-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FLSS3GXv8CbmRz6PoIAFJI3Rv89Ka/72juatiefI3T6yzOGWVd2TYIy8c8sTjruj RLSdXDssqlcY/HiY0gEQXQ== 0000950112-96-001640.txt : 19960522 0000950112-96-001640.hdr.sgml : 19960522 ACCESSION NUMBER: 0000950112-96-001640 CONFORMED SUBMISSION TYPE: 424B1 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19960521 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STRATEGIC DISTRIBUTION INC CENTRAL INDEX KEY: 0000073822 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MEDICAL, DENTAL & HOSPITAL EQUIPMENT & SUPPLIES [5047] IRS NUMBER: 221849240 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-02393 FILM NUMBER: 96570384 BUSINESS ADDRESS: STREET 1: 12600 WEST COLFAX AVE STE A200 STREET 2: C/O PRENTICE HALL CORP SYSTEM INC CITY: LAKEWOOD STATE: CO ZIP: 80215 BUSINESS PHONE: 2036298750 MAIL ADDRESS: STREET 2: 12600 WEST COLFAX AVE SUITE 200 CITY: LAKEWOOD STATE: CO ZIP: 80215 FORMER COMPANY: FORMER CONFORMED NAME: STRATEGIC INFORMATION INC DATE OF NAME CHANGE: 19901113 FORMER COMPANY: FORMER CONFORMED NAME: INFORMEDIA CORP DATE OF NAME CHANGE: 19890221 FORMER COMPANY: FORMER CONFORMED NAME: OCTO LTD DATE OF NAME CHANGE: 19870921 424B1 1 STRATEGIC DISTRIBUTION, INC. Filed pursuant to Rule 424(b)(1) Registration No. 333-02393 [LOGO] PROSPECTUS May 20, 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 20, 1996, the last reported sale price for the Common Stock as reported by Nasdaq was $8 5/8 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.
- ------------------------------------------------------------------------------------------- PRICE UNDERWRITING PROCEEDS PROCEEDS TO THE DISCOUNTS AND TO THE TO SELLING PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS - ------------------------------------------------------------------------------------------- Per Share............. $ 7.75 $ 0.43 $ 7.32 $ 7.32 Total(3).............. $63,550,000 $3,526,000 $51,240,000 $8,784.000 - -------------------------------------------------------------------------------------------
(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 $73,082,500, $4,054,900 and $55,851,600 respectively, and the proceeds to such stockholder will be $4,392,000. 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 May 23, 1996. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION SCHRODER WERTHEIM & CO. HANIFEN, IMHOFF INC. 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 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 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 THE OFFERING 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
- ------------ (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 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.
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) 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
MARCH 31, 1996 ---------------------- DECEMBER 31, AS 1995 ACTUAL ADJUSTED(6) ------------ ------- ----------- BALANCE SHEET DATA: Working capital.................................... $ 23,599 $19,650 $67,555 Total assets....................................... 48,051 48,881 96,786 Long-term debt obligations......................... 5,903 4,162 1,452 Stockholders' equity............................... 27,391 25,518 76,133
- ------------ (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 and the application of the net proceeds therefrom as described under "Use of Proceeds." 7 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 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 (after payment of underwriting discounts and commissions and estimated expenses of the Offering) are estimated to be $50,615,000 ($55,226,700 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 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 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 83,864 Accumulated deficit.............................. (10,558) (10,558) Note receivable from sale of stock............... (50) (50) ------- ----------- Total stockholders' equity................... 25,518 76,133 ------- ----------- Total capitalization......................... $29,680 $ 77,585 ------- ----------- ------- ----------- - ------------ (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 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 20, 1996).............. 9 5 3/4 On May 20, 1996, the last reported sale price for the Common Stock as reported by Nasdaq was $8 5/8 per share. As of March 31, 1996, there were approximately 1,500 holders of record of the Common Stock. 11 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.
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) 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 1996 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
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DECEMBER 31, MARCH 31, ---------------------------------------------------- ---------------------- AS ADJUSTED(8) 1991 1992 1993 1994 1995 1996 1996 ------ ------- ------- ------- ------- ------- ----------- BALANCE SHEET DATA: Working capital............................ $3,854(9) $ 4,464 $ 4,978 $17,902 $23,599 $19,650 $67,555 Total assets............................... 9,056 13,003 14,926 37,408 48,051 48,881 96,786 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 76,133
- ------------ (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 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 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.
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------ -------------------- 1993 1994 1995 1995 1996 ------- ------- -------- -------- -------- (DOLLARS IN THOUSANDS) 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)
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 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 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 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 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 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 19 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 20 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 21 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 22 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. 23 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 24 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 25 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. 26 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. 27 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. 28 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:
NAME AGE POSITION AND OFFICES HELD - ------------------------------------------ --- ------------------------------------------ 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
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 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 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."
LONG-TERM COMPENSATION AWARDS ANNUAL -------------------- COMPENSATION NUMBER OF SECURITIES NAME AND ------------------- UNDERLYING ALL OTHER PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS GRANTED COMPENSATION - -------------------------------- ---- -------- ------- -------------------- ------------ Theodore R. Rieple.............. 1995 $213,617 $40,000 51,500 $1,366(1) President 1994 204,038 10,000 -- 1,534(1) 1993 180,000 5,000 -- 2,630(1)
- ------------ (1) These amounts represent contributions to the Company's Retirement Savings Plan. 31 Mr. Rieple did not receive any other annual compensation, restricted stock awards, stock appreciation rights, long-term incentive plan payouts or other compensation for the three fiscal years ended December 31, 1995. OPTIONS GRANTS IN LAST FISCAL YEAR The following table sets forth options granted to Mr. Rieple during 1995:
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE NUMBER OF % OF TOTAL EXERCISE APPRECIATION SECURITIES OPTIONS OR BASE FOR OPTION TERM UNDERLYING GRANTED TO PRICE EXPIRATION ------------------ NAME OPTIONS GRANTED EMPLOYEES ($/SH) DATE 5% ($) 10% ($) - -------------------------------- --------------- ---------- -------- ---------- -------- -------- Theodore R. Rieple.............. 51,500(1) 14.8% $ 3.45 05/25/2005 $111,755 $283,250
- ------------ (1) These options vest in equal installments on the first three annual anniversaries of the date of grant. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUE TABLE The following table sets forth the option exercises and the value of in-the-money unexercised options held by Mr. Rieple at December 31, 1995:
NUMBER OF SECURITIES VALUE OF UNEXERCISED SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS ACQUIRED OPTIONS/SARS AT FY/END(#) AT ON FY/END($)(1) EXERCISE VALUE --------------------------- --------------------------- NAME (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---------------------------------- -------- -------- ----------- ------------- ----------- ------------- Theodore R. Rieple................ 0 0 257,500 103,000 $ 1,779,325 $ 584,010
- ------------ (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 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 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 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.
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY PRIOR TO OFFERING OWNED AFTER OFFERING DIRECTORS, OFFICERS AND 5% ---------------------- SHARES BEING --------------------- STOCKHOLDERS NUMBER PERCENT OFFERED NUMBER PERCENT - -------------------------------- ---------- ------- ------------ ---------- ------- 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)
- ------------ * 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.
(Footnotes continued on following page) 35 (Footnotes continued from preceding page) (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."
36 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 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 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 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............. 3,015,000 Schroder Wertheim & Co. Incorporated............................ 3,015,000 Hanifen, Imhoff Inc............................................. 770,000 Alex, Brown & Sons Incorporated................................. 100,000 Merrill Lynch, Pierce, Fenner & Smith Incorporated.............. 100,000 Morgan Stanley & Co. Incorporated............................... 100,000 Oppenheimer & Co., Inc.......................................... 100,000 Prudential Securities Incorporated.............................. 100,000 Robertson, Stephens & Company LLC............................... 100,000 Smith Barney, Inc............................................... 100,000 Advest, Inc..................................................... 50,000 Arnhold and S. Bleichroeder, Inc................................ 50,000 Robert W. Baird & Co. Incorporated.............................. 50,000 William Blair & Company, L.L.C.................................. 50,000 Cleary Gull Reiland & McDevitt Inc.............................. 50,000 Dain Bosworth Incorporated...................................... 50,000 First of Michigan Corporation................................... 50,000 Janco Partners, Inc............................................. 50,000 Kirkpatrick, Pettis, Smith, Polan Inc........................... 50,000 McDonald & Company Securities, Inc.............................. 50,000 Petrie Parkman & Co............................................. 50,000 Principal Financial Securities, Inc............................. 50,000 Roney & Co...................................................... 50,000 H.C. Wainright & Co., Inc....................................... 50,000 --------- 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 $0.25 per share. The Underwriters may allow, and such dealers may reallow, discounts not in excess of $0.10 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 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 INDEX TO FINANCIAL STATEMENTS
PAGE NO. ---- 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
F-1 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 STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, MARCH 31, -------------------------- 1994 1995 1996 ----------- ----------- ----------- (UNAUDITED) 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 ----------- ----------- ----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements. F-3 STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------------------ -------------------------- 1993 1994 1995 1995 1996 ----------- ----------- ------------ ----------- ----------- (UNAUDITED) 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 ----------- ----------- ------------ ----------- ----------- ----------- ----------- ------------ ----------- -----------
See accompanying notes to consolidated financial statements. F-4 STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
ADDITIONAL COMMON PAID-IN ACCUMULATED NOTE STOCK CAPITAL DEFICIT RECEIVABLE ----------- ----------- ------------ ---------- 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) ----------- ----------- ------------ ---------- ----------- ----------- ------------ ----------
See accompanying notes to consolidated financial statements. F-5 STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ---------------------------------------- -------------------------- 1993 1994 1995 1995 1996 ---------- ----------- ----------- ----------- ----------- (UNAUDITED) 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
See accompanying notes to consolidated financial statements. F-6 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 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 STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (4) PROPERTY AND EQUIPMENT
DECEMBER 31, ------------------------ MARCH 31, 1994 1995 1996 ---------- ---------- ---------- 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 ---------- ---------- ---------- ---------- ---------- ----------
(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
DECEMBER 31, -------------------------- MARCH 31, 1994 1995 1996 ----------- ----------- ----------- 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 ----------- ----------- ----------- ----------- ----------- -----------
(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 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 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:
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------------ ------------------ 1993 1994 1995 1996 --------- ----------- -------- ------------------ 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 $-- --------- ----------- -------- ---------- --------- ----------- -------- ----------
A reconciliation of the expected Federal income tax expense (benefit) at the statutory rate to the Company's income tax expense follows:
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------------ ------------------ 1993 1994 1995 1996 --------- ----------- -------- ------------------ 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 $ -- --------- ----------- -------- ------------------ --------- ----------- -------- ------------------
F-11 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:
DECEMBER 31, ------------------------ MARCH 31, 1994 1995 1996 ---------- ---------- ---------- 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 ---------- ---------- ---------- ---------- ---------- ----------
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 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):
NUMBER OF SHARES OPTION PRICES ---------------- ------------- 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 ---------------- ----------------
F-13 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:
YEAR ENDED DECEMBER 31, --------------------------------------- 1993 1994 1995 ---------- ----------- ---------- 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 ---------- ----------- ---------- ---------- ----------- ----------
(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 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.
YEAR ENDED DECEMBER 31, ---------------------------- 1994 1995 ------------ ------------ 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
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
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER YEAR ------- ------- ------- ------- -------- 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
- ------------ (a) See footnote 12 (b) Each period is computed separately.
F-15 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 AMERICAN TECHNICAL SERVICES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET APRIL 2, 1995 (UNAUDITED)
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 ----------- -----------
See accompanying notes to consolidated financial statements. F-17 AMERICAN TECHNICAL SERVICES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
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) 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) ------------- ------------ ------------ ------------- ------------- ------------- ------------ ------------ ------------- -------------
See accompanying notes to consolidated financial statements. F-18 AMERICAN TECHNICAL SERVICES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
PREDECESSOR STOCKHOLDERS' COMMON STOCK ADDITIONAL ACCUMULATED EQUITY AMOUNT PAID-IN CAPITAL DEFICIT (DEFICIT) ------------ --------------- ----------- ------------- 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) -- --- --------------- ----------- ------------- --- --------------- ----------- -------------
See accompanying notes to consolidated financial statements. F-19 AMERICAN TECHNICAL SERVICES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
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) 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 -- -- -- --
See accompanying notes to consolidated financial statements. F-20 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 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 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 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 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 INDUSTRIAL SYSTEMS ASSOCIATES, INC. STATEMENT OF STOCKHOLDERS' EQUITY
COMMON STOCK ----------------- RETAINED TREASURY SHARES AMOUNT EARNINGS STOCK ------ ------- ---------- --------- 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) ------ ------- ---------- --------- ------ ------- ---------- ---------
See accompanying notes to financial statements. F-26 INDUSTRIAL SYSTEMS ASSOCIATES, INC. STATEMENT OF CASH FLOWS TEN MONTHS ENDED DECEMBER 31, 1993 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
See accompanying notes to financial statements. F-27 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 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 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 INDUSTRIAL SUPPLIES DIVISION OF LUFKIN INDUSTRIES, INC. STATEMENT OF CHANGES IN LUFKIN'S EQUITY INVESTMENT YEAR ENDED DECEMBER 31, 1993 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 ---------- ----------
The accompanying notes are an integral part of these financial statements. F-31 INDUSTRIAL SUPPLIES DIVISION OF LUFKIN INDUSTRIES, INC. STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1993 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) --------- ---------
The accompanying notes are an integral part of these financial statements. F-32 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 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 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 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 STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES PRO FORMA STATEMENT OF INCOME YEAR ENDED DECEMBER 31, 1995 (UNAUDITED)
PRO FORMA ADJUSTMENT ----------------- DECEMBER 31, (NOTE) PRO FORMA 1995 ATSG COMBINED DEBIT CREDIT COMBINED ------------ ---------- ------------ ------- ------ ------------ 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 ------------ ------------ ------------ ------------
F-37 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 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. ============================================ ================================== 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................. 41 Index to Financial Statements......... F-1 May 20, 1996 ============================================ ================================== -----END PRIVACY-ENHANCED MESSAGE-----