation, NACCO Materials Handling Group, Inc. and Westinghouse Electric
Corporation.
18
<PAGE>
In addition to its In-Plant Store(R) program, the Company offers several
other proprietary industrial supply procurement solutions aimed at specific
types of customers. Through its Value Managed SupplySM program, the Company is
able to provide some of the features of the In-Plant Store(R) to customers which
are too small to support an In-Plant Store(R) or are not prepared to outsource
their industrial supply procurement completely. For industrial activities such
as construction projects and plant turnarounds, the Company offers its
proprietary On-Site StoreSM program in which customers temporarily outsource the
management of industrial supply procurement to the Company. The Company offers
its Value Managed SupplySM and On-Site StoreSM programs through its network of
branches which also provide traditional industrial supply services to customers
in markets that have historically been underserved by other industrial supply
distributors. The Company also offers other selected outsourcing services for
industrial customers, including the management of industrial laundry, process
control maintenance and plant logistics. The Company delivers the Value Managed
SupplySM program, the On-Site StoreSM program, other outsourcing services and
traditional distribution to over 19,000 customers through a network of 32
branches and ten sales and service offices located throughout the United States
and in Mexico.
INDUSTRY OVERVIEW
The total United States market for industrial supplies is estimated to be in
excess of $225 billion annually. As a provider of targeted industrial supply
procurement solutions, the Company's market includes virtually every industrial,
manufacturing and service business that uses large quantities of industrial
supplies. Although growth in the industrial supply market is generally tied to
the expansion of Gross Domestic Product, most companies have continuing needs
for industrial supplies. The Company believes that increasing numbers of
industrial firms are looking for ways to reduce costs by eliminating the
inefficiencies of traditional industrial supply distribution.
The Company operates in a highly fragmented industry with the 50 largest
industrial supply distributors accounting for only about 6% of the market. The
Company believes that approximately 135,000 smaller traditional industrial
distributors, substantially all of which have annual sales of less than $10
million, supply over 65% of the market. Growing recognition of the high costs
and operational inefficiencies associated with purchasing industrial supplies
from traditional distributors has increased demand for alternative methods of
distribution, leading to the development of programs which are generally
referred to as "integrated supply." These programs vary widely, but they include
such concepts as corporate purchasing cards, industrial supply consortiums and
direct mail supply. While these integrated supply programs help to reduce some
of the costs associated with traditional industrial supply distribution and
modestly increase efficiencies, in contrast to the Company's proprietary
In-Plant Store(R) program they do not focus on the structural flaws inherent in
the industrial supply distribution process.
The traditional model for the distribution of industrial supplies is
burdened by both the duplication and the inefficient performance of multiple
functions. In the traditional model, the industrial distributor must (i) source
and absorb the freight costs for the item, (ii) receive, warehouse and account
for the item, (iii) invest in inventory and incur the associated carrying costs
and (iv) market and sell the item to the end user. Once the need for the item
arises, the plant requiring the item must repeat many of these steps, including
(i) sourcing and absorbing the freight costs for the item, (ii) receiving,
warehousing and accounting for the item, (iii) investing in inventory and
incurring the associated carrying costs and (iv) issuing the item to the user on
the plant floor. In the In-Plant Store(R), each activity is performed only once
by the Company, thereby streamlining the procurement process and generating
system-wide savings generally ranging from 15% to 25% of customers' annual
industrial supply purchase costs. The procurement of industrial supplies is
generally outside the core activity of most manufacturers. As a result,
industrial supply procurement is often neglected and poorly managed within
industrial plants. For example, industrial supplies are generally purchased by
personnel whose expertise in purchasing these items is limited. In addition,
supplies are typically stored in a number of locations within an
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industrial plant, resulting in excess inventories and duplicate purchase orders.
Finally, industrial supplies are frequently purchased by multiple personnel in
uneconomic quantities, and a substantial portion of most facilities' industrial
supplies are one-time purchases which entail high prices and time-consuming
administrative efforts. The In-Plant Store(R) eliminates the duplication and
waste inherent in the traditional industrial distribution model.
In addition to the cost savings inherent in eliminating an entire step in
the distribution process, the In-Plant Store(R) leads to operational
improvements at the customers' host plants. For stock items, each of the
In-Plant Store(R) facilities has achieved more than a 98% product request fill
rate. For one-time purchases, In-Plant Store(R) personnel are experts in
efficiently sourcing these generally low usage items. The efficient procurement
of industrial supplies reduces the down-time of equipment in need of a critical
part. In the traditional model, a significant percentage of industrial supplies
are sourced directly by the plant employee in need of the item, rather than a
purchasing professional. These plant employees, whose time is diverted from
performing their core functions, generally do not consider price as the
determining factor in their purchase decision. The In-Plant Store(R), on the
other hand, offers these critical items at prices available to a high volume
purchaser. Further, under the traditional model such plant personnel accumulate
sub-stocks of low usage but critical items. In the Company's experience, the
presence of an In-Plant Store(R) eliminates the need for such sub-stocks.
COMPANY STRATEGY
The Company intends to enhance its position as the leading on-site provider
of proprietary industrial supply procurement solutions, primarily through the
expansion of its In-Plant Store(R) program. The Company believes its In-Plant
Store(R) model is superior to the traditional model of industrial distribution
due to the following key elements: (i) efficient, low cost operations; (ii)
superior customer service; (iii) superior technology; and (iv) ease of
implementation.
. Efficient, Low Cost Operations. The In-Plant Store(R) is an effective
means for customers to eliminate redundant and inefficient distribution
methods. By locating the In-Plant Store(R) within a customer's site, the
cost of supporting two warehouses, one at the traditional distributor and
one within the customer's plant site, is eliminated. Similarly, because
the customer agrees to purchase its industrial supply requirements from
the In-Plant Store(R), the continuing marketing and selling expenses of
the traditional distributor are eliminated. In addition, as a volume
purchaser of low price and often critical items, the In-Plant Store(R)
maintains competitive prices on virtually all items sold. Finally, because
the Company employs its own highly trained personnel and assumes ownership
of the industrial supply inventory at host plants, the Company's customers
can reduce their own headcount and investment in inventory. Although the
inventory investment is transferred to the In-Plant Store(R), the
Company's superior information and sourcing systems enable the In-Plant
Store(R) to operate with reduced levels of inventory with turns often in
excess of seven times per year, as opposed to an average of under two
times per year previously incurred by existing customers which relied on
the traditional method of industrial distribution.
. Superior Customer Service. With its commitment to customer service and
continuous improvement, supported by extensive training at the Company's
dedicated training center in Easton, Maryland, the Company delivers
substantial operational improvements to its customers. By determining
inventory levels appropriate to each customer and installing proprietary
systems which monitor and replenish that inventory on a timely basis, each
of the In-Plant Store(R) facilities has achieved more than a 98% product
request fill rate for stock items. The efficient and dependable sourcing
of low usage, yet critical, repair or replacement parts minimizes machine
down-time at customer plants. In addition, In-Plant Store(R) systems
centrally process authorizations, purchase orders, receiving tickets,
invoices, accounting data and other administrative tasks
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previously dispersed throughout the customer's plant. The customer
receives only two detailed invoices per month.
. Superior Technology. The In-Plant Store's(R) proprietary management
information system, known as ISACSSM, aids customers in improving
manufacturing performance and supports customer service and efficient
operations. In addition to the centralized administrative functions
mentioned above, ISACSSM generates real-time reports specifying product
utilization by work order, department and/or individual. This improved
information flow gives site managers the ability to measure certain
manufacturing and maintenance processes, often for the first time.
Additionally, the In-Plant Store(R) employees have on-line access to stock
inquiry and order-status reports allowing them to respond to customer
inquiries for both stock and one-time purchases on a real-time basis. This
allows the In-Plant Store(R) to minimize its own inventories while
eliminating out-of-stock items for its customer. The Company continually
upgrades its management information system to improve productivity and
customer service. The Company is in the process of developing several
Internet applications, including corporate-wide e-mail and a World Wide
Web presence with ongoing marketing and stockholder information. The
Company is committed to exploring other Internet applications, such as the
development of technical support databases, industrial supply procurement
tools and multimedia marketing presentations.
. Ease of Implementation. When the Company implements an In-Plant Store(R)
program, it redefines the customer's distribution channel for a large
number of critical items. Recognizing the challenges faced by its
customers associated with switching from the traditional to the In-Plant
Store(R) model, the Company believes that a well-executed implementation
is extremely important in creating a long term customer relationship. The
Company's dedicated implementation staff works with the management and
employees of the host site and, when necessary, customizes the In-Plant
Store(R) to the needs of each customer. This customization includes
determining the nature and quantity of stock items appropriate for the
plant site, arranging for the optimal sourcing of one-time buys and
configuring ISACSSM to generate detailed billing, price variance and
inventory control reports useful to that particular host plant. In
addition, the Company's implementation team works with host site managers
to determine whether the customer would benefit from the Company's other
value-added services.
GROWTH STRATEGY
The Company's goal is to become the leading provider of industrial supply
procurement solutions for major industrial companies throughout North America.
In pursuing this goal, the Company benefits from the current trends toward
outsourcing non-core activities, consolidating vendor relationships and focusing
on lowering costs while improving operations. To increase its business, the
Company plans to: (i) market its In-Plant Store(R) program to new customers;
(ii) expand relationships with existing customers; (iii) offer proprietary
solutions to existing customers and new categories of customers; and (iv) expand
internationally.
. New In-Plant Store(R) Customers. The Company believes that its most
significant opportunity to grow revenues is to market its In-Plant
Store(R) program to new customers. The total United States market for the
categories of industrial supplies offered by the Company is estimated to
be approximately $225 billion annually. Of this total, it is estimated
that approximately $20 billion to $30 billion of industrial supplies are
purchased annually by the 15,000 largest industrial plants in the United
States. These plants represent potential customers for the Company's
In-Plant Store(R) program. From January 1994, when the Company began
actively marketing the program, to April 1996, the number of In-Plant
Store(R) sites operated by the Company increased from 13 to 44. Twenty of
these sites were added from March 1995 to April 1996. In addition, the
Company recently announced the signing of an agreement with a single
customer to implement eight additional In-Plant Store(R) facilities during
1996. The Company believes that increasing
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<PAGE>
recognition of the high costs associated with the traditional model of
industrial distribution, as well as recognition of the Company's ability
to provide an effective industrial supply solution, have increased demand
for the Company's In-Plant Store(R) facilities.
The principal tool used by the Company to sell the In-Plant Store(R) concept
is the Value Management StudySM. A Value Management StudySM is an analysis
prepared by the Company and provided to a potential customer detailing the
savings achievable from an In-Plant Store(R). The Value Management StudySM is
a valuable tool in allowing the Company to assess the particular needs of
each potential customer. See "--In-Plant Store(R) Program--Sales and
Marketing."
To meet the increased demand for its In-Plant Store(R) program, the Company
is currently investing substantial resources in order to sell, implement and
staff additional In-Plant Store(R) facilities. The Company has increased its
direct sales force from one at the beginning of 1995 to eight at the
beginning of 1996. The Company's direct sales force is supported by ten
analysts who focus primarily on the preparation of Value Management
StudiesSM. The Company began establishing a dedicated implementation staff in
June 1995 and currently employs 25 implementation specialists. The Company
also employs 11 information technology professionals. Finally, the Company
has established a training center in Easton, Maryland where employees receive
extensive training in the In-Plant Store(R) program.
. Expansion of Existing Customer Relationships. The Company's typical large
industrial customer has multiple plant sites. As a result, the Company has
been successful in selling multi-site In-Plant Store(R) programs to
existing customers. In January 1995, the Company operated multi-site
In-Plant Store(R) programs for two customers representing seven individual
In-Plant Store(R) sites. The Company currently serves nine multi-site
customers representing 28 In-Plant Store(R) sites. The Company believes
that existing In-Plant Store(R) customers operate over 350 additional
industrial sites of sufficient size to support an In-Plant Store(R)
program.
Historically, the Company focused its In-Plant Store(R) sales effort on plant
level decision makers. While the Company still believes that acceptance from
plant level managers is critical to satisfying its customers, the Company is
also directing marketing resources toward corporate level sales. In the
Company's experience, corporate level acceptance has shortened the sales
cycle necessary to add facilities to existing customers.
. Additional Proprietary Services. In addition to its In-Plant Store(R)
program, the Company offers several other proprietary industrial supply
procurement solutions aimed at specific types of customers. Through its
Value Managed SupplySM program, the Company is able to provide some of the
features of the In-Plant Store(R) to customers which are too small to
support an In-Plant Store(R) or are not prepared to outsource completely
their industrial supply procurement. For industrial activities such as
construction projects and plant turnarounds, the Company offers its
proprietary On-Site StoreSM program in which customers temporarily
outsource the management of industrial supply procurement to the Company.
The Company offers its Value Managed SupplySM and On-Site StoreSM programs
through its network of branches which also provide traditional industrial
supply services to customers in markets that have historically been
underserved by other industrial supply distributors. The Company also
offers other selected outsourcing services for industrial customers,
including the management of industrial laundry, process control
maintenance and plant logistics. The Company delivers the Value Managed
SupplySM program, the On-Site StoreSM program, other outsourcing services
and traditional distribution to over 19,000 customers through a network of
32 branches and ten sales and service offices located throughout the
United States and in Mexico.
. International Expansion. The Company has found that its In-Plant Store(R)
program and other of the Company's proprietary services are applicable
outside the United States. The Company
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<PAGE>
believes that foreign markets, including both developed and emerging
markets, are characterized by inadequate industrial supply infrastructure.
In addition, many of the Company's existing In-Plant Store(R) customers
are multi-national corporations. In the first quarter of 1996, the Company
implemented an In-Plant Store(R) in a plant in Mexicali, Mexico.
IN-PLANT STORE(R) PROGRAM
The Company expects its future growth to be achieved primarily through its
In-Plant Store(R) program. The Company believes that the In-Plant Store(R)
offers customers the lowest achievable cost structure for their industrial
supply procurement requirements. The In-Plant Store(R) program is a
comprehensive out-sourcing service through which the Company manages all aspects
of industrial supply procurement at a customer's industrial site. The Company
staffs the In-Plant Store(R) with its own personnel, helps determine optimal
inventory levels, purchases and stocks all industrial supplies, issues them to
the customer's plant employees and provides ongoing technical support.
The In-Plant Store(R) program has been able to achieve substantial cost
savings and more efficient plant operations through reductions in product costs,
elimination of process costs and improvements in operations. Based upon the
Company's Value Management StudiesSM, system-wide savings in customers' annual
industrial supply purchase costs have generally ranged from 15% to 25%.
Reduction of Customer's Product Costs
. Lowers Direct Product Costs. The Company offers pricing that is typically
3% to 5% lower than a customer's historic cost. The Company is able to
achieve such pricing because it is a high volume purchaser and its
operating model comprises a lower inherent cost structure than traditional
methods of supply.
. Eliminates Industrial Supply Inventory Carrying Costs. The Company, rather
than the customer, purchases and maintains industrial supply inventory at
the plant site. The customer is charged only as each item is used, thereby
eliminating the need for the customer's capital to be deployed in
industrial supply inventory. The Company has historically been able to
achieve plant level inventory reductions ranging from $500,000 to $2.5
million. The Company's information systems permit it to carry much lower
inventory positions than customers could carry using traditional
industrial supply management. Although the inventory investment is
transferred to the In-Plant Store(R), the Company's superior information
and sourcing systems enable the In-Plant Store(R) to operate with reduced
levels of inventory with turns often in excess of seven times per year, as
opposed to an average of under two times per year previously incurred by
existing customers which relied on the traditional method of industrial
distribution.
Elimination of Process Costs
. Reduces Paperwork. Accounting and data processing expenses are reduced as
the Company issues the customer only two comprehensive invoices each month
as compared to the thousands of requisitions, purchase orders, packing
slips and vendor invoices which were created when the customer's own
purchasing department was responsible for industrial supply procurement.
The Company believes that the administrative costs associated with placing
a single purchase order can be in excess of $100.
. Reduces Payroll. As a result of the Company assuming the supply function,
the customer can redeploy or eliminate personnel who were previously
responsible for purchasing, receiving, taking inventory and issuing
industrial supplies.
. Eliminates Multiple Suppliers. The customer no longer needs to maintain
relationships with numerous industrial distributors. All supplies are
obtained from one source, the In-Plant Store(R), as opposed to as many as
500 traditional industrial distributors for a typical large industrial
plant.
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Operational Improvements
. Improves Plant Productivity. The Company has developed proprietary
computer systems which maintain appropriate inventory levels of industrial
supplies and minimize the risk to the customer of costly plant down-time
due to the absence of a key part. For stock items, each of the In-Plant
Store(R) facilities has achieved more than a 98% product request fill
rate. The Company offers customers further productivity improvements
through a specialized program to stock certain low-price hardware items in
actual work areas. The Company's procurement expertise also enables it to
fill one-time orders for low usage items in an efficient manner, thereby
eliminating the need for plant employees to devote time to research
availability and negotiate prices.
. Improved Information Flow. The improved information flow provided by the
In-Plant Store(R) program allows customers to reduce shrinkage and improve
their manufacturing process. Using ISACSSM, its proprietary computer
system, the Company establishes sophisticated controls on inventory and
usage of supplies, allowing the In-Plant Store(R) customer to allocate
costs to a department, work cell or individual. Industrial supply costs
and utilization can be tracked as they occur in the plant. Further, the
Company's networking capability allows for the consolidation of a
customer's industrial supply management for any number of facilities that
utilize the In-Plant Store(R) program.
The In-Plant Store(R) Supply Agreement
Operation of the In-Plant Store(R) is governed by an In-Plant Store(R)
supply agreement (the "Supply Agreement"). Pursuant to the Supply Agreement, the
Company is responsible for (i) providing designated categories of supplies and
parts at the In-Plant Store(R), (ii) providing all on-site staffing necessary to
purchase, receive, inventory and issue industrial supplies to plant personnel
and (iii) maintaining certain specified levels of inventory at the In-Plant
Store(R). On the effective date of the Supply Agreement, the Company takes
control of all of the customer's existing industrial supply inventory. During
the period in which the customer's inventory is depleted, the Company is
generally entitled to recover its costs in operating the In-Plant Store(R). As
the In-Plant Store(R) becomes stocked with the Company's own inventory, the
Company's compensation is typically based on a fixed markup from the cost of the
items purchased. In certain situations, however, the Company may, in addition to
or in lieu of such markup, receive a management fee. The Supply Agreement also
provides that if, in any six month period, the customer has not utilized a stock
item, the customer is required to purchase the entire inventory of such product
from the In-Plant Store(R). This provision eliminates the Company's risk of
inventory obsolescence. The term of the typical Supply Agreement is three years,
with automatic renewal provisions, although the customer generally may terminate
the Supply Agreement for any reason upon 90 days' prior written notice. Upon
termination of the Supply Agreement, the customer is required to purchase all
Company owned inventory located at the In-Plant Store(R).
Sales and Marketing
The Company's recent sales effort has focused on the 15,000 domestic plant
sites which the Company believes have sufficient industrial supply requirements
to support an In-Plant Store(R). In particular, the Company has emphasized very
large industrial plants which can generate revenues of over $10 million annually
for the Company, and on prospective customers which have expressed interest in a
multi-plant, company-wide implementation of the Company's programs. The Company
also seeks to penetrate more plants of existing customers, pursue referrals from
satisfied customers and contact plant managers whose manufacturing sites are
located near existing In-Plant Store(R) facilities.
The critical element of the Company's marketing process is the Value
Management StudySM. Through its proprietary study, the Company analyzes the
industrial supply function at the site or sites of a potential customer,
highlights the inefficiencies at the site and quantifies the cost reductions
achievable through the implementation of an In-Plant Store(R) program. For
prospects which become
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customers, the Company uses the Value Management StudySM as a guide for
tailoring the actual In-Plant Store(R) to the customer's particular needs.
As an example, a recent Value Management StudySM for a potential customer
revealed that the customer held $3.8 million in MRO inventory, and on an annual
basis purchased for stock approximately $3 million of MRO items and an
additional $900,000 of one-time purchases. One percent of the stock units
accounted for approximately 50% of the inventory carrying value. The remaining
99% of the stock units were MRO parts with a unit value of less than $150 each.
To purchase and maintain this inventory, the customer employed one supervisor
and three clerks, placed 7,200 purchase orders, and processed 10,000 receipts
and 10,000 invoices per year. As a result of the Value Management StudySM, the
Company was able to identify approximately $770,000 in potential annual savings
achieved over a two-year period, including reductions in purchasing, inventory
carrying, labor and freight costs. In addition, the Value Management StudySM
indicated that within 12 months the In-Plant Store(R) program would eliminate
most of the customer's $3.8 million investment in inventory.
Although the Value Management StudySM described above is representative of
the types of cost savings that can be achieved from the implementation of an
In-Plant Store(R) program, there can be no assurance that such savings could be
achieved by other potential customers of the Company.
ADDITIONAL PROPRIETARY SERVICES
In addition to the In-Plant Store(R) program, the Company markets several
other services to meet the industrial supply and other needs of its customers.
The Value Managed SupplySM and On-Site Store SM programs are proprietary
industrial supply solutions targeted at particular customers and delivered
through the Company's network of 32 branches which typically operate in smaller,
less competitive geographic markets.
Value Managed SupplySM Program
The Value Managed SupplySM program is targeted at smaller plant sites and
large plants which have not adopted the full In-Plant Store(R) program. This
program offers selected elements of the In-Plant Store(R) program that serve to
reduce some of the inefficiencies and costs of traditional industrial supplies
distribution. As a result of its Value Managed SupplySM program, the Company
believes that, through its branches, it is able to provide its customers with a
higher level of service than many of its competitors which attempt to service
customers in smaller markets on a regional basis through warehouses in larger
cities.
On-Site StoreSM Program
The On-Site StoreSM program is marketed to construction sites and process
plants for temporary construction or maintenance projects. This program provides
a temporary on-site warehouse that is fully staffed and stocked with all items
that the customer believes may be necessary for the project. The Company staffs
the On-Site StoreSM with its own trained, technically qualified personnel, who
are responsible for procurement, inventory management, disbursement and product
training. Management of On-Site StoreSM facilities is provided through the
Company's branch network.
Branches
In addition to its proprietary industrial supply procurement services, the
Company also provides more traditional industrial distribution services through
its branch network. The Company has located most branches in smaller cities
which are less well supplied by traditional industrial distributors and where
competition is more moderate than in larger industrial cities. The Company
believes that in these smaller markets, the local availability of adequate
supplies of frequently used industrial supply items, together with locally
based, technically competent service representatives, provide the Company with a
competitive advantage. In addition, to maximize the benefits which customers
realize from the
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Company's branch presence, each branch manager is allowed considerable autonomy
in setting inventory levels that are responsive to the branch customers'
particular needs. Branch managers receive incentive compensation designed to
maximize branch gross profit.
INSTRUMENTATION SERVICES
The Company is one of the largest independent suppliers of instrumentation
services in the United States. These services, as well as process control
services, are provided through a network of five sales offices located across
the United States.
MANAGEMENT INFORMATION SYSTEMS
The In-Plant Store(R) program utilizes ISACSSM, the Company's proprietary
computer system, to control all In-Plant Store(R) functions. In addition to the
traditional functions of inventory control, order processing, purchasing,
accounts receivable, accounts payable and general ledger, ISACSSM has the
flexibility to integrate with the customer's maintenance, accounting and
management systems. ISACSSM allows for real-time reporting of industrial
supplies utilization by work order, department and individual, as well as
on-line stock inquiry and order-status reports. ISACSSM also supports advanced
functions, such as Electronic Data Interchange ("EDI"), customized billing, end
user reporting and facsimile transmission. Operations that interact within the
Company's multiple In-Plant Store(R) programs are linked together through a
dedicated data network.
For its other activities, the Company operates a mainframe system which is
supported by the industry standard open system environment. The Company has
invested significant resources within the last year to increase the capabilities
and networking opportunities of this system. The Company's system supports EDI,
as well as a large number of customer specific databases which tie into the
Company's primary database. This allows the Company to provide its customers
with a wide variety of reports which are customized to meet the specific needs
of the customer. The Company also utilizes a variety of third-party software
packages periodically upgraded to support additional functions.
CUSTOMERS
At April 1, 1996, the Company operated 44 In-Plant Store(R) facilities for
25 individual customers. In addition, the Company recently announced the signing
of an agreement with a single customer to implement eight additional In-Plant
Store(R) facilities during 1996. Additionally, through its branches, the Company
services approximately 19,000 customers in a variety of industries. For the 12
months ended December 31, 1995, Black & Decker Corporation represented
approximately 10% of the Company's revenues. For the three months ended March
31, 1996, Black & Decker Corporation represented less than 10% of the Company's
revenues and Westinghouse Electric Corporation represented approximately 11.5%
of the Company's revenues.
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PRODUCTS
The Company provides a broad range of MRO supplies, replacement parts and
selected classes of production materials, including the following:
. Abrasives . HVAC and plumbing equipment
. Adhesives . Janitorial supplies
. Coatings, lubricants and . Material handling products
compounds
. Cutting, hand, pneumatic and power . Measuring Instruments
tools
. Electrical supplies . Power transmission equipment
. Fasteners . Respiratory products
. Fire protection equipment and . Replacement parts
clothing
. Hoses, pipe fitting and valves . Safety products
. Welding materials
Because of the broad range of products sold by the Company, no single
product or class of products accounted for more than 10% of the Company's
revenues in 1995.
SUPPLIERS
The Company purchases its products from numerous manufacturers and other
distributors. The Company has distribution agreements with numerous suppliers,
some of which give the Company the exclusive right to distribute the supplier's
products in a specific geographic area. All of the contracts can be canceled by
the respective suppliers upon notice of one year or less. Because no supplier
provides products that account for as much as 10% of the Company's revenues and
because the Company believes that it could quickly find alternative sources of
supply if any distribution contract were canceled, the Company does not believe
that the loss of any one distribution contract, or any small group of
distribution contracts, would have a material adverse impact on the Company's
business.
COMPETITION
The Company's business is highly competitive. The Company competes with a
wide variety of traditional industrial supply distributors in each of the
Company's geographic markets. Most of such distributors are small enterprises
selling to customers in a limited geographic area. The Company also competes
with several integrated supply consortiums, direct mail suppliers and large
warehouse stores, some of which have significantly greater financial resources
than the Company. The primary areas of competition include price, breadth and
quality of product lines distributed, ability to fill orders promptly, technical
knowledge of sales personnel and, in certain product lines, service and repair
capability. The Company believes that its ability to compete effectively is
dependent upon its ability to deliver value-added procurement solutions to its
customers through its In-Plant Store(R), Value Managed SupplySM and On-Site
StoreSM programs, to respond to the needs of its customers through quality
service and to be price-competitive. The Company believes that other companies
may develop and implement programs which offer services similar to, and which
compete with, the Company's In-Plant Store(R) program. See "Investment
Considerations--Competition."
The Company also competes to some extent with the manufacturers of
industrial supplies. The Company believes, however, that most of such
manufacturers sell their products through traditional industrial distributors,
because the limited range of products that a manufacturer offers cannot compete
effectively with the broad product lines and additional services offered by
traditional industrial distributors and industrial supply service providers such
as the Company.
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GOVERNMENT REGULATION
In recent years, governmental and regulatory bodies such as The Occupational
Safety and Health Administration, The National Institute for Occupational Safety
and Health and The Mine Safety and Health Administration have promulgated
numerous standards and regulations designed to protect workers' well-being and
to make the workplace safer. The Company reviews regulations governing its
customers in order to be able to distribute products that meet its customers'
needs, and some of the Company's past growth has been as a result of its
customers' compliance with this increasing level of regulation. In addition,
many of the Company's customers are cooperating with their insurance companies
in safety programs designed to reduce accident and injury rates in response to
rising workers' compensation costs. This trend has also resulted in increased
purchases of safety equipment from the Company. The Company cannot predict the
level or direction of future regulation or insurance costs, but believes these
trends will continue to contribute to the Company's growth.
EMPLOYEES
As of April 1, 1996, the Company had approximately 710 employees, of whom
approximately 220 were employed in selling and administrative capacities and
approximately 490 were involved in operations. ATSG regularly employs
individuals covered under collective bargaining agreements for temporary
periods. As of April 1, 1996, approximately 20 of ATSG's employees were covered
under such collective bargaining agreements. The Company considers its employee
relations to be good.
PROPERTIES
The Company's corporate headquarters is located in Lakewood, Colorado. The
Company does not own or lease the space for its In-Plant Store(R) facilities.
Each of the Company's branch facilities (other than the facility in Lufkin,
Texas, which is owned by the Company) is leased by the Company. The Company has
the right to renew some of these leases. The Company believes that the
properties which are currently under lease are adequate to serve the Company's
business operations for the foreseeable future. The Company believes that if it
were unable to renew the lease on any of these facilities, it could find other
suitable facilities with no adverse effect on the Company's business.
INSURANCE
The Company maintains liability and other insurance that it believes to be
customary and generally consistent with industry practice. The Company is also
named as an additional insured under the products liability policies of many of
its suppliers and manufacturers and, with respect to In-Plant Store(R)
facilities, many of its customers. The Company believes that such insurance is
adequate to cover potential claims relating to its existing business activities.
LITIGATION
The Company is currently involved in certain legal proceedings incidental to
the normal conduct of its business. The Company does not believe that any
liabilities relating to such proceedings are likely to be, individually or in
the aggregate, material to its consolidated financial position or results of
operations.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information concerning each of the
Company's directors and executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES HELD
------------------------------------------ --- ------------------------------------------
<S> <C> <C>
Andrew M. Bursky.......................... 39 Chairman of the Board of Directors
Theodore R. Rieple........................ 50 President and Director
Catherine B. James........................ 43 Chief Financial Officer, Executive Vice
President, Secretary, Treasurer and
Director
Charles J. Martin......................... 51 Vice President, Controller and Chief
Accounting Officer
William R. Berkley........................ 50 Director
Arnold W. Donald.......................... 41 Director
George E. Krauter......................... 64 Director
Joshua A. Polan........................... 48 Director
Mitchell I. Quain......................... 44 Director
</TABLE>
Directors of the Company are elected annually at the annual meeting of
stockholders. Each of the directors listed above has been elected for a term
that expires at the annual meeting of stockholders in 1996. The Company's
officers are elected annually by the Board of Directors and serve at the
discretion of the Board of Directors.
Mr. Bursky has served as Chairman of the Board of Directors since July 1988.
He was President of the Company from November 1989 until December 1990. He has
served as an executive officer of Interlaken Capital, Inc. ("Interlaken
Capital"), a private investment firm that is an affiliate of the Company, since
May 1980, and currently is serving as a Managing Director of Interlaken Capital.
Mr. Bursky is a director of Pioneer Companies, Inc. ("PCI"), a manufacturer and
marketer of chlorine and caustic soda and related products.
Mr. Rieple has served as a member of the Board of Directors since 1991. Mr.
Rieple has served as President of the Company since December 1990. From 1984 to
November 1990, Mr. Rieple was President, Chief Executive Officer and a director
of Diversey Corp., a manufacturer of specialty chemicals. In this role, he was
responsible for the United States and Canadian operations.
Ms. James has served as a member of the Board of Directors since 1990. Ms.
James has served as Chief Financial Officer of the Company since February 1996,
has served as Executive Vice President of the Company since January 1989 and has
served as Secretary and Treasurer of the Company since December 1989. She was
Chief Financial Officer of the Company from January 1989 until September 1993.
Ms. James has been a Managing Director of Interlaken Capital since January 1990.
From 1982 through 1988, she was employed by Morgan Stanley & Co. Incorporated,
serving as a Managing Director in the corporate finance area during the last two
years of her tenure.
Mr. Martin has served as Vice President, Controller of the Company since
July 1990. He was employed by Interlaken Capital from August 1986 to January
1996 and served as Vice President, Finance for the last six years of his tenure.
In this role, he was responsible for accounting and general financial
administrative functions.
Mr. Berkley has served as a member of the Board of Directors since May 1994.
Mr. Berkley also serves as Chairman of the Board of several companies which he
controls or founded. These include W.R. Berkley Corporation, a property and
casualty insurance company, PCI and Interlaken Capital. Mr. Berkley is
Vice-Chairman of the Board of Trustees of the University of Connecticut, a
Director of
29
<PAGE>
Georgetown University, a Trustee of New York University and a member of the
Board of Overseers of New York University Stern School of Business.
Mr. Donald has served as a member of the Board of Directors since 1995. Mr.
Donald is President of Monsanto Company's Crop Protection unit, with
responsibility for Monsanto's worldwide agricultural chemicals business, and has
been associated with Monsanto in various capacities for more than the last five
years. Mr. Donald is a past president and serves on the board of The Leadership
Center of Greater St. Louis. He currently serves on the executive boards of John
Burroughs School, British-American Project, Fair St. Louis and the American Crop
Protection Association. Mr. Donald also serves on the board of the National FFA
Organization, National 4-H Council, Lindenwood College, U.S.-Russia Business
Council, Eurasia Foundation, Jackson Laboratories, Opera Theatre of St. Louis,
Carleton College and the Municipal Theatre Association of St. Louis. Mr. Donald
is a member of the advisory boards of the Junior League of St. Louis and the St.
Louis Butterfly House and serves on the National Advisory Council for Washington
University's School of Engineering.
Mr. Krauter has served as a member of the Board of Directors since January
1994. Mr. Krauter is currently President of ISA, which was acquired by the
Company in January 1994, and has served as President of ISA since March 1971.
Mr. Polan has served as a member of the Board of Directors since 1988. He
has served as an executive officer of Interlaken Capital since June 1988,
currently serving as a Managing Director. For more than the five years prior to
June 1988, Mr. Polan was a partner in the accounting firm of Touche Ross & Co.
Mr. Quain has served as a member of the Board of Directors since 1995. Mr.
Quain has been a Managing Director of Schroder Wertheim & Co. Incorporated for
more than the last five years. Mr. Quain is a director of Allied Products
Corporation, a member of the Board of Governors of the School of Engineering and
Applied Sciences at the University of Pennsylvania where he also serves on the
President's Council, and a member of the Board of Trustees and the executive
committee of St. Luke's Academy, a college preparatory school in New Canaan,
Connecticut.
Mr. Bursky, Ms. James and Mr. Polan are executive officers of Idle Wild
Farm, Inc., a privately owned company that was formerly engaged in the
manufacture of frozen foods which, in October 1993, filed a Chapter 11 petition
for reorganization under Federal bankruptcy laws. Mr. Bursky is an executive
officer of Blue Lustre Products, Inc., a privately owned company which is
engaged in the sale and leasing of carpet cleaning equipment and other carpet
cleaning products which, in October 1995, filed a Chapter 11 petition for
reorganization under Federal bankruptcy laws.
COMMITTEES AND BOARD MEETINGS
The Board has two standing committees: the Stock Option and Compensation
Committee and the Audit Committee.
The Stock Option and Compensation Committee, composed of Mr. Bursky and Mr.
Polan, administers the Company's 1990 Incentive Stock Option Plan (the "1990
Stock Option Plan") and makes recommendations to the Board of Directors
regarding the level and form of compensation to be paid to the Company's
executive officers and reviews the levels of compensation of senior officers of
the Company's subsidiaries. The Audit Committee, composed of Messrs. Berkley,
Polan and Quain, meets with management and the Company's independent accountants
to consider the adequacy of the Company's internal controls and other financial
reporting matters.
DIRECTORS' COMPENSATION
Beginning in May 1995, members of the Board of Directors who were not
employees of the Company received directors' fees in the amount of $1,000 for
each meeting of the Board of Directors they attended. The Company was obligated
to reimburse members of the Board of Directors for all
30
<PAGE>
reasonable expenses incurred in connection with their attendance at Directors'
meetings, but no Director made any claim for reimbursement.
At the Company's 1996 Annual Meeting of Stockholders, scheduled to be held
on May 24, 1996 (the "1996 Annual Meeting"), holders of Common Stock have been
asked to approve the adoption of the Company's 1996 Non-Employee Director Stock
Plan (the "Director Plan"). The purpose of the Director Plan is to align the
interests of the non-employee members of the Board of Directors ("Non-Employee
Directors") with those of the Company's stockholders by promoting their
ownership of Common Stock. Under the Director Plan, the Company's Non-Employee
Directors will receive their retainer fee for each calendar year in shares of
Common Stock. The number of shares to be granted each year will be equal to the
annual retainer fee divided by the fair market value of a share of Common Stock
on the last day of such year. The amount of the annual retainer fee will be set
periodically by the full Board of Directors. These shares of Common Stock will
be granted to Non-Employee Directors in
lieu of cash retainer fees. In addition, each person who is a Non-Employee
Director immediately following the 1996 Annual Meeting shall be granted, not
later than June 30, 1996, a number of shares of Common Stock determined by
dividing (1) $20,000 by (2) the fair market value of a share of Common Stock on
May 31, 1996. These shares will be granted to Non-Employee Directors in addition
to any cash retainer fees they received for services rendered during 1995. At
present, six persons are eligible to participate in the Director Plan (including
Mr. Bursky and Ms. James).
STOCK OPTION AND COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1995, Mr. Bursky, Ms. James and Mr. Polan served on the Stock Option
and Compensation Committee. Mr. Bursky has served as Chairman of the Board of
Directors since 1988 and was President of the Company from November 1989 to
December 1990. Ms. James has served as an executive officer of the Company since
January 1989. During 1995, Mr. Bursky served on the compensation committee of
Fine Host Corporation. William R. Berkley, the Chairman of the Board of Fine
Host Corporation, is a member of the Company's Board of Directors. See "Certain
Transactions" for a description of certain transactions between the Company and
certain other companies of which Mr. Bursky, Ms. James, Mr. Polan and Mr.
Berkley are officers, directors and/or shareholders.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth all the cash and noncash compensation for
each of the three fiscal years ended December 31, 1995 awarded to or earned by
the President of the Company. No other executive officer of the Company earned
more than $100,000 in salary and bonus in any of the three fiscal years ended
December 31, 1995. Mr. Bursky and Ms. James do not receive any compensation from
the Company but are executive officers of and are compensated by Interlaken
Capital, which is party to a services agreement with the Company pursuant to
which Interlaken Capital will receive a fee of $400,000 during 1996. See
"Certain Transactions."
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL --------------------
COMPENSATION NUMBER OF SECURITIES
NAME AND ------------------- UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS GRANTED COMPENSATION
-------------------------------- ---- -------- ------- -------------------- ------------
<S> <C> <C> <C> <C> <C>
Theodore R. Rieple.............. 1995 $213,617 $40,000 51,500 $1,366(1)
President 1994 204,038 10,000 -- 1,534(1)
1993 180,000 5,000 -- 2,630(1)
</TABLE>
------------
(1) These amounts represent contributions to the Company's Retirement Savings
Plan.
31
<PAGE>
Mr. Rieple did not receive any other annual compensation, restricted stock
awards, stock appreciation rights, long-term incentive plan payouts or other
compensation for the three fiscal years ended December 31, 1995.
OPTIONS GRANTS IN LAST FISCAL YEAR
The following table sets forth options granted to Mr. Rieple during 1995:
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT
ASSUMED ANNUAL
RATES OF
STOCK PRICE
NUMBER OF % OF TOTAL EXERCISE APPRECIATION
SECURITIES OPTIONS OR BASE FOR OPTION TERM
UNDERLYING GRANTED TO PRICE EXPIRATION ------------------
NAME OPTIONS GRANTED EMPLOYEES ($/SH) DATE 5% ($) 10% ($)
-------------------------------- --------------- ---------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Theodore R. Rieple.............. 51,500(1) 14.8% $ 3.45 05/25/2005 $111,755 $283,250
</TABLE>
------------
(1) These options vest in equal installments on the first three annual
anniversaries of the date of grant.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUE TABLE
The following table sets forth the option exercises and the value of
in-the-money unexercised options held by Mr. Rieple at December 31, 1995:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS
ACQUIRED OPTIONS/SARS AT FY/END(#) AT
ON FY/END($)(1)
EXERCISE VALUE --------------------------- ---------------------------
NAME (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---------------------------------- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Theodore R. Rieple................ 0 0 257,500 103,000 $ 1,779,325 $ 584,010
</TABLE>
------------
(1) Mr. Rieple has been granted options to purchase a total of 309,000 shares of
Common Stock at an exercise price of $0.97 per share and 51,500 shares of
Common Stock at an exercise price of $3.45 per share. The fiscal year-end
closing price of the Common Stock was $7.88 per share. The amounts in these
columns were calculated using the difference between the exercise price and
the fiscal year-end closing price.
32
<PAGE>
CERTAIN TRANSACTIONS
In 1995, 1994 and 1993, the Company and its subsidiaries paid fees to
Interlaken Capital totaling $0, $260,910 and $133,350, respectively, in
consideration of services rendered in connection with acquisitions made by the
Company and its subsidiaries. Mr. Berkley is the sole stockholder of Interlaken
Capital. Messrs. Berkley and Bursky are the sole directors of Interlaken
Capital. Mr. Bursky, Ms. James and Mr. Polan are all employees and executive
officers of Interlaken Capital.
The Company has entered into an agreement (the "Services Agreement") with
Interlaken Capital pursuant to which Interlaken Capital will provide the Company
with certain corporate and administrative services during 1996, including but
not limited to services relating to accounting and internal legal advice. The
fee to be paid by the Company pursuant to the Services Agreement is $400,000
plus expenses incurred by Interlaken Capital. Besides providing services to the
Company, Interlaken Capital provides legal, accounting and other services to
companies engaged in such businesses as fire protection, contract food services,
infants' clothing manufacturing and chemical manufacturing. Ms. James, although
not an employee of the Company, will devote her full attention to the Company in
her capacity as Executive Vice President and Chief Financial Officer. Mr.
Bursky, also not an employee of the Company, will devote a significant portion
of his time to the Company in his capacity as Chairman. However, the percentage
of time Mr. Bursky devotes to the Company will vary, and will depend upon the
demands and growth of the Company and other business enterprises with which he
is involved. Mr. Berkley and Mr. Polan, as directors of the Company, will devote
such time as a director ordinarily devotes to his duties as a director. The
Services Agreement is effective from March 1, 1996 through December 31, 1996
unless terminated by either party on 30 days' prior written notice. The terms of
the Services Agreement were approved by the Company's disinterested directors.
On May 12, 1995, the Company acquired all of the outstanding common stock of
American Technical Services Group, Inc. ("ATSG") in exchange for options to
purchase an aggregate of 1,036,708 shares of Common Stock at a purchase price of
$5.82 per share. The options became exercisable in whole or in part on November
13, 1995 and terminate on May 12, 2000. The selling stockholders of ATSG
included (i) Interlaken Investment Partners, L.P., which received options to
purchase 919,600 shares of Common Stock, (ii) The Berkley Family Limited
Partnership, which received options to purchase 19,649 shares of Common Stock,
(iii) Andrew M. Bursky, who received options to purchase 28,295 shares of Common
Stock, and (iv) Catherine B. James, who received options to purchase 44,800
shares of Common Stock. Ms. James was Chairman of ATSG and Mr. Bursky was a
director of ATSG at the time of the transaction. Mr. Berkley is the sole owner
of a company that indirectly controls Interlaken Investment Partners, L.P. and
is a general partner of The Berkley Family Limited Partnership. The Company
obtained an opinion from an independent investment bank that the transaction was
fair to the Company's stockholders from a financial point of view.
The Company's SafetyMaster subsidiary currently leases space to Master
Protection Corporation ("Master Protection") in offices located in Billings,
Montana and Bismarck, North Dakota. During 1995, 1994 and 1993, SafetyMaster
leased space to Master Protection under the foregoing leases for aggregate
annual rentals of approximately $15,851, $30,194 and $25,597, respectively. It
is anticipated that the Company will receive an aggregate annual rent of $15,839
in 1996. Messrs. Berkley, Bursky and Polan and Ms. James are stockholders of
Master Protection Holdings, Inc. ("Master Protection Holdings"), the parent of
Master Protection. The Company's current directors own, in the aggregate,
approximately 78% of Master Protection Holdings' outstanding common stock. Ms.
James is the Chairman of Master Protection Holdings and Master Protection and
Messrs. Berkley, Bursky and Polan are directors of Master Protection Holdings
and Master Protection.
In accordance with the agreement pursuant to which the Company purchased its
original safety products distribution business from Master Protection in 1990,
Master Protection is the distributor of record for all products manufactured by
Ansul Fire Protection ("Ansul") and sold by SafetyMaster in those markets in
which SafetyMaster operated at the time of the purchase. Master Protection has
had a
33
<PAGE>
long standing relationship with Ansul and is responsible for negotiating the
terms under which SafetyMaster buys Ansul products and resolving any
distribution problems that arise between the Company and Ansul. During 1995,
1994 and 1993, the Company paid annual commissions to Master Protection of
approximately $65,043, $65,419 and $64,228, respectively, in connection with the
sale of Ansul products, and it is anticipated that the Company will continue to
pay annual commissions to Master Protection of approximately $65,000.
The Company has issued a subordinated note due 1998 to Mr. Krauter in the
principal amount of $500,000, bearing interest at the rate of 6% per annum. The
Company issued this note on January 4, 1994 in connection with its acquisition
from Mr. Krauter of all of the issued and outstanding stock of ISA.
The Company believes that the foregoing transactions were on terms no less
favorable to the Company than those available from unaffiliated parties. In the
future, the Company will engage in transactions with affiliated parties only if
they satisfy the foregoing criteria.
34
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information, as of March 31, 1996,
concerning beneficial ownership of Common Stock (calculated based on 21,765,957
shares outstanding, unless otherwise indicated in the footnotes hereto), and as
adjusted to reflect the sale of the Common Stock in the Offering (assuming no
exercise of the Underwriters' over-allotment option), by (i) each person known
by the Company to own beneficially more than five percent of the outstanding
shares of Common Stock, (ii) each director of the Company, (iii) the executive
officer of the Company named in the Summary Compensation Table, (iv) all
executive officers and directors of the Company as a group, and (v) each Selling
Stockholder. Unless otherwise indicated, all amounts reflected in the table
represent shares the beneficial owners of which have sole voting and investment
power.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED SHARES BENEFICIALLY
PRIOR TO OFFERING OWNED AFTER OFFERING
DIRECTORS, OFFICERS AND 5% ---------------------- SHARES BEING ---------------------
STOCKHOLDERS NUMBER PERCENT OFFERED NUMBER PERCENT
-------------------------------- ---------- ------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C>
William R. Berkley (a).......... 9,282,898(b) 40.88(b) -- (c) 9,282,898(c) 31.25(c)
Director
Andrew M. Bursky................ 1,090,863(d) 4.91(d) -- 1,090,863 3.73
Director, Chairman of the
Board
Arnold W. Donald................ 1,030 * -- 1,030 *
Director
Catherine B. James.............. 720,820(e) 3.29(e) -- 720,820 2.49
Chief Financial Officer,
Executive Vice President and
Director
George E. Krauter............... 206,000 * -- 206,000 *
Director
Joshua A. Polan................. 165,781 * -- 165,781 *
Director
Mitchell I. Quain............... 10,000 * -- 10,000 *
Director
Theodore R. Rieple.............. 430,195(f) 1.95(f) -- 430,195 1.48
President and Director
The Soros Group (g)............. 2,472,000 11.36 1,200,000 1,272,000 4.42
Wellington Management Company (h) 1,288,360(i) 5.92 -- 1,288,360 4.48
All executive officers and
directors as a group (9
persons)...................... 11,491,641(j) 49.51(j) -- (k) 11,491,641(k) 38.04(k)
</TABLE>
------------
<TABLE>
<C> <S>
* Owns less than 1% of the outstanding shares of Common Stock.
(a) The business address of William R. Berkley and all executive officers and directors of
the Company is 165 Mason Street, Greenwich, Connecticut 06830. The business addresses
of the members of the Soros Group are set forth in footnote (g) below and the business
address of Wellington Management Company is set forth in footnote (h).
(b) Includes (i) 417,182 shares of Common Stock as to which Mr. Berkley has granted a call
option to Mr. Bursky, (ii) 19,649 shares of Common Stock which are subject to currently
exercisable stock options held by The Berkley Family Limited Partnership, and (iii)
919,600 shares of Common Stock which are subject to currently exercisable stock options
held by Interlaken Investment Partners, L.P. Mr. Berkley is a general partner of The
Berkley Family Limited Partnership and is the sole owner of a company that indirectly
controls Interlaken Investment Partners, L.P.; as such, he may be deemed to be the
beneficial owner of shares of Common Stock and/or options to purchase Common Stock held
by those entities. The number of outstanding shares used to calculate percent of class
is 22,705,206.
</TABLE>
(Footnotes continued on following page)
35
<PAGE>
(Footnotes continued from preceding page)
<TABLE>
<C> <S>
(c) Mr. Berkley may offer up to 600,000 shares of Common Stock upon exercise of the
Underwriters' over-allotment option. If all 600,000 shares are purchased by the
Underwriters from Mr. Berkley and the Underwriters also purchase 630,000 shares from
the Company upon exercise of the over-allotment option, Mr. Berkley will own 8,682,898
shares of Common Stock, representing 28.62% of the Common Stock outstanding after the
Offering See "Underwriting."
(d) Includes (i) 417,182 shares of Common Stock which Mr. Bursky may acquire from Mr.
Berkley upon exercise of a call option and (ii) 28,295 shares of Common Stock which are
subject to currently exercisable stock options held by Mr. Bursky. The number of
outstanding shares used to calculate percent of class is 22,211,434.
(e) Includes 147,800 shares of Common Stock which are subject to currently exercisable
stock options held by Ms. James. The number of outstanding shares used to calculate
percent of class is 21,913,757.
(f) Includes (i) 309,000 shares of Common Stock which are subject to currently exercisable
stock options held by Mr. Rieple and (ii) 17,165 shares of Common Stock which are
subject to stock options held by Mr. Rieple that will become exercisable within 60
days. The number of outstanding shares used to calculate percent of class is
22,092,122.
(g) The Soros Group is comprised of George Soros (doing business as Soros Fund Management),
Brahman Partners II, L.P., B-Y Partners, L.P., Brahman Capital Corp., Brahman Partners,
Peter A. Hochfelder, Robert J. Sobel and Mitchell A. Kuflik. The business address of
Mr. Soros is 888 Seventh Avenue, New York, New York 10106. The business address of all
other members of the Soros Group is 277 Park Avenue, 26th Floor, New York, New York
10017. Information regarding the Soros Group has been obtained by the Company from a
Schedule 13D filed by the Soros Group with the Securities and Exchange Commission on or
about January 12, 1994. The 1,200,000 shares of Common Stock being offered by The Soros
Group are being offered as follows: Brahman Partners II, L.P., 450,000 shares; B-Y
Partners, L.P., 150,000 shares; Quota Fund, NV "Brahman," 450,000 shares; and Genesis
Capital Fund--"Brahman," 150,000 shares. Quota Fund, NV--"Brahman" and Genesis Capital
Fund--"Brahman" are investment accounts managed by Brahman Capital Corp.
(h) The business address of Wellington Management Company is 75 State Street, Boston,
Massachusetts 02109. Information regarding Wellington Management Company has been
obtained by the Company from a Schedule 13G filed by the Wellington Management Company
with the Securities and Exchange Commission on or about January 31, 1996.
(i) Wellington Management Company has shared investment power over 1,288,360 shares of Com-
mon Stock and shared voting power over 629,160 shares of Common Stock. Wellington
Management Company does not have sole voting power over any shares of Common Stock.
(j) Includes 1,442,745 shares of Common Stock which are subject to options held by
executive officers and directors of the Company that are currently exercisable or will
become exercisable within 60 days. The number of outstanding shares used to calculate
percent of class is 23,208,702.
(k) Mr. Berkley may offer up to 600,000 shares of Common Stock upon exercise of the
Underwriters' over-allotment option. If all 600,000 shares are purchased by the
Underwriters from Mr. Berkley and the Underwriters also purchase 630,000 shares from
the Company upon exercise of the over-allotment option, all executive officers and
directors as a group will own 10,891,641 shares of Common Stock, representing 35.32%
of the Common Stock outstanding after the Offering. See "Underwriting."
</TABLE>
36
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, par value $0.10 per share, and 500,000 shares of Preferred Stock,
par value $0.10 per share (the "Preferred Stock").
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights of
outstanding Preferred Stock. Upon the liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to receive ratably the net
assets of the Company available after the payment of all debts and other
liabilities and subject to the prior rights of any outstanding Preferred Stock.
Holders of Common Stock have no preemptive, subscription, redemption or
conversion rights. All the outstanding shares of Common Stock are, and the
shares of Common Stock to be sold by the Company in the Offering when issued and
paid for will be, fully paid and non-assessable. The rights, preferences and
privileges of holders of Common Stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series of Preferred
Stock that the Company may designate and issue in the future.
PREFERRED STOCK
The Board of Directors is authorized, subject to any limitations prescribed
by law and without stockholder approval, to issue shares of Preferred Stock in
one or more series. Each such series of Preferred Stock shall have such rights,
preferences, privileges and restrictions, including voting rights, dividend
rights, conversion rights, redemption privileges and liquidation privileges as
shall be determined by the Board of Directors.
The purpose of authorizing the Board of Directors to issue Preferred Stock
and to determine its rights and preferences is to eliminate delays associated
with a stockholder vote on specific issuances and to provide desirable
flexibility in connection with possible acquisitions and other corporate
purposes. The issuance of any such series may have an adverse effect on the
rights of holders of Common Stock. The issuance of Preferred Stock could
decrease the amount of earnings and assets available for distribution to holders
of Common Stock. In addition, any such issuance could have the effect of
delaying, deferring or preventing a change of control of the Company. The
Company has no present plans to issue shares of Preferred Stock.
CERTAIN CHARTER PROVISIONS
The Company's Restated Certificate of Incorporation contains provisions to
indemnify the Company's directors and officers to the fullest extent permitted
by the Delaware General Corporation Law (the "DGCL"). At the 1996 Annual
Meeting, holders of Common Stock have been asked to approve a proposed amendment
of the Company's Restated Certificate of Incorporation (a) to include provisions
relating to the advance payment by the Company of expenses incurred by a
director, officer, employee or agent of the Company in defending an action, suit
or proceeding and (b) to provide that no subsequent amendment or repeal of the
Restated Certificate of Incorporation shall eliminate or reduce the right of any
such director, officer, employee or agent to indemnification in respect of any
matter occurring before such amendment or repeal. The Company believes that
these provisions will assist the Company in attracting and retaining qualified
individuals to serve as directors.
37
<PAGE>
SECTION 203 OF THE DELAWARE LAW
Generally, Section 203 of the DGCL prohibits certain Delaware corporations
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the time of the transaction in which the person
became an interested stockholder, unless (i) prior to the time of the business
combination, the transaction is approved by the board of directors of the
corporation, (ii) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder owns
at least 85% of the outstanding voting stock, or (iii) at or after such time the
business combination is approved by the board of directors and by the
affirmative vote of at least 66 2/3% of the outstanding voting stock which is
not owned by the interested stockholder. A "business combination" includes
mergers, asset sales and other transactions resulting in a financial benefit to
the interested stockholder. Subject to certain exceptions, an "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within three years, did own) 15% or more of the corporation's voting stock. A
Delaware corporation may "opt out" from the application of Section 203 of the
DGCL through a provision in its certificate of incorporation or by-laws. The
Company has opted out of Section 203 of the DGCL.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Continental Stock
Transfer and Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
REGISTRATION RIGHTS
Following the Offering, the holders of 1,787,000 shares of Common Stock will
have the right, subject to certain conditions, to include such shares in certain
registration statements, if any, filed by the Company under the Securities Act.
The holders of all of such shares of Common Stock have waived their right to
include such shares in the Offering. The 1,200,000 shares of Common Stock being
offered by the Selling Stockholders have been included in the Offering pursuant
to such registration rights.
SALES PURSUANT TO RULE 144
Upon completion of the Offering, the Company will have outstanding
28,765,957 shares of Common Stock (assuming the Underwriters' over-allotment
option is not exercised). Of the total shares outstanding the Company estimates
that 16,017,444 shares, including the 8,200,000 shares sold in the Offering,
will be freely tradeable without restriction or further registration under the
Securities Act, except for any shares purchased by an "affiliate" of the
Company, which will be subject to the limitations of Rule 144 under the
Securities Act ("Rule 144"). The Company estimates that an additional 12,748,513
outstanding shares of Common Stock (10,048,896 of which will be held by
affiliates of the Company) will be eligible for sale, subject to applicable
volume limitations and other provisions of Rule 144, 11,320,896 of which will be
subject to the expiration of the 180 day lock-up agreements described below.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned his or her restricted
securities (as that term is defined in Rule 144) for at least two years from the
date such securities were acquired from the Company or an affiliate of the
Company would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of (i) one percent of the then
outstanding shares of Common Stock (287,660 shares of Common Stock immediately
after the Offering) and (ii) the average weekly trading volume of the Common
Stock during the four calendar weeks preceding a sale by such person. Sales
under Rule 144 are also subject to certain manner-of-sale provisions, notice
requirements and the availability of current
38
<PAGE>
public information about the Company. Under Rule 144, however, a person who has
held shares for a minimum of three years from the later of the date such
securities were acquired from the Company or an affiliate of the Company and who
is not, and for the three months prior to the sale of such shares has not been,
an affiliate of the Company, is free to sell such shares without regard to the
volume, manner-of-sale and certain other limitations contained in Rule 144.
The Company, each executive officer and director of the Company and each
Selling Stockholder have agreed with the Underwriters not to offer, sell,
contract to sell, grant any option to purchase or otherwise dispose of, directly
or indirectly, any shares of Common Stock, or any securities convertible into or
exercisable or exchangeable for, or warrants, rights or options to acquire
Common Stock or in any manner transfer all or a portion of the economic
consequences associated with the ownership of Common Stock, for a period of 180
days after the date of this Prospectus without the prior written consent of the
Donaldson, Lufkin & Jenrette Securities Corporation, except for gifts, provided
that the donee agrees to be bound by the foregoing restrictions, and except that
the Company may grant options under its employee benefit plans consistent with
past practice or issue shares of Common Stock upon the exercise of options
granted under such employee benefit plans. The Company estimates that 11,320,896
outstanding shares of Common Stock will be subject to these lock-up agreements.
No predictions can be made about the effect, if any, that market sales of
shares of Common Stock or the availability of such shares for sale will have on
the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of Common Stock in the public market may have an adverse
impact on the market for the Shares.
39
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in the Underwriting Agreement
(the "Underwriting Agreement"), the underwriters named below (the
"Underwriters"), for whom Donaldson, Lufkin & Jenrette Securities Corporation,
Schroder Wertheim & Co. Incorporated and Hanifen, Imhoff Inc., are acting as
representatives (the "Representatives"), have severally agreed to purchase from
the Company and the Selling Stockholders an aggregate of 8,200,000 Shares. The
number of Shares that each Underwriter has agreed to purchase is set forth
opposite its name below:
NUMBER OF
UNDERWRITERS SHARES
---------------------------------------------------------------- ---------
Donaldson, Lufkin & Jenrette Securities Corporation.............
Schroder Wertheim & Co. Incorporated............................
Hanifen, Imhoff Inc.............................................
---------
Total........................................................... 8,200,000
---------
---------
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the Shares offered hereby are
subject to the approval of certain legal matters by counsel and to certain other
conditions. If any Shares are purchased by the Underwriters pursuant to the
Underwriting Agreement, all the Shares offered hereby (other than shares of
Common Stock subject to the over-allotment option described below) must be
purchased.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
The Company and the Selling Stockholders have been advised by the
Representatives that the Underwriters propose to offer the Shares to the public
initially at the price to the public set forth on the cover page of this
Prospectus and to certain dealers (who may include the Underwriters) at such
price less a concession not in excess of $ per share. The Underwriters
may allow, and such dealers may reallow, discounts not in excess of $
per share to any other Underwriter and certain other dealers.
The Company and a stockholder of the Company have granted to the
Underwriters an option to purchase up to 630,000 and 600,000 additional shares
of Common Stock, respectively, at the initial public offering price net of
underwriting discounts and commissions, solely to cover over-allotments made in
connection with the sale of the Shares offered hereby. The first 600,000
additional shares of Common Stock purchased upon the exercise of the option
will be purchased from such stockholder. Such option may be exercised at any
time within 30 days after the date of this Prospectus. To the extent that the
Underwriters exercise such option, each Underwriter will be committed, subject
to certain conditions, to purchase a number of additional shares proportionate
to such Underwriter's initial commitment as indicated in the preceding table.
See "Principal and Selling Stockholders."
The Company, each executive officer and director of the Company and each of
the Selling Stockholders have agreed with the Underwriters not to offer, sell,
contract to sell, grant any option to purchase or otherwise dispose of, directly
or indirectly, any shares of Common Stock, or any securities convertible into or
exercisable or exchangeable for, or warrants, rights or options to acquire
Common Stock or in any manner transfer all or a portion of the economic
consequences associated with the ownership of Common Stock, for a period of 180
days after the date of this Prospectus without the prior written consent of
Donaldson, Lufkin & Jenrette Securities Corporation, except for gifts, provided
that the donee agrees to be bound by the foregoing restrictions, and except that
the Company may grant options under its employee benefit plans consistent with
past practice or issue shares of Common Stock upon the exercise of outstanding
options granted under such employee benefit plans. See "Shares Eligible for
Future Sale."
40
<PAGE>
Mitchell I. Quain, a director of the Company, is also a Managing Director of
Schroder Wertheim & Co. Incorporated, one of the Underwriters of the Offering.
Hanifen, Imhoff Inc. has, in the past, provided certain investment banking and
underwriting services to the Company for which it received customary
compensation.
LEGAL MATTERS
Certain legal matters in connection with the Common Stock offered hereby
will be passed upon for the Company by Willkie Farr & Gallagher, New York, New
York. Certain legal matters in connection with the Common Stock offered hereby
will be passed upon for the Underwriters by Andrews & Kurth L.L.P., New York,
New York.
EXPERTS
The financial statements of the Company as of December 31, 1994 and 1995 and
for the years ended December 31, 1993, 1994 and 1995 have been included herein
and elsewhere in the Registration Statement of which this Prospectus forms a
part in reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein and upon the authority of said
firm as experts in accounting and auditing.
The financial statements of ATSG for the four months ended July 30, 1993,
the five months ended December 26, 1993 and the year ended December 25, 1994,
included herein and elsewhere in the Registration Statement of which this
Prospectus forms a part have been audited by Smith & Howard, P.C., independent
auditors, as stated in their reports appearing herein, and have been so included
in reliance upon the reports of such firm given upon their authority as experts
in accounting and auditing.
The financial statements of ISA as of December 31, 1993 and for the ten
months ended December 31, 1993 included herein and elsewhere in the Registration
Statement of which this Prospectus forms a part have been audited by Coopers &
Lybrand L.L.P., independent auditors, as stated in their reports appearing
herein, and have been so included in reliance upon the reports of such firm
given upon their authority as experts in accounting and auditing.
The financial statements of the Lufkin Division for the year ended December
31, 1993 included herein and elsewhere in the Registration Statement of which
this Prospectus forms a part have been audited by Arthur Andersen LLP,
independent certified public accountants, as stated in their report appearing
herein, and have been so included in reliance upon the reports of such firm
given upon their authority as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the office of the Securities and Exchange
Commission (the "Commission"), 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549, a Registration Statement on Form S-1 under the
Securities Act with respect to the Common Stock offered hereby. This Prospectus
does not contain all of the information set forth in the Registration Statement,
certain portions of which have been omitted as permitted by the rules and
regulations of the Commission. For further information pertaining to the Common
Stock offered hereby and to the Company, reference is made to the Registration
Statement, including the exhibits filed or incorporated by reference as a part
thereof. Statements contained herein concerning the provisions of any documents
filed with, or incorporated by reference in, the Registration Statement as
exhibits are necessarily summaries and, in each instance, each such statement is
qualified in its entirety by reference to the copy of such document filed as an
exhibit to the Registration Statement.
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended, and, accordingly, files reports,
proxy statements and other information with the Commission which may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549 and at certain regional offices of the Commission located at Suite
1400, Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois
60661-2511 and Seven World Trade Center, New York, New York 10048. Copies of
such material can be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 at
prescribed rates.
41
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C>
THE COMPANY
Independent Auditors' Report....................................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995, and March 31, 1996
(unaudited)...................................................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1993, 1994
and 1995, and the three months ended March 31, 1995 and 1996 (unaudited)......... F-4
Consolidated Statement of Stockholders' Equity for the years ended December 31,
1993, 1994 and 1995, and the three months ended March 31, 1996 (unaudited)....... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994
and 1995, and the three months ended March 31, 1995 and 1996 (unaudited)......... F-6
Notes to Consolidated Financial Statements......................................... F-7
ACQUIRED COMPANIES
American Technical Services Group, Inc.
Independent Auditors' Report....................................................... F-16
Consolidated Balance Sheet as of April 2, 1995 (unaudited)......................... F-17
Consolidated Statements of Operations for the four months ended July 30, 1993, the
five months ended December 26, 1993, the year ended December 25, 1994, the three
months ended April 3, 1994 and the three months ended April 2, 1995 (unaudited).. F-18
Consolidated Statement of Stockholders' Equity for the four months ended July 30,
1993, the five months ended December 26, 1993, the year ended December 25, 1994
and the three months ended April 2, 1995 (unaudited)............................. F-19
Consolidated Statements of Cash Flows for the four months ended July 30, 1993, the
five months ended December 26, 1993, the year ended December 25, 1994, the three
months ended April 3, 1994 and the three months ended April 2, 1995 (unaudited).. F-20
Notes to Consolidated Financial Statements......................................... F-21
Industrial Systems Associates, Inc.
Report of Independent Accountants.................................................. F-24
Statement of Income for the ten months ended December 31, 1993..................... F-25
Statement of Stockholders' Equity for the ten months ended December 31, 1993....... F-26
Statement of Cash Flows for the ten months ended December 31, 1993................. F-27
Notes to Financial Statements...................................................... F-28
Industrial Supplies Division of Lufkin Industries, Inc.
Report of Independent Public Accountants........................................... F-29
Statement of Earnings for the year ended December 31, 1993......................... F-30
Statement of Changes in Lufkin's Equity Investment for the year ended December 31,
1993............................................................................. F-31
Statement of Cash Flows for the year ended December 31, 1993....................... F-32
Notes to Financial Statements...................................................... F-33
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
Basis for Presentation of Pro Forma Financial Information.......................... F-36
Pro Forma Statement of Income for the year ended December 31, 1995................. F-37
Note to Pro Forma Statement of Income (unaudited).................................. F-38
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and
Stockholders
STRATEGIC DISTRIBUTION, INC.:
We have audited the accompanying consolidated balance sheets of Strategic
Distribution, Inc. and subsidiaries as of December 31, 1994 and 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Strategic
Distribution, Inc. and subsidiaries as of December 31, 1994 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Stamford, Connecticut
March 18, 1996
F-2
<PAGE>
STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------------
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 3,022,428 $ 640,360 $ 872,659
Accounts receivable, net.......................... 10,078,210 20,104,270 19,051,554
Inventories....................................... 13,469,229 15,422,066 16,682,200
Prepaid expenses and other current assets......... 418,926 588,188 670,827
Deferred tax asset................................ 1,793,000 1,320,000 1,307,000
----------- ----------- -----------
Total current assets........................ 28,781,793 38,074,884 38,584,240
Property and equipment, net......................... 2,571,796 3,352,948 3,739,766
Excess of cost over fair value of net assets
acquired, net..................................... 5,158,911 5,865,691 5,817,917
Other assets........................................ 895,541 757,121 738,658
----------- ----------- -----------
Total assets................................ $37,408,041 $48,050,644 $48,880,581
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses............. $10,670,635 $14,317,750 $17,866,578
Current portion of long-term debt................. 209,643 158,553 147,469
Reserve for restructuring charge.................. -- -- 920,000
----------- ----------- -----------
Total current liabilities................... 10,880,278 14,476,303 18,934,047
Long-term debt...................................... 1,617,517 1,458,401 1,451,608
Note payable........................................ -- 4,445,000 2,710,000
Deferred tax liability.............................. 189,000 280,000 267,000
----------- ----------- -----------
Total liabilities........................... 12,686,795 20,659,704 23,362,655
----------- ----------- -----------
Stockholders' equity:
Preferred stock, par value $.10 per share.
Authorized: 500,000 shares; issued and
outstanding: none.............................. -- -- --
Common stock, par value $.10 per share.
Authorized: 25,000,000 shares; issued and
outstanding: 21,020,535, 21,716,662 and
21,765,957 shares............................... 2,102,054 2,171,666 2,176,596
Additional paid-in capital.......................... 28,154,039 33,861,694 33,949,442
Accumulated deficit................................. (5,484,847) (8,592,420) (10,558,112)
Note receivable from sale of stock.................. (50,000) (50,000) (50,000)
----------- ----------- -----------
Total stockholders' equity.................. 24,721,246 27,390,940 25,517,926
----------- ----------- -----------
Total liabilities and stockholders'
equity.................................... $37,408,041 $48,050,644 $48,880,581
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------ --------------------------
1993 1994 1995 1995 1996
----------- ----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues........................ $37,097,753 $77,613,379 $117,493,338 $25,396,090 $33,316,372
Cost of sales................... 26,936,870 59,385,787 91,595,757 19,542,626 26,233,440
----------- ----------- ------------ ----------- -----------
Gross profit................... 10,160,883 18,227,592 25,897,581 5,853,464 7,082,932
Selling, general and
administrative expenses........ 9,521,962 16,025,737 23,938,649 4,950,885 8,039,555
Restructuring charge............ -- -- -- -- 920,000
----------- ----------- ------------ ----------- -----------
Operating income (loss)........ 638,921 2,201,855 1,958,932 902,579 (1,876,623)
Interest expense (income):
Interest expense............... 468,371 801,053 178,377 35,686 92,885
Interest (income).............. (31,049) (66,018) (80,371) (40,794) (3,816)
----------- ----------- ------------ ----------- -----------
Interest (income) expense,
net........................ 437,322 735,035 98,006 (5,108) 89,069
----------- ----------- ------------ ----------- -----------
Income (loss) before income
taxes......................... 201,599 1,466,820 1,860,926 907,687 (1,965,692)
Income tax expense (benefit)... -- (768,000) 857,000 368,000 --
----------- ----------- ------------ ----------- -----------
Income (loss) from continuing
operations.................... 201,599 2,234,820 1,003,926 539,687 (1,965,692)
Income from discontinued
operations.................... 100,000 -- -- -- --
----------- ----------- ------------ ----------- -----------
Net income (loss).......... $ 301,599 $ 2,234,820 $ 1,003,926 $ 539,687 $(1,965,692)
----------- ----------- ------------ ----------- -----------
----------- ----------- ------------ ----------- -----------
Net income (loss) per common
share:
Primary:
Income (loss) from continuing
operations................... $ 0.02 $ 0.13 $ 0.05 $ 0.02 $ (0.09)
Income from discontinued
operations................... -- -- -- -- --
----------- ----------- ------------ ----------- -----------
Net income (loss).......... $ 0.02 $ 0.13 $ 0.05 $ 0.02 $ (0.09)
----------- ----------- ------------ ----------- -----------
----------- ----------- ------------ ----------- -----------
Fully diluted--
Net income (loss).......... $ 0.02 $ 0.13 $ 0.04 $ 0.02 $ (0.09)
----------- ----------- ------------ ----------- -----------
----------- ----------- ------------ ----------- -----------
Average number of shares of
common stock outstanding....... 12,684,911 16,993,971 21,689,653 21,661,222 21,740,823
----------- ----------- ------------ ----------- -----------
----------- ----------- ------------ ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED NOTE
STOCK CAPITAL DEFICIT RECEIVABLE
----------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Balance December 31, 1992................ $ 1,227,512 $ 9,959,780 $ (8,021,266) $ (50,000)
Net income............................. -- -- 301,599 --
Issuance of 85,000 shares.............. 8,500 21,750 -- --
----------- ----------- ------------ ----------
Balance December 31, 1993................ 1,236,012 9,981,530 (7,719,667) (50,000)
Net income............................. -- -- 2,234,820 --
Issuance of 505,250 shares............. 50,525 595,475 -- --
Exercise of stock options.............. 517 4,649 -- --
Sale of 8,150,000 shares, net.......... 815,000 17,572,385 -- --
----------- ----------- ------------ ----------
Balance December 31, 1994................ 2,102,054 28,154,039 (5,484,847) (50,000)
Net income............................. -- -- 1,003,926 --
Exercise of stock options.............. 6,407 59,442 -- --
Tax benefit of stock options
exercised............................ -- 43,000 -- --
Value of options issued in connection
with acquisition..................... -- 1,560,100 -- --
Stock dividend (including cash paid for
fractional shares)................... 63,205 4,045,113 (4,111,499) --
----------- ----------- ------------ ----------
Balance December 31, 1995................ 2,171,666 33,861,694 (8,592,420) (50,000)
(unaudited)
Net loss for the three months ended
March 31, 1996....................... -- -- (1,965,692) --
Exercise of stock options.............. 4,930 51,748 -- --
Tax benefit of stock options
exercised............................ -- 36,000 -- --
----------- ----------- ------------ ----------
Balance March 31, 1996................... $ 2,176,596 $33,949,442 $(10,558,112) $ (50,000)
----------- ----------- ------------ ----------
----------- ----------- ------------ ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- --------------------------
1993 1994 1995 1995 1996
---------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)................. $ 301,599 $ 2,234,820 $ 1,003,926 $ 539,687 $(1,965,692)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities:
Depreciation and amortization..... 362,196 802,905 1,211,171 241,097 366,678
Restructuring charge.............. -- -- -- -- 920,000
Deferred taxes.................... -- (886,000) 644,000 296,000 --
Changes in operating assets and
liabilities, net of effects of
acquisitions:
Accounts receivable............. (370,811) (3,113,997) (8,239,648) (3,033,728) 1,052,716
Inventories..................... 43,314 (2,942,819) (1,952,837) 12,332 (1,260,134)
Prepaid expenses and other
current assets................ 5,746 (135,115) (344,814) (205,210) (152,385)
Accounts payable and accrued
expenses...................... (407,962) 163,787 2,348,843 2,439,970 3,563,102
Other, net........................ (55,959) (56,249) 10,237 (1,520) (14,787)
Net cash used in discontinued
operations...................... (100,000) -- -- -- --
---------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities.......... (221,877) (3,932,668) (5,319,122) 288,628 2,509,498
---------- ----------- ----------- ----------- -----------
Cash flows used in investing
activities:
Acquisitions of businesses, net of
cash acquired................... (569,669) (5,020,777) 73,576 -- --
Additions of property and
equipment....................... (245,098) (671,806) (1,183,984) (217,146) (581,000)
---------- ----------- ----------- ----------- -----------
Net cash used in investing
activities.................... (814,767) (5,692,583) (1,110,408) (217,146) (581,000)
---------- ----------- ----------- ----------- -----------
Cash flows from financing
activities:
Proceeds from sale of stock,
net............................. -- 18,392,551 65,849 34,227 56,678
Cash paid in lieu of fractional
shares of stock dividend........ -- -- (3,181) -- --
Proceeds from (repayment of) note
payable......................... 1,251,635 (6,528,256) 4,445,000 -- (1,735,000)
Repayment of subordinated debt.... (56,250) -- -- -- --
Repayment of long-term
obligations..................... (118,286) (488,601) (460,206) (50,884) (17,877)
---------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities.......... 1,077,099 11,375,694 4,047,462 (16,657) (1,696,199)
---------- ----------- ----------- ----------- -----------
Increase (decrease) in cash and
cash equivalents.............. 40,455 1,750,443 (2,382,068) 54,825 232,299
Cash and cash equivalents, at
beginning of the period........... 1,231,530 1,271,985 3,022,428 3,022,428 640,360
---------- ----------- ----------- ----------- -----------
Cash and cash equivalents, at end
of the period..................... $1,271,985 $ 3,022,428 $ 640,360 $ 3,077,253 $ 872,659
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
Supplemental cash flow information:
Taxes paid...................... $ 6,562 $ 227,423 $ 167,653 $ 85,290 $ 196,149
Interest paid................... 448,656 813,006 158,655 32,692 89,453
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information as to the March 31, 1996 balance sheet and as to the statements
of operations and cash flows for the three months ended March 31, 1995 and 1996
is unaudited.
(1) DESCRIPTION OF BUSINESS
The Company provides proprietary industrial supply procurement solutions to
industrial sites, primarily through its In-Plant Store(R) program. The Company
conducts its operations primarily through its four subsidiaries, SafetyMaster
Corporation ("SafetyMaster"), Lewis Supply (Delaware), Inc. ("Lewis Supply"),
Industrial Systems Associates, Inc. ("ISA") and American Technical Services
Group, Inc. ("ATSG").
(2) SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Strategic
Distribution, Inc. and its subsidiaries. All significant intercompany accounts
and transactions have been eliminated. The preparation of the consolidated
financial statements requires estimates and assumptions that affect amounts
reported and disclosed in the financial statements and related notes. Actual
results could differ from those estimates.
Cash Equivalents
All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents. At December 31, 1994 and
December 31, 1995, the Company had invested in cash equivalents of approximately
$2,710,000 and $203,000, respectively.
Disclosure About Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments approximate fair
value due to their short maturity and variable interest rate feature.
Inventories
Inventories of finished goods are stated at the lower of cost (first-in,
first-out basis) or market.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized on a straight-line basis over the shorter
of the remaining useful life of the asset or the lease term. Maintenance and
repairs are charged to expense. Major renewals and improvements are capitalized
and depreciated over the remaining useful life of the asset. Estimated useful
lives are as follows:
Building....................................................... 20 years
Warehouse and office equipment................................. 5-12 years
Leasehold improvements......................................... 5-14 years
Transportation equipment....................................... 4-8 years
F-7
<PAGE>
STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Intangible Assets
Excess of cost over fair value of net assets acquired is amortized on the
straight-line method over periods up to 40 years. The Company assesses the
recoverability of this intangible asset on a systematic basis by determining
whether the amortization over its remaining life can be recovered through
projected undiscounted future results. The amount of impairment, if any, is
measured based on projected discounted future operating earnings before
amortization.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of assets and liabilities and their respective tax bases and
operating loss carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Interim Financial Statements
The accompanying unaudited financial statements as of March 31, 1996 and for
the three months ended March 31, 1995 and 1996 have been prepared in accordance
with generally accepted accounting principles for interim financial information.
In the opinion of management, all adjustments (consisting of normal, recurring
accruals) considered necessary for a fair presentation have been included.
Results for the interim periods are not necessarily indicative of the results
for an entire year.
Net Income (Loss) Per Common Share
Net income (loss) per share of common stock is computed using the weighted
average number of shares and common stock equivalents outstanding during the
respective periods. The fully diluted net income per share for the year ended
December 31, 1995 is based on 22,621,384 shares of Common Stock and common stock
equivalents. For the three months ended March 31, 1996, the net loss per share,
assuming full dilution, is considered to be the same as primary because the
effect of the common stock equivalents would be antidilutive.
Assuming that the 5,750,000 shares of Common Stock issued by the Company on
October 13, 1994 were outstanding for the entire year ended December 31, 1994,
net income per common share would have been $0.12.
(3) ACCOUNTS RECEIVABLE
Accounts receivable is net of an allowance for doubtful accounts of $80,000
and $140,000 at December 31, 1994 and 1995, respectively, and $168,000 at March
31, 1996.
F-8
<PAGE>
STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Land................................................... $ 240,000 $ 240,000 $ 240,000
Building............................................... 567,994 567,994 567,994
Warehouse and office equipment......................... 2,157,140 3,413,553 3,947,242
Leasehold improvements................................. 282,913 569,463 523,898
Transportation equipment............................... 678,363 602,654 645,369
---------- ---------- ----------
3,926,410 5,393,664 5,924,503
Less: accumulated depreciation and amortization........ 1,354,614 2,040,716 2,184,737
---------- ---------- ----------
$2,571,796 $3,352,948 $3,739,766
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
(5) EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
Excess of cost over fair value of net assets acquired is net of accumulated
amortization of $360,000 and $607,000 at December 31, 1994 and 1995,
respectively, and $677,000 at March 31, 1996.
(6) NOTE PAYABLE TO BANK
Effective as of December 31, 1995, the Company entered into a new revolving
bank credit agreement providing maximum outstanding borrowings of $20,000,000.
These borrowings bear interest at the prime rate (8.25% as of March 31, 1996)
and/or a Eurodollar rate, with a 1/4% commitment fee on the unused portion of
the credit available. The credit facility expires on January 31, 2000. At March
31, 1996, $2,710,000 was borrowed, at an interest rate of 8.25%, under the
credit facility. The amount which the Company may borrow under the credit
facility is based upon eligible accounts receivable which were approximately
$18,900,000 at March 31, 1996. The credit facility is collateralized by
substantially all of the assets of the Company's subsidiaries (net book value,
as defined, of approximately $40,340,000 at March 31, 1996) and by a pledge of
all the capital stock of SafetyMaster, Lewis Supply, ISA, ATSG, SafetyMaster's
wholly-owned subsidiary Coulson Technologies, Inc. and ATSG's wholly-owned
subsidiaries ATS Phoenix Inc. and National Technical Services Group, Inc.
(7) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Accounts payable.................................... $ 7,945,378 $11,318,450 $15,495,896
Accrued expenses.................................... 2,225,825 1,604,796 1,208,117
Payroll and related expenses........................ 499,432 1,394,504 1,162,565
----------- ----------- -----------
$10,670,635 $14,317,750 $17,866,578
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
(8) LONG-TERM DEBT
Long-term debt consists of several loans with a weighted average interest
rate of 7.1% at December 31, 1994 and 1995, and 7.0% at March 31, 1996.
F-9
<PAGE>
STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(8) LONG-TERM DEBT--(CONTINUED)
Principal payments due on long-term obligations during each of the next five
years are: 1996 (nine months): $127,689; 1997: $373,994; 1998: $548,754; 1999:
$500,621; 2000: $22,058; and thereafter: $25,961.
(9) ACQUISITIONS
In July 1993 the Company issued 75,000 shares of Common Stock in connection
with the acquisition of Dakota Fire and Safety Equipment Co., Inc. and in
October 1993 issued 10,000 shares of Common Stock in connection with the
acquisition of Corpus Fire & Safety, Inc.
On January 4, 1994, the Company acquired all of the outstanding common stock
of ISA. The purchase price consisted of: (i) $3,000,000 in cash; (ii) a
promissory note in the amount of $500,000; and (iii) 500,000 shares of Common
Stock. The source of the cash portion of the purchase price was borrowings under
a revolving bank facility.
On June 16, 1994, Lewis Supply acquired certain assets of the Industrial
Supplies Division of Lufkin Industries, Inc. (the "Lufkin Division"). The
purchase price consisted of: (i) $2,040,000 in cash; and (ii) a mortgage note in
the amount of $600,000. The source of the cash portion of the purchase price was
borrowings under a revolving bank facility.
On May 12, 1995, the Company acquired all of the outstanding common stock of
ATSG. The purchase price consisted of options to purchase 1,036,708 shares of
Common Stock at a price of $5.82 per share. The fair market value of these
options, as determined by an independent investment bank, was $1,560,100.
(10) DISCONTINUED OPERATIONS
During 1990, the Company disposed of its information services business. The
results of these operations are included under the caption "Income From
Discontinued Operations."
In connection with the discontinuance of this business, the Company remained
liable for certain lease obligations. At December 31, 1993, there was no
remaining liability.
(11) RETIREMENT PLAN
The Company has a qualified defined contribution plan (the "Retirement
Savings Plan") for employees who meet certain eligibility requirements.
Contributions to the Retirement Savings Plan are at the discretion of the Board
of Directors and are limited to the amount deductible for Federal income tax
purposes. The expense for the Retirement Savings Plan was $17,525, $38,452 and
$57,936 for the years ended December 31, 1993, 1994 and 1995, respectively, and
$15,652 and $12,502 for the three months ended March 31, 1995 and 1996,
respectively. ATSG regularly employs individuals covered under collective
bargaining agreements. Accordingly, ATSG makes contributions to several multi-
employer defined contribution and defined benefit pension plans ("Plans") for
these employees. The expense for these Plans was $268,931 for the period from
May 12, 1995 to December 31, 1995 and $52,615 for the three months ended March
31, 1996.
F-10
<PAGE>
STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(12) INCOME TAXES
The income tax expense (benefit) in the Consolidated Statements of
Operations is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ ------------------
1993 1994 1995 1996
--------- ----------- -------- ------------------
<S> <C> <C> <C> <C>
Current:
Federal............................... $ -- $ 20,000 $ 35,000 $--
State................................. -- 98,000 178,000 --
Deferred:
Federal............................... -- (828,000) 632,000 --
State................................. -- (58,000) 12,000 --
--------- ----------- -------- ----------
$ -- $ (768,000) $857,000 $--
--------- ----------- -------- ----------
--------- ----------- -------- ----------
</TABLE>
A reconciliation of the expected Federal income tax expense (benefit) at the
statutory rate to the Company's income tax expense follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ ------------------
1993 1994 1995 1996
--------- ----------- -------- ------------------
<S> <C> <C> <C> <C>
Expected tax expense (benefit).......... $ 103,000 $ 499,000 $632,000 ($668,000)
Increase (reduction) in tax expense
resulting from:
State taxes........................... -- 26,000 125,000 --
Changes in (reversal of) valuation
allowance........................... -- (1,076,000) -- 639,000
Utilization of net operating loss..... (119,000) (386,000) -- --
State net operating loss not
utilized............................ -- 80,000 -- --
Goodwill.............................. 15,000 69,000 77,000 22,000
Other................................. 1,000 20,000 23,000 7,000
--------- ----------- -------- ------------------
$ -- $ (768,000) $857,000 $ --
--------- ----------- -------- ------------------
--------- ----------- -------- ------------------
</TABLE>
F-11
<PAGE>
STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(12) INCOME TAXES--(CONTINUED)
The components of the net deferred tax asset were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforward (expires during
period ending 2008)................................ $1,181,000 $ 632,000 $ 950,000
----------
Accounts receivable.................................. 32,000 55,000 66,000
Inventories.......................................... 192,000 249,000 230,000
Accrued expenses..................................... 318,000 243,000 236,000
Vacation accrual..................................... 50,000 80,000 86,000
Reserve for restructuring charge..................... -- -- 313,000
Other................................................ 90,000 130,000 139,000
Valuation allowance.................................. -- -- (639,000)
---------- ---------- ----------
Total deferred tax asset........................... 1,863,000 1,389,000 1,381,000
---------- ---------- ----------
Deferred tax liabilities:
Property and equipment............................... 129,000 155,000 161,000
Other assets......................................... 122,000 181,000 164,000
Goodwill............................................. 8,000 13,000 16,000
---------- ---------- ----------
Total deferred tax liability....................... 259,000 349,000 341,000
---------- ---------- ----------
Net deferred tax asset................................. $1,604,000 $1,040,000 $1,040,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1994 was
$1,794,000, of which $332,000 was to be allocated to reduce goodwill. During the
fourth quarter of 1994, the valuation allowance was eliminated resulting from
the Company's reevaluation of the realizability of future income tax benefits
due to the 1994 acquisitions of ISA and the Lufkin Division. The reversal of the
valuation allowance for deferred tax assets in 1994 which was allocated to
reduce goodwill was $718,000. At December 31, 1995, no valuation allowance was
provided because management believes that it is more likely than not that
sufficient taxable income will be generated to allow for realization of the tax
benefits. At March 31, 1996, a valuation allowance was recorded because the
Company does not believe that it is more likely than not that a benefit will be
realized during the current year.
(13) STOCKHOLDERS' EQUITY
The Company has authorized 500,000 shares of Preferred Stock, par value
$0.10 per share. No shares of Preferred Stock are currently issued or
outstanding. The Board of Directors may at any time fix by resolution any of the
powers, preferences and rights, and the qualifications, limitations and
restrictions of the Preferred Stock, which may be issued in series.
On January 4, 1994, the Company sold an aggregate of 2,400,000 shares of
Common Stock for $3,000,000.
On October 13, 1994, the Company sold 5,750,000 shares of Common Stock in an
underwritten public offering. The net proceeds to the Company were $15,405,500.
The Company's bank indebtedness was repaid and the balance of the proceeds was
available for working capital and for general corporate acquisitions.
F-12
<PAGE>
STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(13) STOCKHOLDERS' EQUITY--(CONTINUED)
On December 6, 1995, the Company declared a three percent stock dividend
paid on December 29, 1995 to stockholders of record as of December 18, 1995. The
Company had accumulated net income of $4,148,000 from July 1, 1990 (when it
became a provider of industrial supply services) to December 31, 1995.
(14) STOCK COMPENSATION PLAN
The Company has an Incentive Stock Option Plan (the "1990 Stock Option
Plan") under which the Board of Directors is authorized to grant certain
directors, executives and key employees of the Company options for the purchase
of up to 2,060,000 shares of Common Stock. The 1990 Stock Option Plan provides
for the granting of both incentive stock options and options that do not qualify
as incentive stock options. In the case of each incentive stock option granted
under the 1990 Stock Option Plan, the option price must not be less than the
fair market value of the Common Stock at the date of grant. To date, all options
granted under the 1990 Stock Option Plan are exercisable at not less than the
fair market value of the Common Stock at the date of grant. Options which have
been granted under the 1990 Stock Option Plan are exercisable at various rates
from 25% to 33.3% per year beginning on the first anniversary date, except for
103,000 options which were exercisable at the date of grant.
The following table summarizes the option information (as adjusted for the
stock dividend):
<TABLE>
<CAPTION>
NUMBER OF SHARES OPTION PRICES
---------------- -------------
<S> <C> <C>
Options outstanding December 31, 1993......... 721,773 $0.97
Options granted during 1994................... 369,616 $1.21-$3.45
Options canceled or expired................... (83,812) $0.97-$3.45
Options exercised............................. (5,321) $0.97
----------------
Options outstanding December 31, 1994......... 1,002,256 $0.97-$3.45
----------------
Options granted during 1995................... 352,399 $3.45-$5.94
Options canceled or expired................... (99,815) $0.97-$3.45
Options exercised............................. (45,087) $0.97-$3.45
----------------
Options outstanding December 31, 1995......... 1,209,753 $0.97-$5.94
Options granted during first three months
1996........................................ --
Options canceled or expired................... (39,995) $0.97-$3.45
Options exercised............................. (49,295) $0.97-$3.45
----------------
Options outstanding March 31, 1996............ 1,120,463 $0.97-$5.94
----------------
----------------
Options exercisable........................... 690,480 $0.97-$5.94
----------------
----------------
</TABLE>
F-13
<PAGE>
STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(14) STOCK COMPENSATION PLAN--(CONTINUED)
Warrants to purchase 38,625 shares of Common Stock for $1.46 per share were
outstanding at March 31, 1996 and expire in 1999.
(15) LEASE COMMITMENTS
The Company leases equipment and real estate for initial terms of five to
eight years. The minimum future rental payments for operating leases with
initial noncancelable lease terms in excess of one year as of March 31, 1996 are
as follows:
1996 (nine months).............................................. $843,587
1997............................................................ 906,046
1998............................................................ 685,318
1999............................................................ 378,866
2000............................................................ 261,269
Thereafter...................................................... 144,327
Rental expense for the years ended December 31, 1993, 1994 and 1995 was
$576,509, $628,449 and $908,841, respectively, and $217,138 and $319,912 for the
three months ended March 31, 1995 and 1996, respectively.
(16) SUPPLEMENTAL CASH FLOW INFORMATION
In conjunction with the acquisitions, liabilities assumed were:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1993 1994 1995
---------- ----------- ----------
<S> <C> <C> <C>
Fair value of assets acquired......................... $1,621,579 $13,496,558 $3,045,065
Net cash.............................................. 569,669 5,020,777 (73,576)
Common Stock or options issued........................ 30,250 625,000 1,560,100
---------- ----------- ----------
Liabilities assumed................................... $1,021,660 $ 7,850,781 $1,558,541
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
(17) CUSTOMER BUSINESS DATA
One In-Plant Store(R) customer (with which the Company operates under four
separate contracts) represented approximately 15% and 10% of revenues for the
years ended December 31, 1994 and 1995, respectively, and approximately 12.3% of
revenues for the three months ended March 31, 1995. Another In-Plant Store(R)
customer (with which the Company operates under four separate contracts)
represented approximately 11.5% of revenues for the three months ended March 31,
1996.
(18) PRO FORMA
Presented below is an unaudited pro forma condensed statement of income
which gives effect to adjustments in 1994 for the acquisition of the Lufkin
Division on June 16, 1994 as if such acquisition
F-14
<PAGE>
STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(18) PRO FORMA--(CONTINUED)
occurred on January 1, 1994 and adjustments in 1994 and 1995 for the acquisition
of ATSG on May 12, 1995 as if such acquisition occurred on January 1 of each
such year.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1995
------------ ------------
<S> <C> <C>
Revenues....................................... $ 91,630,660 $120,264,734
Operating income............................... $ 1,847,893 $ 1,385,880
Net income..................................... $ 1,797,743 $ 428,840
Net income per common share.................... $ 0.11 $ 0.02
</TABLE>
One In-Plant Store(R) customer (with which the Company operates under four
separate contracts) represented approximately 12% and 10% of pro forma revenues
for the years ended December 31, 1994 and 1995, respectively.
(19) RESTRUCTURING CHARGE
On March 18, 1996, the Company announced the merger of two of its
subsidiaries. In connection with the merger, the Company recorded a
restructuring charge in the first quarter of 1996 aggregating $920,000 for
employee termination benefits, asset write-offs and lease payments.
(20) QUARTERLY DATA (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)--UNAUDITED
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
1994
Revenues................................ $17,307 $18,433 $20,568 $21,305 $ 77,613
Gross profit............................ 3,979 4,282 4,837 5,130 18,228
Net income.............................. 227 283 249 1,476(a) 2,235
Net income per share(b)................. 0.01 0.02 0.02 0.07 0.13
1995
Revenues................................ $25,396 $27,235 $31,926 $32,936 $117,493
Gross profit............................ 5,853 6,180 6,525 7,340 25,898
Net income (loss)....................... 540 381 317 (234) 1,004
Net income (loss) per share(b).......... 0.02 0.02 0.01 (0.01) 0.05
</TABLE>
------------
<TABLE>
<C> <S>
(a) See footnote 12
(b) Each period is computed separately.
</TABLE>
F-15
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
American Technical Services Group, Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of American Technical Services Group, Inc.
(Successor), a Delaware corporation, for the year ended December 25, 1994 and
five months ended December 26, 1993 (Successor periods), and of American
Technical Services Group, Inc. (Predecessor), a Georgia corporation, for the
four months ended July 30, 1993 (Predecessor period). These consolidated
financial statements are the responsibility of the related Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated 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 aforementioned Successor consolidated financial
statements present fairly, in all material respects, the consolidated results of
operations and cash flows for the Successor periods then ended, in conformity
with generally accepted accounting principles. Further, in our opinion, the
aforementioned Predecessor consolidated financial statements present fairly, in
all material respects, the consolidated results of operations and cash flows for
the Predecessor period, in conformity with generally accepted accounting
principles.
As described in Note 5, the Company filed for binding arbitration related to
a contract in progress at December 25, 1994, and the customer filed a
counterclaim against Company. Due to the early stages of arbitration, the
ultimate outcome is not presently determinable.
SMITH & HOWARD, P.C.
Atlanta, Georgia
February 9, 1995, except for Note 5, as to
which the date is April 27, 1995.
F-16
<PAGE>
AMERICAN TECHNICAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
APRIL 2, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 11,349
Contracts receivable, net.................................................... 1,591,740
Costs and estimated earnings in excess of billings........................... 94,126
Other........................................................................ 19,381
-----------
Total current assets....................................................... 1,716,596
Property and equipment, net.................................................. 195,066
Excess of cost over fair value of net assets acquired, net................... 254,414
-----------
Total assets............................................................... $ 2,166,076
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses........................................ $ 748,727
Billings in excess of costs and estimated earnings........................... 101,613
Accrual for loss contract.................................................... 15,709
-----------
Total current liabilities.................................................. 866,049
-----------
Commitments and Contingency
Stockholders' Equity:
Common stock, par value $0.01 per share. Authorized 2,000 shares; issued and
outstanding: 1,319 shares.................................................. 13
Additional paid-in capital................................................... 2,880,987
Accumulated deficit.......................................................... (1,580,973)
-----------
Total stockholders' equity................................................. 1,300,027
-----------
Total liabilities and stockholders' equity................................. $ 2,166,076
-----------
-----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-17
<PAGE>
AMERICAN TECHNICAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FIVE MONTHS
FOUR MONTHS ENDED YEAR ENDED THREE MONTHS THREE MONTHS
ENDED DECEMBER 26, DECEMBER 25, ENDED ENDED
JULY 30, 1993 1993 1994 APRIL 3, 1994 APRIL 2, 1995
------------- ------------ ------------ ------------- -------------
(PREDECESSOR) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................ $ 1,744,161 $2,240,730 $8,669,653 $ 3,032,790 $ 1,785,025
Cost of sales........... 1,229,864 1,861,026 6,619,207 2,461,627 1,508,751
------------- ------------ ------------ ------------- -------------
Gross profit.......... 514,297 379,704 2,050,446 571,163 276,274
Selling, general and
administrative
expenses.............. 476,488 1,108,681 2,567,311 647,840 625,967
------------- ------------ ------------ ------------- -------------
Operating income
(loss).............. 37,809 (728,977) (516,865) (76,677) (349,693)
Interest income
(expense)............. (73,304) 14,562 -- -- --
------------- ------------ ------------ ------------- -------------
Loss before
extraordinary item...... (35,495) (714,415) (516,865) (76,677) (349,693)
Extraordinary item-
forgiveness of
indebtedness.......... 544,839 -- -- -- --
------------- ------------ ------------ ------------- -------------
Net income (loss)..... $ 509,344 $ (714,415) $ (516,865) $ (76,677) $ (349,693)
------------- ------------ ------------ ------------- -------------
------------- ------------ ------------ ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE>
AMERICAN TECHNICAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREDECESSOR
STOCKHOLDERS'
COMMON STOCK ADDITIONAL ACCUMULATED EQUITY
AMOUNT PAID-IN CAPITAL DEFICIT (DEFICIT)
------------ --------------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, April 1, 1993 (Predecessor).... -- -- -- $(255,353)
Net income for the four months ended
July 30, 1993......................... -- -- -- 509,344
-------------
Balance, July 30,1993................... -- -- -- 253,991
Acquisition by Successor on
July 31, 1993......................... $ 10 $ 2,327,490 -- (253,991)
Net loss for the five months ended
December 26, 1993..................... -- -- $ (714,415) --
--- --------------- ----------- -------------
Balance, December 26, 1993.............. 10 2,327,490 (714,415) --
Sale of common stock.................... 3 553,497 -- --
Net loss for the year ended December 25,
1994.................................. -- -- (516,865) --
--- --------------- ----------- -------------
Balance, December 25, 1994.............. 13 2,880,987 (1,231,280) --
Net loss (unaudited) for the three
months ended April 2, 1995............ -- -- (349,693) --
--- --------------- ----------- -------------
Balance, April 2, 1995 (unaudited)...... $ 13 $ 2,880,987 $(1,580,973) --
--- --------------- ----------- -------------
--- --------------- ----------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<PAGE>
AMERICAN TECHNICAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FIVE MONTHS
FOUR MONTHS ENDED YEAR ENDED THREE MONTHS THREE MONTHS
ENDED DECEMBER 26, DECEMBER 25, ENDED ENDED
JULY 30, 1993 1993 1994 APRIL 3, 1994 APRIL 2, 1995
-------------- ------------ ------------ ------------- -------------
(PREDECESSOR) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)................... $ 509,344 $ (714,415) $ (516,865) $ (76,677) $(349,693)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization.... 18,614 30,693 70,510 18,888 17,567
Forgiveness of indebtedness...... (544,839) -- -- -- --
Changes in operating assets and
liabilities:
Contracts receivable........... 1,154,816 (278,359) (635,111) (1,181,963) 158,822
Cost and estimated earnings in
excess of billings........... (78,065) 128,440 (66,290) (82,652) (10,923)
Income taxes receivable........ 71,768 -- -- -- --
Accounts payable and accrued
expenses..................... (554,212) 182,650 (36,755) 424,775 153,524
Billings in excess of costs and
estimated earnings........... (9,730) 19,474 51,726 170,556 7,308
Accrual for loss contracts..... -- -- 208,228 -- (192,520)
Other, net..................... 2,726 6,623 (14,084) (13,696) 14,984
-------------- ------------ ------------ ------------- -------------
Net cash provided by (used
in) operating activities... 570,422 (624,894) (938,641) (740,769) (200,931)
-------------- ------------ ------------ ------------- -------------
Cash flows from investing
activities--
Additions to property and
equipment........................... -- (8,272) (43,991) (20,394) (52,671)
-------------- ------------ ------------ ------------- -------------
Cash flows from financing
activities:
Net repayments under accounts
receivable agreement with
finance company................ (518,482) -- -- -- --
Repayments of other notes
payable...................... (24,283) -- -- -- --
Borrowings of (repayment of)
subordinated debt.............. -- (117,509) (160,742) 1,276 --
Proceeds from sale of common
stock.......................... -- -- 553,500 -- --
-------------- ------------ ------------ ------------- -------------
Net cash provided by operating
activities................... (542,765) (117,509) 392,758 1,276 --
-------------- ------------ ------------ ------------- -------------
Increase (decrease) in cash and
cash equivalents............. 27,657 (750,675) (589,874) (759,887) (253,602)
Cash and cash equivalents, at
beginning of period................ 75,802 1,605,500 854,825 854,825 264,951
-------------- ------------ ------------ ------------- -------------
-------------- ------------ ------------ ------------- -------------
Cash and cash equivalents, at end of
period............................ $ 103,459 $ 854,825 $ 264,951 $ 94,938 $ 11,349
-------------- ------------ ------------ ------------- -------------
-------------- ------------ ------------ ------------- -------------
Supplemental cash flow information:
Taxes paid....................... $ -- $ -- $ -- $ -- $ --
Interest paid.................... 73,304 -- -- -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-20
<PAGE>
AMERICAN TECHNICAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
American Technical Services Group, Inc. ("ATSG" or the "Successor"), through
its wholly owned subsidiaries, ATS Phoenix Inc. and National Technical Services
Group, Inc., is a supplier of process control and instrumentation services
throughout the United States.
Commencement of Operations
On July 31, 1993, ATSG acquired substantially all of the operating assets
and assumed certain liabilities of American Technical Services Group, Inc.
("Predecessor"), a Georgia corporation. The purchase price was approximately
$941,000, which was funded from part of the proceeds from the initial sale of
ATSG's Common Stock.
Basis of Consolidation
The consolidated financial statements include the accounts of ATSG and its
wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
The periods for the Consolidated Statements of Operations are as follows:
ATSG (Successor):
Predecessor (audited):
Four months ended July 30, 1993 was for the period from the
Predecessors last fiscal year end to its last date of operations.
Audited
Year ended December 25, 1994 and five months ended December 26, 1993
was for fiscal periods which ended on the last Sunday of December.
Unaudited
Fourteen week fiscal quarters for the quarters ending April 3, 1994
and April 2, 1995.
In conjunction with this acquisition, liabilities assumed and refinanced
were:
Fair value of assets acquired.................................. $1,413,539
Net cash paid.................................................. (722,000)
Issuance of notes payable...................................... (219,468)
----------
Liabilities assumed and refinanced............................. $ 472,071
----------
----------
Revenue Recognition
Revenues on long-term contracts are recognized by the percentage of
completion method based on cost incurred as a percentage of the estimated total
costs of each contract. Revenues from time-and-material contracts are recognized
currently as the work is performed. Provision for estimated losses, if any, on
uncompleted contracts are made in the periods in which such losses are
determined.
F-21
<PAGE>
AMERICAN TECHNICAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line basis over the estimated useful lives of the assets.
Maintenance and repairs are charged to expense. Major renewals and improvements
are capitalized and depreciated over the remaining useful life of the asset.
Excess of Cost Over Fair Value of Net Assets Acquired
Excess of cost over fair value of net assets acquired is being amortized on
a straight-line basis over forty years.
Income Taxes
ATSG has accumulated operating loss carryovers at December 25, 1994 for
income tax purposes available to offset future taxable income which expire if
unused as follows:
2008........................................................... $ 612,000
2009........................................................... 458,000
----------
$1,070,000
----------
----------
Differences between book and taxable income consist primarily of the excess
of depreciation for tax purposes over the amount for financial reporting
purposes, bad debts accounted for using the direct write off method for tax
reporting purposes and differences in recognition of losses on contracts.
Interim Financial Statements
The accompanying unaudited financial statements as of April 2, 1995 and the
fourteen week fiscal quarters ended April 2, 1994 and April 3, 1995 have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal,
recurring accruals) considered necessary for a fair presentation have been
included. Results for the interim periods are not necessarily indicative of the
results for an entire year.
NOTE 2--RENT EXPENSE
Rent expense was as follows:
Four months ended July 30, 1993................................. $ 59,160
Five months ended December 26, 1993............................. 40,196
Year ended December 25, 1994.................................... 182,388
NOTE 3--PROFIT SHARING PLAN
ATSG has established a 401-K profit sharing plan for eligible employees.
ATSG's contributions to the Plan are at the discretion of its Board of
Directors. ATSG is obligated to pay expenses related to the Plan's
administration. There have been no contributions to the Plan since April 1,
1992.
F-22
<PAGE>
AMERICAN TECHNICAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--EXTRAORDINARY ITEM
A loan balance of $568,433 plus accrued interest of $51,406 under the
Amended Workout Agreement with a bank was sold by the bank to the Predecessors
principal stockholder for $75,000 in June 1993. This transaction resulted in
forgiveness of debt to the Predecessor of $544,839 which is recorded as an
extraordinary item for the four months ended July 31, 1993 in the Consolidated
Statements of Operations. The $75,000 loan, due to the Predecessor's principal
stockholder, was not assumed by the Successor.
NOTE 5--CONTINGENCY
Subsequent to December 25, 1994, ATSG filed for binding arbitration of a
dispute relating to work performed by ATSG in late 1994 and early 1995. The net
loss for the year ended December 25, 1994 includes a $250,000 loss for the
project that is the subject of the arbitration. The customer for whom the work
was performed filed a counterclaim against ATSG. Due to the early stages of the
arbitration proceedings, counsel representing ATSG in this matter cannot offer
an opinion as to the probable outcome. Management of ATSG believes that ATSG
will prevail in the arbitration and that the ultimate resolution will not have a
material adverse effect on ATSG's financial position.
F-23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Industrial Systems Associates, Inc.:
We have audited the accompanying statements of income, stockholders' equity,
and cash flows of Industrial Systems Associates, Inc. for the ten months ended
December 31, 1993. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements of Industrial Systems Associates,
Inc. referred to above present fairly, in all material respects, the results of
its operations and its cash flows for the ten months ended December 31, 1993, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 4, 1994
F-24
<PAGE>
INDUSTRIAL SYSTEMS ASSOCIATES, INC.
STATEMENT OF INCOME
TEN MONTHS ENDED DECEMBER 31, 1993
Revenues...................................................... $22,137,984
Cost of sales................................................. 18,231,174
-----------
Gross profit.............................................. 3,906,810
Selling, general and administrative expenses.................. 3,088,646
-----------
Operating income.......................................... 818,164
Interest expense.............................................. 91,218
-----------
Income before provision for income taxes.................... 726,946
Provision for income taxes.................................... 303,833
-----------
Net income.................................................. $ 423,113
-----------
-----------
See accompanying notes to consolidated financial statements.
F-25
<PAGE>
INDUSTRIAL SYSTEMS ASSOCIATES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------- RETAINED TREASURY
SHARES AMOUNT EARNINGS STOCK
------ ------- ---------- ---------
<S> <C> <C> <C> <C>
Balance, February 28, 1993........................ 99,000 $42,060 $1,269,550 $(170,000)
Net income........................................ -- -- 423,113 --
------ ------- ---------- ---------
Balance, December 31, 1993........................ 99,000 $42,060 $1,692,663 $(170,000)
------ ------- ---------- ---------
------ ------- ---------- ---------
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE>
INDUSTRIAL SYSTEMS ASSOCIATES, INC.
STATEMENT OF CASH FLOWS
TEN MONTHS ENDED DECEMBER 31, 1993
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income................................................................... $ 423,113
Adjustments to reconcile net income to net cash used in operating
activities-- depreciation.................................................. 89,979
Changes in operating assets and liabilities:
Accounts receivable.......................................................... 178,187
Inventory.................................................................... (1,385,077)
Prepaid expenses and other current assets.................................... 30,217
Accounts payable and accrued expenses........................................ 748,566
Income taxes payable......................................................... (271,598)
Other assets, net............................................................ 14,417
-----------
Net cash used in operating activities........................................ (172,196)
-----------
Cash flows from investing activities:
Additions to property and equipment.......................................... (111,110)
-----------
Net cash used in investing activities........................................ (111,110)
-----------
Cash flows from financing activities:
Proceeds from line of credit, net............................................ 412,045
Proceeds from loan payable--officer.......................................... (101,714)
Repayment of long-term debt, net............................................. (21,041)
-----------
Net cash provided by financing activities.................................. 289,290
-----------
Increase in cash......................................................... 5,984
Cash at beginning of period.................................................... 12,399
-----------
Cash at end of period.......................................................... $ 18,383
-----------
-----------
Supplemental cash flow information:
Interest paid................................................................ $ 100,979
Income taxes paid............................................................ 526,757
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE>
INDUSTRIAL SYSTEMS ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Industrial System Associates, Inc. ("ISA") operates in-plant stores for the
distribution and sale of maintenance, repair and operations supplies (MRO) to
large industrial customers in the United States. ISA operates in one business
segment.
Effective March 1, 1993, ISA changed its fiscal year-end from February 28 to
December 31.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventories:
Inventories of finished goods are stated at the lower of cost (first-in,
first-out basis) or market.
Property and Equipment:
Property and equipment are recorded at cost. Depreciation is computed using
accelerated methods for both financial reporting and income tax purposes.
Maintenance and repairs are charged to expense. Major renewals and improvements
are capitalized and depreciated over the remaining life of the asset. Estimated
useful lives of property and equipment generally range from five to seven years.
3. CUSTOMER CONCENTRATION
ISA operates under multi-year contracts with several customers. For the
period ended December 31, 1993, six customers represented 92% of ISA's sales.
4. INCOME TAXES
The provision for income taxes consist of the following:
Currently payable:.............................................. $229,526
Federal....................................................... 67,104
--------
State......................................................... 296,630
Deferred:
Federal....................................................... 7,203
State......................................................... --
--------
$303,833
--------
--------
A reconciliation of the U.S. statutory federal income tax rate to the
effective rate is as follows:
Statutory tax rate................................................... 34.0%
State income taxes, net of federal income tax benefit................ 7.5
----
41.5%
----
5. RENT EXPENSES
Total rent expense for all operating leases recorded for the ten months
ended December 31, 1993 was $68,101.
6. SUBSEQUENT EVENT
On January 4, 1994, Strategic Distribution, Inc. ("SDI") acquired all of the
outstanding capital stock of ISA. The purchase price paid to the shareholder of
ISA consisted of (i) $3,000,000 in cash, (ii) a promissory note in the amount of
$500,000 and (iii) 500,000 shares of SDI's common stock, par value $0.10 per
share.
F-28
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Lufkin Industries, Inc.:
We have audited the accompanying statements of earnings and cash flows of
the Industrial Supplies Division of Lufkin Industries, Inc. (a Texas
corporation) and the related statement of changes in Lufkin's equity investment
for the year ended December 31, 1993. These financial statements are the
responsibility of management of Lufkin Industries, Inc. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of the
Industrial Supplies Division of Lufkin Industries, Inc. and the changes in
Lufkin's equity investment, each for the year ended December 31, 1993, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 31, 1994
F-29
<PAGE>
INDUSTRIAL SUPPLIES DIVISION OF
LUFKIN INDUSTRIES, INC.
STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1993
SALES......................................................... $13,288,527
COST OF SALES................................................. 10,063,206
-----------
GROSS PROFIT.................................................. 3,225,321
-----------
OPERATING EXPENSES:
Selling expenses............................................ 1,062,951
General and administrative expenses......................... 771,275
Allocated Corporate Expenses of Lufkin Industries, Inc...... 515,160
-----------
Total operating expenses.................................. 2,349,386
-----------
EARNINGS BEFORE INCOME TAXES.................................. 875,935
INCOME TAXES.................................................. 297,818
-----------
NET EARNINGS.................................................. $ 578,117
-----------
-----------
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
INDUSTRIAL SUPPLIES DIVISION OF
LUFKIN INDUSTRIES, INC.
STATEMENT OF CHANGES IN LUFKIN'S EQUITY INVESTMENT
YEAR ENDED DECEMBER 31, 1993
<TABLE>
<S> <C>
BALANCE, DECEMBER 31, 1992..................................................... $3,411,612
NET EARNINGS FOR 1993.......................................................... 578,117
DECREASE IN LUFKIN'S EQUITY INVESTMENT, NET.................................... (763,042)
----------
BALANCE, DECEMBER 31, 1993..................................................... $3,226,687
----------
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
INDUSTRIAL SUPPLIES DIVISION OF
LUFKIN INDUSTRIES, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1993
<TABLE>
<S> <C>
Cash Flows From Operating Activities:
Net Earnings.................................................................. $ 578,117
Adjustments To Reconcile Net Earnings To Net Cash
Provided By Operating Activities:
Depreciation.................................................................. 156,841
Gain On Sale Of Assets........................................................ 29,221
Changes In Operating Assets And Liabilities:
Accounts Receivable........................................................... 30,904
Inventories................................................................... (117,827)
Prepaid Insurance............................................................. (794)
Accounts Payable.............................................................. 166,836
Accrued Liabilities........................................................... 5,080
---------
Net Cash Provided By Operating Activities....................................... 848,378
---------
Cash Flows From Investing Activities:
Capital Expenditures.......................................................... (86,136)
Proceeds From Sale Of Assets.................................................. 800
---------
Net Cash Used In Investing Activities........................................... (85,336)
---------
Net Cash Flows from Divisional Financing Activities Representing the Net
Decrease in Lufkin's Equity Investment........................................ $(763,042)
---------
---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
INDUSTRIAL SUPPLIES DIVISION OF LUFKIN INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
The Industrial Supplies Division of Lufkin Industries, Inc. (the "Division")
was established in 1902 and during 1993 was a distributor of industrial products
including power transmission parts, valves, cutting and conveyor equipment and
parts, wire rope and plumbing fixtures and supplies. All products sold are
manufactured by unaffiliated companies. A significant amount of total sales are
to Lufkin Industries, Inc. (the "Parent"), and the Division also sells to
unaffiliated customers in the East Texas region, many of whom are involved in
the forest products and paper industries.
2. BASIS OF FINANCIAL STATEMENT PRESENTATION
In May 1994, Lufkin agreed to sell the inventory and property, plant and
equipment of the Division, except for land and office equipment having a net
carrying value of approximately $119,000 (unaudited), to Lewis Supply
(Delaware), Inc.
The accompanying financial statements represent the 1993 operations of the
Division. For purposes of preparing financial statements under generally
accepted accounting principles, certain allocations have been made in order to
report various assets and liabilities of the Division at their historical costs
less related liabilities. These allocations are considered reasonable by
management.
3. SUMMARY OF MAJOR ACCOUNTING POLICIES
Inventories
The Division uses the last-in, first-out (LIFO) method of determining
inventory cost, which was less than estimated net realizable value. Had the
first-in, first-out method been used for determining inventory values,
inventories would have been approximately the same at December 31, 1993.
Property, Plant and Equipment
The Division records investments in these assets at cost. Improvements are
capitalized, while repair and maintenance costs are charged to operations as
incurred. Gains or losses realized on the sale or retirement of these assets are
reflected in net earnings but were not significant during the period presented.
Depreciation for financial reporting purposes is provided on a straight-line or
double-declining balance method based upon the estimated useful lives of the
assets.
At December 31, 1993, assets with costs of $383,288 were being depreciated
using a double-declining balance method of depreciation.
Income Taxes
For federal income tax purposes, the Division's operating results have been
included in the Parent's federal income tax return. For financial reporting
purposes, the Division has provided federal income taxes as if it were a
stand-alone entity. However, since the Division is not a tax-paying entity with
respect to federal income taxes, deferred income taxes payable of approximately
$66,000 at December 31, 1993, have been included in Lufkin's equity investment
account. These deferred taxes payable result from differences in depreciation
methods used for book and for income tax purposes.
F-33
<PAGE>
INDUSTRIAL SUPPLIES DIVISION OF LUFKIN INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. RELATED-PARTY AND NONRECURRING TRANSACTIONS
During 1993, the Division recorded sales of $5,527,000 to its Parent, which
represented approximately 42 percent of total Division sales. The gross margin
resulting from these sales to the Parent was approximately $1,105,000. General
and administrative expenses for the Division include certain overhead charges
allocated to the Division based on specific activities performed for the
Division and other indirect expenses allocated on a proportionate basis. In
addition, the statement of earnings has been charged for allocated corporate
expenses of the Parent of $515,160. These corporate charges were made to cover
the various expenses incurred by the Parent to provide supporting administrative
services to the Division, including management direction, accounting, data
processing, human resources, etc. Management believes the allocations are
reasonable. Because of the relationship between the Division and its Parent, the
amount of these transactions reflected in the accompanying financial statements
may not have been the same as they would have been among unaffiliated parties.
Lufkin operates a treasury management system under which the Division's cash
needs have been funded by the Parent. Advances to and from Lufkin have been
included in Lufkin's equity investment account. For various reasons, including
the large number of intercompany transactions, it is not practicable to
determine the amount of gross advances and gross repayments settled through
Lufkin's equity investment account during the periods presented, nor is it
practicable to determine what portion of Lufkin's equity investment account
represents retained earnings of the Division.
During 1993, the Division sold approximately $422,000 of products directly
to Russia. These sales were in addition to various sales made to the Parent to
support business activities conducted by the Parent with Russia. The majority of
these sales represented products that are not carried in the Division's normal
inventory. The Division does not anticipate selling any additional products to
Russia in the future.
During 1993, the Division maintained a Pole Line product line for sales
relating to a contract with a local utility company. Sales of the product line
totaled approximately $747,000 and represented 6 percent of total Division
sales. During 1993, the contract with the utility company expired and the
Division discontinued this product line.
5. RETIREMENT BENEFITS
The Division is part of a Lufkin Industries, Inc. noncontributory pension
plan covering substantially all employees. The benefits provided by this plan
are measured by length of service, compensation and other factors and are
currently funded by a trust established under the plan. Funding of retirement
costs for this plan complies with the minimum funding requirements specified by
the Employee Retirement Income Security Act. Plan investment assets are invested
primarily in equity securities, United States Government securities and cash
equivalents.
The following table provides the detail of the components of pension expense
for the Division. It is not practicable to determine the funded status of the
portion of the plan which relates to the Division. On an overall basis, the
funded assets of the Lufkin Industries, Inc. Retirement Plan for Salaried
Employees was in excess of the projected benefit obligation as of December 31,
1993.
Components of pension expense--
Service cost................................................. $ 118,616
Interest cost................................................ 235,888
F-34
<PAGE>
INDUSTRIAL SUPPLIES DIVISION OF LUFKIN INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. RETIREMENT BENEFITS--(CONTINUED)
Actual return on plan assets................................. (268,355)
Net amortization and deferral................................ (53,419)
---------
Net pension expense........................................ $ 32,730
---------
---------
The Division is included in a Lufkin defined contribution thrift plan
covering substantially all of its
employees. The Parent makes contributions of 75 percent of employee
contributions during the year. All obligations of the Division were funded
through December 31, 1993. The allocated thrift expense related to the Division
for this plan totaled $22,511 for the year ended December 31, 1993.
In addition, the Division is included in two Lufkin defined benefit
post-retirement plans that cover its employees. One plan provides medical
benefits and the other plan provides life insurance benefits. Both plans are
contributory, with retiree contributions adjusted periodically. The Division's
expense for these plans was $25,000, for the year ended December 31, 1993 and is
included with the allocated corporate expenses.
6. UNAFFILIATED SIGNIFICANT CUSTOMERS
For the year ended December 31 1993, one unaffiliated customer represented
11 percent of divisional sales.
F-35
<PAGE>
STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
PRO FORMA STATEMENT OF INCOME
BASIS FOR PRESENTATION OF PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma statement of income includes the applicable pro
forma effect of the adjustment for the acquisition of American Technical
Services Group, Inc. ("ATSG"), acquired May 12, 1995, as if such acquisition
occurred on January 1, 1995.
The unaudited pro forma statement of income is not necessarily indicative of
what the actual results of operations would have been had the transaction
occurred at January 1, 1995, nor does it purport to be indicative of future
results of operations.
F-36
<PAGE>
STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
PRO FORMA STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENT
-----------------
DECEMBER 31, (NOTE) PRO FORMA
1995 ATSG COMBINED DEBIT CREDIT COMBINED
------------ ---------- ------------ ------- ------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues.................. $117,493,338 $2,771,396 $120,264,734 $120,264,734
Cost of sales............. 91,595,757 2,407,139 94,002,896 94,002,896
------------ ---------- ------------ ------------
Gross profit.............. 25,897,581 364,257 26,261,838 26,261,838
Selling, general and
administrative expenses. 23,938,649 924,349 24,862,998 $12,960 24,875,958
------------ ---------- ------------ ------------
Operating income(loss).... 1,958,932 (560,092) 1,398,840 1,385,880
Interest expense (income):
Interest expense........ 178,377 2,034 180,411 180,411
Interest (income)....... (80,371) -- (80,371) (80,371)
------------ ---------- ------------ ------------
Interest expense,
net................. 98,006 2,034 100,040 100,040
------------ ---------- ------------ ------------
Income (loss) before
income taxes............ 1,860,926 (562,126) 1,298,800 1,285,840
Income tax expense........ 857,000 -- 857,000 857,000
------------ ---------- ------------ ------- ------ ------------
Net income (loss)......... $ 1,003,926 $ (562,126) $ 441,800 $12,960 $ -- $ 428,840
------------ ---------- ------------ ------- ------ ------------
------------ ---------- ------------ ------- ------ ------------
Net income per share...... $ 0.05 $ 0.02
------------ ------------
------------ ------------
Average number of shares
of common stock
outstanding............. 21,689,653 21,689,653
------------ ------------
------------ ------------
</TABLE>
F-37
<PAGE>
STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
NOTE TO PRO FORMA STATEMENT OF INCOME
(UNAUDITED)
PRO FORMA ADJUSTMENT
Purchase accounting adjustments to conform to Accounting Principles Board
Opinion No. 16, "Business Combination," relating to the amortization of excess
of cost over fair value of net assets acquired. Excess of cost over fair value
of net assets acquired is amortized on a straight-line basis over 20 years.
Historically, excess of cost over fair value of net assets acquired was
amortized on a straight-line basis over 40 years.
F-38
<PAGE>
STRATEGIC DISTRIBUTION LOGO
The Company's In-Plant Store(R) program is a comprehensive outsourcing
service through which the Company manages all aspects of industrial supply
procurement at 44 large industrial sites in North America. The Company also
offers several other proprietary industrial supply procurement programs, as well
as traditional distribution, to more than 19,000 customers through a network of
32 branches and ten sales and service offices located throughout the United
States and in Mexico.
<PAGE>
============================================ ==================================
NO DEALER, SALESPERSON OR OTHER 8,200,000 SHARES
INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORNMATION OR TO MAKE ANY REPRESENTATIONS [LOGO]
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS
IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE STRATEGIC DISTRIBUTION, INC.
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY, ANY SELLING STOCKHOLDER OR THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION COMMON STOCK
OF AN OFFER TO BUY, THE COMMON STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM,
IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE
IN THE FACTS SET FORTH IN THIS PROSPECTUS OR
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR SINCE THE DATES AS OF WHICH
INFORMATION IS SET FORTH HEREIN. -------------------
PROSPECTUS
------------------- -------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.................... 3
Investment Considerations............. 7
Use of Proceeds....................... 8
Dividend Policy....................... 8
Capitalization........................ 9
Price Range of Common Stock........... 10
Selected Historical and Pro Forma
Consolidated Financial Data........... 11 DONALDSON, LUFKIN & JENRETTE
Management's Discussion and Analysis SECURITIES CORPORATION
of Financial Condition and Results
of Operations....................... 13
Business.............................. 17
Management............................ 28 SCHRODER WERTHEIM & CO.
Certain Transactions.................. 32
Principal and Selling Stockholders.... 34
Description of Capital Stock.......... 36
Shares Eligible for Future Sale....... 37
Underwriting.......................... 39 HANIFEN, IMHOFF INC.
Legal Matters......................... 40
Experts............................... 40
Available Information................. 40
Index to Financial Statements......... F-1
, 1996
============================================ ==================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, to be paid in connection with the sale
of the Common Stock being registered, all of which will be paid by the Company.
All amounts are estimates except the registration fee and the NASD filing fee.
Registration Fee............................................... $ 19,916
NASD Filing Fee................................................ 6,276
NASD Listing Fee............................................... 17,500
Blue Sky Fees and Expenses..................................... 10,000
Accounting Fees and Expenses................................... 90,000
Legal Fees and Expenses........................................ 250,000
Transfer Agent and Registrar Fees.............................. 10,000
Printing and Engraving Expenses................................ 125,000
Miscellaneous Expenses......................................... 96,308
---------
Total.................................................... $ 625,000
---------
---------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "DGCL") empowers a
Delaware corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of such corporation) by reason of the
fact that such person is or was a director, officer, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. A
corporation may indemnify such person against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding if he
or she acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful. A Delaware corporation may indemnify officers and
directors in an action by or in the right of the corporation to procure a
judgment in its favor under the same conditions, except that no indemnification
is permitted without judicial approval if the officer or director is adjudged to
be liable to the corporation.
Where a director, officer, employee or agent is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him or her against the expenses (including attorneys' fees) which he
or she actually and reasonably incurred in connection therewith. A corporation
may, in advance of the final disposition of any civil, criminal, administrative
or investigative action, suit or proceeding, pay the expenses (including
attorneys' fees) incurred by any officer, director, employee or agent in
defending such action, provided that the director or officer undertakes to repay
such amount if it shall ultimately be determined that he or she is not entitled
to be indemnified by the corporation. The indemnification provided is not deemed
to be exclusive of any other rights to which a director, officer, employee or
agent may be entitled under any corporation's by-laws, agreement, vote or
otherwise.
In accordance with Section 145 of the DGCL, Article NINTH of the Company's
Restated Certificate of Incorporation, as amended (the "Restated Certificate")
provides that the Company shall indemnify each person who is or was a director,
officer, employee or agent of the Company or is or was serving at the request of
the Company as a director, officer, employee or agent of another corporation,
II-1
<PAGE>
partnership, joint venture, trust or other enterprise, to the fullest extent
permitted under Section 145 of the DGCL, as the same may be amended or
supplemented. The indemnification provided by the Restated Certificate shall not
be deemed exclusive of any other rights to which any of those seeking
indemnification or advancement of expenses may be entitled under any by-law,
agreement, vote of shareholders or disinterested directors or otherwise, both as
to action in his or her official capacity and as to action in another capacity
while holding such office, and shall continue as to a person who has ceased to
be a director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
The Company's Board of Directors has recommended that at its 1996 Annual
Meeting, stockholders approve an amendment to the Restated Certificate to
include provisions providing that (x) expenses incurred in defending a civil or
criminal action, suit or proceeding shall (in the case of any action, suit or
proceeding against a director or officer of the Company) or may (in the case of
any action, suit or proceeding against a trustee, employee or agent) be paid by
the Company in advance of the final disposition of such action, suit or
proceeding as authorized by the Board upon receipt of an undertaking by or on
behalf of the indemnified person to repay such amount if it shall ultimately be
determined that he is not entitled to be indemnified by the Company as
authorized by the Restated Certificate and that (y) neither the amendment nor
repeal of Article NINTH of the Restated Certificate, as proposed to be amended,
nor the adoption of any provision of the Restated Certificate inconsistent with
such Article shall eliminate or reduce the effect of such Article in respect of
any matter occurring before such amendment, repeal or adoption of an
inconsistent provision or in respect of any cause of action, suit or claim
relating to any such matter which would have given rise to a right of
indemnification or right to receive expenses pursuant to such Article if such
provision had not been so amended or repealed or if a provision inconsistent
therewith had not been so adopted.
The foregoing statements are subject to the detailed provisions of Section
145 of the DGCL and Article NINTH of the Restated Certificate, as proposed to be
amended.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On August 11, 1994, the Company issued 5,250 shares of Common Stock to an
individual in return for services rendered to the Company. The Common Stock was
issued pursuant to the exemption from registration under Section 4(2) of the
Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ------------------------------------------------------------------------------------
<C> <S>
1 Form of Underwriting Agreement**
3.1 Restated Certificate of Incorporation of the Company, as amended through August 21,
1987 (incorporated by reference to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995 (the "fiscal 1995 10-K Report"))*
3.1(a) Amendment to Certificate of Incorporation of the Company filed August 21, 1987 with
the Secretary of State of Delaware (incorporated by reference to the fiscal 1995
10-K Report)*
3.1(b) Amendment to Certificate of Incorporation of the Company filed December 16, 1987
with the Secretary of State of Delaware (incorporated by reference to the fiscal
1995 10-K Report)*
3.1(c) Amendment to Certificate of Incorporation of the Company filed December 15, 1988
with the Secretary of State of Delaware (incorporated by reference to the fiscal
1995 10-K Report)*
3.1(d) Certificate of Stock Designations of the Company filed September 15, 1989 with the
Secretary of State of Delaware (incorporated by reference to the fiscal 1995 10-K
Report)*
3.1(e) Amendment to Certificate of Incorporation of the Company filed November 9, 1990 with
the Secretary of State of Delaware (incorporated by reference to the fiscal 1995
10-K Report)*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ------------------------------------------------------------------------------------
<C> <S>
3.1(f) Amendment to Certificate of Incorporation of the Company filed April 8, 1996 with
the Secretary of State of Delaware*
3.2 Amended and Restated Bylaws of the Company dated July 24, 1986 (incorporated by
reference to the fiscal 1995 10-K Report)*
3.2(a) Amendment to Amended and Restated Bylaws of the Company dated April 25, 1988
(incorporated by reference to the fiscal 1995 10-K Report)*
4 Specimen of Common Stock certificate (incorporated by reference to Amendment No. 2
to the Company's Registration Statement on Form S-1, Registration No. 33-82906,
dated October 5 1994)*
5 Opinion of Willkie Farr & Gallagher regarding the legality of the Common Stock being
registered**
10.1 Form of Strategic Distribution, Inc., Amended and Restated 1990 Incentive Stock
Option Plan (incorporated by reference to the fiscal 1995 10-K Report)*
10.2 Securities Purchase Agreement, dated as of January 4, 1994, among the Company and
the Purchasers listed therein (incorporated by reference to the Company's January 4,
1994 Current Report on Form 8-K)*
10.3 Stock Purchase Agreement, dated as of January 4, 1994, between the Company and
George E. Krauter (incorporated by reference to the Company's January 4, 1994
Current Report on Form 8-K)*
10.4 Asset Purchase Agreement, dated as of June 14, 1994, between Lewis Supply
(Delaware), Inc. and Lufkin Industries, Inc. (incorporated by reference to the
Company's June 29, 1994 Current Report on Form 8-K)*
10.5 Stock Purchase Agreement, dated as of May 12, 1995, between the Company and the
selling shareholders parties thereto (incorporated by reference to the Company's May
12, 1995 Current Report on Form 8-K)*
10.6 Credit Agreement, dated as of December 31, 1995, between the Company and Bank of
America (incorporated by reference to the fiscal 1995 10-K Report)*
10.7 Services Agreement between the Company and Interlaken Capital, Inc.**
21 List of Subsidiaries of the Company (incorporated by reference to the fiscal 1995
10-K Report)*
23.1 Consent of KPMG Peat Marwick LLP, independent public accountants*
23.2 Consent of Smith & Howard, P.C., independent public accountants*
23.3 Consent of Coopers & Lybrand L.L.P., independent public accountants*
23.4 Consent of Arthur Andersen LLP, independent public accountants*
23.5 Consent of Willkie Farr & Gallagher (included in the opinion filed herewith as
Exhibit 5 hereto)**
24 Power of Attorney of the Board of Directors (included in Part II of the Registration
Statement)*
</TABLE>
------------
* Previously filed.
** Filed herewith.
(b) Financial Statement Schedules
None
II-3
<PAGE>
ITEM 17. UNDERTAKINGS
(1) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities 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 Securities Act and will be governed by the final
adjudication of such issue.
(2) The undersigned registrant hereby undertakes that:
(a) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Company certifies that it has reasonable grounds to believe that it meets all of
the requirements for filing on Form S-1 and has duly caused this Amendment No. 2
to Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Greenwich, Connecticut, on May 17,
1996.
STRATEGIC DISTRIBUTION, INC.
By: /s/ ANDREW M. BURSKY
..................................
Andrew M. Bursky
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 2 to Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
------------------------------------- ------------------------------------- ---------------
<S> <C> <C>
/s/ ANDREW M. BURSKY Chairman of the Board and Director May 17, 1996
..................................... (Principal Executive Officer)
Andrew M. Bursky
* /S/ THEODORE R. RIEPLE President and Director May 17, 1996
.....................................
Theodore R. Rieple
* /S/ CATHERINE B. JAMES Chief Financial Officer, Executive May 17, 1996
..................................... Vice President, Treasurer, Secretary
Catherine B. James and Director (Principal Financial
Officer)
* /S/ CHARLES J. MARTIN Vice President, Controller and Chief May 17, 1996
..................................... Accounting Officer (Principal
Charles J. Martin Accounting Officer)
* /S/ WILLIAM R. BERKLEY Director May 17, 1996
.....................................
William R. Berkley
..................................... Director May 17, 1996
Arnold W. Donald
* /S/ GEORGE E. KRAUTER Director May 17, 1996
.....................................
George E. Krauter
* /S/ MITCHELL I. QUAIN Director May 17, 1996
.....................................
Mitchell I. Quain
* /S/ JOSHUA A. POLAN Director May 17, 1996
.....................................
Joshua A. Polan
</TABLE>
*By: /s/ WILLIAM L. MAHONE
................................
William L. Mahone
Attorney-in-Fact
II-5
<PAGE>
APPENDIX A
The inside front cover page of the paper version of this filing contains
a map showing the location of the Company's facilities and the inside back cover
page contains a chart illustrating the differences between the Company's
In-Plant Store(R) program and traditional industrial supply distribution
methods.
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGE
------- -----
<C> <S> <C>
1 Form of Underwriting Agreement**
3.1 Restated Certificate of Incorporation of the Company, as amended through
August 21, 1987 (incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995 (the "fiscal 1995 10-K
Report"))*
3.1(a) Amendment to Certificate of Incorporation of the Company filed August 21, 1987
with the Secretary of State of Delaware (incorporated by reference to the
fiscal 1995 10-K Report)*
3.1(b) Amendment to Certificate of Incorporation of the Company filed December 16,
1987 with the Secretary of State of Delaware (incorporated by reference to the
fiscal 1995 10-K Report)*
3.1(c) Amendment to Certificate of Incorporation of the Company filed December 15,
1988 with the Secretary of State of Delaware (incorporated by reference to the
fiscal 1995 10-K Report)*
3.1(d) Certificate of Stock Designations of the Company filed September 15, 1989 with
the Secretary of State of Delaware (incorporated by reference to the fiscal
1995 10-K Report)*
3.1(e) Amendment to Certificate of Incorporation of the Company filed November 9,
1990 with the Secretary of State of Delaware (incorporated by reference to the
fiscal 1995 10-K Report)*
3.1(f) Amendment to Certificate of Incorporation of the Company filed April 8, 1996
with the Secretary of State of Delaware*
3.2 Amended and Restated Bylaws of the Company dated July 24, 1986 (incorporated
by reference to the fiscal 1995 10-K Report)*
3.2(a) Amendment to Amended and Restated Bylaws of the Company dated April 25, 1988
(incorporated by reference to the fiscal 1995 10-K Report)*
4 Specimen of Common Stock certificate (incorporated by reference to Amendment
No. 2 to the Company's Registration Statement on Form S-1, Registration No.
33-82906, dated October 5 1994)*
5 Opinion of Willkie Farr & Gallagher regarding the legality of the Common Stock
being registered**
10.1 Form of Strategic Distribution, Inc., Amended and Restated 1990 Incentive
Stock Option Plan (incorporated by reference to the fiscal 1995 10-K Report)*
10.2 Securities Purchase Agreement, dated as of January 4, 1994, among the Company
and the Purchasers listed therein (incorporated by reference to the Company's
January 4, 1994 Current Report on Form 8-K)*
10.3 Stock Purchase Agreement, dated as of January 4, 1994, between the Company and
George E. Krauter (incorporated by reference to the Company's January 4, 1994
Current Report on Form 8-K)*
10.4 Asset Purchase Agreement, dated as of June 14, 1994, between Lewis Supply
(Delaware), Inc. and Lufkin Industries, Inc. (incorporated by reference to the
Company's June 29, 1994 Current Report on Form 8-K)*
10.5 Stock Purchase Agreement, dated as of May 12, 1995, between the Company and
the selling shareholders parties thereto (incorporated by reference to the
Company's May 12, 1995 Current Report on Form 8-K)*
10.6 Credit Agreement, dated as of December 31, 1995, between the Company and Bank
of America (incorporated by reference to the fiscal 1995 10-K Report)*
10.7 Services Agreement between the Company and Interlaken Capital, Inc.**
21 List of Subsidiaries of the Company (incorporated by reference to the fiscal
1995 10-K Report)*
23.1 Consent of KPMG Peat Marwick LLP, independent public accountants*
23.2 Consent of Smith & Howard, P.C., independent public accountants*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGE
------- -----
<C> <S> <C>
23.3 Consent of Coopers & Lybrand L.L.P., independent public accountants*
23.4 Consent of Arthur Andersen LLP, independent public accountants*
23.5 Consent of Willkie Farr & Gallagher (included in the opinion filed herewith as
Exhibit 5 hereto)**
24 Power of Attorney of the Board of Directors (included in Part II of the
Registration Statement)*
</TABLE>
------------
* Previously filed.
** Filed herewith.
Exhibit 1
Draft ^ 5/17/96
=======
^ 8,200,000 Shares
=========
STRATEGIC DISTRIBUTION, INC.
Common Stock
UNDERWRITING AGREEMENT
----------------------
^ May 20, 1996
======
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SCHRODER WERTHEIM & CO. INCORPORATED
HANIFEN, IMHOFF INC.
As representatives of the
several underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette
Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
Strategic Distribution, Inc., a Delaware corporation (the "Company"),
and the stockholders of the Company named in Schedule ^ IIA hereto
===
(collectively, the "Firm Selling Stockholders"), severally propose to sell
====
an aggregate of ^ 8,200,000 shares of Common Stock, par value $.10 per
=========
share, of the Company (the "Firm Shares"), to the several underwriters
named in Schedule I hereto (the "Underwriters"). The Firm Shares consist
of ^ 7,000,000 shares to be issued and sold by the Company and ^ an
========= ==
aggregate of 1,200,000 outstanding shares to be sold by the Firm Selling
====================== ====
Stockholders. The Company ^ and the stockholder of the Company named in
===========================================
Schedule IIB hereto (the "Additional Selling Stockholder") also propose to
==========================================================================
sell, severally and not jointly, to the several Underwriters not more than
================================
^ an aggregate of 1,230,000 additional shares of Common Stock, par value
=========================
$.10 per share, of the Company (the "Additional Shares"), if requested by
the Underwriters as provided in Section 2 hereof. The Firm Shares and the
Additional Shares are herein collectively called the "Shares." The shares
of common stock of the Company to be outstanding after giving effect to the
sales contemplated hereby are hereinafter referred to as the "Common
Stock." The Firm Selling Stockholders and the Additional Selling
===========================================================
Stockholder are hereinafter collectively referred to as the "Selling
====================================================================
Stockholders." The Company and the Selling Stockholders are hereinafter
=============
collectively called the "Sellers."
<PAGE>
1. Registration Statement and Prospectus. The Company has prepared
-------------------------------------
and filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended,
and the rules and regulations of the Commission thereunder (collectively
called the "Act"), a registration statement on Form S-1 (Registration No.
333-^ 02393) including a prospectus relating to the Shares, which may be
======
amended. The registration statement as amended at the time when it
becomes effective, including a registration statement (if any) filed
pursuant to Rule 462(b) under the Act increasing the size of the offering
registered under the Act and information (if any) deemed to be part of the
registration statement at the time of effectiveness pursuant to Rule 430A
or Rule 434 under the Act, is hereinafter referred to as the "Registration
Statement;" and the prospectus (including any prospectus subject to
completion taken together with any term sheet meeting the requirements of
Rule 434(b) or Rule 434(c) under the Act) in the form first used to confirm
sales of Shares is hereinafter referred to as the "Prospectus."
2. Agreements to Sell and Purchase. On the basis of the
-------------------------------
representations and warranties contained in this Agreement, and subject to
its terms and conditions, (i) the Company agrees to issue and sell ^
7,000,000 Firm Shares, (ii) each Firm Selling Stockholder agrees, severally
========= ====
and not jointly, to sell the number of Firm Shares set forth opposite such
Firm Selling Stockholder's name in Schedule ^ IIA hereto and (iii) each
==== ===
Underwriter agrees, severally and not jointly, to purchase from each ^ of
==
the Company and each Firm Selling Stockholder at a price per share of
=============================================
$______ (the "Purchase Price") the number of Firm Shares (subject to such
adjustments to eliminate fractional shares as you may determine) which
bears the same proportion to the total number of Firm Shares to be sold by
^ the Company and such Firm Selling Stockholder as the number of Firm
=============================================
Shares set forth opposite the name of such Underwriter in Schedule I hereto
bears to the total number of Firm Shares.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, (i) the Company agrees
to issue and sell up to ^ Additional Shares and the
------------------ =========================
Additional Selling Stockholder agrees to sell up to
---------------------
===================================================
Additional Shares and (ii) the Underwriters shall have the right to
purchase, severally and not jointly, up to an aggregate of ^ 1,230,000
=========
Additional Shares from the Company and the Additional Selling Stockholder
======================================
at the Purchase Price. If the Underwriters elect to purchase only a
============================================
portion of the Additional Shares or elect to purchase Additional Shares in
==========================================================================
increments, the first Additional Shares will be
-------------------
===================================================================
purchased from the Additional Selling Stockholder and the remaining
===================================================================
Additional Shares will be purchased from the Company. Additional Shares
=====================================================
may be purchased solely for the purpose of covering over-allotments made in
connection with the offering of the Firm Shares. The Underwriters may
exercise their right to purchase Additional Shares in whole or in part from
time to time by giving written notice thereof to the Company and to the
==========
Additional Selling Stockholder within 30 days after the date of this
==============================
Agreement. You shall give any such notice on behalf of the Underwriters
and such notice shall specify the aggregate number of Additional Shares to
be purchased pursuant to such exercise and the date for payment and
delivery thereof. The date specified in any such notice shall be a
business day (i) no earlier than the Closing Date (as hereinafter defined),
(ii) no later than ten business days after such notice has been given and
(iii) no
2
<PAGE>
earlier than two business days after such notice has been given. If any
Additional Shares are to be purchased, each Underwriter, severally and not
jointly, agrees to purchase from the Company and the Additional Selling
==========================
Stockholder the number of Additional Shares (subject to such adjustments to
===========
eliminate fractional shares as you may determine ^ and subject to the
==================
requirement that the first Additional Shares
----------------------------
=========================================================================
shall be purchased from the Additional Selling Stockholder) which bears the
===========================================================
same proportion to the total number of Additional Shares to be purchased
from the Company and the Additional Selling Stockholder as the number of
======================================
Firm Shares set forth opposite the name of such Underwriter in Schedule I
bears to the total number of Firm Shares.
The ^ Company and the Firm Selling Stockholders hereby agree,
=========================================
severally and not jointly, and the Company shall, concurrently with the
execution of this Agreement, deliver an agreement executed by ^ each of the
directors and executive officers of the Company ^(including, without
========= ===================
limitation, the Additional Selling Stockholder), pursuant to which each
===============================================
such person agrees^ not to offer, sell, contract to sell, grant any option
to purchase^ or otherwise dispose of any ^ shares of Common Stock or any
======================
securities convertible into or exercisable or exchangeable for ^, or
====
warrants, rights or options to acquire Common Stock, or in any other manner
====================================================
transfer all or a portion of the economic consequences associated with the
ownership of ^ Common Stock, except to the Underwriters pursuant to this
============
Agreement, for a period of 180 days after the date of the Prospectus
without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation. Notwithstanding the foregoing, during such period
(i) the Company may (x) grant stock options pursuant to the Company's
===
existing stock option plans consistent with past practice and (y) may grant
=============
stock or stock options pursuant to the benefit plans proposed to be adopted
===========================================================================
at the Company's 1996 Annual Meeting of Stockholders (as described in the
=========================================================================
Company's Proxy Statement dated April 24, 1996), provided that the total
========================================================================
number of shares of Common Stock granted during the aforementioned 180 day
==========================================================================
period (including shares issuable upon the exercise of stock options)
=====================================================================
pursuant to the benefit plans referred to in (y) does not exceed 50,000;
========================================================================
(ii) the Company may issue shares of ^ Common Stock upon the exercise of an
============
option ^ granted under the employee benefit plans referred to in (x) and
===============================================================
(y) or upon the exercise of a warrant or the conversion of a security
=============================
outstanding on the date hereof; and (iii) the directors, executive officers
=============================================
and Selling Stockholders can make gifts of shares of Common Stock as
====================================================================
provided in the individual Lock-Up Agreements heretofore delivered to you.
=========================================================================
3. Terms of Public Offering. The Sellers are advised by you that
------------------------
the Underwriters propose (i) to make a public offering of their respective
portions of the Shares as soon after the effective date of the Registration
Statement as in your judgment is advisable and (ii) initially to offer the
Shares upon the terms set forth in the Prospectus.
4. Delivery and Payment. Delivery to the Underwriters of and
--------------------
payment for the Firm Shares shall be made at 10:00 A.M., New York City
time, on the third or fourth business day unless otherwise permitted by the
Commission pursuant to Rule 15c6-1 of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")(the "Closing Date") following the date of
the initial public offering of the Firm Shares, at such place outside the
==================
State of New York as you shall designate. The
3
<PAGE>
Closing Date and the location of delivery of and the form of payment for
the Firm Shares may be varied by agreement between you and the ^ Company.
=======
Delivery to the Underwriters of and payment for any Additional Shares
to be purchased by the Underwriters shall be made at such place as you
shall designate at 10:00 A.M., New York City time, on the date specified in
the applicable exercise notice given by you pursuant to Section 2 (an
"Option Closing Date"). Any such Option Closing Date and the location of
delivery of and the form of payment for such Additional Shares may be
varied by agreement between you and the Company.
Certificates for the Shares shall be registered in such names and
issued in such denominations as you shall request in writing not later than
two full business days prior to the Closing Date or an Option Closing Date,
as the case may be. Such certificates shall be made available to you for
inspection not later than 9:30 A.M., New York City time, on the business
day next preceding the Closing Date or an Option Closing Date, as the case
may be. Certificates in definitive form evidencing the Shares shall be
delivered to you on the Closing Date or an Option Closing Date, as the case
may be, with any transfer taxes thereon duly paid by the respective
Sellers, for the respective accounts of the several Underwriters, against
payment of the Purchase Price therefor by certified or official bank checks
payable in New York Clearing House funds to the order of the applicable ^
Seller.
======
5. Agreements of the Company. The Company agrees with you:
-------------------------
(a) To use its best efforts to cause the Registration Statement to
become effective at the earliest ^ practical time.
=========
(b) To advise you promptly and, if requested by you, to confirm such
advice in writing, (i) when the Registration Statement has become effective
and when any post-effective amendment to it becomes effective, (ii) of any
request by the Commission for amendments to the Registration Statement or
amendments or supplements to the Prospectus or for additional information,
(iii) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of the suspension of
qualification of the Shares for offering or sale in any jurisdiction, or
the initiation of any proceeding for such purposes, and (iv) of the
happening of any event during the period referred to in paragraph (e) below
which makes any statement of a material fact made in the Registration
Statement or the Prospectus untrue or which requires the making of any
additions to or changes in the Registration Statement or the Prospectus in
order to make the statements therein not misleading. If at any time the
Commission shall issue any stop order suspending the effectiveness of the
Registration Statement, the Company will ^ use its reasonable ^ best
======= ====
efforts to obtain the withdrawal or lifting of such order at the earliest
=======
possible time.
(c) To furnish to you, without charge, four (4) signed copies of the
Registration Statement as first filed with the Commission and of each
amendment to it, including all exhibits, and to furnish to you and each
Underwriter designated by you such number of conformed copies of the
4
<PAGE>
Registration Statement as so filed and of each amendment to it, without
exhibits, as you may reasonably request.
(d) Not to file any amendment or supplement to the Registration
Statement, whether before or after the time when it becomes effective, or
to make any amendment or supplement to the Prospectus including the
issuance or filing of any term sheet within the meaning of Rule 434 of
which you shall not previously have been advised or to which you shall
reasonably object; and to prepare and file with the Commission, promptly
upon your reasonable request, any amendment to the Registration Statement
or supplement to the Prospectus including the issuance or filing of any
term sheet within the meaning of Rule 434 which may be ^ required in order
=================
to comply with the requirements of the Act in connection with the
==========================================
distribution of the Shares by you, and to use its reasonable best efforts
==========
to cause the same promptly to become ^ effective.
========
(e) Promptly after the Registration Statement becomes effective, and
from time to time thereafter for such period as ^ a prospectus is required
by law to be delivered in connection with sales by an Underwriter or a
dealer, to furnish to each Underwriter and dealer as many copies of the
Prospectus (and of any amendment or supplement to the Prospectus) as such
Underwriter or dealer may reasonably request.
(f) If during the period specified in paragraph (e) any event shall
occur as a result of which, in the reasonable opinion of counsel for the
==========
Underwriters and the Company it becomes necessary to amend or supplement
===============
the Prospectus in order to make the statements therein, in the light of the
circumstances when the Prospectus is delivered to a purchaser, not
misleading, or if it is necessary to amend or supplement the Prospectus to
comply with any law, forthwith to prepare and file with the Commission an
appropriate amendment to the Registration Statement or supplement to the
=============================
Prospectus so that the statements in the Prospectus, as so amended or
supplemented, will not, in the light of the circumstances when it is so
=
delivered, be misleading, or so that the Prospectus will comply with law,
and to furnish to each Underwriter and to such dealers as you shall
specify^ such number of copies thereof as such Underwriter or dealers may
reasonably request.
(g) Prior to any public offering of the Shares, to cooperate with you
and counsel for the Underwriters in connection with the registration or
qualification of the Shares for offer and sale by the several Underwriters
and by dealers under the state securities or Blue Sky laws of such
jurisdictions as you may request, and to continue such qualification in
===
effect for so long as required for distribution of the Shares ^(but not
========
longer than twelve months); provided that no such registration or
============================================
qualification shall be required in any jurisdiction where, solely as a
========================================================
result thereof, the Company would be subject to taxation or qualification
=========================================================================
as a foreign corporation doing business in such jurisdiction where it is
========================================================================
not now so qualified or to take any action that would subject it to service
===========================================================================
of process in suits, other than those arising out of the offering or sale
=========================================================================
of the Shares, in any jurisdiction where it is not now subject.
==============================================================
(h) To mail and make generally available to its stockholders as soon
as reasonably practicable an earnings statement covering a period of at
least twelve months after the effective date
5
<PAGE>
of the Registration Statement (but in no event commencing later than 90
days after such date) which shall satisfy the provisions of Section 11(a)
of the Act and Rule 158 thereunder, and to advise you in writing when such
=======================
statement has been so made available.
(i) During the period ending on the second anniversary of the date
============================================
hereof ^, to furnish to you as soon as available a copy of each report or
======
other publicly available information of the Company mailed to the holders
of Common Stock or filed with the Commission ^.
=
^(j) To pay all costs, expenses, fees and taxes incident to (i) the
===
preparation, printing, filing and distribution under the Act of the
Registration Statement (including financial statements and exhibits), each
preliminary prospectus and all amendments and supplements to any of them
prior to or during the period specified in paragraph (e), (ii) the printing
and delivery of the Prospectus and all amendments or supplements to it
during the period specified in paragraph (e), (iii) the printing and
delivery of this Agreement, the Preliminary and Supplemental Blue Sky
Memoranda and all other agreements, memoranda, correspondence and other
documents printed and delivered in connection with the offering of the
Shares (including in each case any disbursements of counsel for the
Underwriters relating to such printing and delivery), (iv) the registration
or qualification of the Shares for offer and sale under the securities or
Blue Sky laws of the several states (including in each case the fees and
disbursements of counsel for the Underwriters relating to such registration
or qualification and memoranda relating thereto), (v) filings and clearance
with the National Association of Securities Dealers, Inc. in connection
with the offering, (vi) the listing of the Shares on the National
Association of Securities Dealers Automated Quotation system ("NASDAQ")
National Market System, (vii) furnishing such copies of the Registration
Statement, the Prospectus and all amendments and supplements thereto as may
be requested for use in connection with the offering or sale of the Shares
by the Underwriters or by dealers to whom Shares may be sold and (viii) the
performance by the ^ Company of its obligations under this Agreement and
===================================================
under any registration rights or similar agreement pursuant to which the
========================================================================
Company is required to register the Shares to be sold by any Selling
====================================================================
Stockholder pursuant to this Agreement.
=======================================
^(k) To use its reasonable best efforts to include the Common Stock in
=== =============================================
the NASDAQ National Market System (or on a national securities exchange) ^.
=
^(l) To use its reasonable best efforts to do and perform all things
=== =====================
required or necessary to be done and performed under this Agreement by the
Company prior to the Closing Date or any Option Closing Date, as the case
may be, and to satisfy all conditions precedent on the part of the Company
==========================
to the delivery of the Shares.
6. Representations and Warranties of the Company. The Company
---------------------------------------------
represents and warrants to each Underwriter that:
(a) The Registration Statement has become effective; no stop order
suspending the effectiveness of the Registration Statement is in effect,
and no proceedings for such purpose are pending before or, to the best
knowledge of the Company, threatened by the Commission.
6
<PAGE>
(b) (i) Each part of the Registration Statement, when such part
became effective, did not contain and each such part, as amended or
supplemented, if applicable, on the date of such amendment or supplement,
=============================================
will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading; (ii) the Registration Statement and the
Prospectus comply and, as amended or supplemented, if applicable, will
comply in all material respects with the requirements of the Act; and (iii)
===================
the Prospectus does not contain and, as amended or supplemented, if
applicable, on the Closing Date or an Option Closing Date, as the case may
===============================================================
be, will not contain any untrue statement of a material fact or omit to
===
state a material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading^;
=
provided, however, that the Company makes no representation or warranty as
==========================================================================
to information contained in or omitted from the Registration Statement or
===========================================
the Prospectus ^, or any such amendment or supplement, in reliance upon,
========================================================
and in conformity with, written information furnished to the Company ^ by
=========================================== ==
or on behalf of any of the Underwriters or the Selling Stockholders
===================================================================
expressly for use in connection with the preparation of the Registration
========================================================================
Statement.
==========
(c) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Act, ^ complied when so filed in all
material respects with the Act; and when so filed did not contain an untrue
=============
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
(d) The Company and each of ^ Industrial Systems Associates, Inc.,
====================================
Lewis Supply (Delaware), Inc., SafetyMaster Corporation and American
====================================================================
Technical Services Group, Inc. (each, a "Subsidiary" and, collectively, the
==============================
"Subsidiaries") has been duly incorporated, is validly existing as a
corporation in good standing under the laws of its jurisdiction of
incorporation and has the corporate power and authority to carry on its
business as it is currently being conducted and to own, lease and operate
its properties, and each is duly qualified and is in good standing as a
foreign corporation authorized to do business in each jurisdiction in which
the nature of its business or its ownership or leasing of property requires
such qualification, except where the failure to be so qualified would not
have a material adverse effect on the Company and its subsidiaries (as
===
defined in Rule 405 under the Act), taken as a whole.
==================================
(e) All of the outstanding shares of capital stock of, or other
ownership interests in, each of the ^ Subsidiaries have been duly
authorized and validly issued and are fully paid and non-assessable, and ^
are owned by the Company, free and clear of any security interest, claim,
lien, encumbrance or adverse interest of any nature, except as may be set
======================
forth in the Prospectus.
=======================
(f) All the outstanding shares of capital stock of the Company
(including the Shares to be sold by the Selling Stockholders) have been
duly authorized and validly issued and are fully paid, non-assessable and
not subject to any preemptive or similar rights ^ which have not been
validly waived in writing ^ by the holders thereof; and the Shares to be
======================
issued and sold by the Company
7
<PAGE>
hereunder have been duly authorized and, when issued and delivered to the
Underwriters against payment therefor as provided by this Agreement, will
be validly issued, fully paid and non-assessable, and the issuance of such
Shares will not be subject to any preemptive or similar rights ^ which will
====
not have ^ been validly waived in writing by the holders thereof^.
=== ======================
(g) The authorized capital stock of the Company, including the Common
Stock, conforms as to legal matters to the description thereof contained in
the Prospectus. There are no outstanding subscriptions, rights, warrants,
options, calls, convertible securities, commitments of sale or liens
related to or entitling any person to purchase or otherwise to acquire any
shares of the capital stock of, or other ownership interest in, the Company
or any ^ Subsidiary except as otherwise ^ set forth in the ^ Prospectus.
========== ========= ==========
(h) Neither the Company nor any of its subsidiaries is in violation
of its respective charter or by-laws or in default in the performance of
any obligation, agreement, covenant or condition contained in any contract,
lease, mortgage, license, bond, debenture, note or any other evidence of
indebtedness or in any other agreement, indenture or instrument material to
the conduct of the business of the Company and its subsidiaries, taken as a
whole, to which the Company or any of its subsidiaries is a party or by
which it or any of its subsidiaries or their respective property is bound,
except for such defaults that, individually or in the aggregate, would not
have a material adverse effect on the Company and its subsidiaries, taken
as a whole.
(i) The execution, delivery and performance by the Company of this
==============
Agreement, compliance by the Company with all the provisions hereof and ^
consummation by the Company of the transactions contemplated hereby will
==============
not require any consent, approval, authorization or other order of any
court, regulatory body, administrative agency or other governmental body
(except such as may be required by the Act, the Exchange Act or the
=========================
National Association of Securities Dealers, Inc. (the "NASD") or under the
=============================================================
securities or Blue Sky laws of the various states), and will not conflict
=
with or constitute a breach of any of the terms or provisions of, or a
default under, the charter or by-laws of the Company or any of its
subsidiaries, or violate or conflict with any laws, administrative
regulations or rulings or court decrees applicable to the Company, any of
its subsidiaries or their respective property, except for such conflicts,
breaches, defaults or violations that, individually or in the aggregate,
would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole. The execution, delivery and performance by
==
the Company of this Agreement, and the consummation by the Company of the
=========== ==============
transactions contemplated herein, have been duly authorized by all
necessary corporate action on the part of the Company and do not and will
==========================
not conflict with or constitute a breach of, or default under, or result in
the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or its subsidiaries pursuant to, any
contract, lease, mortgage, license, bond, debenture, loan agreement, note
or any other evidence of indebtedness or in any other agreement, indenture
or instrument material to the conduct of the business of the Company and
its subsidiaries, taken as a whole, to which the Company or any of its
subsidiaries is a party or by which it or any of its subsidiaries or their
respective property is bound, except for such conflicts, breaches,
defaults, liens, charges or
8
<PAGE>
encumbrances that, individually or in the aggregate, would not have a
material adverse effect on the Company and its subsidiaries, taken as a
whole.
(j) Except as otherwise set forth in the Prospectus, there are no
material legal or governmental proceedings pending to which the Company or
any of ^ the Subsidiaries is a party or of which any of their respective
================
property is the subject, and, to the best of the Company's knowledge, no
such proceedings are threatened or contemplated. No contract or document
of a character required to be described in the Registration Statement or
the Prospectus or to be filed as an exhibit to the Registration Statement
is not so described or filed as required.
(k) The business and operations conducted by the Company and ^ the
===
Subsidiaries, as described in the Prospectus, are being conducted in
============
compliance in all material respects with all applicable laws, rules and
regulations of all public authorities, foreign or domestic, having
jurisdiction over the Company or any Subsidiary. Neither the Company nor
any of ^ the Subsidiaries has violated any foreign, federal, state or local
===
law or regulation relating to the protection of human health and safety,
the environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), nor any federal or state law relating
to discrimination in the hiring, promotion or pay of employees nor any
applicable federal or state wages and hours laws, nor any provisions of the
Employee Retirement Income Security Act or the rules and regulations
promulgated thereunder, which in each case might reasonably be expected to
=========================
result in any material adverse change in the business, ^ financial
condition or results of operation of the Company and its subsidiaries,
taken as a whole.
(l) The Company and each of its subsidiaries has such permits,
licenses, franchises and authorizations of governmental or regulatory
authorities ("permits"), including, without limitation, under any
applicable Environmental Laws, as are necessary to own, lease and operate
its respective properties and to conduct its business, except where the
failure to have such permits would not, individually or in the aggregate,
have a material adverse effect on the Company and its subsidiaries, taken
as a whole; the Company and each of its subsidiaries has fulfilled and
performed all of its material obligations with respect to such permits and
no event has occurred which allows, or after notice or lapse of time would
allow, revocation or termination thereof or ^ result in any other material
======
impairment of the rights of the holder of any such permit, except where the
failure to so fulfill or perform, ^ or such revocation or termination,
==================================
would not, individually or in the aggregate, reasonably be expected to have
=========================
a material adverse effect on the Company and its subsidiaries, taken as a
whole; and, except as described in the Prospectus, such permits contain no
restrictions that are materially burdensome to the Company or any of ^ the
===
Subsidiaries. Neither the Company nor any of its subsidiaries has received
any notice of proceedings relating to the revocation or modification of any
such permit which, individually or in the aggregate, if the subject of any
unfavorable decision, ruling or finding, ^ might reasonably be expected to
===============================
have a material adverse effect on the Company and its subsidiaries, taken
as a whole.
(m) Except as otherwise set forth in the Prospectus or such as are
not material to the business, ^ financial condition or results of operation
of the Company and its subsidiaries, taken as
9
<PAGE>
a whole, the Company and each of its subsidiaries has good and marketable
title, free and clear of all liens, claims, encumbrances and restrictions,
except liens for taxes not yet due and payable, to all property and assets
described in the Registration Statement as being owned by it. All leases
to which the Company or any of its subsidiaries is a party, that are
material to the Company and its subsidiaries, taken as a whole, are valid
and binding and no default has occurred or is continuing thereunder, which
might reasonably be expected to result in any material adverse change in
=========================
the business, ^ financial condition or results of operation of the Company
and its subsidiaries taken as a whole^; and the Company and its
=
subsidiaries enjoy peaceful and undisturbed possession under all such
leases to which any of them is a party as lessee with such exceptions as ^
would not reasonably be expected to have a material adverse effect on the
=========================================================================
Company and its subsidiaries, taken as a whole.
==============================================
(n) The Company and each of its Subsidiaries maintains reasonably
adequate insurance.
(o) KPMG Peat Marwick LLP are independent public accountants with
respect to the Company as required by the Act.
(p) The financial statements, together with related schedules and
notes forming part of the Registration Statement and the Prospectus (and
any amendment or supplement thereto), present fairly the consolidated
financial position, results of operations and changes in financial position
of the Company and its consolidated subsidiaries on the basis stated in the
============
Registration Statement at the respective dates or for the respective
periods to which they apply; such statements and related schedules and
notes have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved, except as
disclosed therein; and the other financial and statistical information and
data set forth in the Registration Statement and the Prospectus (and any
amendment or supplement thereto) is, in all material respects, accurately
presented and prepared on a basis consistent with such financial statements
and the books and records of the Company.
(q) The Company owns, licenses or possesses adequate rights to use
all material patents, patent applications, trademarks, service marks, trade
names, trademark registrations, service mark registrations, copyrights,
licenses, inventions, trade secrets and other proprietary and similar
rights (including, without limitation, rights to use computer software)
necessary for the conduct of its business as currently conducted.
(r) The Company is not an "investment company" or a company
"controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
(s) No holder of any security of the Company has any right to require
registration of shares of Common Stock or any other security of the Company
or to require inclusion of shares of Common Stock or any other security of
the Company in the Registration Statement, ^ which rights have not been
==========================
waived by the holders thereof.
==============================
10
<PAGE>
(t) The Company has complied with all provisions of Section 517.075,
Florida Statutes (Chapter 92-198, Laws of Florida).
(u) The ^ Common Stock has been included for quotation ^ in the
==== ==
Nasdaq National Market System and the Company has filed ^ with the NASD a
==== =
notification ^ with respect to the issuance of the ^ Shares.
=============== ======
^(v) No labor dispute with the employees of the Company or any of ^
===
the Subsidiaries exists or, to the knowledge of the Company, is imminent
===
that might reasonably be expected to have a material adverse effect on the
=========================
Company and its subsidiaries, taken as a whole.
^(w) The Company and each of its subsidiaries maintains a system of
===
internal accounting controls sufficient to provide reasonable assurance
that (i) transactions are executed in accordance with management's general
or specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability; (iii)
access to assets is permitted only in accordance with management's general
or specific authorization; and (iv) the recorded accountability for assets
is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
^(x) Except as set forth in the Prospectus, all material tax returns
=== ==========================================
required to be filed by the Company and each of ^ the Subsidiaries in any
================
jurisdiction have been filed, other than those filings being contested in
good faith, and all material taxes, including withholding taxes, penalties
and interest, assessments, fees and other charges due pursuant to such
returns or pursuant to any assessment received by the Company or any of ^
the Subsidiaries have been paid, other than those being contested in good
===
faith and for which adequate reserves have been provided.
7. Representations and Warranties of the Selling Stockholders. Each
----------------------------------------------------------
Selling Stockholder severally represents and warrants to each Underwriter
that:
(a) Such Selling Stockholder is the ^ sole registered owner of the
===============
Shares to be sold by such Selling Stockholder pursuant to this Agreement
and has, and on the Closing Date ^ will have, valid and marketable title to
========================================
the Shares proposed to be sold by such Selling Stockholder hereunder, free
==========================================================================
of any restrictions on transfer^ imposed by the Company, and any liens,
====== ===============================
encumbrances, security interests and claims whatsoever.
(b) Upon delivery of and payment for ^ the Shares to be sold by such
=============================
Selling Stockholder pursuant to this Agreement, ^ valid and ^ marketable
=================== ===== ==========
title to such Shares will pass to the Underwriters, free of ^ any
===
restrictions on transfer^ imposed by the Company, and any liens,
===============================
encumbrances, security interests and claims whatsoever.
(c) Such Selling Stockholder has, and on the Closing Date will have,
full legal right, power and authority to enter into this Agreement and the
Custody Agreement between the Selling
11
<PAGE>
Stockholders and ^ Continental Stock Transfer and Trust Company, as
============================================
Custodian (the "Custody Agreement"), and to sell, assign, transfer and
deliver ^ the Shares proposed to be sold by such Selling Stockholder
==========================================================
hereunder in the manner provided herein and therein, and this Agreement and
=========
the Custody Agreement have been duly authorized, executed and delivered by
such Selling Stockholder ^, and the Custody Agreement is a valid and
=
binding agreement of such Selling Stockholder enforceable in accordance
with its terms, except as enforceability may be limited by general
========================================
equitable principles, bankruptcy, insolvency, reorganization, moratorium or
===========================================================================
other laws affecting creditors' rights generally, as availability of
====================================================================
equitable remedies may be limited by equitable principles of general
====================================================================
applicability and as rights to indemnity and contribution ^ thereunder may
==================== ==========
be limited by applicable law.
(d) The power of attorney signed by such Selling Stockholder
appointing ^ Andrew M. Bursky ^ and ^ William L. Mahone^, or either one of
=
them, as ^ its attorney-in-fact, to the extent set forth therein with
=
regard to the transactions contemplated hereby and by the Registration
Statement and the Custody Agreement, has been duly authorized, executed and
=
delivered by or on behalf of such Selling Stockholder and is a valid and
binding instrument of such Selling Stockholder enforceable in accordance
with its terms, except as enforceability may be limited by general
===================================================
equitable principles, bankruptcy, insolvency, reorganization, moratorium or
===========================================================================
other laws affecting creditors' rights generally, as availability of
====================================================================
equitable remedies may be limited by equitable principles of general
====================================================================
applicability and as rights to indemnity and contribution thereunder may be
===========================================================================
limited by applicable law; and, pursuant to such power of attorney, such
==========================
Selling Stockholder has authorized ^ Andrew M. Bursky ^ and ^ William L.
Mahone^, or either one of them, to execute and deliver on his or its behalf
=
this Agreement and any other document necessary or desirable in connection
with the transactions contemplated hereby and to deliver the Shares to be
===
sold by such Selling Stockholder pursuant to this Agreement.
(e) Such Selling Stockholder has not taken, and will not take,
directly or indirectly, any action designed to, or which might reasonably
be expected to, cause or result in stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of
the Shares pursuant to the distribution contemplated by this Agreement and,
other than as permitted by the Act, ^ such Selling Stockholder has not
====
distributed and will not distribute any prospectus or other offering
material in connection with the offering and sale of the Shares.
(f) The execution, delivery and performance of this Agreement by such
Selling Stockholder, compliance by such Selling Stockholder with all the
provisions hereof and the consummation of the transactions contemplated
hereby will not require any consent, approval, authorization or other order
of any court, regulatory body, administrative agency or other governmental
body (except such as may be required under the Act ^, the Exchange Act or
=====================
the NASD, or under state securities or Blue Sky laws) and will not conflict
==================
with or constitute a breach of any of the terms or provisions of, or a
default under, any organizational documents of such Selling Stockholder, if
not an individual, or any agreement, indenture or other instrument to which
such Selling Stockholder is a party or by which such Selling Stockholder or
any property of such Selling
12
<PAGE>
Stockholder is bound, or violate or conflict with any laws, administrative
regulation or ruling or court decree applicable to such Selling Stockholder
or property of such Selling Stockholder.
(g) ^ The information in the Prospectus under the caption "Principal
=================================
and Selling Stockholders" which specifically ^ relates to such Selling
=======
Stockholder ^ does not, and will not on the Closing Date^, contain any
====
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
===
(h) At any time during the period described in paragraph 5(e) hereof,
if there is any material change in the information referred to in paragraph
========
7(g) above, the Selling Stockholders will immediately notify you of such
change.
8. Indemnification.
---------------
(a) The Company ^ agrees to indemnify and hold harmless each
======
Underwriter and each person, if any, who controls any Underwriter within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act from
and against any and all losses, claims, damages, liabilities, costs and
=======
judgments (collectively, "Liabilities") caused by or based upon any untrue
============================= =============
statement or alleged untrue statement of a material fact contained in the
Registration Statement or the Prospectus (as amended or supplemented if the
Company shall have furnished any amendments or supplements thereto) or any
preliminary prospectus, or caused by or based upon any omission or alleged
=============
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as
such ^ Liabilities are caused by any such untrue statement or omission or
===========
alleged untrue statement or omission based upon information relating to any
Underwriters furnished in writing to the Company by or on behalf of any
Underwriter through you expressly for use therein^; provided, however, that
the foregoing indemnity agreement with respect to any preliminary
prospectus or any Prospectus that is subsequently supplemented or amended
==============================================================
shall not inure to the benefit of any Underwriter from whom the person
asserting any such ^ Liabilities purchased Shares, if a copy of the
==============================
Prospectus (as then amended or supplemented if the Company shall have
furnished any amendments or supplements thereto) was not sent or given by
or on behalf of such Underwriter to such person, if required by law so to
have been delivered, at or prior to the written confirmation of the sale of
the Shares to such person, and if the Prospectus (as so amended and
supplemented) would have cured the defect giving rise to such ^ Liability.
===========
^(b) Each Selling Stockholder agrees, severally and not jointly, to
=== ==============================================================
indemnify each Underwriter and each person, if any, who controls any
====================================================================
Underwriter within the meaning of Section 15 of the Act or Section 20 of
========================================================================
the Exchange Act, from and against any and all Liabilities caused by or
=======================================================================
based upon any untrue statement or alleged untrue statement of a material
=========================================================================
fact contained in the Registration Statement or the Prospectus (as amended
==========================================================================
or supplemented if the Company shall have furnished any amendments or
=====================================================================
supplements thereto) or any related preliminary prospectus, or caused by or
============================================================================
based upon any omission or alleged omission to state therein a material
=======================================================================
fact required to be stated therein or necessary to make the statements
======================================================================
therein not misleading, but only with reference
================================================
13
<PAGE>
to information furnished by or on behalf of such Selling Stockholder
====================================================================
expressly for use in the Registration Statement or Prospectus or in any
=======================================================================
related amendment or supplement thereto, or in any preliminary prospectus;
==========================================================================
provided, however, that (i) the foregoing indemnity agreement with respect
==========================================================================
to any preliminary prospectus or any Prospectus that is subsequently
====================================================================
supplemented or amended shall not inure to the benefit of any Underwriter
=========================================================================
from whom the person asserting any such Liabilities purchased Shares if a
=========================================================================
copy of the Prospectus (as then amended or supplemented if the Company
======================================================================
shall have furnished any amendments or supplements thereto) was not sent or
===========================================================================
given by or on behalf of such Underwriter to such person, if required by
========================================================================
law so to have been delivered, at or prior to the written confirmation of
=========================================================================
the sale of the Shares to such person, and if the Prospectus (as so amended
===========================================================================
and supplemented) would have cured the defect giving rise to such
=================================================================
Liability; and (ii) the aggregate liability of any Selling Stockholder
======================================================================
pursuant to the provisions of this paragraph shall be limited to an amount
==========================================================================
equal to the aggregate purchase price received by such Selling Stockholder
==========================================================================
from the sale of such Selling Stockholder's Shares hereunder.
==============================================================
(c) In case any action shall be brought against any Underwriter or
===
any person controlling such Underwriter, based upon any preliminary
prospectus, the Registration Statement or the Prospectus or any amendment
or supplement thereto and with respect to which indemnity may be sought
against the Company ^ or any Selling ^ Stockholder, such Underwriter shall
====== ===========
promptly notify the Company and the applicable Selling ^ Stockholder(s) in
========== ==============
writing and the Company ^ and/or the applicable Selling ^ Stockholder(s)
====== ========== ==============
shall assume the defense thereof, including the employment of counsel
reasonably satisfactory to such indemnified party and payment of all fees
and expenses. Any Underwriter or ^ such controlling person shall have the
right to employ separate counsel in any such action and participate in the
defense thereof, but the fees and expenses of such counsel shall be at the
expense of such Underwriter or such controlling person, unless (i) the
employment of such counsel has been specifically authorized in writing by
the Company^ or, if indemnity is sought against a Selling Stockholder and
============================================================
not the Company, such Selling Stockholder, (ii) the Company and/or the
======================================================================
Selling Stockholder(s), as the case may be, ^ shall have failed to assume
====================== ===========================
the defense and employ counsel or (iii) the named parties to any such
=====================================================================
action (including any impleaded parties) include both such Underwriter or
=====================================================
such controlling person and the Company or any Selling Stockholder(s), as
=================================================
the case may be, and such Underwriter or such controlling person shall have
================================================================
been advised by such counsel in writing that there may be one or more legal
==========
defenses available to it which are different from or additional to those
available to the Company or the Selling ^ Stockholder(s), as the case may
==============
be, ^ or that a conflict exists between such Underwriter or such
===========================================================
controlling person and the Company or a Selling Stockholder (in which cases
===========================================================================
the Company and the Selling ^ Stockholder(s) shall not have the right to
==============
assume the defense of such action on behalf of such Underwriter or such
controlling person, it being understood, however, that the Company and the
Selling ^ Stockholder(s) shall not, in connection with any one such action
==============
or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances,
be liable for the fees and expenses of more than one separate firm of
attorneys (in addition to any local counsel) for all such Underwriters and
controlling persons, which firm shall be designated in writing by
Donaldson, Lufkin & Jenrette Securities Corporation and that all such fees
and expenses shall be reimbursed as they are incurred). ^ The Company and
===============
the applicable Selling Stockholder shall not be liable for any settlement
==================================
of any such action effected
14
<PAGE>
without ^ their written consent ^, but if settled with the written consent
=====
of ^ the Company and the applicable Selling Stockholder(s), the Company and
======================================================================
such Selling Stockholder(s) agree to indemnify and hold harmless any
=================================
Underwriter and any such controlling person from and against any loss or
liability by reason of such settlement. Notwithstanding the immediately
preceding sentence, if in any case where the fees and expenses of counsel
are at the expense of the indemnifying party and an indemnified party shall
have requested the indemnifying party to reimburse the indemnified party
for such fees and expenses of counsel as incurred, such indemnifying party
agrees that it shall be liable for any settlement of any action effected
without its written consent if (i) such settlement is entered into more
than ^ twenty business days after the receipt by such indemnifying party of
======
the aforesaid request and (ii) such indemnifying party shall have failed to
reimburse the indemnified party in accordance with such request for
reimbursement prior to the date of such settlement. No indemnifying party
shall, without the prior written consent of the indemnified party, effect
any settlement of any pending or threatened proceeding in respect of which
any indemnified party is or could have been a party and indemnity could
have been sought hereunder by such indemnified party, unless such
settlement includes an unconditional release of such indemnified party from
all liability on claims that are the subject matter of such proceeding.
^(d) Each Underwriter agrees, severally and not jointly, to indemnify
===
and hold harmless the Company, its directors, its officers who sign the
Registration Statement, any person controlling the Company within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, each
Selling Stockholder and each person, if any, controlling such Selling
Stockholder within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act to the same extent as the foregoing ^ indemnities from the
===========
^ Company and the Selling Stockholders to each Underwriter, but only with
====================================
reference to information relating to such Underwriter furnished in writing
by or on behalf of such Underwriter through you expressly for use in the
Registration Statement, the Prospectus or any preliminary prospectus. In
case any action shall be brought against the Company, any of its directors,
any such officer or any person controlling the Company or any Selling
Stockholder or any person controlling such Selling Stockholder based on the
Registration Statement, the Prospectus or any preliminary prospectus and in
respect of which indemnity may be sought against any Underwriter, the
Underwriter shall have the rights and duties given to the ^ Company and the
===============
Selling Stockholders (except that if the Company or any Selling Stockholder
===========================================================================
shall have assumed the defense thereof, such Underwriter shall not be
required to do so, but may employ separate counsel therein and participate
in the defense thereof, but the fees and expenses of such counsel shall be
at the expense of such Underwriter), and the Company, its directors, any
such officers and any person controlling the Company and the Selling
Stockholders and any person controlling such Selling Stockholders shall
have the rights and duties given to the ^ Underwriters by Section ^ 8(c)
============ ====
hereof.
^(e) If the indemnification provided for in this Section 8 is
===
unavailable to an indemnified party in respect of any ^ Liabilities
===========
referred to ^ herein, then each indemnifying party, in lieu of indemnifying
======
such indemnified party, shall contribute to the amount paid or payable by
such indemnified party as a result of such ^ Liabilities (i) in such
===========
proportion as is appropriate to reflect the relative benefits received by
the ^ Company and the Selling Stockholders on the one hand and the
====================================
Underwriters on the other hand from the offering of the Shares or (ii) if
the allocation provided
15
<PAGE>
by clause (i) above^ is not permitted by applicable law, in such proportion
as is appropriate to reflect not only the relative benefits referred to in
clause (i) above but also the relative fault of the ^ Company, the Selling
====================
Stockholders and the Underwriters in connection with the statements or
============
omissions which resulted in such ^ Liabilities, as well as any other
===========
relevant equitable considerations. The relative benefits received by the ^
Company, the Selling Stockholders and the Underwriters shall be deemed to
=================================
be in the same proportion as the total net proceeds from the offering
(before deducting expenses) received by the ^ Company and the Selling
=======================
Stockholders, and the total underwriting discounts and commissions received
============
by the Underwriters, bear to the total price to the public of the Shares,
in each case as set forth in the table on the cover page of the Prospectus.
The relative fault of the ^ Company, the Selling Stockholders and the
=================================
Underwriters shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
Company, the Selling Stockholders or the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
The ^ Company, the Selling Stockholders and the Underwriters agree
=================================
that it would not be just and equitable if contribution pursuant to this
Section ^ 8(e) were determined by pro rata allocation (even if the
====
Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable
considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an indemnified party as a result of the ^
Liabilities referred to in the immediately preceding paragraph shall be
===========
deemed to include, subject to the limitations set forth above, any legal or
other expenses reasonably incurred by such indemnified party in connection
with investigating or defending any such action or claim. Notwithstanding
the provisions of this Section 8, no Underwriter shall be required to
contribute in the aggregate any amount in excess of the amount by which the
================
total ^ underwriting discount applicable to the Shares purchased by such
================================================================
Underwriter exceeds the amount of any damages which such Underwriter has
===========
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section ^ 8(e) are several in proportion to the respective
====
number of Shares purchased by each of the Underwriters hereunder and not
joint.
^(f) Each Selling Stockholder hereby irrevocably consents and agrees,
=== ================================================================
for the benefit of each Underwriter and each person who controls any
====================================================================
Underwriter, that any action, suit or proceeding ^ asserting a claim for
=================
indemnification or contribution under or pursuant to this Section 8^ may be
======
instituted by any Underwriter or any such controlling person in any state
=========================================================================
or federal court in the Borough of Manhattan in the City of New York, and
=========================================================================
each Selling Stockholder will accept the jurisdiction of such court in such
========================
action, and waives, to the fullest extent permitted by applicable law, any
defense based upon lack of personal jurisdiction or venue. ^
16
<PAGE>
9. Conditions of Underwriters' Obligations. The several obligations
---------------------------------------
of the Underwriters to purchase the Firm Shares under this Agreement are
subject to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company contained
in this Agreement shall be true and correct on the Closing Date with the
same force and effect as if made on and as of the Closing Date.
(b) The Registration Statement shall have become effective not later
than 5:00 P.M.(and in the case of a Registration Statement filed under Rule
462(b) of the Act, not later than 10:00 p.m.), New York City time, on the
date of this Agreement or at such later date and time as you may approve in
writing, and at the Closing Date (i) no stop order suspending the
===
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been commenced or shall be pending
before or contemplated by the Commission and (ii) no action shall have been
==================================
taken by any governmental agency, body or official, and no injunction,
======================================================================
restraining order or order of any nature by any federal or state court
======================================================================
shall have been issued, which would prevent the issuance of the Shares.
======================================================================
(c) (i) Since the date of the latest balance sheet included in the
Registration Statement and the Prospectus, there shall not have been any
material adverse change, or any development involving a prospective
material adverse change, in the condition, financial or otherwise, or in
the earnings, affairs or business prospects, whether or not arising in the
ordinary course of business, of the Company and its subsidiaries, taken as
==============================
a whole, (ii) since the date of the latest balance sheet included in the
=======
Registration Statement and the Prospectus, there shall not have been any
=
change, or any development involving a prospective material adverse change,
in the capital stock or in the long-term debt of the Company from that set
forth in the Registration Statement and Prospectus, (iii) the Company and
its subsidiaries shall have no liability or obligation, direct or
contingent, which is material to the Company and its subsidiaries, taken as
a whole, other than those reflected in the Registration Statement and the
Prospectus and (iv) on the Closing Date you shall have received a
certificate, dated the Closing Date, signed by ^ the President and the
= =====================
Chief Financial Officer of the Company, confirming the matters set forth in
paragraphs (a), (b)^ and (c) of this Section 9.
(d) All the representations and warranties of the Selling
Stockholders contained in this Agreement shall be true and correct on the
Closing Date with the same force and effect as if made on and as of the
Closing Date and you shall have received a certificate to such effect,
dated the Closing Date, from each Selling Stockholder.
(e) You shall have received on the Closing Date an opinion ^(in form
========
and substance reasonably satisfactory to you), dated the Closing Date, of
=============================================
Willkie Farr & Gallagher, counsel for the Company ^, to the effect that:
(i) the Company ^ is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation and has
the corporate power and authority required
17
<PAGE>
to carry on its business as it is currently being conducted and to
own, lease and operate its properties;
(ii) all the outstanding shares of Common Stock (including the
Shares to be sold by the Selling Stockholders) have been duly
authorized and validly issued and are fully paid^ and non-assessable;
===================
(iii) the Shares to be issued and sold by the Company
hereunder have been duly authorized, and when ^ duly countersigned by
=====================
the Company's transfer agent and registrar and delivered to the
==========================================
Underwriters or upon their order against payment therefor as provided
===================
by this Agreement, will have been validly issued and will be fully
paid and non-assessable^; no statutory preemptive or, to the best of
============================================
such counsel's knowledge, any other preemptive or similar rights ^
===================================
granted by the Company to subscribe for new issuances of Common Stock
=====================================================================
of stockholders of the Company exist which have not been ^ waived with
==================================== ===========
respect to the issue and sale of the Shares; and the certificates for
============================================
the Shares are in due and proper form under the laws of the State of
Delaware;
(iv) this Agreement has been duly authorized, executed and
delivered by the Company ^;
(v) the authorized capital stock of the Company, including the
Common Stock, conforms as to legal matters to the description thereof
contained in the Prospectus;
(vi) the Registration Statement has become effective under the
Act, no stop order suspending its effectiveness has been issued and no
proceedings for that purpose are, to the knowledge of such counsel,
pending before or contemplated by the Commission;
(vii) the statements under the captions "^ Description of
Capital Stock^" and "Shares Eligible for Future Sale" ^ in the
===
Prospectus and ^ Item 14 ^ of Part II of the Registration Statement,
====
insofar as such statements ^ purport to summarize the provisions of
======================================
documents or ^ agreements specifically referred to therein, fairly
=======================
present the information called for with respect ^ thereto by Form S-1
===================
and the rules and regulations under the Act;
============================================
(viii) the execution^ and delivery of this Agreement, the
================================
consummation of the transactions contemplated hereby ^ and the
=======
fulfillment of the terms hereof will not conflict with or ^ result in
=============================== =========
a violation of or default under the certificate of incorporation or
================================================================
by-laws of the Company or any of ^ the Subsidiaries or, to the best of
===================================
such counsel's knowledge, any statute, rule, regulation, ruling or
==================================================================
court decree applicable to the Company or any of ^ the Subsidiaries ^
============ ===
or their respective properties, except for such conflicts, ^ defaults
or violations that, individually or in the aggregate, would not have a
material adverse effect on the Company and its subsidiaries, taken as
a whole;
18
<PAGE>
^(ix) Each approval, consent, order, authorization,
==== =============================================
designation, declaration or filing by or with any regulatory,
=============================================================
administrative or other governmental body necessary in connection with
======================================================================
the execution and delivery by the Company of this Agreement and the
============================================================
consummation of the transactions ^ herein contemplated has been
============================
obtained or made and is in full force and effect, except for such
=================================================================
permits and similar authorizations required under the Act and the
=================================================================
securities or blue sky laws of certain jurisdictions;
=====================================================
(x) to the best of such counsel's knowledge, there is no ^
=== ===========
contract or other document ^ required to be filed as an exhibit to the
==========================
Registration Statement or described in the Registration Statement or
=========================
the Prospectus ^ which is not filed or described as required;
============================================
^(xi) the Company is not an "investment company" or a company
====
"controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended;
^(xii) to the best of such counsel's knowledge, ^ no holder of
=====
any security of the Company has any right to require registration of
shares of Common Stock or any other security of the Company^, which
=
right has not been ^ waived with respect to ^ the Registration
===== ===============
Statement^; and
=====
(xiii) the Registration Statement ^ and the Prospectus and any
====== ===
supplement or amendment thereto (except for financial statements,
=
schedules and other financial and statistical data included therein as
===================================================================
to which no opinion need be expressed) comply as to form in all
material respects with ^ Form S-1 and the other requirements of the
==========================================
Act.
====
In addition to the matters set forth above, such opinion of Willkie
===================================================================
Farr & Gallagher shall also include a statement that such counsel has
=====================================================================
participated in conferences with officers and other representatives of the
==========================================================================
Company, representatives of KPMG Peat Marwick LLP, independent public
=====================================================================
accountants for the Company, and representatives of the Underwriters in
=======================================================================
connection with the preparation of the Registration Statement and the ^
==================================
Prospectus and has considered the matters required to be stated therein ^
=========================================
and the statements contained therein and, on the basis of the foregoing,
========================================================================
nothing has come to the attention of such counsel which leads them to
=====================================================================
believe that the Registration Statement, as amended or supplemented, ^ at
======================================= ==
the time the Registration Statement or any post-effective amendment became
==========================================================================
effective, contained any untrue statement of a material fact or ^ omitted
==================== =======
to state a material fact required to be stated therein or necessary ^ to
================================
make the statements therein, in the light of the circumstances under which
they were made, not misleading, or that the Prospectus, or any amendment or
=============================================
supplement thereto, on the date it was filed pursuant to Rule 424(b) and,
=========================================================================
as of the Closing Date and at each Option Closing Date, as applicable,
======================================================================
contained or contains any untrue statement of a material fact or omitted or
===========================================================================
omits to state a material fact required to be stated therein or necessary
=========================================================================
to make the statements therein, in light of the circumstances under which
=========================================================================
they were made, not misleading (except that such counsel need express no
========================================================================
view as to financial statements, schedules and other financial and
==================================================================
statistical data included therein).^
===================================
19
<PAGE>
^ In rendering such opinion, such counsel may rely upon the opinion of
====================================================================
William L. Mahone delivered pursuant to Section 9(f) of this Agreement and,
===========================================================================
as to matters governed by laws other than Federal law, the laws of the
======================================================================
State of New York and the Delaware General Corporation Law, on the opinion
==========================================================================
of local counsel in such jurisdictions, provided that in each case such
=======================================================================
counsel shall state that they believe that they and the Underwriters are
========================================================================
justified in relying on such other counsel.
===========================================
The opinion of Willkie^ Farr & Gallagher described in this paragraph
(e) shall be rendered to you at the request of the Company ^ and shall so
state therein.
(f) You shall have received on the Closing Date an opinion ^(in form
========
and substance reasonably satisfactory to you), dated the Closing Date, of
=============================================
William L. Mahone, Esq., General Counsel of Interlaken Capital, Inc. and
Assistant Secretary of the Company, to the effect that:
(i) ^ each of ^ the Subsidiaries has been duly incorporated, is
===
validly existing as a corporation in good standing under the laws of
its jurisdiction of incorporation and has the corporate power and
authority required to carry on its business as it is currently being
conducted and to own, lease and operate its properties;
(ii) the Company and each of ^ the Subsidiaries is duly qualified
===
and is in good standing as a foreign corporation authorized to do
business in each jurisdiction in which the nature of its business or
its ownership or leasing of property requires such qualification,
except where the failure to be so qualified would not have a material
adverse effect on the Company and its subsidiaries, taken as a whole;
(iii) all the outstanding shares of Common Stock (including
=====================================================
the Shares to be sold by the Selling Stockholders) have been duly
=================================================================
authorized and validly issued and are fully paid and non-assessable;
====================================================================
all of the outstanding shares of capital stock of, or other ownership
interests in, each of the ^ Subsidiaries have been duly and validly
authorized and issued and are fully paid and non-assessable, and are
owned by the Company, free and clear of any security interest, claim,
lien, encumbrance or adverse interest of any nature, except as set
===============
forth in the Prospectus;
=======================
(iv) (A) neither the Company nor any of ^ the Subsidiaries is in
===
violation of its respective charter or by-laws and, to the best of
such counsel's knowledge ^, neither the Company nor any of its ^
subsidiaries is in default in the performance of any obligation,
============
agreement, covenant or condition contained in any contract, lease,
mortgage, license, bond, debenture, note or any other evidence of
indebtedness or in any other agreement, indenture or instrument
material to the conduct of the business of the Company and its
subsidiaries, taken as a whole, to which the Company or any of its
subsidiaries is a party or by which it or any of its subsidiaries or
their respective property is bound, except for such defaults that,
individually or in the aggregate, would not have a material adverse
effect on the Company and its subsidiaries, taken as a whole, and (B)
to the best of such counsel's knowledge, the execution, delivery and
performance of this Agreement, and the consummation of the
20
<PAGE>
transactions contemplated herein, have been duly authorized by all
necessary corporate action and do not and will not conflict with or
constitute a breach of, or default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or
assets of the Company or ^ the Subsidiaries pursuant to, any contract,
===
lease, mortgage, license, bond, debenture, loan agreement, note or any
other evidence of indebtedness or in any other agreement, indenture or
instrument material to the conduct of the business of the Company and
its subsidiaries, taken as a whole, to which the Company or any of its
subsidiaries is a party or by which it or any of its subsidiaries or
their respective property is bound, except for such conflicts,
breaches, defaults, liens, charges or encumbrances that, individually
or in the aggregate, would not have a material adverse effect on the
Company and its subsidiaries, taken as a whole;
(v) ^ to the best of such counsel's knowledge, there are no
=====================================================
legal or governmental ^ proceedings pending or threatened to which the
===========
Company or any of ^ the Subsidiaries is a party or to which any of
================
their respective property is subject which is required to be described
in the Registration Statement or the Prospectus and is not so
described;
(vi) to the best of such counsel's knowledge, ^ the business and
operations conducted by the Company and ^ the Subsidiaries, as
===
described in the Prospectus, are being conducted in compliance in all
material respects with all applicable laws, rules and regulations of
all public authorities, foreign or domestic, having jurisdiction over
the Company or any Subsidiary;
^(vii) to the best of such counsel's knowledge, the Company
===== ========================================
and each of its ^ subsidiaries has such permits, licenses, franchises
============
and authorizations of governmental or regulatory authorities
("permits")^ as are necessary to own, lease and operate its respective
properties and to conduct its business in the manner described in the
Prospectus, except where the failure to have such permits would not,
individually or in the aggregate, have a material adverse effect on
the Company and its subsidiaries, taken as a whole;
(viii) No statutory preemptive or, to the best of such
====== ===========================
counsel's knowledge, any other preemptive or similar rights granted by
=================================================
the Company to subscribe for new issuances of Common Stock of
=============================================================
stockholders of the Company exist which have not been waived with
=================================================================
respect to the issue and sale of the Shares; and to ^ such counsel's
====================================================
knowledge, ^ no holder of any security of the Company has any right to
require registration of shares of Common Stock or any other security
of the Company^, which right has not been ^ waived with respect to the
= ===== ==========================
Registration Statement;
======================
(ix) except as ^ set forth in the Prospectus, to the best of such
=========
counsel's knowledge, there are no outstanding options, warrants or
other rights calling for the issuance of any shares of capital stock
of the Company or any security convertible into or exchangeable for
capital stock of the Company; and
====
21
<PAGE>
(x) to the best of such counsel's knowledge, the Company ^ and
===
the Subsidiaries own, license or possess adequate rights to use all
========================================
material patents, patent applications, trademarks, service marks,
trade names, trademark registrations, service mark registrations,
copyrights, licenses, inventions, trade secrets and other proprietary
and similar rights (including, without limitation, rights to all
computer software) necessary for the conduct of ^ their businesses as
================
currently conducted^.
=
^ In rendering such opinion, such counsel may rely as to matters
==============================================================
governed by laws other than Federal law, the laws of the State of New York
==========================================================================
and the Delaware General Corporation Law, on the opinion of local counsel
=========================================================================
in such jurisdictions, provided that in each case such counsel shall state
==========================================================================
that he believes that he and the Underwriters are justified in relying on
=========================================================================
such other counsel.
===================
The opinion of William L. Mahone, Esq. described in this paragraph (f)
shall be rendered to you at the request of the Company and shall so state
therein. Mr. Mahone shall also state that he ^ performs legal services on
==========================
behalf of the Company and^ is familiar with the legal affairs of the
=========
Company.
(g) You shall have received on the Closing Date an opinion ^(in form
========
and substance reasonably satisfactory to you), dated the Closing Date, of ^
=============================================
Werbel, McMillin & Carnelutti, counsel for ^ the Firm Selling Stockholders,
============================== ========
to the effect that:
(i) ^ this Agreement has been duly authorized, executed and
====
delivered by ^ or on behalf of the Selling Stockholders and the
=================== ===
Custody Agreement has been duly authorized, executed and delivered by
=====================================================================
each Selling Stockholder and each is a valid and binding agreement of
=================================
each ^ Selling Stockholder;
====================
^(ii) each Selling Stockholder has full legal right, power
==== ========================
and authority, and any approval required by law (other than any
approval imposed by the applicable state securities and Blue Sky laws)
to sell, assign, transfer and deliver the Shares to be sold by it in
the manner provided in this Agreement and the Custody Agreement;
(iii) each ^ Selling Stockholder is the sole registered owner
================================================
of the Shares to be sold by it pursuant to this Agreement and upon
== ==========================
delivery thereof^ pursuant hereto and payment therefor^ and assuming
============
that the Underwriters have purchased such Shares without notice of any
======================================================================
adverse claims, valid and marketable title to such Shares will pass to
=========================================================
the Underwriters, severally, free ^ and clear of any adverse claim,
===============================
any lien in favor of the Company and any restriction on transfer
================================================================
imposed by the Company; and
======================
(iv) the power of attorney signed by each ^ Selling ^ Stockholder
===========
appointing ^ Andrew M. Bursky ^ and ^ William L. Mahone^, or either of
=
them, as its attorney-in-fact to the extent set forth therein with
regard to the transactions contemplated hereby and by the Registration
Statement has been duly authorized, executed and delivered by or on
behalf of such Selling Stockholder and is a valid and binding
instrument of such Selling Stockholder
22
<PAGE>
enforceable in accordance with its terms, except as enforceability may
=============================
be limited by general equitable principles, bankruptcy, insolvency,
===================================================================
reorganization, moratorium or other laws affecting creditors' rights
====================================================================
generally, as availability of equitable remedies may be limited by
==================================================================
equitable principles of general applicability and as rights to
==============================================================
indemnity and contribution thereunder may be limited by applicable
==================================================================
law; and pursuant to such power of attorney, each of such Selling
====
Stockholders has authorized ^ Andrew M. Bursky ^ and ^ William L.
Mahone^, or either of them, to execute and deliver on its behalf this
Agreement and any other document necessary or desirable in connection
with transactions contemplated hereby and to deliver the Shares to be
sold by it pursuant to this Agreement
(h) You shall have received on the Closing Date an opinion, dated the
Closing Date, of Andrews & Kurth L.L.P., counsel for the Underwriters^ in
==
form and substance reasonably satisfactory to you.
=================================================
(i) You shall have received a letter on and as of the Closing Date,
in form and substance reasonably satisfactory to you, from KPMG Peat
==========
Marwick LLP, independent public accountants, with respect to the financial
statements and certain financial information contained in the Registration
Statement and the Prospectus and substantially in the form and substance of
the letter delivered to you by KPMG Peat Marwick LLP on the date of this
Agreement.
(j) The Company and the Selling Stockholders shall not have failed at
or prior to the Closing Date to perform or comply with any of the
agreements herein contained and required to be performed or complied with
by the Company or the Selling Stockholders at or prior to the Closing Date.
===========================
(k) You shall have received on the Closing Date^ a certificate of
each Selling Stockholder who is not a U.S. Person to the effect that such
Selling Stockholder is not a U.S. Person (as defined under applicable U.S.
federal tax legislation), which certificate may be in the form of a
properly completed and executed United States Treasury Department Form W-8
(or other applicable form or statement specified by Treasury Department
regulations in lieu thereof).
The several obligations of the Underwriters to purchase any Additional
Shares hereunder from the Company are subject to the delivery to you on the
================
applicable Option Closing Date of such documents as you may reasonably
request with respect to the good standing of the Company, the due
authorization and issuance of such Additional Shares, the satisfaction of
=====================
the conditions set forth in this Section 9 as of the Option Closing Date
========================================================================
and other matters related to the issuance of such Additional Shares. The
===
several obligations of the Underwriters to purchase any Additional Shares
=========================================================================
hereunder from the Additional Selling Stockholder are subject to the
====================================================================
delivery to you on the applicable Option Closing Date of (i) an opinion (in
===========================================================================
form and substance reasonably satisfactory to you), dated the Option
====================================================================
Closing Date, of Willkie Farr & Gallagher, counsel for the Additional
=====================================================================
Selling Stockholder, to the effect of the matters set forth in Section (g)
==========================================================================
of this Section 9 with respect to the Additional Selling Stockholder and
========================================================================
(ii) such documents as you may reasonably request with respect
===============================================================
23
<PAGE>
to the satisfaction of the conditions set forth in this Section 9 as of the
===========================================================================
Option Closing Date and other matters related to the sale of Additional
=======================================================================
Shares by the Additional Selling Stockholder.
=============================================
10. Effective Date of Agreement and Termination. This Agreement
-------------------------------------------
shall become effective upon the later of (i) execution of this Agreement
and (ii) when notification of the effectiveness of the Registration
Statement has been released by the Commission.
This Agreement may be terminated at any time prior to the Closing Date
by you by written notice to the Sellers if any of the following has
occurred: (i) since the respective dates as of which information is given
in the Registration Statement and the Prospectus, any material adverse
change or development involving a prospective material adverse change in
the condition, financial or otherwise, of the Company and its subsidiaries,
taken as a whole, or the earnings, affairs^ or business prospects of the
Company and its subsidiaries, taken as a whole, whether or not arising in
the ordinary course of business, which would, in your judgment, make it
impracticable to market the Shares on the terms and in the manner
contemplated in the Prospectus, (ii) any outbreak or escalation of
hostilities or other national or international calamity or crisis or change
in economic conditions or in the financial markets of the United States or
elsewhere that, in your judgment, is material and adverse and would, in
your judgment, make it impracticable to market the Shares on the terms and
in the manner contemplated in the Prospectus, (iii) the suspension or
material limitation of trading in securities on the New York Stock
Exchange, the American Stock Exchange or the NASDAQ National Market System
or limitation on prices for securities on any such exchange or National
Market System, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of
any court or other governmental authority which in your opinion materially
and adversely affects, or will materially and adversely affect, the
business or operations of the Company ^ and its subsidiaries, taken as a
================================
whole, (v) the declaration of a banking moratorium by either federal or New
=====
York State authorities or (vi) the taking of any action by any federal,
state or local government or agency in respect of its monetary or fiscal
affairs which in your opinion has a material adverse effect on the
financial markets in the United States.
If on the Closing Date or on an Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase
the Firm Shares or Additional Shares, as the case may be, which it or they
have agreed to purchase hereunder on such date and the aggregate number of
Firm Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters, as the case may be, agreed but failed or
refused to purchase is not more than one-tenth of the total number of
Shares to be purchased on such date by all Underwriters, each
non-defaulting Underwriter shall be obligated severally, in the proportion
which the number of Firm Shares set forth opposite its name in Schedule I
bears to the total number of Firm Shares which all the non-defaulting
Underwriters, as the case may be, have agreed to purchase, or in such other
proportion as you may specify, to purchase the Firm Shares or Additional
Shares, as the case may be, which such defaulting Underwriter or
Underwriters, as the case may be, agreed but failed or refused to purchase
on such date; provided that in no event shall the number of Firm Shares or
Additional Shares, as the case may be, which any Underwriter has agreed to
purchase pursuant to Section 2 hereof be increased pursuant to this Section
10 by an amount in excess of one-ninth of such number of Firm Shares or
24
<PAGE>
Additional Shares, as the case may be, without the written consent of such
Underwriter. If on the Closing Date or on an Option Closing Date, as the
case may be, any Underwriter or Underwriters shall fail or refuse to
purchase Firm Shares^ or Additional Shares, as the case may be, and the
aggregate number of Firm Shares or Additional Shares, as the case may be,
with respect to which such default occurs is more than one-tenth of the
aggregate number of Shares to be purchased on such date by all Underwriters
and arrangements satisfactory to you and the applicable Sellers for
purchase of such Shares are not made within 48 hours after such default,
this Agreement will terminate without liability on the part of any
non-defaulting Underwriter and the ^ Sellers. In any such case which does
not result in termination of this Agreement, either you or the Sellers
shall have the right to postpone the Closing Date or the applicable Option
Closing Date, as the case may be, but in no event for longer than seven
days, in order that the required changes, if any, in the Registration
Statement and the Prospectus or any other documents or arrangements may be
effected. Any action taken under this paragraph shall not relieve any
defaulting Underwriter from liability in respect of any default of any such
Underwriter under this Agreement.
11. Agreements of the Selling Stockholders. Each Selling Stockholder
--------------------------------------
severally agrees with you and the Company:
(a) To pay or to cause to be paid all transfer taxes with respect to
the Shares to be sold by such Selling Stockholder; and
(b) To take all reasonable actions in cooperation with the Company
and the Underwriters to cause the Registration Statement to become
effective at the earliest possible time, to do and perform all things to be
done and performed under this Agreement prior to the Closing Date and to
satisfy all conditions precedent to the delivery of the Shares pursuant to
this Agreement.
12. Miscellaneous. Notices given pursuant to any provision of this
-------------
Agreement shall be addressed as follows: (a) if to the Company, to
Strategic Distribution, Inc., 12136 West Bayaud, Lakewood, Colorado 80228,
(b) if to the Selling Stockholders, to ^ Andrew M. Bursky, c/o Interlaken
================================
Capital, Inc., 165 Mason Street, Greenwich, Connecticut 06830 and (c) if to
=============================================================
any Underwriter or to you, to you c/o Donaldson, Lufkin & Jenrette
Securities Corporation, 277 Park Avenue, New York, New York 10172,
Attention: Syndicate Department, or in any case to such other address as
the person to be notified may have requested in writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the ^ Company, its officers and
directors, of the Selling Stockholders and of the several Underwriters set
=============================
forth in or made pursuant to this Agreement shall remain operative and in
full force and effect, and will survive delivery of and payment for the
Shares, regardless of (i) any investigation, or statement as to the results
thereof, made by or on behalf of any Underwriter or by or on behalf of any
of the Sellers, the officers or directors of the Company or any controlling
person of the Sellers, (ii) acceptance of the Shares and payment for them
hereunder and (iii) termination of this Agreement.
25
<PAGE>
If this Agreement shall be terminated by the Underwriters because of
any failure or refusal on the part of the Sellers to comply with the terms
or to fulfill any of the conditions of this Agreement, the Sellers agree to
reimburse the several Underwriters for all out-of-pocket expenses
(including the fees and disbursements of counsel) reasonably incurred by
them.
Except as otherwise provided, this Agreement has been and is made
solely for the benefit of and shall be binding upon the Sellers, the
Underwriters, any controlling persons referred to herein and their
respective successors and assigns, all as and to the extent provided in
this Agreement, and no other person shall acquire or have any right under
or by virtue of this Agreement. The term "successors and assigns" shall
not include a purchaser of any of the Shares from any of the several
Underwriters merely because of such purchase.
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
This Agreement may be signed in various counterparts which together
shall constitute one and the same instrument.
Please confirm that the foregoing correctly sets forth the agreement
between the Company, the Selling Stockholders and the several Underwriters.
Very truly yours,
STRATEGIC DISTRIBUTION, INC.
^ By: ____________________________
=== ============================
Title:
THE SELLING STOCKHOLDERS NAMED
IN SCHEDULE II HERETO
^ By: ____________________________
=== ============================
Attorney-in-^ Fact
====
26
<PAGE>
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SCHRODER WERTHEIM & CO. INCORPORATED
HANIFEN, IMHOFF INC.
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto
By: DONALDSON, LUFKIN & JENRETTE
= SECURITIES CORPORATION
By: __________________________
= Title:
27
<PAGE>
SCHEDULE I
----------
Underwriters Number of Firm Shares
------------ to be Purchased
--------------------------
Donaldson, Lufkin & Jenrette
Securities Corporation
Schroder Wertheim & Co. Incorporated
Hanifen, Imhoff Inc.
------------------------------
Total 8,200,000
------------------------------
==============================
28
<PAGE>
^
^ SCHEDULE II
===========
SELLING STOCKHOLDERS
================================================
Schedule IIA
============================================
Firm Selling Stockholders
-------------------------
=============================
Number of Firm
Name Shares Being Sold
---- -----------------
^
Brahman Partners II, L.P. 450,000
=======
B-Y Partners, L.P. 150,000
===================================================================
Quota Fund, N.V. "Brahman" 450,000
===================================================================
Genesis Capital Fund--"Brahman" 150,000
--------
===========================================================================
Total 1,200,000
===========================================================================
Schedule IIB
============================================
Additional Selling Stockholder
------------------------------
=====================================================
Number of Additional
=================================================================
Name Shares Proposed to be Sold
---- --------------------------
=======================================================================
William R. Berkley [ ] ^
============================================================================
29
<PAGE>
------------------ COMPARISON OF FOOTNOTES ------------------
-FOOTNOTE * -
^
------------------ COMPARISON OF FOOTERS ------------------
YC01: ^ 17115.4
=======
30
<PAGE>
This redlined draft, generated by CompareRite - The Instant Redliner, shows
the differences between -
original document : G:\14393.2
and revised document: G:\17115.4
CompareRite found 362 change(s) in the text
CompareRite found 2 change(s) in the notes
Deletions appear as a normal ^
Additions appear as double underlined text
31
Exhibit 5
May 20, 1996
Strategic Distribution, Inc.
12136 West Bayaud
Suite 320
Lakewood, Colorado 80228
Gentlemen:
You have requested our opinion, as counsel for Strategic Distribution,
Inc., a Delaware corporation (the "Corporation"), in connection with the
Registration Statement on Form S-1 (No. 333-02393), as amended (the
"Registration Statement"), under the Securities Act of 1933, as amended,
filed by the Corporation with the Securities and Exchange Commission.
The Registration Statement relates to an offering of up to 9,430,000 shares
("Shares") of common stock, par value $.10 per share, of the Corporation,
of which 1,230,000 Shares are subject to a 30-day over-allotment option.
In that connection, we have examined and relied upon originals or copies,
certified or otherwise identified to our satisfaction, of such documents,
corporate records, certificates and instruments relating to the Corporation
as we have deemed relevant and necessary to the formation of the opinions
hereinafter set forth. In such examination, we have assumed the
genuineness and authenticity of all documents examined by us and all
signatures thereon, the legal capacity of all persons executing such
documents, the conformity to originals of all copies of documents submitted
to us and the truth and correctness of any representations and warranties
contained therein.
Based upon and subject to the foregoing, we are of the opinion that the
Shares are duly authorized, and, upon issuance, delivery and sale, for the
consideration specified in the Registration Statement, will be legally
issued, fully paid and non-assessable.
<PAGE>
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption
"Legal Matters" in the Registration Statement.
Very truly yours,
Willkie Farr & Gallagher
-2-
Exhibit 10.7
SERVICES AGREEMENT
Services Agreement, effective April 1, 1996, by and between
Strategic Distribution, Inc., a Delaware corporation ("Strategic
Distribution"), and Interlaken Capital, Inc., a Delaware corporation
("Interlaken").
WHEREAS, Strategic Distribution wishes to retain Interlaken
to perform certain services for Strategic Distribution and Interlaken
wishes to perform such services.
NOW THEREFORE, in consideration of the premises and for
other good and valuable consideration the sufficiency of which is hereby
expressly acknowledged, Strategic Distribution and Interlaken hereby agree
as follows:
1. Interlaken hereby agrees to provide corporate and
administrative services to Strategic Distribution (the "Subject
Services") during the period March 1, 1996 through December 31, 1996.
The Subject Services shall include, but shall not be limited to,
services relating to accounting and internal legal advice. The extent
of additional Subject Services shall be subject to negotiation between
Strategic Distribution and Interlaken.
2. Strategic Distribution shall pay Interlaken a fee of
$400,000, $100,000 of which shall be due on the date that this
Agreement is executed and the remainder of which shall be payable in
eight equal installments beginning with May 1, 1996 and ending with
December 1, 1996. Strategic Distribution shall also reimburse
Interlaken for all reasonable out-of-pocket expenses incurred by
Interlaken in connection with the Subject Services, such expenses to
be paid promptly upon the furnishing to Strategic Distribution of a
written statement with respect thereto.
3. The term of this Agreement shall extend until December 31,
1996. Notwithstanding the foregoing, this Agreement may be terminated
by either party upon thirty days' prior written notice to the other
party.
4. Strategic Distribution agrees to indemnify Interlaken and
its officers, employees and agents to the fullest extent permitted by
law and to hold them harmless from and with respect to all (a) fees,
costs and expenses incurred in connection with or resulting from any
claim, action or demand against Interlaken or against any of its
officers, employees or agents that arise out of or in any way relate
to Strategic Distribution, its properties, business or affairs and (b)
any losses or damages resulting from any such claim, action or demand,
including amounts paid in settlement or comprise of the claim, action
or demand. This indemnification shall apply, however, only so long as
the action or failure to act by Interlaken, its
<PAGE>
April 11, 1996
Page 2
officers, employees or agents does not constitute fraud, bad faith
or gross negligence. The termination of any action, suit or
proceeding by judgment, order or settlement, or upon a plea of
nolo contendere or its equivalent, shall not of itself create a
---------------
presumption that any person acted with gross
negligence.
IN WITNESS WHEREOF, the parties hereunto set their hands as
of the date first above written.
INTERLAKEN CAPITAL, INC.
By:/s/ William R. Berkley
--------------------------
Name: William R. Berkley
Title: President
STRATEGIC DISTRIBUTION, INC.
By: /s/ Andrew M. Bursky
---------------------------
Name: Andrew M. Bursky
Title: Chairman
-2-
