-----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, Pg6763oTDc3SPmEDuoDe6g0SoX27zdt6Wxzjd98hEeiMhZM/p5gRJSRbAO6i54su krrHqQME2Tkj6Y9pOEu4Tg== 0000889812-97-001609.txt : 19970731 0000889812-97-001609.hdr.sgml : 19970731 ACCESSION NUMBER: 0000889812-97-001609 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19970730 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MSC INDUSTRIAL DIRECT CO INC CENTRAL INDEX KEY: 0001003078 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-INDUSTRIAL MACHINERY & EQUIPMENT [5084] IRS NUMBER: 113289165 STATE OF INCORPORATION: NY FISCAL YEAR END: 0902 FILING VALUES: FORM TYPE: S-3/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-31837 FILM NUMBER: 97647938 BUSINESS ADDRESS: STREET 1: 151 SUNNYSIDE BLVD CITY: PLAINVIEW STATE: NY ZIP: 11803 BUSINESS PHONE: 5163497100 MAIL ADDRESS: STREET 1: 151 SUNNYSIDE BLVD CITY: PLAINVIEW STATE: NY ZIP: 11803 S-3/A 1 PRE-EFFECTIVE AMENDMENT NO. 1 TO REGISTRATION STATEMENT As filed with the Securities and Exchange Commission on July 30, 1997 Registration No. 333-31837 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 -------------- PRE-EFFECTIVE AMENDMENT NO. 1 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------- MSC INDUSTRIAL DIRECT CO., INC. (Exact Name of Registrant as Specified in its Charter) New York 5084 11-3289165 (State of Incorporation) (Primary Standard Industrial (I.R.S.Employer Classification Code Number) Identification Number) 151 Sunnyside Blvd. Plainview, New York 11803-1592 (516) 349-7100 (Address and telephone number of registrant's principal executive offices) -------------- Mitchell Jacobson MSC Industrial Direct Co., Inc. 151 Sunnyside Blvd. Plainview, New York 11803-1592 (516) 349-7100 (Name, address and telephone number of agent for service) -------------- Copies to: Joseph L. Getraer, Esq. Philip E. Coviello, Esq. Rosenman & Colin LLP Latham & Watkins 575 Madison Avenue 885 Third Avenue, Suite 1000 New York, New York 10022 New York, New York 10022 (212) 940-8800 (212) 906-1200 -------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. |_| If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. |_| The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. SUBJECT TO COMPLETION, DATED JULY 30, 1997 PROSPECTUS _______, 1997 1,550,000 Shares [LOGO] Class A Common Stock All of the 1,550,000 shares of Class A Common Stock offered hereby are being sold by the Selling Shareholders. The Company will not receive any of the proceeds from the sale of shares of Class A Common Stock by the Selling Shareholders. See "Principal and Selling Shareholders." The Company has two classes of common stock. Holders of the Class A Common Stock, which is offered hereby, are entitled to one vote per share, and holders of the Class B Common Stock are entitled to ten votes per share. See "Description of Capital Stock." Upon completion of this Offering, the principal shareholders of the Company will own approximately 51.7% of the outstanding shares of capital stock of the Company and will control approximately 91.5% of the combined voting power of all outstanding shares of capital stock of the Company. Consequently, such shareholders will be in a position to elect all of the directors of the Company and to determine the outcome of any matter submitted to a vote of the Company's shareholders for approval. See "Principal and Selling Shareholders". The Class A Common Stock is listed on the New York Stock Exchange under the symbol "MSM." On July 21, 1997, the last reported sales price for the Class A Common Stock on the New York Stock Exchange was $41.1875. See "Risk Factors" beginning on page 7 for certain information that should be considered by prospective investors. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - ------------------------------------------------------------------------------- Price Underwriting Proceeds to to the Discounts and the Selling Public Commissions(1) Shareholders (2) - ------------------------------------------------------------------------------- Per Share....... $ $ $ Total........... $ $ $ - ------------------------------------------------------------------------------- (1) The Company and the Selling Shareholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses estimated at $500,000, of which approximately $30,000 and $470,000 will be paid by the Company and the Selling Shareholders, respectively. (3) The Selling Shareholders have granted to the Underwriters a 30-day option to purchase up to an aggregate of 232,500 additional shares of Class A Common Stock solely to cover over-allotments, if any. The Company will not receive any of the proceeds upon exercise of such over-allotment option. If such option is exercised in full, the total Price to the Public, Underwriting Discounts and Commissions and Proceeds to the Selling Shareholders will be $ , $ and $ , respectively. See "Underwriting." The shares are being offered by the several Underwriters, subject to prior sale, when, as and if delivered to and accepted by the Underwriters and subject to various prior conditions, including their right to reject orders in whole or in part. It is expected that delivery of the shares will be made against payment in New York, New York on or about . Donaldson, Lufkin & Jenrette Prudential Securities Incorporated Securities Corporation CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND MAY BID FOR AND PURCHASE SHARES OF THE CLASS A COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THOSE ACTIVITIES, SEE "UNDERWRITING." AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934 and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission. Reports, proxy statements and other information filed by the Company can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices at Northwestern Atrium Center, 400 West Madison Street, Suite 140, Chicago, Illinois 60661 and 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of such material can be obtained from the Commission's Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission, and the address of such site is http://www.sec.gov. Such reports, proxy statements and other information are also available for inspection at the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005. 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information (including the financial statements and the notes thereto) included elsewhere in this Prospectus. Each prospective investor is urged to read this Prospectus in its entirety. Unless otherwise indicated, (i) all information in this Prospectus, including all adjusted and pro forma financial information, has been adjusted to give effect to the "Reorganization" (as such term is hereinafter defined), (ii) all references to the "Company" or "MSC" are to MSC Industrial Direct Co., Inc. and, unless the context otherwise requires, its subsidiaries and (iii) unless otherwise indicated, the information in this Prospectus assumes that the Underwriters' over-allotment option will not be exercised. See "The Company" and "Underwriting." All references to a fiscal year are to the Company's fiscal year which ends on the Saturday nearest August 31 of such year. References to "this Offering" are to the offering of Class A Common Stock made by this Prospectus. References to the "Initial Public Offering" are to the Company's initial public offering of Class A Common Stock in December 1995. References to the "1996 Offering" are to the Company's second public offering of Class A Common Stock in September 1996. References to the "Public Offerings" are to both the Initial Public Offering and the 1996 Offering. The Company was formed in October 1995 as a holding company to own all of the outstanding capital stock of Sid Tool Co., Inc. (the "Operating Subsidiary"), which has been in business since 1941. Immediately prior to the Company's Initial Public Offering, a total of 24,000,000 shares of the Company's Class B Common Stock were issued to the then existing shareholders of the Operating Subsidiary in exchange for all of the capital stock of the Operating Subsidiary (the "Reorganization"). The Company's principal executive offices are located at 151 Sunnyside Boulevard, Plainview, New York 11803-1592. THE COMPANY MSC is one of the largest direct marketers of a broad range of industrial products to small and mid-sized industrial customers throughout the United States. The Company distributes a full line of industrial products, such as cutting tools, abrasives, measuring instruments, machine tool accessories, safety equipment, fasteners, welding supplies and electrical supplies, intended to satisfy its customers' maintenance, repair and operations ("MRO") supplies requirements. The Company offers over 300,000 stock-keeping units ("SKUs") through its 3,560 page master catalog and weekly, monthly and quarterly specialty and promotional catalogs, newspapers and brochures, which are supported by approximately 50 customer service locations. Most of the Company's products are carried in stock, and orders for these products are typically fulfilled the day on which the order is received. MSC has grown rapidly due to expanded product offerings, increased catalog distribution and supplemental mailings and geographic expansion. The Company's net sales have increased at a compound annual rate of 24.9% from $125.5 million in fiscal 1992 to $305.3 million in fiscal 1996. During this same period, income from operations increased at a compound annual rate of 28.6% from $12.6 million to $34.5 million. These strong growth trends have continued during fiscal 1997. For the nine months ended May 31, 1997, net sales increased by $96.3 million, or 42.9%, to $320.8 million from $224.5 million for the nine months ended June 1, 1996, and income from operations, before taking into account the relocation costs associated with the move of the Company's Long Island distribution center to Harrisburg, Pennsylvania in fiscal 1996, increased by $11.8 million, or 36.6%, to $43.8 million from $32.0 million for the nine months ended June 1, 1996. The Company also expects to realize modest future growth from four acquisitions effected during fiscal 1997. MSC's business strategy is to provide an integrated, low cost solution to the purchasing, management and administration of its customers' MRO needs. MSC has positioned itself to add value to its customers' purchases by reducing their total MRO supplies costs, taking into account both the direct cost of products and the administrative, personnel and financial cost of obtaining and maintaining MRO supplies. MSC's extensive product offerings allow customers to reduce the administrative burden of dealing with many suppliers for their MRO needs. The Company guarantees same-day shipping of products, approximately 95% of which are generally kept in stock, thereby enabling customers to reduce their inventory investment and carrying costs. The Company reduces its customers' administrative paperwork, costs of shipping and personnel costs related to internal distribution and purchase order management by consolidating multiple purchases into a single shipment, providing a single invoice 3 relating to multiple purchases over varying periods of time and offering the ability to direct shipments to specific departments and personnel within a single facility or multiple facilities. The Company's customers include a wide range of purchasers of industrial supply products, from one-man machine shops to Fortune 500 companies. The Company's core business focuses on selling relatively higher margin, lower volume products and has an average order size of approximately $150. MSC has in excess of 141,000 active customers (companies that have purchased at least one item during the past 12 months), which are typically small and mid-size companies. MSC's customers select desired products from the Company's various publications and place their orders by telephone, facsimile or direct computer link. The Company operates primarily in the United States, with customers in all 50 states, through a network of three regional distribution centers and approximately 50 branch offices. The Company's distribution centers are located in Harrisburg, Pennsylvania, Atlanta, Georgia and Elkhart, Indiana. The strategic locations of the Company's current distribution centers allow for next day delivery via low cost ground carriers in 28 states located primarily in the eastern United States, which states account for 81% of the Company's sales. The Company's experience has been that areas accessible by next day delivery generate significantly greater sales than areas where next day delivery is not available. Accordingly, the Company's long-term strategy is to establish additional distribution centers in the West and Southwest, supported by local branch offices, to expand the Company's geographic coverage of next day delivery throughout the continental United States. 4 THIS OFFERING Class A Common Stock Offered..........................1,550,000 shares Capital Stock to be Outstanding After this Offering Class A Common Stock................................16,429,119 shares(1) Class B Common Stock................................17,413,700 shares(2) Total...........................................33,842,819 shares Voting Rights.........................................The Class A Common Stock, par value $.001 per share (the "Class A Common Stock"), is entitled to one vote per share and the Class B Common Stock, par value $.001 per share (the "Class B Common Stock"), is entitled to ten votes per share on all matters requiring a shareholder vote. See "Risk Factors-- Control of the Company" and "Description of Capital Stock." Use of Proceeds.......................................The Company will not receive any of the proceeds from the sale of the shares of Class A Common Stock offered by the Selling Shareholders. Risk Factors..........................................Certain factors should be considered in connection with an investment in the Class A Common Stock. See "Risk Factors." NYSE Symbol..........................................."MSM" - ----------- (1) Excludes 1,950,111 shares of Class A Common Stock reserved for issuance under the Company's 1995 Stock Option Plan, of which options to purchase 1,138,007 shares of Class A Common Stock are outstanding. (2) The Class B Common Stock is convertible into Class A Common Stock on a one-for-one basis at the option of the holder and upon transfer of such shares to persons other than existing shareholders or certain of their family members. See "Principal and Selling Shareholders." 5 SUMMARY FINANCIAL INFORMATION (amounts in thousands, except per share data)
Fiscal Year Ended Nine Months Ended ------------------------------------------------------------------- ---------------------- August 29, August 28, August 27, September 2, August 31, 1992 1993 1994 1995 1996 June 1, May 31, (52 weeks) (52 weeks) (52 weeks) (53 weeks) (52 weeks) 1996 1997 ------------------------------------------------------------------- ---------------------- Income Statement Data: Net sales....................... $125,454 $142,287 $174,682 $248,483 $305,294 $224,527 $320,794 Gross profit.................... 55,385 61,796 74,852 103,288 126,775 93,263 131,420 Operating expenses.............. 42,454 44,951 50,811 69,532 83,666 61,214 87,626 Restructuring charge............ -- -- -- -- 8,600 8,600 -- Income from operations.......... 12,630 16,845 24,041 33,756 34,509 23,449 43,794 Income taxes.................... 323 418 813 765 5,531 1,947 17,418 Net income...................... 10,458 15,682 22,573 31,698 28,503 21,246 26,702 Net income per share............ $0.79 ===== Weighted average number of shares outstanding.......... 33,930 ====== Pro forma net income(1)......... 6,523 9,740 14,149 19,640 20,591 14,033(3) Pro forma net income per share(2)................ $0.67 $0.45 ===== ===== Pro forma weighted average number of shares outstanding(2).............. 30,696 30,205 ====== ====== Selected Operating Data(4): Active customers................ 75 78 98 120 127 125 141 Number of SKUs.................. 140 150 170 231 302 250 302 Orders entered.................. 967 1,103 1,348 1,833 2,155 1,560 1,906 Number of publication titles (not in thousands).......... 12 13 20 38 70 61 39 Number of publications mailed... 2,447 2,688 4,794 6,604 6,300 5,167 6,723 Revenues per employee........... $ 189 $ 201 $ 214 $ 249 $ 266 $ 262 $ 280
August 31, 1996 May 31, 1997 --------------- ------------ Balance Sheet Data: Working capital............................ $163,785 $190,703 Total assets............................... 265,484 316,912 Short-term debt............................ 2,486 59 Long-term debt, net of current portion..... 42,191 2,590 Shareholders' equity....................... 172,571 264,971 - ------------------------ (1) Gives pro forma effect to "C" corporation taxation at an assumed annual rate of 39.5%. (2) Pro forma net income per share is calculated by dividing pro forma net income by pro forma shares outstanding, which gives effect to (i) the weighted average shares of Class A and Class B Common Stock outstanding during the year, (ii) the impact of approximately 262,000 shares issued for the acquisition of an affiliated corporation and the Company's 1995 Restricted Stock Plan assumed to be outstanding for the entire year, (iii) the impact of 3,318,000 shares issued in the Initial Public Offering, the proceeds of which were used to pay the final "S" corporation distribution, assumed to be outstanding for the entire year, and (iv) the common stock equivalent impact of 756,000 outstanding options issued under the Company's 1995 Stock Option Plan, based upon the grant date of the options. (3) Excluding the tax-effected impact of the restructuring charge of $8,600,000 in the nine month period ended June 1, 1996, pro forma net income for that period would have been $19,233,000 or $0.61 per share. (4) See "Management's Discussion and Analysis of Financial Condition and Results of Operations--General." 6 RISK FACTORS In addition to the other information in this Prospectus, the following factors should be considered in evaluating the Company and its business before purchasing the shares of Class A Common Stock offered hereby Certain information set forth in this Prospectus contains forward-looking statements, as such term is defined in Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Certain factors discussed herein could cause actual results to differ materially from those in the forward-looking statements. Changing Industry Environment The industrial supply industry is undergoing significant change driven by pressure from industry participants and by customer objectives. Traditional industrial suppliers are consolidating operations and acquiring or merging with other industrial suppliers to achieve economies of scale and increase efficiency. This consolidation trend could cause the industry to become more competitive and make it more difficult for the Company to maintain its operating margins. Customers are increasingly aware of the total costs of fulfilling their purchasing requirements and are seeking low cost alternatives to traditional methods of purchasing and sources of supply. MSC believes that the current trend is to reduce the number of suppliers and rely more on lower cost alternatives such as direct mail and/or integrated supply arrangements. Although the Company believes it provides a competitive solution to customers' MRO purchasing needs and it is well positioned to take advantage of this trend, there can be no assurance that it will be able to do so effectively or that it will be able to establish relationships with integrated supply providers. See "Business--Industry Overview." Management of Rapid Growth MSC's sales have grown from $125.5 million in fiscal 1992 to $305.3 million in fiscal 1996. This growth trend has continued during fiscal 1997. For the nine months ended May 31, 1997, net sales increased by $96.3 million, or 42.9%, to $320.8 million from $224.5 million for the nine months ended June 1, 1996. This growth has placed increasing demands on the Company's management resources and facilities. While there can be no assurance that the Company's historical growth rates will continue in the future, the Company's success will, in part, be dependent upon the ability of the Company to continue to manage internal growth effectively. Dependence on Systems The Company believes that its proprietary computer software programs are an integral part of its business and growth strategies. MSC depends upon its information systems generally to process orders, to manage inventory and accounts receivable collections, to purchase, sell and ship products efficiently and on a timely basis, to maintain cost-effective operations and to provide superior service to its customers. While the Company has taken precautions against certain events that could disrupt the operation of its information systems, there can be no assurance that such a disruption will not occur. Any such disruption could have a material adverse effect on MSC's business and results of operations. See "Business--Information Systems." Distribution Center Expansion/Move During the current fiscal year, the Company commenced shipping from its new Harrisburg, Pennsylvania distribution center. In addition, MSC expects to open new distribution centers to improve the Company's efficiency, geographic distribution and market penetration. Moving or opening distribution centers requires a substantial capital investment, including expenditures for real estate and construction, and a substantial investment in inventory. In 7 addition, new distribution centers will have an adverse impact on distribution expenses as a percentage of sales, inventory turnover and return on investment in the periods prior to and for some time following the commencement of operations of each new distribution center. Additionally, until sales volumes mature at new distribution centers, expenses as a percentage of sales may be adversely impacted. Further, substantial or unanticipated delays in the commencement of operations at new distribution centers, as a result of inadequate financing, construction difficulties or otherwise, will have a material adverse effect on the Company's planned geographic expansion and may impact results of operations. See "Business--Distribution Centers." Integration of Prospective Acquisitions Acquisitions have played a limited role in the growth of MSC to date. An element of the Company's future growth strategy is to pursue selected acquisitions that either expand or complement its business in new or existing markets. In furtherance of this strategy, the Company made four acquisitions during fiscal 1997. However, there can be no assurance that in the future the Company will be able to identify and to acquire acceptable acquisition candidates on terms favorable to the Company and in a timely manner to the extent necessary to fulfill the Company's growth strategy. The failure to complete or successfully integrate prospective acquisitions may have an adverse impact on the Company's growth strategy. The Company is not currently a party to any oral or written acquisition agreement or engaged in any negotiations with respect to any material acquisition candidate. See "Business--Growth Strategy" and "--Acquisitions." Competition The MRO supply industry is a large, fragmented industry that is highly competitive. The Company faces competition from traditional channels of distribution such as retail outlets, small dealerships and regional or national distributors utilizing direct sales forces, from manufacturers of MRO supplies, from large warehouse stores and from larger direct mail distributors. The Company believes that sales of MRO supplies will become more concentrated over the next few years, which may increase the competitiveness of the industry. Certain of the Company's competitors offer a greater variety of products and have substantially greater financial and other resources than the Company. See "Business--Competition." Dependence on Key Personnel The Company's success depends largely on the efforts and abilities of certain key management employees, in particular the Company's three senior executive officers, Mitchell Jacobson, James Schroeder and Shelley Boxer. The loss of the services of one or more of such key personnel could have a material adverse effect on the Company's business and financial results. The Company does not maintain any key-man insurance policies with respect to any of its executive officers. See "Management." Control of the Company The Company's President and Chief Executive Officer, his sister, certain of their family members and trusts established for their benefit (hereinafter collectively referred to as the "Jacobson and Gershwind families") collectively own 100% of the outstanding shares of Class B Common Stock and will control approximately 91.5% of the combined voting power of the Company's capital stock upon the closing of this Offering. Consequently, such shareholders will be in a position to elect all of the directors of the Company and to determine the outcome of any matter submitted to a vote of the Company's shareholders for approval. See "Principal and Selling Shareholders" and "Description of Capital Stock." 8 Possible Volatility of Stock Price The Company believes certain factors, such as sales of Class A Common Stock into the market by existing shareholders, fluctuations in operating results of the Company or its competitors and market conditions generally could cause the market price of the Class A Common Stock to fluctuate substantially. Such market volatility may adversely affect the market price of the Class A Common Stock. Shares Eligible for Future Sale Sales of a substantial number of shares of Class A Common Stock in the public market, whether by purchasers in this Offering or other shareholders of the Company, could adversely affect the prevailing market price of the Class A Common Stock and could impair the Company's future ability to raise capital through an offering of its equity securities. There will be 16,429,119 shares of Class A Common Stock outstanding immediately after completion of this Offering, substantially all of which are freely tradeable. All of the shares of Class B Common Stock (and the shares of Class A Common Stock into which such shares are convertible) are "restricted securities" for purposes of the Securities Act. Subject to the volume and other limitations set forth in Rule 144 promulgated under the Securities Act, all of such restricted securities are eligible for public sale. See "Principal and Selling Shareholders" and "Underwriting." USE OF PROCEEDS The Company will not receive any of the proceeds from the sale of the shares of Class A Common Stock offered by the Selling Shareholders. SELECTED FINANCIAL AND OPERATING DATA The following selected financial information is qualified by reference to, and should be read in conjunction with, the Company's Financial Statements and the notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained elsewhere in this Prospectus. The selected income statement data for the fiscal years ended August 27, 1994, September 2, 1995 and August 31, 1996 and the selected balance sheet data as of September 2, 1995 and August 31, 1996 are derived from the Company's audited financial statements which are included elsewhere herein. The selected income statement data and balance sheet data for the nine month periods ended June 1, 1996 and May 31, 1997 have been derived from, and are qualified by reference to, the Company's unaudited interim financial statements included elsewhere herein and include all adjustments, consisting only of normal recurring adjustments, which management considers necessary for a fair presentation of the results of the Company for such periods. Results for interim periods are not necessarily indicative of results that may be achieved for the full fiscal year. The selected balance sheet data as of August 29, 1992, August 28, 1993 and August 27, 1994 the selected income statement data for the fiscal years ended August 29, 1992 and August 28, 1993 are derived from audited financial statements of the Company not included herein. 9
Fiscal Year Ended ----------------------------------------------------------------------------- August 29, August 28, August 27, September 2, August 31, 1992 1993 1994 1995 1996 (52 weeks) (52 weeks) (52 weeks) (53 weeks) (52 weeks) ----------------------------------------------------------------------------- (amounts in thousands, except per share data) Income Statement Data: Net sales...................................... $125,454 $142,287 $174,682 $248,483 $305,294 Gross profit................................... 55,385 61,796 74,852 103,288 126,775 Operating expenses............................. 42,454 44,951 50,811 69,532 83,666 Restructuring charge........................... -- -- -- -- 8,600 Income from operations......................... 12,630 16,845 24,041 33,756 34,509 Income taxes................................... 323 418 813 765 5,531 Net income..................................... 10,458 15,682 22,573 31,698 28,503 Net income per share........................... Weighted average number of shares outstanding.. Pro forma net income(1) ....................... 6,523 9,740 14,149 19,640 20,591 Pro forma net income per share(2).............. $0.67 ==== Pro forma weighted average number of shares outstanding(2)............................... 30,696 ====== Selected Operating Data(4): Active customers............................... 75 78 98 120 127 Number of SKUs................................. 140 150 170 231 302 Orders entered................................. 967 1,103 1,348 1,833 2,155 Number of publication titles (not in thousands) 12 13 20 38 70 Number of publications mailed.................. 2,447 2,688 4,794 6,604 6,300 Revenues per employee.......................... $ 189 $ 201 $ 214 $ 249 $ 266 Nine Months Ended --------------------------------------------- June 1, May 31, 1996 1997 --------------------------------------------- (amounts in thousands, except per share data) Income Statement Data: Net sales...................................... $224,527 $320,794 Gross profit................................... 93,263 131,420 Operating expenses............................. 61,214 87,626 Restructuring charge........................... 8,600 -- Income from operations......................... 23,449 43,794 Income taxes................................... 1,947 17,418 Net income..................................... 21,246 26,702 Net income per share........................... $0.79 ======== Weighted average number of shares outstanding.................................. 33,930 ======== Pro forma net income(1) ....................... 14,033(3) Pro forma net income per share(2).............. $0.45 ======== Pro forma weighted average number of shares outstanding(2)............................... 30,205 ======== Selected Operating Data(4): Active customers............................... 125 141 Number of SKUs................................. 250 302 Orders entered................................. 1,560 1,906 Number of publication titles (not in thousands) 61 39 Number of publications mailed.................. 5,167 6,723 Revenues per employee.......................... $ 262 $ 280
August 29, August 28, August 27, September 2, August 31, May 31, 1992 1993 1994 1995 1996 1997 ---------- ---------- ---------- ------------ ---------- ------- Balance Sheet Data (at period end): Working capital........................ $54,158 $57,335 $48,726 $81,228 $163,785 $190,703 Total assets........................... 75,745 80,853 91,307 139,032 265,484 316,912 Short-term debt........................ 498 665 12,728 9,208 2,486 59 Long-term debt, net of current portion. 23,762 18,374 3,220 30,969 42,191 2,590 Shareholders' equity................... 40,187 49,708 55,750 72,088 172,571 264,971
- -------------------------------------------- (1) Gives pro forma effect to "C" corporation taxation at an assumed annual rate of 39.5%. (2) Pro forma net income per share is calculated by dividing pro forma net income by pro forma shares outstanding, which gives effect to (i) the weighted average shares of Class A and Class B Common Stock outstanding during the year, (ii) the impact of approximately 262,000 shares issued for the acquisition of an affiliated corporation and the Company's 1995 Restricted Stock Plan assumed to be outstanding for the entire year, (iii) the impact of 3,318,000 shares issued in the Initial Public Offering, the proceeds of which were used to pay the final "S" corporation distribution, assumed to be outstanding for the entire year, and (iv) the common stock equivalent impact of 756,000 outstanding options issued under the Company's 1995 Stock Option Plan, based upon the grant date of the options. (3) Excluding the tax-effected impact of the restructuring charge of $8,600,000 in the nine month period ended June 1, 1996, pro forma net income for that period would have been $19,233,000 or $0.61 per share. (4) See "Management's Discussion and Analysis of Financial Condition and Results of Operations--General." 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General In recent years, the Company made the strategic decision to leverage its strength as a low-cost value-added MRO provider by adding new categories of MRO supplies, such as welding and electrical supplies, which has increased sales to existing customers and allowed the Company access to new customers. The Company believes that revenues have increased, in part, as a result of the increase in the number of SKUs; however, the Company is unable to quantify precisely the impact of such increase. The Company intends to continue to add new product categories and increase the number of products offered in existing product categories in its efforts to gain new customers and increase sales from existing customers. During fiscal 1996, the Company added over 70,000 SKUs and expects to add approximately 25,000 SKUs during each of the next two fiscal years. The Company generally adds SKUs in response to the feedback it receives from its existing customers. In this way, the Company seeks to increase purchases from existing customers through increased product offerings that it knows are desired by its customers. While adding new product categories is important to increasing volume and profits, this expansion will result in increases in the Company's inventory purchases. The Company also seeks to expand its customer base by offering its increased product lines and product offerings to customers who have not previously purchased merchandise from the Company. There can be no assurance that the Company will be able to increase the number of SKUs offered or that the correlation between the number of SKUs offered and revenues will continue. The Company significantly expanded its direct mail marketing program from approximately 4.8 million pieces in fiscal 1994 to 6.6 million pieces in fiscal 1995. In fiscal 1996, the Company adopted a more focused strategy for targeting mailing pieces and increased its level of investment in new products and distribution capabilities. Accordingly, in fiscal 1996, mailings remained relatively flat at 6.3 million pieces. In fiscal 1997, the number of targeted marketing pieces mailed will increase to approximately 11.3 million as the Company increases its direct marketing efforts to take advantage of additional products offered and its expanded distribution capabilities. Targeted mailings to customers or potential customers are designed to maximize the Company's return in relation to its marketing expenditures. The Company utilizes its customer databases to match specific customer profiles with an expanding selection of catalog titles which emphasize specific product categories. The Company believes that increasing mailings to more targeted customer segments has resulted in increased marketing productivity. In fiscal 1997, the Company took advantage of the additional products offered and its expanded distribution capabilities by further increasing its direct marketing efforts. These direct marketing expenditures are expected to enhance the expanded products offerings and improved distribution capabilities; however, the costs associated with this program will be incurred substantially in advance of increased sales and may negatively impact operating margins in the short term. Such costs are expected to be offset, in part, by increases in vendor funded co-op payments which will offset a portion of the catalog and mailing expenses. There can be no assurance that continued expansion of the Company's direct mail marketing program will result in new customers or an increase in sales from existing customers. Revenue per employee increased from approximately $214,000 in fiscal 1994 to an annualized rate of approximately $280,000 during the first nine months of fiscal 1997. The Company believes that this increase in revenue per employee is indicative of its efforts to achieve higher levels of efficiency and cost savings at the employee level. However, commencement of shipping operations at the Elkhart, Indiana and Harrisburg, Pennsylvania distribution centers has had a negative impact on revenue per employee. The Company intends to continue to improve the efficiency and performance of its employees, although there can be no assurance that this can be accomplished. The number of annual orders entered and processed has increased from approximately 1.3 million in fiscal 1994 to approximately 2.2 million during fiscal 1996. The number of orders entered and processed is approximately 1.9 million for the first nine months of fiscal 1997, an increase from approximately 1.6 million for the comparable period in fiscal 1996. The average order size of approximately $150 for the Company's core business has remained relatively constant throughout this period. The Company believes that its targeted marketing campaign strategy to continue to add new product categories and new products within existing categories and increased efficiencies in 11 order processing have been significant contributing factors to the Company's increase in orders and, accordingly, sales, both from existing customers and from new customers; however, there can be no assurance that the Company will be able to continue to grow at rates recently experienced or at all. In fiscal 1996, the Company recorded and, through the first half of fiscal 2001 the Company will record, a non-cash deferred compensation charge at a rate of approximately $600,000 per year as a result of the issuance of 156,131 shares of Class A Common Stock to certain of the Company's employees pursuant to the Company's 1995 Restricted Stock Plan. MSC commenced shipping operations at its new distribution center in Elkhart, Indiana during fiscal 1996 and its new distribution center in Harrisburg, Pennsylvania during fiscal 1997 in order to improve the Company's efficiency, geographic distribution and market penetration. The opening of these new distribution centers required a substantial capital investment, including expenditures for real estate and construction, and substantial investment for inventory. The openings have also adversely impacted distribution expenses as a percentage of sales, inventory turnover and return on investment in the periods prior to and since the commencement of operations. Additionally, until sales volumes mature at these new distribution centers, expenses as a percentage of sales may be adversely impacted. Results of Operations The following table represents the Company's net sales and statement of income data expressed as a percentage of net sales for the three most recent fiscal years and the nine months ended June 1, 1996 and May 31, 1997:
Fiscal Year Ended Nine Months Ended ------------------------------------------------------ ------------------------------- August 27, 1994 September 2, 1995 August 31, 1996 June 1, 1996 May 31, 1997 --------------- ----------------- --------------- ------------ ------------ Net sales (dollars in thousands)... $174,682 $248,483 $305,294 $224,527 $320,794 ======== ======== ======== ======== ======== Net sales.......................... 100.0% 100.0% 100.0% 100.0% 100.0% Gross profit....................... 42.9 41.6 41.5 41.5 41.0 Operating expenses................. 29.1 28.0 27.4 27.3 27.3 Restructuring charge............... -- -- 2.8 3.8 -- Net income......................... 12.9 12.8 9.3 9.5 8.3 Pro forma net income............... 8.1 7.9 6.7 6.3 --
Thirty-Nine Weeks Ended May 31, 1997 Compared to Thirty-Nine Weeks Ended June 1, 1996 Net sales increased by $96.3 million, or 42.9%, to $320.8 million during the first nine months of 1997 from $224.5 million in the first nine months of 1996. This increase was attributable to an increase in sales to the Company's existing customers, an increase in the number of active customers and the effect of the acquisitions made subsequent to June 1, 1996. The increase in sales to existing customers was derived primarily from an increase in the number of SKUs offered. Gross profit increased by $38.2 million, or 40.9%, to $131.4 million in the first nine months of 1997, from $93.3 million in the first nine months of 1996, primarily attributable to increased sales. As a percentage of sales, gross profit decreased from 41.5% to 41.0%, resulting primarily from slightly lower margins realized from customers and product lines gained through the Company's acquisitions. Operating expenses increased by $26.4 million, or 43.1%, to $87.6 million in the first nine months of 1997, from $61.2 million in the first nine months of 1996. As a percentage of sales, operating expenses remained constant at 27.3%. This results from both operating efficiencies and the distribution of fixed expenses over a larger revenue base offset by the expenses related to the investment in new branches, which will enhance future growth. 12 Restructuring charge of $8.6 million, recorded during the third quarter of 1996, is the estimated cost of the relocation of the Company's Long Island distribution center and warehouses. This is the equivalent of $5.2 million after taxes, or $0.16 per share. The restructuring charge includes the cost of relocating or replacing the Company's Long Island workforce, the cost to physically move the inventory from Long Island to Harrisburg, Pennsylvania, and the cost of leases and assets associated with abandoned facilities. Net income increased by $5.5 million, to $26.7 million in the first nine months of 1997 from $21.2 million in the first nine months of 1996, but increased by $12.7 million as compared with pro forma 1996 net income of $14.0 million, which gives pro forma effect to "C" corporation taxation for the entire period. The increase in net income is primarily attributable to increased sales and gross margins offset by the increase in operating expenses necessary in order to service increased volume and invest in future growth. Fiscal Year Ended August 31, 1996 Compared to Fiscal Year Ended September 2, 1995 Net sales increased by $56.8 million, or 22.9%, to $305.3 million in fiscal 1996 from $248.5 million in fiscal 1995, which included one extra week (the Company's fiscal years contain either 52 or 53 weeks). This increase was primarily attributable to an increase in sales to the Company's existing customers and, to a lesser extent, to an increase in the number of new customers. The increase in sales to existing customers was derived primarily from an increase of 31% in the number of SKUs offered as well as from more focused marketing efforts. Average annual sales per customer increased 16%, and the number of active customers increased 6% in fiscal 1996, as compared to fiscal 1995. Gross profit increased by $23.5 million, or 22.7%, to $126.8 million in fiscal 1996 from $103.3 million in fiscal 1995. The increase in gross profit was attributable to increased sales. As a percentage of sales, gross profit remained constant at approximately 41.5% and 41.6% for the respective periods. Operating expenses, exclusive of the restructuring charge, increased by $14.1 million, or 20.3%, to $83.7 million in fiscal 1996 from $69.5 million in fiscal 1995. This increase was attributable to increased sales volume which required added staffing and support. As a percentage of sales, operating expenses declined from 28.0% to 27.4%. Restructuring charge of $8.6 million, recorded during the third quarter of fiscal 1996, is the estimated cost of the relocation of the Company's Long Island distribution center and warehouses. This is the equivalent of $5.2 million after taxes, or $0.17 per share. The restructuring charge includes the cost of relocating or replacing the Company's Long Island workforce, the cost to physically move the inventory from Long Island to Harrisburg, Pennsylvania, and the cost of leases and assets associated with abandoned facilities. The Harrisburg, Pennsylvania distribution center commenced shipping in September 1996, and is expected to be fully operational in the first half of fiscal 1997. Income from operations increased by $0.8 million, or 2.2%, to $34.5 million in fiscal 1996 from $33.8 million in fiscal 1995. This increase was attributable to increased sales and gross profit offset in part by the aforementioned restructuring charge and increases in operating expenses. Before taking into account the restructuring charge, income from operations would have increased by $9.4 million, or 27.7%, to $43.1 million. Net income decreased by $3.2 million, or 10.1%, to $28.5 million in fiscal 1996, from $31.7 million in fiscal 1995. The decrease in net income is primarily attributable to the restructuring charge and taxation at "C" corporation rates for a portion of fiscal 1996, partially offset by increased sales and gross profit. Before taking into account the restructuring charge, net income would have increased by $2.0 million, or 6.3%, to $33.7 million. Pro forma net income increased by $1.0 million, or 4.8%, to $20.6 million in fiscal 1996 from $19.6 million in fiscal 1995. This change in pro forma net income reflects primarily the cumulative effects of the changes in net income. As a percentage of sales, pro forma net income in fiscal 1996 decreased to 6.7% from 7.9% in fiscal 1995. This decline in pro forma net income as a percentage of sales reflects primarily the restructuring charge 13 in 1996, offset, in part, by the percentage decline in other operating expenses and the decline in pro forma income taxes, both as a percentage of sales. Fiscal Year Ended September 2, 1995 Compared to Fiscal Year Ended August 27, 1994 Net sales increased by $73.8 million, or 42.2%, to $248.5 million in fiscal 1995 from $174.7 million in fiscal 1994. This increase was attributable to a 35.8% increase in the number of SKUs offered by MSC, a 19% increase in revenues per SKU and the inclusion of an extra week in fiscal 1995 (the Company's fiscal years contain either 52 or 53 weeks). These increases also reflect a 24% increase in the average number of active customers and a 15% increase in average annual sales per customer. The Company believes that the new customers were attracted as a result of direct marketing expenditures of $6.5 million in fiscal 1995 compared to expenditures of $3.9 million in fiscal 1994 (net of cooperative advertising revenues of approximately $1.1 million in fiscal 1995 and approximately $0.5 million in fiscal 1994), as well as the addition of 24 new sales representatives and the opening of 4 new branch offices. The Company believes that average sales per customer increased primarily as a result of the increased selection of merchandise available as reflected by the increased SKU count, as well as increased direct marketing efforts. Gross profit increased by $28.4 million, or 38.0%, to $103.3 million in fiscal 1995 from $74.9 million in fiscal 1994. As a percentage of sales, gross profit margins in fiscal 1995 declined to 41.6% from 42.9% in fiscal 1994. The absolute increase in gross profit was attributable to increased sales and the inclusion of an extra week in fiscal 1995, offset in part by decreasing margins. Gross profit margins declined, in part, due to the introduction of approximately 61,000 new SKUs in fiscal 1995. New SKUs are typically introduced at slightly reduced prices in order to establish such products in the marketplace. The Company believes that new product introductions will ultimately result in increased gross margins when new product volumes reach levels that are customary for mature products. Operating software improvements allowing better control over buying and pricing decisions were implemented during fiscal 1995 and are expected to have a positive impact on margins for fiscal 1996 and beyond. Operating expenses increased by $18.7 million, or 36.8%, to $69.5 million in fiscal 1995 from $50.8 million in fiscal 1994. As a percentage of sales, operating expenses in fiscal 1995 declined to 28.0% from 29.1% in fiscal 1994. The absolute increase in operating expenses was attributable to increased sales volumes which required added staffing and support and the inclusion of an extra week in fiscal 1995. The decline in operating expenses as a percentage of sales was attributable to leveraging of fixed costs over a larger revenue base, the realization of economies of scale and installed technological improvements such as increased automation of order processing and improvements in fulfillment processes. The improvements were offset, in part, by increased direct marketing expenditures necessary to expand the Company's customer base and product development, marketing and stocking costs necessary to support the increased SKU count. The Company expects to incur approximately $3.5 million of additional operating, personnel and depreciation expenses during fiscal 1996 with respect to its new Elkhart, Indiana distribution facility. This facility will continue to incur similar expenses until commencement of full scale operations in fiscal 1997. Income from operations increased by $9.7 million, or 40.4%, to $33.8 million in fiscal 1995 from $24.0 million in fiscal 1994. As a percentage of sales, income from operations in fiscal 1995 decreased to 13.6% from 13.8% in fiscal 1994. This decrease reflects the cumulative effects of a 1.3% decline in gross profit margins offset by a 1.1% improvement in operating expenses as a percentage of sales. Net interest expense increased by $1.1 million, or 160.8%, to $1.8 million in fiscal 1995 from $0.7 million in fiscal 1994. This increase was primarily attributable to additional borrowings necessary to fund increased investments in inventory. Additionally, the Company experienced a small increase in its average interest rates paid during fiscal 1995. Net income increased by $9.1 million, or 40.4%, to $31.7 million in fiscal 1995 from $22.6 million in fiscal 1994. As a percentage of sales, net income in fiscal 1995 decreased to 12.8% from 12.9% in fiscal 1994. This decrease reflects the cumulative effects of a 1.3% decline in gross profit margins and a 0.3% increase in net 14 interest expense as a percentage of sales, offset by a 1.1% improvement in operating expenses as a percentage of sales. Pro forma net income increased by $5.5 million, or 38.8%, to $19.6 million in fiscal 1995 from $14.1 million in fiscal 1994. As a percentage of sales, pro forma net income in fiscal 1995 decreased to 7.9% from 8.1% in fiscal 1994. This change in pro forma net income reflects the cumulative effects of the changes in net income. Quarterly Results and Seasonality The following table sets forth unaudited financial data for each of the Company's last eleven fiscal quarters.
Year Ended September 2, 1995 ------------------------------------------------------ First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- (dollars in thousands, except per share data) Income Statement Data: Net sales............................. $54,118 $61,187 $66,719 $66,459 Income from operations................ 6,520 8,353 10,128 8,755 Net income............................ 6,210 7,880 9,311 8,297 Pro forma net income(1)............... 3,845 4,900 5,782 5,113 Year Ended August 31, 1996 ------------------------------------------------------ First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- (dollars in thousands, except per share data) Income Statement Data: Net sales............................. $69,681 $74,631 $80,215 $80,767 Income from operations................ 8,766 10,305 4,378 11,060 Net income............................ 7,988 10,950 2,758(2) 6,807 Pro forma net income(1)............... 4,969 6,305 -- -- Year Ended August 30, 1997 --------------------------------------- First Second Third Quarter Quarter Quarter ------- ------- ------- (dollars in thousands, except per share data) Income Statement Data: Net sales............................. $92,214 $104,685 $123,895 Income from operations................ 11,364 14,675 17,755 Net income............................ 6,950 8,831 10,921 Pro forma net income(1)............... -- -- --
- ------------------- (1) Gives pro forma effect to "C" corporation taxation at an assumed annual rate of 39.5%. (2) Net of restructuring charge of $5,200,000 (after income tax effect of $3,400,000). The Company has generally experienced slightly lower sales volumes during the summer months and the Company expects this trend to continue in the foreseeable future. As a result, net income in its fourth fiscal quarter is somewhat lower than in the third fiscal quarter, due largely to the continuation of the Company's fixed costs during slower sales periods. The Company's quarterly results of operations may also fluctuate as a result of a variety of other factors, including the timing of commencement of operations at new distribution centers. Liquidity and Capital Resources The Company's primary capital needs have been to fund (i) the working capital requirements necessitated by its sales growth and (ii) prior to the Reorganization (see Note 1 to the annual consolidated financial statements), distributions to its then existing shareholders, primarily to satisfy their tax liabilities resulting from the previous "S" corporation status of the Operating Subsidiary. The Company's sources of financing have historically been from operations, bank borrowings under its $80 million credit facility (the "Credit Facility "), subordinated loans from shareholders, and a portion of the proceeds from the Initial Public Offering and the 1996 Public Offering. The Company completed the Initial Public Offering on December 20, 1995, and outstanding subordinated debt to shareholders and credit facility debt as of that date were repaid out of the net proceeds. Subsequent bank borrowings were repaid out of the proceeds from the 1996 Public Offering. The Company anticipates that its cash flows from operations and available lines of credit will be adequate to support its operations and its growth for the immediate future and for at least the next 24 months. In March 1996, the Company commenced shipments from its Elkhart, Indiana distribution center, which provides next day service to most of the midwestern United States. As a result of the opening of this facility, the Company significantly increased its inventories to provide for future orders from the distribution center. 15 Net cash provided by (used in) operating activities increased $60.8 million to $33.6 million from a net cash usage of $27.3 million for the thirty-nine week periods ended May 31, 1997 and June 1, 1996, respectively. The net usage of cash in 1996 was primarily due to purchases of inventory in connection with the initial stocking of the Elkhart distribution center and introduction of new products. In 1997, inventory excluding inventory of acquired companies declined, reflecting improved inventory control policies and procedures. Net cash provided by (used in) operating activities was $21.0 million, $(1.2) million and $(30.9) million in fiscal 1994, 1995 and 1996, respectively. The decrease from fiscal 1994 to fiscal 1995 resulted principally from an increase in inventory due to investments in the new Elkhart, Indiana distribution center and a build-up of inventory for the introduction of approximately 70,000 new SKUs in September 1995. The decrease from fiscal 1995 to fiscal 1996 results principally from purchases of inventory in connection with the stocking of the Elkhart distribution center and the introduction of new products. Net cash used in investing activities for the thirty-nine week periods ended May 31, 1997 and June 1, 1996 was approximately $39.1 million and $15.4 million, respectively. The increase is primarily attributable to cash paid for acquisitions during 1997. The balance reflects continued investment in existing distribution centers and new branches. Net cash used in investing activities for fiscal 1996 was approximately $37.4 million, substantially representing costs associated with the construction of the distribution centers in Elkhart, Indiana and Harrisburg, Pennsylvania. Net cash used in investing activities in fiscal 1995 of $9.5 million was primarily as a result of purchases of property, plant and equipment. Net cash used in investing activities in fiscal 1994 of $2.8 million was primarily attributable to purchases of property, plant and equipment, as well as the acquisition of a business for $629,000. Net cash provided by financing activities during the thirty-nine week periods ended May 31, 1997 and June 1, 1996 was approximately $13.1 million and $43.7 million, respectively. The change of $30.7 million is primarily attributable to the difference between the proceeds received from the completion of the Company's Public Offerings, net of the repayment of existing long-term debt and shareholder distributions from such proceeds. Net cash provided by (used in) financing activities was $(15.0) million, $7.9 million and $69.3 million in fiscal 1994, 1995 and 1996, respectively, primarily reflecting proceeds from the Company's Public Offerings, the Company's borrowings in connection with the Credit Facility and additional bank borrowings in fiscal 1995 principally to fund the growth in inventory. 16 BUSINESS General MSC is one of the largest direct marketers of a broad range of industrial products to small and mid-sized industrial customers throughout the United States. The Company distributes a full line of industrial products, such as cutting tools, abrasives, measuring instruments, machine tool accessories, safety equipment, fasteners, welding supplies and electrical supplies, intended to satisfy its customers' MRO supplies requirements. The Company offers over 300,000 SKUs through its 3,560 page master catalog and weekly, monthly and quarterly specialty and promotional catalogs, newspapers and brochures, which are supported by approximately 50 customer service locations. Most of the Company's products are carried in stock, and orders for these products are typically fulfilled the day on which the order is received. MSC has grown rapidly due to expanded product offerings, increased catalog distribution and supplemental mailings and geographic expansion. The Company's net sales have increased at a compound annual rate of 24.9% from $125.5 million in fiscal 1992 to $305.3 million in fiscal 1996. During this same period, income from operations increased at a compound annual rate of 28.6% from $12.6 million to $34.5 million. These growth trends have continued during fiscal 1997. For the nine months ended May 31, 1997, net sales increased by $96.3 million, or 42.9%, to $320.8 million from $224.5 million for the nine months ended June 1, 1996, and income from operations, before taking into account the relocation costs associated with the move of the Company's Long Island distribution center to Harrisburg, Pennsylvania in fiscal 1996, increased by $11.8 million, or 36.6%, to $43.8 million from $32.0 million for the nine months ended June 1, 1996. The Company also expects to realize modest future growth from four acquisitions effected during fiscal 1997. MSC's business strategy is to provide an integrated, low cost solution to the purchasing, management and administration of its customers' MRO needs. MSC has positioned itself to add value to its customers' purchases by reducing their total MRO supplies costs, taking into account both the direct cost of products and the administrative, personnel and financial cost of obtaining and maintaining MRO supplies. MSC's extensive product offerings allow customers to reduce the administrative burden of dealing with many suppliers for their MRO needs. The Company guarantees same-day shipping of products, approximately 95% of which are generally kept in stock, thereby enabling customers to reduce their inventory investment and carrying costs. The Company reduces its customers' administrative paperwork, costs of shipping and personnel costs related to internal distribution and purchase order management by consolidating multiple purchases into a single shipment, providing a single invoice relating to multiple purchases over varying periods of time and offering the ability to direct shipments to specific departments and personnel within a single facility or multiple facilities. The Company's customers include a wide range of purchasers of industrial supply products, from one-man machine shops to Fortune 500 companies. The Company's core business focuses on selling relatively higher margin, lower volume products and has an average order size of approximately $150. MSC has in excess of 141,000 active customers (companies that have purchased at least one item during the past 12 months), which are typically small and mid-size companies. MSC's customers select desired products from the Company's various publications and place their orders by telephone, facsimile or direct computer link. The Company operates primarily in the United States, with customers in all 50 states, through a network of three regional distribution centers and approximately 50 branch offices. The Company's distribution centers are located in Harrisburg, Pennsylvania, Atlanta, Georgia and Elkhart, Indiana. The strategic locations of the Company's current distribution centers allow for next day delivery via low cost ground carriers in 28 states located primarily in the eastern United States, which states account for 81% of the Company's sales. The Company's experience has been that areas accessible by next day delivery generate significantly greater sales than areas where next day delivery is not available. Accordingly, the Company's long-term strategy is to establish additional distribution centers in the West and Southwest, supported by local branch offices, to expand the Company's geographic coverage of next day delivery throughout the continental United States. 17 Industry Overview The Company operates in a large, fragmented industry characterized by multiple channels of distribution. The total United States market for MRO supplies of the categories of industrial products sold by MSC is estimated to be in excess of $140 billion annually, with the top 50 industrial distributors accounting for approximately 16% of the market. The Company believes that approximately 135,000 small retailers, dealerships and distributors, substantially all of which have annual sales of less than $10 million, supply over 65% of the market. The distribution channels in the industrial products market include retail outlets, small distributorships, national, regional and local distributors, direct mail suppliers, large warehouse stores and manufacturers' own sales forces. Almost every industrial, manufacturing and service business has an ongoing need for MRO supplies. The Company believes that because most businesses focus primarily on their manufacturing processes or services provided, relatively little attention is given to MRO purchasing. Except in the largest industrial plants, MRO supplies inventories may not be effectively managed or monitored, resulting in higher purchasing costs and increased administrative burdens. MRO items are generally purchased by personnel whose primary functions involve areas other than the acquisition of MRO supplies. Within larger facilities, such items are frequently stored in multiple locations, resulting in excess inventories and duplicative purchase orders. MRO items are frequently purchased by multiple personnel in uneconomic quantities and a substantial portion of most facilities' MRO supplies are "one-time purchases," resulting in higher purchasing costs and time-consuming administrative efforts by multiple plant personnel. The Company believes that the administrative costs associated with placing a MRO purchase order can be in excess of $100. Awareness of these high costs and purchasing inefficiencies as referenced above has been driving large companies to streamline the purchasing process by utilizing a limited number of suppliers which can provide adequate selection, prompt delivery and superior customer service. Customized billing practices and report generation capabilities tailored to customer objectives are also becoming an increasingly important feature of the total cost reduction model to customers and have significantly reduced the need for purchasing agents and administrative personnel. The Company believes that the mid-size customer has begun to respond to industry and economic pressures and is moving more rapidly toward the more efficient, cost saving, single supply source offered by the Company. The Company also believes that the small shop customer is just beginning to realize the value of suppliers such as MSC in reducing overall costs through reductions in paperwork, multiple sources of supply, inventory stocks and delivery times. Despite the apparent inefficiencies of the traditional MRO purchasing process, long-standing relationships with local retailers and distributors have generally perpetuated the status quo. Due to limited capital availability, high operating cost structures and relatively small sales volumes, suppliers to the industrial market are experiencing increasing pressure to consolidate and curtail services and certain product lines in order to remain competitive. Even large suppliers with extensive field sales forces are finding it increasingly difficult to visit all buyers cost-effectively and provide the support necessary to satisfy customer demands for control of costs and improved efficiency. The Company believes that the relative inability of traditional distribution channels to respond to these changing industry dynamics has created a continuing opportunity for the growth of direct marketing organizations such as MSC. As a result of these dynamics, large warehouse stores and direct mail marketers have captured an increasing share of sales by providing lower total purchasing costs, better product selection and a higher level of service. MSC has developed a low cost solution to the purchasing inefficiencies and high costs described above. Customers that purchase products from MSC will generally find that their total purchasing costs are reduced through consolidation of multiple sources of supply into a single supplier, consolidation of multiple purchase orders into a single purchase order, consolidation of multiple invoices into a single invoice, significant reduction in tracking of invoices, significant reduction in stocking decisions and elimination of purchases for inventory and, through the Company's electronic ordering system, the elimination of paper orders and invoices. The Company's customers will generally notice a reduction in purchasing costs, inventory carrying costs and administrative inefficiency. 18 Business Strategy The Company's business strategy is to provide its customers with a low cost means for obtaining and maintaining MRO supplies. The strategy includes the following key elements: (i) a broad selection of in-stock products; (ii) prompt response and same-day shipping; (iii) superior, value-added customer services; (iv) targeted direct mail marketing; and (v) a commitment to technological innovation. As a result of this strategy, the Company is able to lower its customers' overall MRO supplies costs by reducing administrative paperwork, shipping costs, internal distribution costs and inventory investment and carrying costs. o Breadth of Products. The Company believes that its ability to offer its customers a broad spectrum of brand name and generic MRO products and a "good-better-best" product selection alternative (similar product offerings with varying degrees of name recognition, quality and price, thus permitting the customer to choose the appropriate product for a specific task at the lowest cost) has been critical to its success. The Company's customers are increasingly consolidating their purchasing into fewer suppliers to reduce the administrative burden of ordering from multiple suppliers. By offering for sale over 300,000 products, approximately 95% of which are in stock and available for immediate shipment, the Company aims to provide a broad range of merchandise in order to become its customers' preferred supplier of MRO products. o Same-Day Shipping. The Company's guaranteed same-day shipping of products results in delivery the next day or second day for customers in most of the continental United States. This prompt delivery allows customers to reduce the administrative burden of dealing with many suppliers and reduces inventory investment and carrying costs. The Company fulfills its same-day shipment of orders guarantee more than 99.9% of the time. The Company's experience has been that areas accessible by next day delivery will generate significantly greater sales than areas where next day delivery is not available. The strategic locations of the Company's distribution centers allow next day delivery via low cost ground carriers in 28 states located primarily in the eastern United States. o Superior Customer Service. Customer service is a key element in becoming a customer's preferred provider of MRO supplies. The Company emphasizes customer service and supports this superior service with sophisticated information systems and extensive training. Utilizing its proprietary customer support software, the Company's in-bound telemarketing representatives implement the Company's "one call does it all" philosophy. Telemarketing representatives are able to inform customers on a real time basis of the Company's in-stock inventory availability, recommend substitute products, verify credit information, receive special, custom or manufacturer direct orders, cross-check inventory items using customer product codes previously entered into the Company's information systems and provide technical product information. The Company believes that its simple, one-call method of fulfilling all purchasing needs of a customer through a single highly trained telemarketing representative supported by the Company's proprietary information systems results in greater efficiency for customers and increased customer satisfaction. To complement its customer service, the Company seeks to ease the administrative burdens on its customers by offering electronic data interchange ("EDI") ordering, customized billing services, customer savings reports, bulk discounts, stocking of specialty items specifically requested by customers and other customized report features. o Targeted Direct Mail Marketing Strategy. MSC's primary tool for marketing and product reference is a master catalog containing 3,560 pages and over 300,000 items, which is currently distributed once per year. The Company's catalog was supplemented by approximately 50 specialty and promotional catalog, brochure and newspaper titles in fiscal 1997, covering such specialty areas as welding, cutting tools, measuring instruments, abrasives, industrial supply, and hose and tubing. The Company uses its database of approximately 180,000 companies and 685,000 individuals, and also purchases mailing lists of prospective customers, to target the distribution of these various publications to specific individuals within an organization whose purchasing 19 history or other criteria suggest receptiveness to mailings of specific publication titles. The use of specialty and promotional publications, which are produced in-house, increases productivity through lower costs, increased response rates and more efficient use of advertising space. MSC's publications mailings increased from 2.4 million in fiscal 1992 to approximately 6.6 million in fiscal 1995. The number of targeted marketing pieces mailed in fiscal 1996 decreased to 6.3 million as the Company adopted a more focused strategy for distributing targeted marketing pieces. In fiscal 1997, the number of targeted marketing pieces mailed will increase to approximately 11.3 million as the Company increases its direct marketing efforts to take advantage of additional products offered and its expanded distribution capabilities. The Company's expenditures on direct mail increased from $3.8 million in fiscal 1992 to approximately $10 million in fiscal 1996, and is expected to grow to approximately $12.5 million in fiscal 1997. o Commitment to Technological Innovation. The Company utilizes technological innovation to improve customer service and to reduce its operating costs through more effective buying practices, automated inventory replenishment and efficient order fulfillment operations. MSC's proprietary software tracks all 300,000 SKUs and enables the customer and the telemarketing representative to determine the availability of products in stock on a real time basis and to evaluate alternative products and pricing. The Company's EDI system allows a customer to order products directly, set purchase limits for particular buyers, run customized reports of purchasing history and select from a variety of billing options. The information systems developed by the Company enhance inventory management and turnover, customer service and cost reduction for both MSC and its customers. In addition to internal and customer information systems, the Company continually upgrades its distribution methods and systems to improve productivity and efficiency. The Company has also developed a World Wide Web information site in anticipation of increased commerce on the Internet. The Company believes that direct mail is one of the most effective, low cost methods of reaching customers. The Company continually seeks to reduce its own costs in order to continue to be the integrated low cost solution for its customers. MSC's call centers are a lower cost and more effective alternative to maintaining a large direct sales force. The Company produces its various product and promotional publications in-house, thereby significantly reducing marketing costs. MSC's increasing volume purchasing power has resulted in lower prices from vendors on many of the products it sells and dispersion of central costs over a wider revenue base. Growth Strategy The Company's objective is to become the preferred supplier of industrial products for small and mid-size companies throughout the United States. The Company intends to increase sales to existing and new customers in existing geographic markets served by next day delivery by: (i) increasing the number of product lines and SKUs offered; (ii) increasing the circulation of the master catalog and expanding its targeted direct mail campaign; and (iii) acquiring smaller local distributors to gain access to customers while consolidating the acquired operations into existing Company distribution facilities. The Company also intends to increase sales to customers in regions not currently served by next day delivery by increasing the geographic availability of next day delivery. o Increased Penetration of Existing Markets. The Company believes that its most significant current opportunity to increase profits lies in the incremental revenue which can be realized from existing customers and new customers in existing geographic areas. MSC believes that continuing to increase the breadth of its product line and providing high levels of customer service are the two primary methods for increasing sales to existing customers and attracting new customers. Accordingly, MSC has added in excess of 130,000 SKUs over the past two years while simultaneously increasing the Company's inventory turns. By expanding the product lines offered, the Company seeks to satisfy an increasing percentage of the MRO supplies purchases of its customers. Additionally, the Company's ability to deliver such expanding product lines on a next day basis is an important service advantage that results in lower costs to customers. The Company's commitment to superior customer service and a broad product base adds to the convenience and effectiveness of doing business with MSC. 20 In fiscal 1997, the Company shifted its growth emphasis from increasing its offering of SKUs to increasing the size and diversity of its customer base. This shift took advantage of the Company's ability to service the industrial midwestern United States through its Elkhart, Indiana facility. The Company has accumulated a buyer database of approximately 685,000 individuals, and utilizes empirical information from this database to prospect for new customers and supplement its master catalog with directed mailings of specialty and promotional publications intended to increase customer response and product purchases. MSC has increased the number of publication titles distributed over the past several years from 12 in fiscal 1992 to approximately 50 in fiscal 1997. o Expansion into New Markets. The Company operates primarily in the continental United States through a network of three regional distribution centers and approximately 50 branch offices. The strategic locations of the Company's distribution centers allow next day delivery via low cost ground carriers in 28 states located primarily in the eastern United States and second day delivery throughout the rest of the continental United States. The Company's experience has been that sales in areas accessible by next day delivery are significantly greater than in areas with second day delivery. The Company's long-term goal is to open distribution centers in the West and Southwest, supported locally by branch offices, which will expand the Company's geographic coverage of next day delivery throughout the United States. o Selected Acquisitions. The Company believes that local market acquisitions of small suppliers of industrial products provide a very attractive opportunity for expanding its customer base in existing markets. Three of the Company's acquisitions completed during fiscal 1997 operate in markets where the Company already was present. The Company believes that the integration of acquired entities offers a number of opportunities to improve productivity and customer service. These benefits include: (i) elimination of redundant facilities and services; (ii) reduction of administrative overhead; (iii) consolidation of purchasing power; (iv) expanded customer services; and (v) increased merchandise selection. The Company will consider expansion into new markets through the acquisition of industrial supply companies with existing distribution facilities. One of the Company's acquisitions completed during fiscal 1997 operates in a market where the Company previously was not present. The completion of such acquisitions allows the Company to accelerate its growth plans and immediately penetrate new markets in a more efficient manner without the need for lengthy construction periods or significant capital expenditures that will not yield a return on investment for several months or years. Additionally, corporate and administrative infrastructures necessary to support such acquisitions are already in place. No assurance can be given that any such acquisitions, if made, will be successfully integrated into the Company's existing operations, nor can there be any assurance that the Company will be able to implement this phase of its growth strategy. Products The Company currently offers in excess of 300,000 SKUs, which number represents a greater than 100% increase since 1991. The Company attributes a portion of its sales growth to the total number of SKUs offered. In this regard, the Company intends to continue to add new product categories and increase the number of products offered in existing product categories in its efforts to gain new customers and increase sales from existing customers. The Company's core products include cutting tools, abrasives, measuring instruments, machine tool accessories, machinery and safety products. As part of its strategy of supplying an increasing portion of its customers' MRO needs, the Company has recently expanded its product mix to include plumbing supplies, process instrumentation, hardware, marking products, pumps and pneumatics and has significantly increased its offering of flat stock raw materials and cutting tools. MSC seeks to distinguish itself from its competition through offering both name brand and generic products and significant depth in its core product lines while maintaining competitive pricing. The Company's offering of specific products from multiple manufacturers at different prices and quality levels permits MSC to offer a good-better-best product selection alternative. This alternative provides the customer a choice among similar product offerings with varying degrees of name recognition, quality and price, thus permitting the customer to choose the appropriate product for a specific task at the lowest cost. For example, if a customer requires a drill bit to drill 100 holes, it would not be cost-effective to purchase the top-of-the-line name 21 brand which is capable of drilling 10,000 holes. MSC's telemarketing representatives and technical support personnel are trained specifically to assist customers in making intelligent cost-saving purchases. The Company believes that its product alternative offerings and knowledgeable customer service and technical support personnel result in significant amounts of repeat business and are an integral part of MSC's overall customer cost reduction strategy. The following table itemizes the product categories currently offered by MSC and the number of SKUs available in each product category: Number of Category SKUs -------- --------- Cutting Tools 119,000 Machinery 27,500 Fasteners 24,500 Tooling 20,100 Measuring Instruments 15,700 Flat Stock Raw Materials 14,300 Electrical Supplies 10,900 Power Transmission 10,900 Plumbing Supplies 10,900 Material Handling 10,800 Hand and Power Tools 10,200 Abrasives 9,200 Hose Tube and Fittings 6,700 Safety Products 5,800 Process Instrumentation 5,000 Hardware 4,600 Welding 4,600 Marking Products 2,800 Janitorial/Maintenance 2,700 Lubricants 1,700 Pneumatics 1,100 Pumps 800 Miscellaneous 3,200 ------- Total 323,000 ======= The Company purchases substantially all of its products directly from approximately 1,700 manufacturers located in the United States. Approximately 10% of products are purchased from manufacturers located overseas. The Company is not materially dependent on any one supplier or small group of suppliers. No single supplier accounted for more than 5% of the Company's total purchases in fiscal 1997. Generic products, primarily machine tools, are manufactured by third parties to the Company's specifications. Distribution Centers A significant number of the Company's products are carried in stock, and approximately 95% of orders are fulfilled from the distribution centers or branch offices. Certain products, such as specialty or custom items and some very large orders, are shipped directly from the manufacturer. The operations of the Company's distribution centers are managed via computer-based SKU tracking systems and radio frequency devices that facilitate the location of specific stock items to make the picking process more efficient. The Company has invested significant resources in technology and automation to increase efficiency and reduce costs, and continuously monitors its order fulfillment process and endeavors to maintain its commitment to technological efficiencies and cost reduction. The Company currently utilizes three distribution centers for product shipment located in Harrisburg, Pennsylvania, Atlanta, Georgia and Elkhart, Indiana. The Company commenced shipping from the Elkhart, Indiana distribution center during fiscal 1996, and the center is now fully operational. During fiscal 1997, the Company commenced shipping from the Harrisburg, Pennsylvania distribution center which became fully operational during the first half of fiscal 1997. Over the next several years, the Company intends to open additional 22 distribution centers in the West and Southwest in order to achieve the Company's goal of next day delivery throughout the continental United States. Sales and Marketing The Company's customers include a broad range of purchasers of industrial supply products, from one-man machine shops to Fortune 500 companies. The Company's core business focuses on selling relatively higher margin, lower volume products and has an average order size of approximately $150. The Company focuses its marketing efforts on the small shop segment, consisting of job shops and other small industrial entities with fewer than 100 employees and usually less than $500,000 of annual industrial supplies purchases, and the mid-size corporate segment, consisting of industrial entities with 100-999 employees and annual MRO purchases of between $500,000 and $1,000,000. The Company's strategy to pursue the large corporate segment is to develop relationships with, and supply MRO products directly to, integrated supply providers that are hired by large corporations to manage their MRO purchasing and administrative operations. The Company believes that its expanded product offerings, rapid delivery capabilities and total cost reduction strategy are critical to expanding its market share. MSC has in excess of 141,000 active customers (companies which have purchased at least one item during the past 12 months). Typically, a customer's MRO purchases are managed by several buyers responsible for different categories of products. The Company targets these individual buyers within an organization and distributes publication titles corresponding to the product categories for which such buyers are responsible. The Company is able to accomplish this directed marketing strategy as a consequence of the depth of customer information contained in its information systems databases. The Company's customers select desired products from the Company's various publications and place their orders by telephone, facsimile or direct computer link. The Company has invested significant resources in developing an extensive customer and prospect database. This database, which includes more than 685,000 buyers' names, is a key component of the Company's growth strategy. The customer and prospect database includes detailed information, including company size, number of employees, industry of operation, various demographic and geographic characteristics and personal purchase histories (catalog preference, product preference, order value). The Company supplements this database with third party mailing lists which are screened to the Company's specifications. In fiscal 1997, such lists will result in over 1,000,000 mailings to potential buyers who had not previously purchased from MSC. The Company has recently hired a database management professional to utilize more effectively the information contained in the Company's database and purchased lists. The Company believes that this variety and depth of information on its customers offers the Company a significant competitive advantage in increasing sales to existing customers and attracting new customers. The Company relies on its approximately 300 in-bound telemarketing representatives, who are responsible for a substantial majority of customer contacts and order entries. These telemarketing representatives are highly trained individuals who build relationships with customers, assist customers in reducing costs, provide technical support, coordinate special orders and shipments with vendors and update customer account profiles in the Company's information systems databases. The Company's "one call does it all" philosophy is predicated on the ability of the telemarketing representative, with the assistance of the Company's information systems databases, to respond effectively to the customer's needs. When a customer places a call to the Company, the telemarketing representative taking the call has immediate access, through the Company's proprietary information systems databases, to that customer's company and specific buyer profile, as well as inventory levels by distribution center on all of the over 300,000 SKUs offered by MSC. The telemarketing representative is able to access historical and current billing information, purchasing profiles, plant and industry information and is prompted to update the information contained in the databases, including employee and buyer personnel information. The Company believes that its information systems databases are an important factor in achieving customer satisfaction and the success of the Company's business strategy. MSC's telemarketing representatives undergo an intensive two week training course, are required to attend regular on-site training seminars and workshops and are monitored and evaluated at regular intervals. Additionally, the telemarketing representatives are divided into teams that are evaluated monthly and monitored on a daily basis 23 by team supervisors. Telemarketing representatives receive technical training regarding various products from vendors and in-house training specialists. The Company also maintains a separate technical support group dedicated to answering specific customer inquiries and assisting customers with the operation of products and finding low cost solutions to manufacturing problems. Additionally, the Company employs a direct sales force of approximately 130 sales representatives. These commission-based sales representatives are responsible for presenting the Company's total cost reduction program to existing customers and increasing sales per customer. Branch Offices The Company currently operates approximately 50 branch offices located in 33 states. The Company estimates these branch offices receive approximately 35% of all orders and are staffed with highly trained telemarketing representatives that utilize the same information systems as in the distribution centers. The Company has experienced higher sales growth and market penetration in areas where it has established a branch office and believes its branch offices are critical to the success of the Company's business strategy. In addition to opening new branch offices in support of its distribution centers, the Company has acquired local distributors and converted them to branch offices in new geographic locations to obtain an immediate established local market presence through use of the acquired customer base and integration of its operations with MSC. The Company believes that branch office acquisitions will result in more rapid expansion at a lower cost. See "--Acquisitions." Publications The Company's primary reference tool is its 3,560 page master catalog, which is supported by specialty and promotional catalog, brochure and newspaper titles, approximately 50 of which were published in fiscal 1997. Specialty and promotional publications permit multiple targeted mailings to customers within various specialty process areas, such as welding, electrical supply and hose and tubing. The Company intends to distribute specialty and promotional catalogs, brochures and newspapers through utilization of the Company's databases and purchased mailing lists to customers whose purchasing history or profile suggests that they are most likely to purchase according to specific product categories or product promotions. Consequently, specialty catalogs offer a more focused selection of products at a lower catalog production cost due to increased response rates and more efficient use of advertising space. MSC's in-house staff designs and produces all of MSC's catalogs, brochures and newspapers. Each publication is printed with photographs, contains detailed product descriptions and includes a toll-free telephone number to be used by customers to place a product order. In-house production helps reduce overall expense and shortens production time, allowing the Company the flexibility to alter its product offerings and pricing and refine its catalog, brochure and newspaper formats more quickly. The success of the Company's targeted marketing program in enhancing revenue has justified an increase in the Company's direct mail budget (excluding cooperative advertising revenue) from approximately $3 million in fiscal 1993 to approximately $10 million in fiscal 1996. The Company anticipates spending approximately $12.5 million in fiscal 1997. As reflected in the following table, the number of publication titles has increased from 13 in fiscal 1993 to approximately 50 in fiscal 1997. The number of pieces mailed has increased from 2.7 million in fiscal 1993 to 6.3 million in fiscal 1996, and is expected to reach approximately 11.3 million in fiscal 1997.
Fiscal Year Ended ------------------------------------------------------------------------------ August 28, August 27, September 2, August 31, August 30, 1993 1994 1995 1996 1997 (52 weeks) (52 weeks) (53 weeks) (52 weeks) (52 weeks) ---------- ---------- ---------- ---------- ---------- Number of publication titles....... 13 20 38 70 50 Number of publications mailed...... 2,688,000 4,794,000 6,604,000 6,300,000 11,300,000
24 Customer Service One of the Company's goals is to make purchasing its products as convenient as possible for its customers. Since a majority of customer orders are placed by telephone, the efficient handling of calls is an extremely important aspect of the Company's business. Order entry and fulfillment occurs at each of the Company's approximately 50 branches and main call centers located at the Company's three operating distribution centers. Calls are received by highly trained in-bound telemarketing representatives who utilize on-line terminals to enter customer orders into computerized order processing systems. The Company's branch offices field approximately 35% of all telephone orders. The Company's telephone ordering system is flexible and, in the event of local or regional breakdown, can be rerouted to alternative locations. When an order is entered into the system, a credit check is performed, and, if the credit is approved, the order is electronically transmitted to the warehouse closest to the customer and a packing slip is printed for order fulfillment. Most of the orders placed with the Company are shipped by United Parcel Service ("UPS"), and, to a limited extent, by various other freight lines and local carriers. Air freight is also used when appropriate. The Company has no written agreement with UPS but has been able to negotiate favorable shipping rates due to the volume of shipments from the Company. The Company is not dependent on any one carrier and believes that alternative shipping arrangements can be made with minimal disruption to operations in the event of the loss of UPS as the Company's primary carrier. The Company believes that its relationships with all its carriers are satisfactory. The Company guarantees same-day shipping if the order is received prior to 4:30 p.m. eastern time and most customers receive their orders (other than custom items and large industrial items shipped directly by the manufacturer) within one or two business days of the order date. Customers are invoiced for merchandise, shipping and handling promptly after shipment. Back order levels are, and historically have been, immaterial. Information Systems The Company's proprietary information systems allow centralized management of key functions, including communication links between distribution centers, inventory and accounts receivable management, purchasing, pricing, sales and distribution, and the preparation of daily operating control reports that provide concise and timely information regarding key aspects of its business. These proprietary information systems enable the Company to ship to customers on a same-day basis, respond quickly to order changes and provide a high level of customer service. The proprietary information systems enable the Company to achieve cost savings, deliver superior customer service and manage its operations centrally. Certain of the Company's information systems operate over a wide area network and are real-time information systems that allow each distribution center and branch office to share information and monitor daily progress relating to sales activity, credit approval, inventory levels, stock balancing, vendor returns, order fulfillment and other measures of performance. The Company also maintains a sophisticated buying and inventory management system that monitors substantially all of its SKUs and automatically purchases inventory from vendors for replenishment based on projected customer ordering models. The Company has completed the testing of an EDI purchasing program with its vendors and customers for the purpose of reducing inventory levels and increasing inventory turnover and has offered this program to many of the Company's vendors during fiscal 1997. In addition to the proprietary computer software programs for use in the telemarketing and distribution operations, the Company has also developed a proprietary MRO management system, the Customer Direct Access Plus System ("CDA"), which is designed to automate, simplify and control the administration and management of MRO purchasing by giving the customer direct access to the Company's computers for automatic product selection, customization of purchasing parameters, a variety of report generation and product tracking capabilities and cross-referencing capability to a customer's own product stock numbers. In addition, the Company is developing a Windows(R)-based CDA and a CD-ROM package and has recently commenced providing product information on the Internet. The Company runs its systems on an AS400 platform and utilizes disaster recovery techniques and procedures which the Company believes are adequate to fulfill its needs and are consistent with this type of equipment. The Company believes that planned enhancements and upgrades to the next generation of its existing operating platforms will be sufficient to sustain its present operations and its anticipated growth for the foreseeable future. 25 Acquisitions The Company has completed a limited number of acquisitions to date. The Company, however, may actively consider acquisitions as part of its future growth strategy if opportunities arise. The Company believes that the ongoing consolidation within the industrial supply industry is spurring smaller competitors to seek partners to increase their productivity and reduce costs. The Company believes that it is well positioned to play a significant role in this industry consolidation. The Company believes that the most beneficial acquisitions are those which can be integrated into its existing operations. Accordingly, the Company expects to focus on branch office acquisition prospects that can be integrated into its distribution facilities. The Company will also consider new market acquisitions if they are of sufficient size that the Company can establish a meaningful presence in such markets in accordance with its geographic growth plans. Upon completing an acquisition within an existing market, the Company intends to move rapidly to integrate the acquired entity into its existing operations. The Company believes that such integration offers a number of opportunities to improve productivity and customer service. These benefits include: (i) elimination of redundant facilities and services; (ii) reduction of administrative overhead; (iii) consolidation of purchasing power; (iv) expanded customer services; and (v) increased merchandise selection. From time to time, the Company has engaged in and continues to engage in preliminary discussions with respect to potential acquisitions. The Company is not currently a party to any oral or written acquisition agreement or engaged in any negotiations with respect to any material acquisition candidate. No assurance can be given that any such acquisitions, when and if made, will be successfully integrated into the Company's existing operations, nor can there be any assurance that the Company will be able to implement this phase of its growth strategy. See "Risks Factors--Integration of Prospective Acquisitions." Competition The MRO supply industry is a large, fragmented industry that is highly competitive. The Company faces competition from (i) traditional channels of distribution such as retail outlets, small dealerships, regional or national distributors utilizing direct sales forces, and manufacturers of MRO supplies and (ii) large warehouse stores and larger direct mail distributors. The Company believes that sales of MRO supplies will become more concentrated over the next few years, which may make the industry more competitive. Certain of the Company's competitors offer a greater variety of products and have substantially greater financial and other resources than the Company. In the industrial products market, customer purchasing decisions are primarily based on one or more of the following criteria: price, product selection, product availability, level of service and convenience. The Company believes it competes effectively on all such criteria. Employees As of July 18, 1997, the Company employed approximately 1,710 employees, including approximately 1,665 full-time and approximately 45 part-time employees. None of the Company's employees is represented by a labor union. The Company considers its relationships with employees to be good and has experienced no work stoppages. Properties The Company's distribution centers are as follows: Approx. Operational Location Sq. Ft. Date -------- --------- ------------ Atlanta, Georgia(1) 340,000 October 1990 Elkhart, Indiana(2) 270,000 March 1996 Harrisburg, Pennsylvania(2) 270,000 January 1997 - ------------------- 26 (1) The lease for this facility expires on July 31, 2010. (2) This facility is owned by the Company. The Company maintains its headquarters at an 83,000 square foot facility in Plainview, Long Island, and sublets to a third party approximately 60,000 square feet of another facility also located in Plainview, Long Island. The Company maintains approximately 50 branch offices located in 33 states, ranging in size from 850 to 16,000 square feet. The leases for these branch offices will expire at various periods between October 1997 and June 2003. The aggregate annual lease payments on these properties in fiscal 1997 was approximately $1,645,000. The Company believes that its facilities are adequate for its current needs and that suitable additional space will be available as needed. Regulatory and Legal Matters The direct response business conducted by the Company is subject to the Mail or Telephone Order Merchandise Rule and related regulations promulgated by the Federal Trade Commission. While the Company believes it is in compliance with such regulations, no assurance can be given that new laws or regulations will not be enacted or adopted that might adversely affect the Company's operations. There are no material legal proceedings pending against the Company. MANAGEMENT Directors and Executive Officers The following table sets forth information with respect to the directors and executive officers of the Company. Other than Messrs. Kelly, Redman and Langton, the directors and executive officers of the Company were elected to the positions listed in October 1995. Accordingly, the descriptions of their positions held with MSC or the Company prior to October 1995 refer to the Operating Subsidiary. Name Age Position - ---- --- -------- Sidney Jacobson...... 79 Chairman of the Board of Directors Mitchell Jacobson.... 46 President, Chief Executive Officer and Director James Schroeder...... 57 Vice President, Chief Operating Officer and Director Shelley Boxer........ 49 Vice President, Chief Financial Officer and Director Thomas Eccleston..... 49 Vice President - Plant and Equipment and Secretary Barbara Schwartz..... 64 Vice President - Human Resources Denis Kelly.......... 48 Director Melvin Redman........ 46 Director Raymond Langton...... 52 Director Sidney Jacobson is a co-founder of MSC and has been its Chairman since June 1982. Prior to 1982, Mr. Jacobson served as President and Chief Executive Officer of MSC since 1941. 27 Mitchell Jacobson was appointed President and Chief Executive Officer of MSC in June 1982. Prior to that time, Mr. Jacobson had been an Executive Vice President since joining the Company in 1976. Mitchell Jacobson is the son of Sidney Jacobson. James Schroeder was appointed Vice President and Chief Operating Officer of MSC in 1986. Mr. Schroeder has served as Group Vice President of National Service Industries, a manufacturing company, from 1984 to 1986, as President of Avanti Motor Corp., an automobile dealership company, from 1983 to 1984, and as President of the MSC Division of Wheelabrator-Frye, Inc., a manufacturing company, from 1980 to 1983. Shelley Boxer was appointed Vice President and Chief Financial Officer of MSC in 1993. Mr. Boxer was formerly the Vice President and Chief Financial Officer at Joyce International, Inc., a distribution and manufacturing company, from 1992 to 1993. From 1987 to 1992, he was the Executive Vice President and Chief Financial Officer at Kinney Systems, Inc., an automobile parking and real estate company. From 1982 to 1987, Mr. Boxer was Vice President and Treasurer of Meyers Parking System, Inc., an automobile parking and real estate company. Tom Eccleston joined MSC in 1985 and was appointed Vice President of Plant and Equipment of MSC in 1986. Prior to joining MSC, Mr. Eccleston was the Director of Marine Operations at Prudential Lines, Inc., a shipping company, from 1979 to 1983 and Operations Manager at Norton, Lilly & Co., an international steamship agency, from 1973 to 1979. Barbara Schwartz joined MSC in 1974 and was appointed Vice President of Human Resources in 1986. From 1983 to 1985, Ms. Schwartz held the position of Director of Operations and from 1976 to 1983 was the Controller at MSC. Denis Kelly has been a director of the Company since April 1996. Mr. Kelly is a Managing Director of Prudential Securities Incorporated, a position he has held since July 1993. Before July 1993, Mr. Kelly was President of Denbrook Capital Corporation. Mr. Kelly is also a director of Kenneth Cole Productions, Inc. Melvin Redman has been a director of the Company since April 1996. Mr. Redman is a principal of Redman & Associates, a management consulting firm in Arkansas. From 1992 to June 30, 1995, Mr. Redman was Senior Vice President of Operations for Walmart Stores, Inc. Prior to 1992, Mr. Redman was Senior Vice President of Store Planning for Walmart. Raymond Langton has been a director of the Company since July 1997. Mr. Langton is currently an investor for his own account. Mr. Langton was the President and Chief Executive Officer of Chicago Rawhide Worldwide from 1995 to February 1997. From 1991 to 1995, Mr. Langton was President and Chief Executive Officer of SKF North America. Mr. Langton is also a director of SKF USA, Inc. Committees of the Board The Board of Directors established an Audit Committee of the Board, comprised of Messrs. Kelly, Redman and Langton. The Audit Committee is charged with reviewing the Company's annual audit and meeting with the Company's independent accountants to review the Company's internal controls and financial management practices. The Board of Directors also established a Compensation Committee of the Board, comprised of Messrs. Kelly, Redman and Langton. The Compensation Committee is responsible for establishing salaries, bonuses and other compensation for the Company's executive officers and for administering the Company's 1995 Stock Option Plan, including granting options and setting the terms thereof pursuant to such plan, and the 1995 Restricted Stock Plan. Directors' Compensation The Company's policy is not to pay compensation to directors who are also employees of the Company. The Company will grant options to purchase 2,500 shares of Class A Common Stock to non-employee directors upon their election and reelection to the Board of Directors. Directors elected other than at an annual meeting of 28 shareholders will receive a pro rata number of options. The Company also pays each non-employee director compensation of $10,000 per annum and $1,500 per board meeting. 29 PRINCIPAL AND SELLING SHAREHOLDERS The following table provides certain information regarding the beneficial ownership of the Company's capital stock and as adjusted to give effect to this Offering by (i) each shareholder known by the Company to beneficially own more than 5% of any class of the Company's outstanding voting securities, (ii) each director of the Company, (iii) the Chief Executive Officer and each other executive officer listed in the Summary Compensation Table and (iv) all directors and executive officers as a group. Except as otherwise noted below, each of the persons identified in the table has sole voting and investment power over the shares beneficially owned by such person.
Class A Common Stock Class B Common Stock(1) -------------------- ---------------------- Beneficial Ownership Beneficial Ownership Beneficial Ownership Prior to Offering After Offering(4) -------------------- -------------------- -------------------- Number of Shares Percent Percent Beneficial Owner(3) Number Percent(2) Offered Number Before Number After - ---------------- ------ ------- --------- ------ ------ ------ ----- Mitchell Jacobson(5) 40,526 * 750,000(16) 9,660,014 28.7% 8,910,014 26.3% Marjorie Gershwind(6) 33,158 * 750,000(16) 5,389,686 16.0 4,639,686 13.7 Sidney Jacobson(7) 100 * -- 2,608,000 7.7 2,608,000 7.7 Erik Gershwind(8) -- -- -- 1,424,000 4.2 1,424,000 4.2 Stacey Gershwind(9) -- -- -- 1,424,000 4.2 1,424,000 4.2 Joshua Jacobson Trust(10) -- -- -- 1,256,000 3.7 1,256,000 3.7 Jacobson Family Foundation(11) 57,500 * 50,000 -- -- -- -- Joseph Getraer(12) 2,500 * -- 1,256,000 3.7 1,256,000 3.7 Denis Kelly 15,000 * -- -- -- -- -- Melvin Redman 625 * -- -- -- -- -- James Schroeder -- -- -- -- -- -- -- Shelley Boxer 2,000 * -- -- -- -- -- Thomas Eccleston 5,263 * -- -- -- -- -- Barbara Schwartz 3,157 * -- -- -- -- -- T. Rowe Price Associates, Inc.(13) 808,250 5.6% -- -- -- -- -- 100 E. Pratt Street Baltimore, Maryland 21202 William Blair & Company, L.L.C.(14) 1,327,180 9.3 -- -- -- -- -- 222 West Adams Street Chicago, Illinois 60606-5312 All directors and executive officers as a 66,671 * -- 12,334,685(15) 36.3 11,584,685 34.2 group (8 persons)
- ---------------------- * Less than 1%. (1) The Class B Common Stock has ten votes per share and is convertible into Class A Common Stock on a one-to-one basis at the option of the holder upon transfer to persons who are not members of the Jacobson or Gershwind families. See "Description of Capital Stock." (2) Excludes 1,950,111 shares of Class A Common Stock reserved for issuance under the Company's 1995 Stock Option Plan. (3) The address of each person is c/o the Company, 151 Sunnyside Boulevard, Plainview, New York 11803-1592 unless otherwise indicated. 30 (4) Includes 17,413,700 shares of Class B Common Stock and 16,429,119 shares of Class A Common Stock to be outstanding after this Offering. (5) Includes an aggregate of 240,000 shares of Class B Common Stock that are beneficially held by Mitchell Jacobson as Trustee for the issue of Marjorie Gershwind pursuant to the Marjorie Diane Gershwind 1995 Qualified 3 Year Annuity Trust Agreement, dated October 31, 1995. If the Underwriters' over-allotment option is exercised in full, 112,500 additional shares of Class B Common Stock held by Mitchell Jacobson will be converted and sold to the Underwriters. See "Underwriting." In such event, the total shares beneficially owned by Mitchell Jacobson after the Offering will be 26.0%. (6) Marjorie Gershwind is the sister of Mitchell Jacobson. If the Underwriters' over-allotment option is exercised in full, 112,500 additional shares of Class B Common Stock held by Marjorie Gershwind will be converted and sold to the Underwriters. See "Underwriting." In such event, the total shares benefically owned by Marjorie Gershwind after the Offering will be 13.4%. (7) Includes an aggregate of 1,648,000 shares of Class B Common Stock which are beneficially owned by Sidney Jacobson as Co-Trustee for both Stacey Gershwind and Erik Gershwind pursuant to the Stacey Gershwind 1995 Trust Agreement dated November 28, 1995 and the Erik Gershwind 1995 Trust Agreement dated November 28, 1995, and an aggregate of 960,000 shares of Class B Common Stock which are beneficially owned by Sidney Jacobson as Trustee for both Stacey Gershwind and Erik Gershwind pursuant to two separate Marjorie Gershwind 1994 15 year and 7 year Annuity Trust Agreements, dated September 26, 1994. Sidney Jacobson is the father of Mitchell Jacobson and Marjorie Gershwind. (8) Includes 1,424,000 shares of Class B Common Stock held in trust pursuant to various trust agreements. Erik Gershwind is the son of Marjorie Gershwind. (9) Includes 1,424,000 shares of Class B Common Stock held in trust pursuant to various trust agreements. Stacey Gershwind is the daughter of Marjorie Gershwind. (10) Joshua Jacobson is the son of Mitchell Jacobson. (11) If the Underwriters' over-allotment option is exercised in full, 7,500 additional shares of Class A Common Stock will be sold to the Underwriters. (12) Includes 240,000 shares of Class B Common Stock beneficially held by Joseph Getraer as Trustee for the Joshua Jacobson 1994 Trust pursuant to the Mitchell Jacobson 1995 Qualified 3 year Annuity Trust Agreement dated October 31, 1995 and 1,016,000 shares of Class B Common Stock beneficially held by Joseph Getraer as Trustee for Joshua Jacobson pursuant to The Joshua Jacobson 1994 Trust Agreement, dated January 31, 1994. (13) Based on Schedule 13G dated February 11, 1997. (14) Based on Schedule 13G dated February 18, 1997. (15) Includes an aggregate of 12,268,685 shares of Class B Common Stock and 66,671 shares of Class A Common Stock. (16) Represents shares of Class B Common Stock that will be converted simultaneously with the Offering. DESCRIPTION OF CAPITAL STOCK The following description of the capital stock of the Company and certain provisions of the Company's Certificate of Incorporation (the "Certificate") and the By-Laws is a summary and is qualified in its entirety by reference to the provisions of the Certificate and the By-Laws, copies of which have been filed with the Securities and Exchange Commission (the "Commission") as exhibits to the Company's Registration Statement of which this Prospectus is a part. The authorized capital stock of the Company consists of (i) 100,000,000 shares of Class A Common Stock, $.001 par value, (ii) 50,000,000 shares of Class B Common Stock, $.001 par value and (iii) 5,000,000 shares of preferred stock, $.001 par value ("Preferred Stock"). Class A and B Common Stock At July 18, 1997, there were approximately 485 holders of record of Class A Common Stock and 14,929,119 shares of Class A Common Stock were issued and outstanding. At July 18, 1997, there were 9 holders of record of Class B Common Stock and 18,913,700 shares of Class B Common Stock issued and outstanding. Subject to the rights of the holders of any Preferred Stock which may be outstanding, each holder of Class A Common Stock and Class B Common Stock on the applicable record date is entitled to receive such dividends as may be declared by the Board of Directors out of funds legally available therefor, and, in the event of liquidation, to share pro rata in any distribution of the Company's assets after payment or providing for the payment of liabilities and the liquidation preference of any outstanding Preferred Stock. Each holder of Class A Common Stock is entitled to one vote for each share held of record on the applicable record date on all matters presented to a vote of shareholders, including the election of directors. The holders of Class B Common Stock are entitled to ten votes per share on the applicable record date and are entitled to vote, together with the holders of the Class A Common Stock, on all matters which are subject to shareholder approval. Holders of Class A Common Stock and Class B Common Stock have no cumulative voting rights or preemptive rights to purchase or subscribe for any stock or other securities and there are no conversion rights or redemption or sinking fund provisions with respect to such stock. 31 The holders of the Class B Common Stock have the right to convert their shares of Class B Common Stock into shares of Class A Common Stock at their election and on a one-to-one basis, and all shares of Class B Common Stock convert into shares of Class A Common Stock on a one-to-one basis upon the sale or transfer of such shares of Class B Common Stock to any person who is not a member of the Jacobson or Gershwind families. The shares of Class A Common Stock offered hereby, when issued, will be fully paid and nonassessable. The Class A Common Stock is listed on the NYSE under the symbol "MSM." The transfer agent for the Class A Common Stock is American Stock Transfer & Trust Company. Preferred Stock The Company's Certificate authorizes 5,000,000 shares of Preferred Stock. The Company's Board of Directors has the authority to issue shares of Preferred Stock in one or more series and to fix, by resolution, the voting powers, full or limited or no voting powers, and such designations, preferences and relative, participating, optional or other rights, if any, and the qualifications, limitations or restrictions thereof, if any, including the number of shares in such series (which the Board may increase or decrease as permitted by New York law), liquidation preferences, dividend rates, conversion rights and redemption provisions of the shares constituting any series, without any further vote or action by the shareholders. Any shares of Preferred Stock so issued would have priority over the Class A Common Stock and Class B Common Stock with respect to dividend or liquidation rights or both. There are currently no shares of Preferred Stock outstanding and the Company has no current intention to issue any shares of Preferred Stock. Certain Provisions of By-laws Affecting Shareholders Special meetings of the shareholders may be called by resolution of the Board of Directors or by the president and shall be called by the president or secretary upon the written request (stating the purpose or purposes of the meeting) of a majority of the Board of Directors or of the holders of a majority of the outstanding shares entitled to vote. Only business related to the purposes set forth in the notice of the meeting may be transacted at a special meeting. Business Combination Statute The Company, as a New York resident domestic corporation, is subject to the provisions of Section 912 of the New York Business Corporation Law. Section 912 provides, with certain exceptions, that a New York resident domestic corporation may not engage in a "business combination" (e.g., merger, consolidation, recapitalization or disposition of stock) with any "interested shareholder" for a period of five years from the date that such person became an interested shareholder unless: (a) the transaction resulting in a person becoming an interested shareholder, or the business combination was approved by the board of directors of the corporation prior to that person becoming an interested shareholder; (b) the business combination is approved by the holders of a majority of the outstanding voting stock not beneficially owned by such interested shareholder; or (c) a business combination that meets certain valuation requirements for the stock of the New York resident domestic corporation. An "interested shareholder" is defined as any person that (a) is the beneficial owner of 20% or more of the outstanding voting stock of the New York resident domestic corporation or (b) is an affiliate or associate of the corporation that at any time during the five years prior was the beneficial owner, directly or indirectly, of 20% or more of the then outstanding voting stock. These provisions are likely to impose greater restrictions on an unaffiliated shareholder than on the existing shareholders who will continue to own all of the Class B Common Stock after this Offering. 32 UNDERWRITING Subject to the terms and conditions contained in the Underwriting Agreement (the "Underwriting Agreement"), the underwriters named below (the "Underwriters") for whom Donaldson, Lufkin & Jenrette Securities Corporation and Prudential Securities Incorporated are acting as representatives (the "Representatives") have severally agreed to purchase from the Selling Shareholders the number of shares of Class A Common Stock that each Underwriter has agreed to purchase as set forth opposite its name below: Underwriters Number of Shares ------------ ---------------- Donaldson, Lufkin & Jenrette Securities Corporation........ Prudential Securities Incorporated......................... ---------------- Total....................................... 1,550,000 ================ The Underwriting Agreement provides that the obligations of the several Underwriters to purchase and accept delivery of the shares of Class A Common Stock offered hereby are subject to approval of certain legal matters by counsel and to certain other conditions. If any shares of Class A Common Stock are purchased by the Underwriters pursuant to the Underwriting Agreement, all such shares (other than shares covered by the over-allotment option described below) must be purchased. The Underwriters have advised the Company that they propose to offer the shares of Class A Common Stock to the public initially at the price to the public set forth on the cover page of this Prospectus and to certain dealers (who may include the Underwriters) at such price less a concession not to exceed $____ per share. The Underwriters may allow, and such dealers may re-allow, discounts not in excess of $____ per share to any other Underwriter and certain other dealers. In connection with the Offering, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Class A Common Stock. Specifically, the Underwriters may overallot the Offering, creating a syndicate short position. Underwriters may bid for and purchase shares of Class A Common Stock in the open market to cover syndicate short positions. In addition, the Underwriters may bid for and purchase shares of Class A Common Stock in the open market to stabilize the price of the Class A Common Stock. These activities may stabilize or maintain the market price of the Class A Common Stock above independent market levels. The Underwriters are not required to engage in these activities, and may end these activities at any time. The Company and the Selling Shareholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the Underwriters may be required to make in respect thereof. 33 The Company, the Selling Shareholders and certain members of the Gershwind and Jacobson families have agreed not to sell any Class A Common Stock (or Class A Common Stock issuable upon conversion of Class B Common Stock, except pursuant to this Offering) prior to the expiration of 180 days from the date of this Prospectus without the prior written consent of the Underwriters. 34 LEGAL MATTERS The validity of the shares of Class A Common Stock offered hereby and certain other legal matters in connection with this Offering will be passed upon for the Company by Rosenman & Colin LLP, New York, New York. Certain legal matters in connection with the shares of Class A Common Stock offered hereby will be passed upon for the Underwriters by Latham & Watkins, New York, New York. Certain members and associates of the firm of Rosenman & Colin LLP own an aggregate of approximately 4,800 shares of Class A Common Stock. An additional 1,256,000 shares of Class B Common Stock are beneficially held by Joseph Getraer, a partner of Rosenman & Colin LLP, as Trustee for the Joshua Jacobson 1994 Trust pursuant to the Mitchell Jacobson 1995 Qualified 3 year Annuity Trust Agreement dated October 31, 1995 and as Trustee for the Joshua Jacobson 1994 Trust. EXPERTS The annual financial statements of MSC Industrial Direct Co., Inc. and Subsidiaries included in this Prospectus and elsewhere in the Registration Statement, of which this Prospectus is a part, have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in accounting and auditing in giving said reports. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement on Form S-3 under the Securities Act with respect to the Class A Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the Class A Common Stock, reference is hereby made to such Registration Statement and the exhibits and schedules thereto. Statements contained in this Prospectus as to the contents of any contract or other document summarize the terms of any such contract or other document that are material to such discussion but are not necessarily complete and, in each instance, reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. Copies of the Registration Statement, including all exhibits thereto, may be obtained from the Commission's principal office at 450 5th St., N.W., Washington, D.C. 20549, upon payment of the fees prescribed by the Commission, or may be examined without charge at the offices of the Commission. The Company furnishes to its shareholders annual reports containing financial statements of the Company audited by its independent auditors and quarterly reports containing unaudited condensed financial statements for each of the first three quarters of each fiscal year. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents heretofore filed by the Company with the Commission pursuant to the Exchange Act are incorporated herein by reference: (i) The Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996; and (ii) The Company's Quarterly Reports on Form 10-Q for the fiscal quarters ended November 30, 1996, March 1, 1997 and May 31, 1997. All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the termination of the offering of the Common Stock hereunder 35 shall be deemed to be incorporated by reference herein and such documents shall be deemed to be a part hereof from the date of filing of such reports and documents. The Company will provide without charge to each person to whom a copy of this Prospectus is delivered, upon the request of any such person, a copy of any or all of the documents incorporated herein by reference (exclusive of exhibits to such documents unless such exhibits are specifically incorporated by reference herein). Requests for such copies should be directed to Shelley Boxer, Vice President, MSC Industrial Direct Co., Inc., 151 Sunnyside Boulevard, Plainview, New York, 11803-1592, telephone (516) 349-7100. Any statement contained herein or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. 36 INDEX TO FINANCIAL STATEMENTS Page ---- Annual Financial Statements - --------------------------- Report of Independent Public Accountants....................................F-2 Consolidated Balance Sheets as of September 2, 1995 and August 31, 1996...........................................................F-3 Consolidated Statements of Income for the three fiscal years ended August 31, 1996...........................................................F-4 Consolidated Statements of Shareholders' Equity for the three fiscal years ended August 31, 1996...............................................F-5 Consolidated Statements of Cash Flows for the three fiscal years ended August 31, 1996...........................................................F-6 Notes to Consolidated Financial Statements .................................F-7 Unaudited Interim Financial Statements - -------------------------------------- Consolidated Balance Sheets as of May 31, 1997 and August 31, 1996 (Audited).................................................F-22 Consolidated Statements of Income for the nine month periods ended May 31, 1997 and June 1, 1996 ............................................F-23 Consolidated Statement of Shareholders' Equity for the nine month period ended May 31, 1997.................................................F-24 Consolidated Statements of Cash Flows for the nine month periods ended May 31, 1997 and June 1, 1996.............................................F-25 Notes to Consolidated Financial Statements..................................F-26 F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To MSC Industrial Direct Co., Inc. and Subsidiaries: We have audited the accompanying balance sheets of MSC Industrial Direct Co., Inc. (a New York corporation) and Subsidiaries as of September 2, 1995 (Note 2) and August 31, 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three fiscal years in the period ended August 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of MSC Industrial Direct Co., Inc. and Subsidiaries as of September 2, 1995 and August 31, 1996, and the results of their operations and their cash flows for each of the three years in the period then ended August 31, 1996 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Melville, New York November 6, 1996 F-2 MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
September 2, August 31, 1995 1996 ------------ ---------- (Note 2) ASSETS Current Assets: Cash and cash equivalents $ 681 $ 1,679 Accounts receivable, net of allowance for doubtful accounts of $877 and $1,319, respectively 31,078 41,042 Inventories 83,448 152,620 Due from officers, employees and affiliated companies 791 1,052 Prepaid expenses and other current assets 1,070 1,792 Current deferred income tax assets - 9,920 Prepaid Federal income tax payments - 4,512 -------- --------- Total current assets 117,068 212,617 -------- --------- Property, Plant and Equipment, net 14,648 38,989 -------- --------- Other Assets: Goodwill - 8,224 Prepaid Federal income tax payments 3,115 - Other 4,201 5,654 -------- --------- 7,316 13,878 -------- --------- $139,032 $ 265,484 ======== ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 7,821 $ 13,270 Accrued liabilities 18,811 33,076 Current portion of long-term notes payable 51 2,486 Current portion of subordinated debt to shareholders 9,157 - -------- --------- Total current liabilities 35,840 48,832 Long-Term Notes Payable 28,348 42,191 Subordinated Debt to Shareholders 2,621 - Other Long-Term Liabilities 135 110 Deferred Income Tax Liabilities - 1,780 -------- --------- Total liabilities 66,944 92,913 -------- --------- Commitments and Contingencies (Note 14) Shareholders' Equity: Preferred stock; $0.001 par value; 5,000,000 shares authorized; none outstanding - - Class A common stock; $0.001 par value; 100,000,000 shares authorized; 0 and 8,311,394 shares, respectively, issued and outstanding - 8 Class B common stock; $0.001 par value; 50,000,000 shares authorized; 24,000,000 and 23,475,000 shares, respectively, issued and outstanding 24 24 Additional paid-in capital 8,034 145,628 Retained earnings 64,030 29,482 -------- --------- 72,088 175,142 Deferred stock compensation - (2,571) -------- --------- Total shareholders' equity 72,088 172,571 -------- --------- $139,032 $ 265,484 ======== =========
The accompanying notes are an integral part of these consolidated balance sheets. F-3 MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data)
For the Fiscal Years Ended ------------------------------------------ August 27, September 2, August 31, 1994 1995 1996 ---------- ------------ ---------- (Note 2) (Note 2) Net Sales $ 174,682 $ 248,483 $ 305,294 Cost of Goods Sold 99,830 145,195 178,519 --------- --------- --------- Gross Profit 74,852 103,288 126,775 Operating expenses 50,811 69,532 83,666 Distribution center restructuring charge (Note 5) - - 8,600 --------- --------- --------- Income from operations 24,041 33,756 34,509 --------- --------- --------- Other income (expense): Income on rental property 113 118 123 Interest expense (870) (1,870) (1,534) Interest income 164 29 647 Other income (expense), net (62) 430 289 --------- --------- --------- (655) (1,293) (475) --------- --------- --------- Income before Provision for Income Taxes 23,386 32,463 34,034 Provision for Income Taxes 813 765 5,531 --------- --------- --------- Net Income $ 22,573 $ 31,698 $ 28,503 ========= ========= ========= Pro Forma Information (Note 3): Income before provision for income taxes $ 34,034 Pro forma provision for income taxes 13,443 --------- Pro forma net income $ 20,591 ========= Pro forma net income per common share $ 0.67 ========= Pro forma weighted average number of common shares outstanding 30,696 =========
The accompanying notes are an integral part of these consolidated statements. F-4 MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE THREE FISCAL YEARS ENDED AUGUST 31, 1996 (In thousands)
Class A Class B Common Stock Common Stock Additional Deferred --------------- --------------- Paid-In Retained Stock Shares Amount Shares Amount Capital Earnings Compensation Total ------ ------ ------ ------ ---------- -------- ------------ -------- BALANCE, August 28, 1993 - $- 24,000 $24 $ 8,034 $ 41,650 $ - $ 49,708 Net income - - - - - 22,573 - 22,573 Distributions to shareholders - - - - - (16,531) - (16,531) ----- -- ------ --- -------- -------- ------- -------- BALANCE, August 27, 1994 - - 24,000 24 8,034 47,692 - 55,750 Net income - - - - - 31,698 - 31,698 Distributions to shareholders - - - - - (15,360) - (15,360) ----- -- ------ --- -------- -------- ------- -------- BALANCE, September 2, 1995 (Note 2) - - 24,000 24 8,034 64,030 - 72,088 Initial public offering of common stock, net of costs of offering of $10,352 (Note 1) 7,525 8 - - 132,623 - - 132,631 Exchange of Class B Common stock for Class A common stock 525 - (525) - - - - - Issuance of restricted common stock (Note 12) 157 - - - 2,981 - (2,981) - Cancellation of restricted common stock (1) - - - (10) - 10 - Amortization of deferred stock compensation - - - - - - 400 400 Issuance of common stock for acquisition of subsidiary (Note 4) 105 - - - 2,000 - - 2,000 Net income - - - - - 28,503 - 28,503 Distributions to shareholders (Note 1) - - - - - (63,051) - (63,051) ----- -- ------ --- -------- -------- ------- -------- BALANCE, August 31, 1996 8,311 $8 23,475 $24 $145,628 $ 29,482 $(2,571) $172,571 ===== == ====== === ======== ======== ======= ========
The accompanying notes are an integral part of these consolidated statements. F-5 MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
For the Fiscal Years Ended --------------------------------------- August 27, September 2, August 31, 1994 1995 1996 ---------- ------------ ---------- (Note 2) (Note 2) Cash flows from operating activities: Net income $ 22,573 $ 31,698 $ 28,503 -------- -------- --------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 1,501 1,932 3,087 Amortization of deferred stock compensation - - 400 Loss (gain) on disposal of property, plant and equipment 96 (2) 29 Provision for doubtful accounts 489 694 1,019 Deferred income taxes - - (7,811) Changes in operating assets and liabilities, net of effect from acquisitions: Accounts receivable (5,626) (8,578) (7,758) Inventories (4,089) (30,561) (59,866) Prepaid expenses and other current assets 1,845 26 510 Prepaid federal income tax payments (695) (1,036) (1,397) Other assets (2,366) (1,435) (1,334) Accounts payable and accrued liabilities 7,222 6,081 14,523 Other long-term liabilities 10 (3) (781) -------- -------- --------- Total adjustments (1,613) (32,882) (59,379) -------- -------- --------- Net cash provided by (used in) operating activities 20,960 (1,184) (30,876) -------- -------- --------- Cash flows from investing activities: Purchases of property, plant and equipment (2,163) (9,495) (26,886) Proceeds from sale of property, plant and equipment 40 11 10 Cash paid for acquisitions, net of cash acquired (629) - (10,530) -------- -------- --------- Net cash used in investing activities (2,752) (9,484) (37,406) -------- -------- --------- Cash flows from financing activities: Net proceeds from initial public offering of common stock - - 132,631 Net (borrowings) proceeds under notes payable (10,900) 21,349 11,616 Payments under capital leases (84) (478) - Proceeds from subordinated debt to shareholders 17,232 20,144 - Repayment of subordinated debt to shareholders (9,423) (17,263) (11,778) Repayments from (advances to) affiliates 4,715 (539) (138) Distributions to shareholders (16,531) (15,360) (63,051) -------- -------- --------- Net cash provided by (used in) financing activities (14,991) 7,853 69,280 -------- -------- --------- Net increase (decrease) in cash and cash equivalents 3,217 (2,815) 998 Cash and cash equivalents, beginning of year 279 3,496 681 -------- -------- --------- Cash and cash equivalents, end of year $ 3,496 $ 681 $ 1,679 ======== ======== ========= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 866 $ 1,883 $ 2,022 ======== ======== ========= Income taxes $ 624 $ 561 $ 12,376 ======== ======== ========= Supplemental schedule of noncash investing and financing activities: Issuance of stock for purchase of subsidiary (Note 4) - - $ 2,000 ======== ======== ========= Issuance of stock for restricted stock plan (Note 12) - - $ 2,981 ======== ======== =========
The accompanying notes are an integral part of these consolidated statements. F-6 MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data, estimated lives and customer amounts) 1. BUSINESS AND ORGANIZATION: Organization MSC Industrial Direct Co., Inc. ("MSC" or the "Company") was incorporated in the State of New York on October 24, 1995 as a holding company for the purpose of (i) issuing 8,050 shares of Class A Common Stock in an initial public offering ("IPO") and (ii) issuing 24,000 shares of Class B Common Stock to the shareholders of Sid Tool Co., Inc. (the "Operating Subsidiary") in exchange for their then outstanding 30 shares of common stock of the Operating Subsidiary immediately prior to the effective date of MSC's IPO. On December 20, 1995, the Company consummated the IPO relating to the offer and sale of 8,050 shares of Class A Common Stock, 7,525 of which shares were offered by the Company and 525 of which shares were offered by a principal shareholder of the Company, at a price of $19.00 per share. The 525 shares offered and sold by a principal shareholder were converted to Class A Common Stock from previously issued Class B Common Stock. Net proceeds received by the Company were approximately $132,600. As a result of the IPO, the Operating Subsidiary no longer qualified as a subchapter "S" corporation, and became subject to subchapter "C" corporation taxation. Prior to the offering, the Operating Subsidiary declared an "S" corporation dividend to the then existing shareholders in the aggregate amount of approximately $63,000, which amount was equal to substantially all previously taxed, undistributed "S" corporation earnings. The Operating Subsidiary paid the "S" corporation dividend by delivery to the then existing shareholders of promissory notes in the principal amount of such dividends, which notes have been repaid with a portion of the net proceeds from the offering. The provision for income taxes for the year ended August 31, 1996 reflects "S" corporation taxation through the date of the public offering, and "C" corporation taxation thereafter (Note 2). Business The Company is a distributor of industrial equipment and supplies with headquarters in Plainview, New York. The Company serves both domestic and international markets through its distribution network, which includes thirty-three local branches in twenty states, concentrated in the Eastern and Southern United States, regional distribution centers in Plainview/Central Islip, New York; Elkhart, Indiana and Atlanta, Georgia and a planned distribution center near Harrisburg, Pennsylvania (Note 5). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Principles of Consolidation The accompanying consolidated financial statements include the accounts of MSC Industrial Direct Co., Inc. and its wholly-owned subsidiaries Sid Tool Co., Inc.; Swiss Precision Instruments, Inc.; Cut-Rite Tool Corp.; D.T.C. Tool Corp.; Primeline International, Inc.; Kaja Productions, Inc. and MSC Services, Inc. All intercompany accounts and transactions have been eliminated in consolidation. The 1994 and 1995 financial statements included herein are those of the Operating Subsidiary and have been retroactively restated to give effect to the recapitalization of the Company related to the IPO (Note 1). The 1996 consolidated financial statements are those of the Company and its subsidiaries which, prior to December 20, 1995, reflect only the activity of the Operating Subsidiary. F-7 MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data, estimated lives and customer amounts) (CONTINUED) Fiscal Year The Company's fiscal year ends on the Saturday closest to August 31. The financial statements for fiscal 1994, 1995 and 1996 contain activity for fifty-two weeks, fifty-three weeks and fifty-two weeks, respectively. Cash and Cash Equivalents Cash and cash equivalents consist of cash in banks, as well as certain highly liquid investments with original maturities of three months or less. Concentration of Credit Risk The Company's mix of receivables is diverse, with approximately 127,000 active customer accounts. The Company sells its products directly to end users and, in some cases, to other wholesalers and distributors in its market areas. Inventory Valuation Inventories consist of merchandise held for resale and are stated at the lower of average cost or market. Property, Plant and Equipment Depreciation and amortization of property, plant and equipment are computed for financial reporting purposes on both the straight-line and accelerated methods based on the estimated useful lives of the assets. Property, plant and equipment are stated at cost. Expenditures for maintenance and repairs are charged to expense as incurred; costs of major renewals and improvements are capitalized. At the time property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are eliminated from the asset and accumulated depreciation accounts and the profit or loss on such disposition is reflected in income. In accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 34, "Capitalization of Interest Cost", interest attributable to construction of distribution centers is capitalized as part of the cost of related buildings during the period prior to which such facilities are available and ready for use. The amount of interest included in property, plant and equipment at September 2, 1995 and August 31, 1996 is $231 and $719, respectively. The Company capitalizes certain payroll costs associated with the development of internal computer systems. These costs are included within property, plant and equipment in the accompanying consolidated balance sheets. These costs are amortized on a straight-line basis over the estimated useful lives of the related computer systems, not to exceed five years. F-8 MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data, estimated lives and customer amounts) (CONTINUED) Goodwill Goodwill shown in the consolidated balance sheet at August 31, 1996 relates to several acquisitions completed during fiscal 1996 (Note 4). Goodwill is being amortized on a straight-line basis over a 40-year period. Accumulated amortization was $44 at August 31, 1996. There was no goodwill at September 2, 1995. Deferred Catalog Costs The costs of producing and distributing the Company's principal catalogs ($3,546 and $4,488 at September 2, 1995 and August 31, 1996, respectively) are deferred and included in other assets in the Company's consolidated balance sheet in accordance with Statement of Position ("SOP") 93-7, "Reporting on Advertising Costs". These costs are charged to expense over the period that the catalogs remain the most current source of sales, which period is typically one year or less. The costs associated with brochures and catalog supplements are charged to expense as incurred. Sales Returns The Company reports its sales levels on a net sales basis, with net sales being computed by deducting from gross sales the amount of actual sales returns and the amount of reserve established for anticipated sales returns. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Income Taxes The Company provides for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes". Under the asset and liability method specified by SFAS No. 109, the deferred income tax amounts included in the balance sheet are determined based on the differences between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse. Differences between assets and liabilities for financial statement and tax return purposes are principally related to inventories and certain accrued liabilities related to the restructuring charge described in Note 5. Deferred tax assets and liabilities, which were established in the second quarter of fiscal 1996 due to the Company's taxation as a subchapter "C" corporation since the closing date of the IPO in December 1995, resulted in a credit to the provision for income taxes of $3,966 for the year ended August 31, 1996. Affiliates The Company is affiliated with MSC International Korea, Inc. and various real estate entities (together, the "affiliates"). The affiliates are owned primarily by the Company's principal shareholders. In connection with the F-9 MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data, estimated lives and customer amounts) (CONTINUED) IPO during fiscal 1996, the Company acquired two affiliated companies, Primeline International, Inc. and Kaja Productions, Inc. See Notes 4, 6 and 13 for discussion of certain related party transactions. New Accounting Pronouncements During March 1995, SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to be Disposed Of", was issued by the Financial Accounting Standards Board ("FASB"). This statement establishes financial accounting and reporting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used, and for long-lived assets and certain identifiable intangibles to be disposed of. This statement is effective for financial statements for fiscal years beginning after December 15, 1995. During October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation". This statement establishes financial accounting and reporting standards for stock-based employee compensation plans. The provisions of SFAS No. 123 encourage entities to adopt a fair value based method of accounting for stock compensation plans; however, these provisions also permit the Company to continue to measure compensation costs under pre-existing accounting pronouncements. If the fair value based method of accounting is not adopted, SFAS No. 123 requires pro forma disclosures of net income and net income per share in the notes to the financial statements. The accounting requirements of SFAS No. 123 are effective for transactions entered into in fiscal years that begin after December 15, 1995. The disclosure requirements of SFAS No. 123 are effective for financial statements for fiscal years beginning after December 15, 1995, or for an earlier fiscal year for which SFAS No. 123 is initially adopted for recognizing compensation cost. The Company will be required to comply with the accounting and disclosure provisions of SFAS No. 121 and SFAS No. 123 during fiscal 1997. The effect, if any, on the consolidated financial statements of the implementation of SFAS No. 121 is not expected to be material. The Company will adopt the provisions of SFAS No. 123 by providing the pro forma disclosures. Reclassifications Certain reclassifications have been made to the prior years' financial statements to conform with the classifications used in the current year. 3. PRO FORMA NET INCOME PER COMMON SHARE: Pro forma net income per common share for the year ended August 31, 1996 includes the pro forma effect of a "C" corporation income tax provision for the entire fiscal year (Notes 1 and 2). Pro forma weighted average common shares outstanding include (i) the weighted average shares of Class A and Class B Common Stock outstanding during the year, (ii) the impact of approximately 262 shares issued for the acquisition of Primeline International, Inc. (Note 4) and the Restricted Stock Plan (Note 12) assumed outstanding for the entire year, (iii) the impact of 3,318 shares issued in the initial public offering, the proceeds of which were used to pay the final "S" corporation distribution (Note 1), assumed outstanding for the entire year, and (iv) the common stock equivalent impact of 756 outstanding options issued under the Company's 1995 Stock Option Plan based upon the grant date of the options. F-10 MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data, estimated lives and customer amounts) (CONTINUED) 4. ACQUISITION OF BUSINESSES: On August 15, 1994, the Company acquired various assets and assumed various liabilities, principally the accounts receivable, inventory and accounts payable, of Cast Industrial Products Co. for a net cash purchase price of $629. There was no goodwill as a result of this transaction. During fiscal 1996 the Company acquired five businesses, two of which were from related parties. The acquisitions were accounted for based on the purchase method and were valued based on management's estimate of the fair value of the assets acquired and liabilities assumed with respect to each acquisition at the dates of acquisition. The results of operations of the acquired entities from the respective dates of acquisition through fiscal year end are included in the accompanying consolidated statement of income for the fiscal year ended August 31, 1996. The Company acquired Primeline International, Inc. for a purchase price of approximately $2,000 payable in shares of Class A common stock, which resulted in the issuance of 105 shares of Class A common stock. Costs in excess of net assets acquired in these acquisitions of $8,268 were allocated to goodwill. Summarized below are the unaudited pro forma results of operations as though these fiscal 1996 acquisitions had occurred at the beginning of fiscal 1995. Adjustments have been made for pro forma income taxes and amortization of goodwill related to these transactions. For the Fiscal Years Ended -------------------------------- September 2, August 31, 1995 1996 -------------- -------------- Pro Forma: Net sales $278,300 $329,100 ======== ======== Net income $ 20,000 $20,100 ======== ======== Net income per common share $0.65 ======== F-11 MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data, estimated lives and customer amounts) (CONTINUED) 5. DISTRIBUTION CENTER RESTRUCTURING CHARGE: On May 9, 1996, the Company announced that it would be relocating its multi-location Long Island, New York warehouse and distribution center operation to a new, single-location, Company-owned facility near Harrisburg, Pennsylvania. The Pennsylvania distribution center commenced shipping in September 1996, and is expected to be fully operational in the first half of fiscal 1997. The estimated cost associated with the relocation of the Company's existing Long Island facilities is approximately $8,600, which is primarily comprised of personnel relocation and severance costs, lease abandonment costs, moving costs and disposal costs, and this amount has been reflected as a charge to income from operations for the year ended August 31, 1996. Costs of approximately $644, primarily relating to labor and travel associated with the move were charged against the liability as of August 31, 1996, and the remaining liability of $7,956 is included in accrued liabilities in the accompanying consolidated balance sheet as of August 31, 1996 (Note 9). 6. DUE FROM AFFILIATED COMPANIES: The amounts due from affiliated companies bear interest at the prime rate (8.25% at August 31, 1996). 7. PROPERTY, PLANT AND EQUIPMENT: The following is a summary of property, plant and equipment and the estimated useful lives used in the computation of depreciation and amortization: Number of September 2, August 31, Years 1995 1996 --------- ------------ ---------- Land $ 637 $ 2,949 Building 40 5,799 14,569 Building and leasehold improvements The lesser of the life of the lease or 31.5 2,532 2,563 Furniture, fixtures and equipment 3-10 16,526 29,034 Automobiles 5 364 321 Computer systems-related 3-15 - 3,704 ------- ------- 25,858 53,140 Less: Accumulated depreciation and amortization 11,210 14,151 ------- ------- $14,648 $38,989 ======= ======= 8. INCOME TAXES: The Company was required to make certain Federal income tax depository payments in order to maintain its fiscal year end as a subchapter "S" corporation. Concurrent with the consummation of the IPO during fiscal 1996, the Company no longer qualified as a subchapter "S" corporation and became a subchapter "C" corporation. The balance in prepaid Federal income tax payments as of August 31, 1996 represents the prepayments made prior to the Company's subchapter "C" corporation status which will be F-12 MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data, estimated lives and customer amounts) (CONTINUED) returned to the Company prior to the end of fiscal 1997. As of September 2, 1995 and August 31, 1996, these Federal tax deposits amounted to $3,115 and $4,512, respectively. The provision for income taxes is comprised of the following: For the Fiscal Year Ended --------------------------------------------------- August 27, 1994 September 2, 1995 August 31, 1996 --------------- ----------------- --------------- Current: Federal $ - $ - $10,744 State and local 813 765 2,598 ---- ---- ------- 813 765 13,342 ---- ---- ------- Deferred: Federal - - (3,128) State and local - - (717) ---- ---- ------- - - (3,845) ---- ---- ------- Subchapter "C" impact of SFAS No. 109 - - (3,966) ---- ---- ------- Total $813 $765 $ 5,531 ==== ==== ======= Significant components of deferred tax assets and liabilities are as follows: August 31, 1996 --------------- Current and non-current deferred tax liabilities: Depreciation $ (183) Prepaid advertising (1,773) ------- (1,956) Current and non-current deferred tax assets: Accounts receivable 679 Inventory 4,382 Restructuring charge accrual 3,143 Bonus accrual 944 Deferred stock compensation 158 Other 790 ------- 10,096 ------- Net Deferred Tax Assets $ 8,140 ======= The Company believes that, based upon its lengthy and consistent history of profitable operations, it is probable that the net deferred tax assets of $8,140 will be realized, primarily from the generation of future taxable income. F-13 MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data, estimated lives and customer amounts) (CONTINUED) Reconciliation of the statutory Federal income tax rate to the Company's effective tax rate is as follows: Fiscal Year Ended August 31, 1996 ----------------- U.S. Federal statutory rate 35.0% State income taxes, net of Federal benefit 4.5 Income from "S" corporation period taxable to shareholders (11.9) Subchapter "C" impact of SFAS No. 109 (11.7) All other, net 0.4 ------ Effective income tax rate 16.3% ====== 9. ACCRUED LIABILITIES: Accrued liabilities consist of the following: September 2, August 31, 1995 1996 ------------ ----------- Accrued purchases $ 6,755 $10,349 Accrued payroll and bonus 3,618 4,408 Accrued restructuring charge - 7,956 Accrued other 8,438 10,363 ------- ------- Total accrued liabilities $18,811 $33,076 ======= ======= F-14 MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data, estimated lives and customer amounts) (CONTINUED) 10. LONG-TERM NOTES PAYABLE: Long-term notes payable consist of the following: September 2, 1995 August 31, 1996 ----------------- --------------- Revolving credit agreement (a) $27,800 $40,000 Term notes payable (b) 599 2,307 Credit agreement of subsidiary (c) - 2,300 Other - 70 ------- -------- 28,399 44,677 Less: Current portion 51 2,486 ------- -------- $28,348 $42,191 ======= ======= Maturities of long-term notes payable are as follows: Fiscal ------ 1997 $ 2,486 1998 222 1999 40,568 2000 126 2001 130 Thereafter 1,145 ------- $44,677 ======= (a) As of August 31, 1996, the Company had an unsecured revolving credit agreement with a bank, as agent for a group of banks, with borrowings of $40,000. The credit agreement provides for maximum borrowings of $80,000 expiring on April 30, 1999. During the term of the agreement, the Company can borrow at the bank's base rate (8.25% at August 31, 1996), bankers acceptance rate or LIBOR rate plus margins, which vary from 0.45% to 0.75% per annum based on the ratio of total liabilities to effective net worth, or bid note rate. A facility fee of one-eighth of one percent (0.125%) per annum is payable on the unused portion of the credit. The agreement contains certain covenants including, but not limited to, restrictions related to indebtedness, net worth, capital expenditures and the payment of dividends. As of August 31, 1996, the Company was not in compliance with the maximum capital expenditure covenant, however, the Company received a waiver from the bank. (b) The term notes payable consist of three separate notes. The first note represents the Company's share of a loan payable under a credit agreement with a bank, as agent for a group of banks. The Company is obligated for 50% of the total debt, as these borrowings are secured by real property which is owned 50% by the Company and 50% by a real estate affiliate (Note 2). This note bears interest at the LIBOR rate plus margins which vary from 0.45% to 0.75% per annum, and is payable in monthly F-15 MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data, estimated lives and customer amounts) (CONTINUED) principal installments of $4, plus interest, through April 1999, at which time the balance of the unpaid principal and any accrued interest is due. The balance as of August 31, 1996 is $548. The second note is payable to the Pennsylvania Industrial Development Authority and is secured by the land on which the Harrisburg, Pennsylvania distribution center is located. The loan bears interest at 3% per annum and is payable in monthly installments of $14 through September 2011. The Company received 80% of the approved loan amount and will receive the remaining 20% upon approval of the final construction cost of the Pennsylvania distribution center. The outstanding balance under this note is $1,600 as of August 31, 1996. The third note is payable to the Pennsylvania Department of Community and Economic Development and is unsecured. The loan bears interest at 3% per annum and is payable in monthly installments of $1 through August 2011. The balance as of August 31, 1996 is $159. (c) The Company assumed obligations of $2,300 under a $3,750 line of credit in connection with the acquisition of Swiss Precision Instruments, Inc. (Note 4). Borrowings under the line bear interest at the bank's reference rate (8.25% at August 31, 1996) plus 1%. The line of credit is available through November 30, 1996. Subsequent to August 31, 1996, this amount was repaid by the Company. 11. SUBORDINATED DEBT TO SHAREHOLDERS: During fiscal 1992, the Company entered into subordinated debt agreements with its shareholders. Borrowings under these agreements were subordinated to the long-term notes payable described in Note 10. Subordinated debt to shareholders was comprised of the following: September 2, 1995 ----------------- Subordinated debt to shareholders $11,778 Less: Current portion 9,157 ------- $ 2,621 ======= During fiscal 1996, subordinated debt was repaid with the proceeds from the IPO. 12. EMPLOYEE BENEFIT PLANS: Sid Tool Savings Plan The Company maintains a defined contribution plan with both a profit sharing feature and a 401(k) feature, which covers all employees who have completed at least one month of service with the Company. For the fiscal years ended August 27, 1994, September 2, 1995 and August 31, 1996, the Company contributed $623, $1,350 and $216, respectively, to the Sid Tool Savings Plan. Company contributions are discretionary. F-16 MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data, estimated lives and customer amounts) (CONTINUED) Option and Restricted Stock Plans In connection with the IPO, MSC adopted the MSC Industrial Direct Co., Inc. 1995 Stock Option Plan, pursuant to which options to purchase 2,000 shares of Class A common stock may be granted. MSC also adopted the Restricted Stock Plan, whereby MSC awarded 157 shares of Class A common stock to various employees. Employees vest in their ownership of these shares at the end of five years, prior to which such shares would be forfeited upon the departure of the employees. The value of these shares at the grant date ($2,981) is included as a separate component of shareholders' equity, and the related compensation charge is being recorded ratably over the five year vesting period. Information regarding the Company's option and restricted stock plans is summarized below:
1995 Stock Restricted Option Plan Stock Plan -------------------------- ------------------------ Shares Price Shares Price ------ ----- ------ ----- Outstanding at September 2, 1995 - - - - Granted 853 $19.00 - $30.75 157 19.00 Exercised - - - - Cancelled (97) 19.00 - 28.38 (1) 19.00 --- --- Outstanding at August 31, 1996 756 $19.00 - $30.75 156 19.00 === ===
13. RELATED PARTY TRANSACTIONS: For the fiscal years ended August 27, 1994, September 2, 1995 and August 31, 1996, respectively, sales to and purchases from Primeline International, Inc. were as follows: 1994 1995 1996 -------- --------- ---------- (a) Sales to affiliate $1,732 $1,744 $492 Purchases from affiliate 1,416 967 210 (a) On December 13, 1995, the Company purchased Primeline International, Inc. (Note 4). All intercompany transactions subsequent to that date have been eliminated and are not included in the table above (Note 2). F-17 MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data, estimated lives and customer amounts) (CONTINUED) 14. COMMITMENTS AND CONTINGENCIES: Leases The operations of the Company are conducted, in part, on leased premises, some of which are leased from affiliates. The leases (most of which provide for the payment of real estate taxes, insurance and other operating costs) are for varying periods, the longest extending to the year 2010. At August 31, 1996, approximate minimum annual rentals on such leases are as follows: Total (Including Related Related Party Party Fiscal Year Commitments) Commitments ----------- ------------- ----------- 1997 $2,896 $1,845 1998 2,073 1,392 1999 1,825 1,190 2000 1,415 1,097 2001 1,235 1,050 Thereafter 8,632 8,482 Total rental expense (exclusive of real estate taxes, insurance and other operating costs) for all operating leases for the fiscal years ended August 27, 1994, September 2, 1995 and August 31, 1996 was $3,100, $2,964 and $3,290, respectively, including $2,800, $2,511 and $2,519, respectively, paid to affiliates. In the opinion of the Company's management, the leases with affiliates are on terms which approximate fair market value. The Company is obligated under certain equipment and automobile operating leases, which expire on varying dates through fiscal 2001. At August 31, 1996, approximate minimum annual rentals on such leases are as follows: Fiscal Year ----------- 1997 $1,341 1998 978 1999 583 2000 73 2001 3 F-18 MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data, estimated lives and customer amounts) (CONTINUED) Guarantees As of August 31, 1996, the Company was a guarantor on loans made to affiliated real estate companies aggregating approximately $1,700. Self-Insurance The Company has a self-insured group health insurance plan. The Company is responsible for all covered claims to a maximum liability of $100 per participant during a September 1 plan year. Benefits paid in excess of $100 are reimbursed to the plan under the Company's stop loss policy. Group health insurance expense for the fiscal years ended August 27, 1994, September 2, 1995 and August 31, 1996 was approximately $2,400, $3,200 and $4,100, respectively. Letters of Credit As of August 31, 1996, the Company had outstanding letters of credit aggregating approximately $3,600. Employment Agreements The Chairman of the Board of Directors of the Company is employed pursuant to an employment agreement with a term expiring in January, 2004. Under this agreement, the Chairman receives an annual base salary of $250 and is entitled to participate in benefits available to Company employees. The Chairman has agreed that upon termination of his employment, he will not compete with the Company for a period of three years. The agreement also provides for certain payments in the event of his disability or death. Finally, the agreement provides that the Chairman may, at his option, elect to become a consultant and advisor to the Company at an annual fee of $300 for the remainder of the term of the agreement. The President and Chief Executive Officer of the Company is employed pursuant to an employment agreement with a term expiring either on August 1, 2004 or 90 days after the President's written election to terminate employment. Under this agreement, the President receives an annual base salary of $400, subject to increases in the cost of living, and is entitled to participate in benefits available to Company employees. The agreement also provides for certain payments in the event of his disability or death. The Company has an agreement with another officer which provides for annual benefit payments to the employee for seven years upon his retirement or, in the event of his death, to his designated beneficiary. The benefit is based upon a percentage of the growth in shareholders' equity over a certain base amount. The expense associated with this agreement was $300 in 1996. F-19 MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data, estimated lives and customer amounts) (CONTINUED) In connection with the various acquisitions during fiscal 1996 (Note 4), the Company entered into employment and consulting agreements with the selling shareholders of the acquired businesses. The future minimum commitments under these agreements are as follows: Aggregate Number of Annual Individuals Term Amount ----------- ---- --------- 2 June 1996 - June 1998 $125 2 June 1996 - June 1999 180 1 May 1996 - December 1998 62 1 July 1996 - July 2004 100 1 July 1996 - July 2004 25 Litigation The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial position or results of operations of the Company. 15. SUBSEQUENT EVENTS: Secondary Offering In September 1996, the Company completed a secondary offering of 6,500 shares of Class A Common Stock, of which 2,000 shares were sold by the Company and 4,500 shares were converted from Class B to Class A Common Stock and sold by existing shareholders. This offering generated net proceeds to the Company of approximately $64,390. Supplemental pro forma net income for the fiscal year ended August 31, 1996 reflects the tax-effected impact of the reduction of interest expense of $1,450 attributable to debt outstanding at August 31, 1996 which was repaid from the proceeds of the secondary offering as though this debt was repaid at the beginning of the year. Supplemental weighted average common shares outstanding includes the pro forma weighted average common shares outstanding (Note 3), as well as the supplemental effect of the issuance of 1,181 shares of Class A common stock, which is the number of incremental shares that would have been needed to be issued at the secondary offering price to provide proceeds sufficient to pay the outstanding amounts of such debt at August 31, 1996. These incremental shares were not issued and outstanding for any other purpose and are included in this calculation solely to illustrate their effect on a supplemental basis. F-20 MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data, estimated lives and customer amounts) (CONTINUED) 1996 ---- Supplemental pro forma information: Supplemental pro forma net income $21,468 ======= Supplemental pro forma net income per common share $ 0.67 ======= Supplemental pro forma weighted average number of common shares outstanding 31,877 ======= Acquisition In November 1996, the Company completed the acquisition of a company. The pro forma effects of this transaction have not been presented, as the results are immaterial to the Company's financial statements taken as a whole. F-21 MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES Consolidated Balance Sheets (in thousands, except share data)
May 31, August 31, 1997 1996 ----------- --------- (unaudited) (audited) ASSETS Current Assets: Cash and cash equivalents $ 9,187 $ 1,679 Accounts receivable, net of allowance for doubtful accounts of $1,785 and $1,319, respectively 54,909 41,042 Inventories 163,829 152,620 Due from officers, employees and affiliated companies 611 1,052 Prepaid expenses and other current assets 1,514 1,792 Deferred income tax assets 8,135 9,920 Prepaid Federal income tax payments 568 4,512 --------- --------- Total current assets 238,753 212,617 --------- --------- Property, Plant and Equipment, net 49,100 38,989 --------- --------- Other Assets: Goodwill 25,557 8,224 Other 3,502 5,654 --------- --------- 29,059 13,878 --------- --------- $ 316,912 $ 265,484 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 11,988 $ 13,270 Accrued liabilities 36,003 31,568 Income taxes payable - 1,508 Current portion of long-term debt 59 2,486 --------- --------- Total current liabilities 48,050 48,832 Long-Term Notes Payable 2,590 42,191 Other Long-Term Liabilities 84 110 Deferred Income Tax Liabilities 1,217 1,780 --------- --------- Total liabilities 51,941 92,913 --------- --------- Shareholders' Equity: Preferred stock; $0.001 par value; 5,000,000 shares authorized; none outstanding Class A common stock; $0.001 par value; 100,000,000 15 8 shares authorized; 14,851,858 and 8,311,394 shares, respectively, issued and outstanding Class B common stock; $0.001 par value; 50,000,000 shares 19 24 authorized; 18,975,000 shares and 23,475,000 shares, respectively, issued and outstanding Additional paid-in capital 210,884 145,628 Retained earnings 56,184 29,482 --------- --------- 267,102 175,142 Deferred stock compensation (2,131) (2,571) --------- --------- Total shareholders' equity 264,971 172,571 --------- --------- $ 316,912 $ 265,484 ========= =========
The accompanying notes are an integral part of these consolidated balance sheets. F-22 MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES Consolidated Statements of Income (unaudited) (in thousands, except per share data) Thirty-nine Weeks Ended ----------------------- May 31, June 1, 1997 1996 --------- --------- (Note 1) Net Sales $ 320,794 $ 224,527 Cost of Goods Sold 189,374 131,264 --------- --------- Gross Profit 131,420 93,263 Operating Expenses 87,626 61,214 Distribution center Restructuring Charge (Note 5) - 8,600 --------- --------- Income from Operations 43,794 23,449 Other Income (Expense): Interest income 806 748 Interest expense (658) (1,293) Other income (expense), net 178 289 --------- --------- 326 (256) --------- --------- Income before Provision for Income Taxes 44,120 23,193 Provision for Income Taxes (Note 3) 17,418 1,947 --------- --------- Net Income $ 26,702 $ 21,246 ========= ========= Net Income per Common Share (Note 5) $ 0.79 ========= Weighted Average Number of Common Shares Outstanding 33,930 ========= The accompanying notes are an integral part of these consolidated statements. F-23 MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES Consolidated Statement of Shareholders' Equity (unaudited) (in thousands)
Thirty-nine weeks ended May 31, 1997: Class A Class B Deferred Common Stock Common Stock Additional Stock -------------- ---------------- Paid-In Retained Compen- Shares Amount Shares Amount Capital Earnings sation Total ------ ------ ------- ------ ---------- -------- -------- -------- Balance, August 31, 1996 (Note 1) 8,311 $ 8 23,475 $24 $145,628 $29,482 $(2,571) $172,571 Exchange of Class B common stock for 4,500 5 (4,500) (5) - - - - Class A common stock Secondary public offering of common stock, 2,000 2 - - 64,442 - - 64,444 net of costs of offering of $3,306 Exercise of common stock options 41 - - - 814 - - 814 Net income - - - - - 26,702 - 26,702 Amortization of deferred stock compensation - - - - - - 440 440 ------ --- ------- --- -------- ------- ------- -------- Balance, May 31, 1997 14,852 $15 18,975 $19 $210,884 $56,184 $(2,131) $264,971 ====== === ======= === ======== ======= ======= ========
The accompanying notes are an integral part of this consolidated statement. F-24 MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (unaudited) (in thousands)
Thirty-nine Weeks Ended ----------------------- May 31, June 1, 1997 1996 -------- --------- Cash Flows from Operating Activities: Net income $ 26,702 $ 21,246 -------- --------- Adjustments to reconcile net income to net cash Provided by (used in) operating activities: Deferred income taxes 3,944 (7,542) Depreciation and amortization 3,974 2,282 Provision for doubtful accounts 566 618 Gain on disposal of property and equipment - (33) Changes in operating assets and liabilities, net of effect from acquisitions: Accounts receivable (9,106) (9,043) Inventories 8,594 (45,637) Prepaid expenses and other current assets 2,341 (700) Other assets 2,181 (1,056) Accounts payable and other current liabilities (5,038) 12,611 Other long-term liabilities (589) (21) -------- --------- 6,867 (48,521) -------- --------- Net cash provided by (used in) operating activities 33,569 (27,275) -------- --------- Cash Flows from Investing Activities: Expenditures for property, plant and equipment (11,351) (15,359) Cash paid for acquisitions, net of cash acquired (27,771) - -------- --------- Net cash used in investing activities (39,122) (15,359) -------- --------- Cash Flows from Financing Activities: Net proceeds from public offering of common stock 64,444 131,466 Net proceeds from exercise of common stock options 814 - Long-term borrowings 10,672 67,614 Repayments of long-term debt (63,310) (82,386) Repayments of subordinated debt to shareholders - (11,778) Repayments from officers, employees and affiliates 441 791 Distributions to shareholders - (61,963) -------- --------- Net cash provided by financing activities 13,061 43,744 -------- --------- Net Increase in Cash and Cash Equivalents 7,508 1,110 Cash and Cash Equivalents - beginning of period 1,679 681 -------- --------- Cash and Cash Equivalents - end of period $ 9,187 $ 1,791 ======== =========
The accompanying notes are an integral part of these consolidated statements. F-25 MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (in thousands except per share data) (unaudited) 1. MSC Industrial Direct Co., Inc. ("MSC" or the "Company") was incorporated in the State of New York on October 25, 1995, as a holding company for the purpose of (i) issuing 8,050 shares of Class A Common Stock in an initial public offering ("IPO") and (ii) issuing 24,000 shares of Class B Common Stock to the shareholders of Sid Tool Co., Inc. (the "Operating Subsidiary") in exchange for their then outstanding 30 shares of common stock of the Operating Subsidiary immediately prior to the effective date of MSC's IPO. MSC did not have any significant operating activity from its inception until December 20, 1995, the closing date of the IPO. The consolidated financial statements for the thirty-nine weeks ended June 1, 1996 include the results of operations of the operating subsidiary only, through the date of the IPO, and MSC's consolidated results of operations thereafter. All references to a year are to the Company's fiscal year, which ends on the Saturday nearest August 31 of such year. 2. Reference is made to the Notes to Consolidated Financial Statements contained within the Company's audited financial statements for the year ended August 31, 1996 included elsewhere in this Prospectus and in the Company's annual report on Form 10- K. In the opinion of management, the interim unaudited financial statements included herein reflect all adjustments necessary, consisting of normal recurring adjustments, for a fair presentation of such data on a basis consistent with that of the audited data presented therein. The results of operations for interim periods are not necessarily indicative of the results to be expected for a full year. 3. As a result of the IPO, the Operating Subsidiary no longer qualified as a Subchapter "S" corporation, and became subject to "C" corporation taxation. The provision for income taxes for the thirty-nine weeks ended June 1, 1996 reflects "S" corporation rates through the date of the IPO, and "C" corporation rates thereafter. On September 25, 1996, the Company completed a secondary offering of 6,500 shares of Class A Common Stock, of which 2,000 shares were sold by the Company and 4,500 shares were converted from Class B to Class A Common Stock and sold by existing shareholders. Net proceeds received by the Company as a result of this offering were approximately $64,444. 4. During the third quarter of 1996, the Company announced that it would be relocating its multi-location Long Island, New York warehouse and distribution center operation to a new, single- location, Company-owned facility near Harrisburg, Pennsylvania. The Pennsylvania distribution center commenced shipping in September 1996, and became fully operational during the second quarter of fiscal 1997. The estimated cost associated with the relocation of the Company's existing Long Island facilities is approximately $8,600, which is primarily comprised of personnel relocation and severance costs, lease abandonment costs, and moving and disposal costs, and this amount was reflected as a charge to income from operations in the 3rd quarter of fiscal 1996. Expenditures of approximately $5,719 have been charged against the liability as of May 31, 1997, and the remaining $2,881 is included in accrued liabilities in the accompanying consolidated balance sheet as of May 31, 1997. 5. Had the initial public offering occurred on the first day of fiscal 1995, the weighted average number of common shares used in the computation of earnings per share would have resulted in pro forma net income and earnings per share as follows: F-26
Thirteen Weeks Ended Thirty-Nine Weeks Ended -------------------- ----------------------- June 1, June 1, 1996 1996 ---- ---- Including Restructuring (Note 4) Pro forma net income $2,758 $14,033 Pro forma earnings per share $0.09 $0.45 Excluding Restructuring (Note 4) Pro forma net income $7,958 $19,233 Pro forma earnings per share $0.25 $0.61
6. The Company provides for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". Under the asset and liability method specified by SFAS No. 109, the deferred tax amounts included in the balance sheet are determined based on the differences between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse. Differences between assets and liabilities for financial statement and tax return purposes are principally related to inventories and certain accrued liabilities. Deferred income tax assets and liabilities were initially established during 1996 due to the Company's taxation as a "C" Corporation since the closing date of its IPO in December 1995. 7. During March 1995, SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed of", was issued by the Financial Accounting Standards Board ("FASB"). This statement establishes financial accounting and reporting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used, and for long-lived assets and certain identifiable intangibles to be disposed of. This statement is effective for financial statements for fiscal years beginning after December 15, 1995 (fiscal 1997 for the Company). During October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation". This statement establishes financial accounting and reporting standards for stock-based employee compensation plans. The provisions of SFAS No. 123 encourage entities to adopt a fair value based method of accounting for stock compensation plans; however, these provisions also permit the Company to continue to measure compensation costs under pre-existing accounting pronouncements. If the fair value based method of accounting is not adopted, SFAS No. 123 requires pro forma disclosures of net income and net income per share in the notes to the financial statements. The accounting requirements of SFAS No. 123 are effective for transactions entered into in fiscal years that begin after December 15, 1995. The disclosure requirements of SFAS No. 123 are effective for financial statements for fiscal years beginning after December 15, 1995 (fiscal 1997 for the Company). The effect, if any, on the consolidated financial statements, of implementation of SFAS No. 121 is not expected to be material. The Company will adopt the provisions of SFAS No. 123 by providing the pro forma disclosures in its annual report on Form 10-K for fiscal 1997. In March 1997, the FASB issued SFAS No. 128, "Earnings per Share" ("EPS"). This statement establishes standards for computing and presenting EPS, replacing the presentation of currently required primary EPS with a presentation of Basic EPS. For entities with complex capital structures, the statement requires the dual presentation of both Basic EPS and Diluted EPS on the face of the consolidated statements of operations. Under this new standard, Basic EPS is computed based on weighted average shares outstanding and excludes any potential dilution; Diluted EPS reflects potential dilution from the exercise or conversion of securities into F-27 common stock or from other contracts to issue common stock and is similar to the currently required fully diluted EPS. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997 (the second quarter of fiscal 1998 for the Company), including interim periods, and earlier application is not permitted. When adopted, the Company will be required to restate its EPS data for all periods presented. The Company does not expect the impact of the adoption of this statement to be material to previously reported EPS amounts. F-28 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- No person has been authorized to give any information or to make any representations, other than those contained in this Prospectus, in connection with the offering made hereby, and, if given or made, such information or representation must not be relied upon as having been authorized by the Company, the Underwriters or any other person. Neither the delivery of this Prospectus nor any sale made hereunder shall under any circumstances create any implication that there has been no change in the affairs of the Company since the date hereof. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered hereby by anyone in any jurisdiction in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to any person to whom it is unlawful to make such offer or solicitation. -------------------- TABLE OF CONTENTS -------------------- Prospectus Summary.......................................................... 3 Risk Factors................................................................ 7 Use of Proceeds ............................................................ 9 Selected Financial and Operating Data....................................... 9 Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................. 11 Business.................................................................... 17 Management.................................................................. 27 Principal and Selling Shareholders.......................................... 30 Description of Capital Stock................................................ 31 Underwriting................................................................ 33 Legal Matters............................................................... 35 Experts..................................................................... 35 Additional Information...................................................... 35 Index to Financial Statements............................................... F-1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1,550,000 Shares [LOGO] Class A Common Stock ------------------- P R O S P E C T U S ------------------- Donaldson, Lufkin & Jenrette Securities Corporation Prudential Securities Incorporated , 1997 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution The Registrant's expenses in connection with the issuance of the securities being registered, other than underwriting discounts and commissions, are estimated as follows: Securities and Exchange Commission Registration Fee........... $0 NASD Filing Fee............................................... 0 Printing and Engraving........................................ 0 Counsel Fees and Expenses..................................... 0 Accountants' Fees and Expenses................................ 0 Blue Sky Qualification Fees and Expenses...................... 0 Transfer Agent and Registrar Fees and Expenses................ 0 New York Stock Exchange Listing Fee........................... 29,500 Miscellaneous................................................. 0 ---- Total......................................................... $29,500
* To be filed by amendment Item 14. Indemnification of Directors and Officers The Certificate of Incorporation of the Registrant provides that any person may be indemnified against all expenses and liabilities to the fullest extent permitted by the Business Corporation Law of the State of New York. Section 722 of the New York Business Corporation Law, as amended, the law of the state in which the Registrant is incorporated, empowers a corporation, within certain limitations, to indemnify any person who served in any capacity at the request of the corporation, by reason of the fact that he, his testator or intestate, was a director or officer of the corporation, or served such other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise in any capacity, against judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees actually and necessarily incurred as a result of such action or proceeding, or any appeal therein, if such director or officer acted, in good faith, for a purpose which he reasonably believed to be in, or, in the case of service for any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise, not opposed to, the best interests of the corporation and, in criminal actions or proceedings, in addition, had no reasonable cause to believe that his conduct was unlawful. II-1 Item 15. Recent Sales of Unregistered Securities The Registrant was formed in October 1995 as a holding company to hold all of the outstanding capital stock of Sid Tool Co., Inc. Pursuant to the Exchange Agreement dated October 30, 1995, the shareholders of Sid Tool Co., Inc. contributed all of their shares of stock of Sid Tool Co., Inc. in exchange for 24,000,000 shares of Class B Common Stock of the Registrant. In October 1995, the Registrant entered into an agreement to acquire all of the capital stock of Primeline International, Inc. ("Primeline") for a purchase price of $2 million payable in shares of Class A Common Stock of the Registrant upon consummation of the Initial Public Offering. The Registrant's President and his sister owned 70% of the outstanding stock of Primeline. The foregoing transactions were accomplished pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended (the "Act"), pursuant to Section 4(2) of the Act. Item 16. Exhibits and Financial Statement Schedules The following documents are filed as part of this Registration Statement: a. Exhibits
Exhibit No. Description - ------- ----------- 1.01 Form of Underwriting Agreement. *1.02 Master Agreement Among Underwriters dated March 1, 1993. *1.03 Master Dealer Agreement dated December 1, 1987 *3.01 Certificate of Incorporation of Registrant. *3.02 By-laws of Registrant. *4.01 Specimen Class A Common Stock Certificate. 5.01 Opinion of Rosenman & Colin LLP. *10.01 Registrant's 1995 Stock Option Plan. *10.02 Employment Agreement, dated as of January 2, 1994, between Registrant and Sidney Jacobson, as amended on October 31, 1995. *10.03 Employment Agreement, dated as of August 1, 1994, between Registrant and Mitchell Jacobson. *10.04 Exchange Agreement dated October 30, 1995 between the Registrant and the Shareholders named therein. 10.05 Credit Agreement, dated as of June 12, 1997, between the Registrant and the banks named therein. +21.01 List of Subsidiaries 23.01 Consent of Arthur Andersen LLP 23.02 Consent of Rosenman & Colin LLP (included in Exhibit 5.01). +24.01 Power of Attorney (included on signature page at page II-4).
- ------------------------------ * Filed as an Exhibit to the Company's Registration Statement on Form S-1, Registration Statement No. 33-98832. + Filed as an Exhibit to the Company's Registration Statement on Form S-3, Registration Statement No. 333-31837, dated July 23, 1997. Item 17. Undertakings Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification II-2 against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being Registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. Additionally, the undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purposes of determining any liability under the Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3/A and has duly caused this Pre-effective Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, County of New York, State of New York on July 29, 1997. MSC INDUSTRIAL DIRECT CO., INC. By: /s/ Mitchell Jacobson --------------------- Mitchell Jacobson President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, as amended, this Pre-effective Amendment No. 1 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Sidney Jacobson Chairman of the Board - --------------------- of Directors July 29, 1997 Sidney Jacobson /s/ Mitchell Jacobson President, Chief - --------------------- Executive Officer Mitchell Jacobson and Director July 29, 1997 /s/ James Schroeder Vice President, - --------------------- Chief Operating Officer, James Schroeder and Director July 29, 1997 /s/ Shelley M. Boxer Vice President, Chief - --------------------- Financial Officer, Shelley M. Boxer Principal Accounting Officer and Director July 29, 1997 /s/ Denis Kelly Director July 29, 1997 - --------------------- Denis Kelly /s/ Melvin Redman Director July 29, 1997 - --------------------- Melvin Redman /s/ Raymond Langton Director July 29, 1997 - --------------------- Raymond Langton
II-4 EXHIBIT INDEX
Exhibit Description Page - ------- ----------- ---- 1.01 Form of Underwriting Agreement............................... *1.02 Master Agreement Among Underwriters dated March 1, 1993...... *1.03 Master Dealer Agreement dated December 1, 1987............... *3.01 Certificate of Incorporation of Registrant................... *3.02 By-laws of Registrant........................................ *4.01 Specimen Class A Common Stock Certificate.................... 5.01 Opinion of Rosenman & Colin LLP.............................. *10.01 Registrant's 1995 Stock Option Plan.......................... *10.02 Employment Agreement, dated as of January 2, 1994, between Registrant and Sidney Jacobson, as amended on October 31, 1995......................................................... *10.03 Employment Agreement, dated as of August 1, 1994, between Registrant and Mitchell Jacobson............................. *10.04 Exchange Agreement dated October 30, 1995 between the Registrant and the Shareholders named therein................ 10.05 Credit Agreement, dated as of June 12, 1997 between the Registrant and the banks named therein....................... +21.01 List of Subsidiaries......................................... 23.01 Consent of Arthur Andersen LLP............................... 23.02 Consent of Rosenman & Colin LLP (included in Exhibit 5.01)... +24.01 Power of Attorney (included on signature page at page II-4)..
- ------------------------------ * Filed as an Exhibit to the Company's Registration Statement on Form S-1, Registration Statement No. 33-98832. + Filed as an Exhibit to the Company's Registration Statement on Form S-3, Registration Statement No. 333-31837, dated July 23, 1997. II-5 EX-1.01 2 UNDERWRITING AGREEMENT L&W REVISED DRAFT July 25, 1997 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- MSC INDUSTRIAL DIRECT CO., INC. --------------------------------------------------- 1,550,000 Shares of Class A Common Stock --------------------------------------------------- ------------------------------------------------ UNDERWRITING AGREEMENT DATED AS OF JULY __, 1997 ------------------------------------------------ Donaldson, Lufkin & Jenrette Securities Corporation Prudential Securities Incorporated - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1,550,000 Shares MSC INDUSTRIAL DIRECT CO., INC. Class A Common Stock UNDERWRITING AGREEMENT July __, 1997 DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION PRUDENTIAL SECURITIES INCORPORATED As representatives of the several Underwriters named in Schedule I hereto c/o Donaldson, Lufkin & Jenrette Securities Corporation 277 Park Avenue New York, New York 10172 Ladies and Gentlemen: The shareholders of MSC Industrial Direct Co., Inc., a New York corporation (the "Company") named in Part A of Schedule II hereto (collectively, the "Selling Shareholders") severally propose to sell to the several underwriters named in Schedule I hereto (the "Underwriters") an aggregate of 1,550,000 shares of Class A Common Stock, par value $.001 per share (the "Common Stock"), of the Company (the "Firm Shares"). The Selling Shareholders set forth on Part B of Schedule II hereto (the "Option Selling Shareholders") also propose to sell to the several Underwriters not more than an additional 232,500 shares of Common Stock (the "Additional Shares"), if requested by the Underwriters as provided in Section 2 hereof. The Firm Shares and the Additional Shares are hereinafter collectively called the "Shares." Terms not otherwise defined herein shall have the meaning given them in the Prospectus (as defined below). 1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder (collectively, the "Act"), a registration statement on Form S-3 (No. 333-31837) including a prospectus relating to the Shares, which may be amended. As used in this agreement (the "Agreement"), (i) the term "Registration Statement" shall mean the registration statement prepared and filed by the Company with the Commission on Form S-3 (No. 333-31837), as amended, at the time it becomes effective, including the information, if any, contained in any registration statement filed under Rule 462(b) under the Act or any prospectus filed with the Commission after such registration statement becomes effective pursuant Rule 424(b) under the Act and deemed to be part of such registration statement at the time it became effective pursuant to Rule 430A under the Act, and (ii) the term "Prospectus" shall mean the prospectus in the form first used by the Underwriters to confirm sales of the Shares, whether or not filed with the Commission pursuant to Rule 424(b) under the Act. 2. AGREEMENTS TO SELL AND PURCHASE. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, (i) each Selling Shareholder agrees, severally and not jointly, to sell the number of Firm Shares set forth opposite such Selling Shareholder's name in Schedule II hereto to the several Underwriters named in Schedule I hereto and (ii) each of the Underwriters agrees, severally and not jointly, to purchase from the Selling Shareholders at a price per share of $_________ (the "Purchase Price") the respective number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto. On the basis of the representations and warranties contained in this Agreement and subject to its terms and conditions, each Option Selling Shareholder severally agrees to sell to the several Underwriters named in Schedule I hereto the Additional Shares and the Underwriters shall have the right to purchase, severally and not jointly, up to the number of Additional Shares set forth opposite each such Option Selling Shareholder's name on Schedule II hereof (aggregating up to 232,500 Additional Shares from all Option Selling Shareholders) at the Purchase Price. Additional Shares may be purchased solely for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. The Underwriters may exercise their right to purchase Additional Shares in whole or in part from time to time by giving written notice thereof to each Option Selling Shareholder within 30 days after the date of this Agreement. The Representatives shall give any such notice on behalf of the Underwriters and such notice shall specify the aggregate number of Additional Shares to be purchased pursuant to such exercise and the date for payment and delivery thereof. The date specified in any such notice shall be a business day (i) no earlier than the Closing Date (as hereinafter defined), (ii) no later than ten business days after such notice has been given and (iii) no earlier than two business days after such notice has been given. If any Additional Shares are to be purchased, each Underwriter, severally and not jointly, agrees to purchase from each Option Selling Shareholder at the Purchase Price the number of Additional Shares (subject to such adjustments to eliminate fractional shares as the Representatives may determine) which bears the same proportion to the total number of Additional Shares to be purchased from such Option Selling Shareholder as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I bears to the total number of Firm Shares. 2 The Company and the Selling Shareholders hereby agree, severally and not jointly, and the Company shall, concurrently with the execution of this Agreement, deliver an agreement (collectively, the "Lock-up Agreements") executed by (i) the Company and (iii) each shareholder listed on Annex I hereto, pursuant to which each such person agrees not to offer, sell, contract to sell, grant any option to purchase, or otherwise dispose of any shares of common stock of the Company or any securities convertible into or exercisable or exchangeable for such common stock or in any other manner transfer all or a portion of the economic consequences associated with the ownership of any such common stock (each, a "Prohibited Transfer") except to the Underwriters pursuant to this Agreement, for a period of 180 days after the date of the Prospectus, without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"). The Company also agrees to take such other actions as the Representatives may reasonably request to prevent parties listed on Annex I hereto from consummating a Prohibited Transfer. Notwithstanding the foregoing, during such period (i) the Company may issue shares pursuant to the Company's 1995 Restricted Stock Plan and may grant stock options pursuant to the Company's 1995 Stock Option Plan and (ii) the Company may issue shares of its common stock upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof. 3. TERMS OF PUBLIC OFFERING. The Selling Shareholders are advised by the Representatives that the Underwriters propose (i) to make a public offering of their respective portions of the Shares as soon after the effective date of the Registration Statement as in their judgment is advisable, and (ii) initially to offer the Shares upon the terms set forth in the Prospectus. 4. DELIVERY AND PAYMENT. Delivery to the Underwriters of, and payment by the Underwriters for, the Firm Shares shall be made at 10:00 A.M., New York City time, on the third business day (such time and date being referred to as the "Closing Date") following the date of the initial public offering of the Firm Shares, at the offices of Latham & Watkins, 885 Third Avenue, Suite 1000, New York, New York, 10022. The Closing Date and the location of delivery of the Firm Shares may be varied by agreement between the Representatives and the Company. Delivery to the Underwriters of, and payment for, any Additional Shares to be purchased by the Underwriters shall be made at such place as the Representatives shall designate at 10:00 A.M., New York City time, on the date specified in the applicable exercise notice given by the Representatives pursuant to Section 2 (an "Option Closing Date"). Any such Option Closing Date and the location of delivery of such Additional Shares may be varied by agreement between the Representatives and the Option Selling Shareholders. Certificates for the Shares shall be registered in such names and issued in such denominations as the Representatives shall request in writing not later than two full business days prior to the Closing Date or an Option Closing Date, as the case may be. Such certificates shall be made available for inspection not later than 9:30 A.M., New York City time, on the business 3 day next preceding the Closing Date or an Option Closing Date, as the case may be. Certificates in definitive form evidencing the Shares shall be delivered to the Representatives on the Closing Date or an Option Closing Date, as the case may be, with any transfer taxes thereon duly paid by the Company, for the respective accounts of the several Underwriters, against payment of the Purchase Price by wire transfer of immediately available funds. 5. AGREEMENTS OF THE COMPANY. The Company agrees with the Representatives: (a) To use its best efforts to cause the Registration Statement to become effective at the earliest possible time. (b) To advise the Representatives promptly and, if requested by the Representatives, to confirm such advice in writing, (i) when the Registration Statement has become effective, if and when the Prospectus is sent for filing pursuant to Rule 424 under the Act and when any post-effective amendment thereto becomes effective, (ii) of the receipt by the Company of any comments from the Commission or any state securities commission or other regulatory authority that relate to the Registration Statement or the Prospectus or requests by the Commission or any state securities commission or other regulatory authority for amendments to the Registration Statement or amendments or supplements to the Prospectus or for additional information, (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the suspension of qualification of the Shares for offering or sale in any jurisdiction, or the initiation of any proceeding for such purposes by the Commission or any state securities commission or other regulatory authority, and (iv) of the happening of any event during the period referred to in Section 5(e) that makes any statement of a material fact made in the Registration Statement or the Prospectus untrue or that requires the making of any additions to or changes in the Registration Statement or the Prospectus in order to make the statements therein not misleading. The Company shall use its best efforts during the period referred to in Section 5(e) to prevent the issuance of any stop order or order suspending the qualification or exemption of the Shares under any state securities or Blue Sky laws, and, if at any time during the period referred to in Section 5(e) the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, or any state securities commission or other regulatory authority shall issue an order suspending the qualification or exemption of the Shares under any state securities or Blue Sky laws, the Company shall use its best efforts to obtain the withdrawal or lifting of such order at the earliest possible time. (c) To furnish to the Underwriters, without charge, four (4) copies (one (1) manually executed copy and three (3) conformed copies) of the Registration Statement as and when first filed with the Commission and of each amendment to it as and when filed, including all exhibits filed therewith, and to furnish to each Underwriter such reasonable number of conformed copies of the Registration Statement as first filed and of each amendment to it, without exhibits, as and when requested by such Underwriter. 4 (d) Not to file any amendment or supplement to the Registration Statement, whether before or after the time when it becomes effective, or to make any amendment or supplement to the Prospectus of which the Underwriters shall not previously have been advised and provided a copy at least two business days prior to the filing thereof or such lesser reasonable amount of time as is necessitated by the exigency of such amendment or supplement, or to which the Underwriters shall object, provided, that the consent of the Underwriters to the filing of any amendment or supplement to the Registration Statement shall not be unreasonably withheld or delayed; and to prepare and file with the Commission, promptly upon the Representatives' request, any amendment to the Registration Statement or supplement to the Prospectus which may be legally required or reasonably advisable in connection with the distribution of the Shares by the Underwriters, and to use its best efforts to cause the same to become promptly effective. (e) Within the time period during which the Prospectus relating to the Shares is required to be delivered under the Act, if in the opinion of counsel for the Underwriters a prospectus is required by law to be delivered in connection with the sales by an Underwriter or a dealer, to furnish to each Underwriter or dealer as many copies of the Prospectus (and of any amendment or supplement to the Prospectus) as such Underwriter or dealer may reasonably request. (f) If during the period specified in Section 5(e) any event shall occur as a result of which, in the opinion of counsel for the Underwriters it becomes necessary to amend or supplement the Prospectus in order to make the statements therein not misleading when the Prospectus is delivered to a purchaser, or if it is necessary to amend or supplement the Prospectus to comply with any law, forthwith to prepare and file with the Commission an appropriate amendment or supplement to the Prospectus so that the statements in the Prospectus, as so amended or supplemented, will not be misleading when it is so delivered, or so that the Prospectus will comply with law, and to furnish to each Underwriter and to such dealers as the Representatives shall specify, such number of copies thereof as such Underwriter or dealers may reasonably request. (g) Prior to any public offering of the Shares, to (i) cooperate with the Underwriters and counsel for the Underwriters in connection with the registration or qualification of the Shares for offer and sale by the several Underwriters and by dealers under the state securities or Blue Sky laws of such jurisdictions as the Underwriters may reasonably request, (ii) continue such qualification in effect so long as required for distribution of the Shares, and (iii) file such consents to service of process or other documents as may be necessary to effect such registration or qualification; provided, however, that the Company shall not be required in connection therewith to register or qualify as a foreign corporation where it is not now so qualified. (h) During a period of five years following the date of this Agreement, to deliver to the Representatives promptly upon their becoming available (i) copies of all current, regular and periodic reports filed by the Company with any securities exchange or with the Commission or any governmental authority succeeding to any of the Commission's functions 5 and (ii) such other information as the Representatives may reasonably request regarding the Company or its Subsidiaries (as defined). (i) During a period of five years following the date of this Agreement, to mail to the Representatives, without charge, as soon as available a copy of each report or other publicly available information of the Company furnished to the holders of Common Stock or filed with the Commission and such other publicly available information concerning the Company as the Representatives may request. (j) To use its best efforts to maintain the inclusion of the Common Stock on the New York Stock Exchange or a comparable national securities exchange for a period of five years after the effective date of the Registration Statement; provided, however, that the Company shall not be required to comply with this clause (j) in the event the Company is no longer subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). (k) To pay all costs, expenses, fees and taxes (but only to the extent that such costs, expenses, fees and taxes are not paid by the Selling Shareholders in accordance with Sections 8(a) and 8(b) hereof (other than with respect to clause (6) below, which the Company shall pay)) in connection with or incident to: (1) the preparation, printing, processing, filing, distribution and delivery under the Act of the Registration Statement (including financial statements and exhibits), each preliminary prospectus, the Prospectus and all amendments and supplements thereto; (2) the preparation, printing, processing, execution, distribution and delivery of the preliminary and supplemental Blue Sky memoranda (including, in each case, any disbursements of counsel to the Underwriters relating to such printing and delivery); (3) the registration with the Commission, and the delivery to the several Underwriters, of the Shares (including, without limitation, the fees of the Company's transfer agent and registrar, the costs of printing and engraving the certificates evidencing the Shares, if any, and any transfer or other taxes payable thereon); (4) the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of the several states (including, without limitation, in each case the reasonable fees and disbursements of counsel to the Underwriters relating to such registration or qualification and any filing fees in connection therewith); (5) filing fees payable to the National Association of Securities Dealers, Inc. (the "NASD") in connection with the offering; 6 (6) the listing of the Shares on the New York Stock Exchange; and (7) furnishing such copies of the Registration Statement, the preliminary prospectus, the Prospectus and all amendments and supplements thereto as may be requested by the Underwriters or by dealers to whom the Shares may be sold. (l) Not to take, directly or indirectly, any action designed to, or that might reasonably be expected to, cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares. Except as permitted by the Act, the Company will not distribute any Registration Statement, preliminary prospectus or Prospectus or other offering material in connection with the offering and sale of the Shares. (m) To use its best efforts to do and perform all things required or necessary to be done and performed under this Agreement by the Company prior to the Closing Date or any Option Closing Date, as the case may be, and to satisfy all conditions precedent to the delivery of the Shares. 6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to and covenants with each Underwriter that: (a) When the Registration Statement becomes effective, including at the date of any post-effective amendment, at the date of the Prospectus and at the Closing Date, (1) the Registration Statement will comply in all material respects with the provisions of the Act, and will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; and (2) the Prospectus and any supplements thereto will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (b) Each preliminary prospectus filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the Act, complied when so filed in all material respects with the Act; and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The representations and warranties contained in clauses (1) and (2) of Section 6(a) and Section 6(b) shall not apply to statements or omissions in any preliminary prospectus, the Registration Statement or the Prospectus (or any supplement or amendment to them) 7 made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by or on behalf of such Underwriter expressly for use therein. The Company acknowledges for all purposes under this Agreement that the statements set forth in any preliminary prospectus and the Prospectus (or any amendment or supplement) (i) in the last paragraph on the cover page and (ii) in the table, and the second paragraph below the table under the caption "Underwriting" constitute the only written information furnished to the Company by any Underwriter as of the date hereof expressly for use in the preliminary prospectus, the Registration Statement or the Prospectus (or any amendment or supplement to them as of the date hereof). (c) The Company and each of its subsidiaries (each, a "Subsidiary" and, collectively, the "Subsidiaries") is a corporation duly organized, validly existing and in good standing under the laws of its respective jurisdiction of incorporation, has full corporate power and authority to carry on its respective business and to own, lease and operate its respective properties, and is duly qualified and is in good standing as a foreign corporation registered to do business in each jurisdiction in which the nature of its business, or its ownership, leasing or operation of property requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the condition (financial or other), business, property, prospects or results of operations of the Company and its Subsidiaries taken as a whole (a "Material Adverse Effect"). All of the outstanding shares of capital stock of, or other equity interests in, each of the Subsidiaries have been duly authorized and validly issued, are fully paid and non-assessable, are not subject to preemptive or similar rights or, except as described in the Prospectus or contained in contracts filed as exhibits to the Registration Statement, contractual rights. Except as described in the Prospectus or contained in contracts filed as exhibits to the Registration Statement, (i) all of the shares of capital stock or other equity interests in the Subsidiaries are owned directly or indirectly by the Company, free and clear of any security interest, mortgage, pledge, claim, lien or encumbrance (each, a "Lien"), and (ii) there are no outstanding subscriptions, rights, warrants, calls or options to acquire, or instruments or securities convertible into or exchangeable for, any shares of capital stock or other equity interest in any such Subsidiary or the Company. (d) All the outstanding shares of capital stock of the Company (including, without limitation, the Shares to be sold by the Selling Stockholders) have been duly authorized and validly issued and are fully paid and non-assessable and not subject to any preemptive or similar rights. The Company has all necessary corporate power and authority to enter into and perform its obligations under this Agreement. (e) The authorized capital stock of the Company, including the Common Stock, conforms as to legal matters to the description thereof contained in the Prospectus. (f) Except as could not be expected to have a Material Adverse Effect, neither the Company nor any of its Subsidiaries is in violation of its respective charter or by-laws or 8 in default in the performance of any obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness or in any other agreement, indenture, mortgage, deed of trust or other contract, lease or other instrument to which the Company or any of its Subsidiaries is a party or by which it or any of its Subsidiaries or their respective property is bound, or to which any of the property or assets of the Company or any of its Subsidiaries is subject which has not been waived. (g) The execution, delivery and performance of this Agreement by the Company, the compliance by the Company with the provisions of this Agreement, and the consummation of the transactions contemplated by this Agreement will not, except as may be disclosed in the Registration Statement or the Prospectus, (i) require any consent, approval, authorization or other order of, or filing or registration with, any court, regulatory body, administrative agency or other governmental body (except as may be required under the Act or other securities or Blue Sky laws of various states or by the NASD); (ii) conflict with or constitute a breach of any of the terms or provisions of, or default under, the charter or by-laws of the Company or any of the Subsidiaries; (iii) require any consent or approval (which has not been obtained) of parties to, or conflict with or constitute a breach of any of the terms or provisions of, or default under, any material agreement or other instrument to which the Company or any of the Subsidiaries or their respective properties are bound which has not been waived; or (iv) result in the creation or imposition of any lien on any material asset of the Company or any of the Subsidiaries. (h) This Agreement has been duly authorized and validly executed by the Company and (assuming the due execution and delivery thereof by the Underwriters) is the legally valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as such enforceability may be: (i) subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally, (ii) limited by general principles of equity (whether considered in a proceeding at law or in equity) and (iii) limited by securities laws prohibiting or limiting the availability of, and public policy against, indemnification or contribution. (i) As of the Closing Date, the Registration Statement has become effective under the Act and any required filing of the Prospectus, or any supplement thereto, pursuant to Rule 424(b) under the Act has been made in the manner and within the time period required thereunder, and no stop order suspending the effectiveness of the Registration Statement has been issued and, to the knowledge of the Company, no proceedings for that purpose are pending before or contemplated by the Commission. There is no contract or document concerning the Company or any of its Subsidiaries of a character required to be described in the Registration Statement or in the Prospectus or to be filed as an exhibit to the Registration Statement that is not so described or filed as required. (j) There is (i) no action, suit or proceeding before or by any court, arbitrator or governmental agency, body or official, domestic or foreign, now pending or, to the knowledge of the Company, threatened or contemplated to which the Company or any of 9 its Subsidiaries is a party or to which the business or property of the Company or any of its Subsidiaries is subject, (ii) to the knowledge of the Company, no statute, rule, regulation or order that has been enacted, adopted or issued by any governmental agency or that has been proposed by any governmental body (other than Blue Sky laws, regulations or orders), or (iii) no injunction, restraining order or order of any nature by a federal or state court of competent jurisdiction to which the Company or any of its Subsidiaries is subject, that, in each case above, (1) might have a Material Adverse Effect (except as disclosed in the Registration Statement or the Prospectus) or (2) might in any manner invalidate or question the validity of any provisions of this Agreement (other than provisions relating to indemnification and contribution) or the Shares. (k) No holder of any security of the Company has or will have any right to require registration of any security of the Company by virtue of any transaction contemplated by this Agreement. (l) Except as set forth in the Prospectus or that, singly or in the aggregate, could not be expected to have a Material Adverse Effect, neither the Company nor any of its Subsidiaries has violated any applicable existing federal, state, local or foreign laws or regulations ("Laws"), including, but not limited to, (i) Laws relating to the protection of human health and safety or the environment, (ii) Laws relating to discrimination in the hiring, promotion or pay of employees, (iii) wage or hour Laws, and (iv) provisions of the Employee Retirement Income Security Act of 1974. (m) Except as disclosed in the Prospectus or that could not be expected to have a Material Adverse Effect, there are no business relationships or related party transactions required to be disclosed therein by Item 404 of Regulation S-K of the Commission. (n) All tax returns required to be filed by the Company and each of its Subsidiaries in any jurisdiction have been filed, and all material taxes (including, but not limited to, withholding taxes, penalties and interest, assessments, fees and other charges due or claimed to be due from any taxing authority) have been paid other than, in either case, those (i) being contested in good faith and for which adequate reserves have been provided, (ii) currently payable without penalty or interest or (iii) which would not have a Material Adverse Effect. (o) Except as set forth in the Prospectus or that, singly or in the aggregate, could not be expected to have a Material Adverse Effect, (i) the Company and each of its Subsidiaries has (1) such permits, licenses, franchises, certificates, consents, exemptions, orders, and authorizations of governmental or regulatory authorities ("Permits") as are necessary to own, lease, license and use its respective properties and to conduct its business, and (2) fulfilled and performed all of its material obligations with respect to the Permits, (ii) all such Permits are valid and in full force and effect and (iii) no event has occurred that could be expected to allow, or after notice or lapse of time could be expected to allow, revocation or termination of any Permit or that could be expected to result in any other 10 material impairment of the rights granted to the Company or any of its Subsidiaries under any Permit. (p) Except as set forth in the Prospectus or that, singly or in the aggregate, could not be expected to have a Material Adverse Effect, (i) the Company and each of its Subsidiaries have good and marketable title, free and clear of all liens (except liens for taxes not yet due and payable) to all property and assets described in the Registration Statement as being owned by it, (ii) each lease to which the Company and each of its Subsidiaries is a party is valid and binding and no default has occurred or is continuing thereunder, and (iii) the Company and each of its Subsidiaries enjoy peaceful and undisturbed possession under all such leases to which it is a party as lessee. (q) The Company and each of its Subsidiaries maintain adequate insurance covering their properties, operations, personnel and businesses. Such insurance insures against such losses and risks as are adequate in accordance with customary industry practice to protect the Company and each of its Subsidiaries and their respective businesses. (r) The consolidated historical financial statements and pro forma financial information of the Company (and its predecessor entity) set forth in the Registration Statement, together with related schedules and notes (and any amendment or supplement thereto), comply as to form in all material respects with the applicable requirements of the Act. Such consolidated historical financial statements present fairly the consolidated financial position, results of operations and changes in financial position of the Company (and its predecessor entity) on the basis stated in the Registration Statement at the respective dates or for the respective periods to which they apply and are in accordance with generally accepted accounting principles ("GAAP"), and such financial statements and related schedules and notes have been prepared in accordance with GAAP consistently applied throughout the periods involved, except as disclosed therein. Such pro forma financial information has been prepared on a basis consistent with such historical statements, except for the pro forma adjustments specified, and give effect to assumptions made on a reasonable basis and present fairly the historical and proposed transactions contemplated by the Prospectus and this Agreement. The other historical financial information and data relating to the Company (and its predecessor entity) set forth in the Registration Statement and the Prospectus (and any amendment or supplement thereto) is, in all material respects, accurately presented and prepared on a basis consistent with the financial statements and the books and records of the Company (and its predecessor entity). (s) The Company and each of its Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that: (1) transactions are executed in accordance with management's general or specific authorizations; (2) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain accountability for assets; (3) access to assets is permitted only in accordance with management's general or specific authorization; and (4) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. 11 (t) There has not occurred any material adverse change, or any development involving a prospective material adverse change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company and its subsidiaries, taken as a whole from that set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement). (u) Subsequent to the dates for which information is given in the Registration Statement and Prospectus and up through the Closing Date, unless set forth in or contemplated by the Prospectus, the Company has, or will, notify the Underwriters that: (1) neither the Company nor any of its Subsidiaries has incurred any liabilities or obligations, direct or contingent, which are material, individually or in the aggregate, to the Company and its Subsidiaries taken as a whole, nor entered into any material transactions not in the ordinary course of business; and (2) there has not been any decrease in the Company's capital stock or any material increase in long-term indebtedness or short-term indebtedness of the Company and its Subsidiaries, taken as a whole, or any payment of or declaration to pay any dividends or any other distribution with respect to the Company's capital stock. (v) Arthur Andersen LLP are independent public accountants with respect to the Company (including its predecessor entities) and its Subsidiaries as required by the Act. (w) To the Company's knowledge, the Company (directly or through its Subsidiaries) possesses or is licensed to use the patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names (collectively, "Intellectual Property") material to the business of the Company and its Subsidiaries and neither the Company nor any of its Subsidiaries has received any notice of infringement of or conflict with asserted rights of others with respect of the foregoing. The use of such material Intellectual Property in connection with the business and operations of the Company and the Subsidiaries does not, to the Company's knowledge, infringe on the rights of any person. (x) Neither the Company nor any of its Subsidiaries is (a) an "investment company" within the meaning of the Investment Company Act of 1940, as amended or (b) a "holding company" or a "subsidiary company" of a holding company or an "affiliate" thereof within the meaning of the Public Utility Holding Company Act of 1935, as amended. (y) Neither the Company nor any of its affiliates is presently doing business with the government of Cuba or with any person or affiliate located in Cuba. (z) Each certificate signed by any officer of the Company and delivered to the Underwriters or counsel for the Underwriters shall be deemed to be a representation and warranty by the Company to each Underwriter as to the matters covered thereby. 12 7. REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDERS. Excluding paragraph (h) below, which pertains only to Mitchell Jacobson, each Selling Shareholder severally represents and warrants to each Underwriter that: (a) Such Selling Shareholder is the lawful owner of the Shares to be sold by such Selling Shareholder pursuant to this Agreement and has, and on the Closing Date (and any Option Closing Date, if applicable) will have, good and clear title to such Shares, free of all restrictions on transfer, liens, encumbrances, security interests and claims whatsoever. (b) Upon delivery of and payment for such Shares pursuant to this Agreement, good and clear title to such Shares will pass to the Underwriters, free of all restrictions on transfer, liens, encumbrances, security interests and claims whatsoever. (c) Such Selling Shareholder has, and on the Closing Date will have, full legal right, power and authority to enter into this Agreement and to sell, assign, transfer and deliver such Shares in the manner provided herein, and this Agreement has been duly authorized, executed and delivered by such Selling Shareholder and this Agreement is a valid and binding agreement of such Selling Shareholder enforceable in accordance with its terms, except as rights to indemnity and contribution hereunder may be limited by applicable law. (d) Such Selling Shareholder has not taken, and will not take, directly or indirectly, any action designed to, or which might reasonably be expected to, cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares pursuant to the distribution contemplated by this Agreement, and other than as permitted by the Act, such Selling Shareholder has not distributed and will not distribute any prospectus or other offering material in connection with the offering and sale of the Shares. (e) The execution, delivery and performance of this Agreement by such Selling Shareholder, compliance by such Selling Shareholder with all the provisions hereof and the consummation of the transactions contemplated hereby will not require any consent, approval, authorization or other order of any court, regulatory body, administrative agency or other governmental body (except such as may be required under the Act, state securities laws or Blue Sky laws) and will not conflict with or constitute a breach of any of the terms or provisions of, or a default under, organizational documents of such Selling Shareholder, if not an individual, or any agreement, indenture or other instrument to which such Selling Shareholder is a party or by which such Selling Shareholder or property of such Selling Shareholder is bound, or violate or conflict with any laws, administrative regulation or ruling or court decree applicable to such Selling Shareholder or property of such Selling Shareholder. (f) Such parts of the Registration Statement under the caption "Principal and Selling Shareholders" which specifically relate to such Selling Shareholder do not, and will not on the Closing Date (and any Option Closing Date, if applicable), contain any untrue 13 statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (g) At any time during the period described in paragraph 5(e) hereof, if there is any change in the information referred to in paragraph 7(f) above, the Selling Shareholders will immediately notify you of such change. (h) Mitchell Jacobson represents and warrants to each Underwriter that he has no actual knowledge that any preliminary prospectus, the Registration Statement or the Prospectus (or any amendment or supplement thereto) contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties contained in this Section 7(h) shall not apply to statements or omissions in any preliminary prospectus, the Registration Statement or the Prospectus (or any amendment or supplement thereto) based upon information relating to any Underwriter furnished to the Company in writing by or on behalf of any Underwriter through the Underwriters expressly for use therein. 8. AGREEMENTS OF THE SELLING SHAREHOLDERS. Each Selling Shareholder severally agrees with you and the Company: (a) To pay or to cause to be paid all transfer or other taxes with respect to the Shares to be sold by such Selling Shareholder; and (b) To pay all costs, expenses, fees and taxes with respect to the Shares to be sold by each Selling Shareholder, including the costs, expenses, fees and taxes in connection with or incident to: (1) the preparation, printing, processing, filing, distribution and delivery under the Act of the Registration Statement (including financial statements and exhibits), each preliminary prospectus, the Prospectus and all amendments and supplements thereto; (2) the preparation, printing, processing, execution, distribution and delivery of the preliminary and supplemental Blue Sky memoranda (including, in each case, any disbursements of counsel to the Underwriters relating to such printing and delivery); (3) the registration with the Commission, and the delivery to the several Underwriters, of the Shares (including, without limitation, the fees of the Company's transfer agent and registrar, the costs of printing and engraving the certificates evidencing the Shares, if any); 14 (4) the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of the several states (including, without limitation, in each case the reasonable fees and disbursements of counsel to the Underwriters relating to such registration or qualification and any filing fees in connection therewith); (5) filing fees payable to the National Association of Securities Dealers, Inc. (the "NASD") in connection with the offering; and (6) furnishing such copies of the Registration Statement, the preliminary prospectus, the Prospectus and all amendments and supplements thereto as may be requested by the Underwriters or by dealers to whom the Shares may be sold. (c) To take all reasonable actions in cooperation with the Company and the Underwriters to cause the Registration Statement to become effective at the earliest possible time, to do and perform all things to be done and performed by such Selling Shareholder under this Agreement prior to the Closing Date. 9. INDEMNIFICATION. (a) Each of the Company and the Selling Shareholders agrees to indemnify and hold harmless (i) each Underwriter and (ii) each person, if any, who controls (within the meaning of Section 15 of the Act or Section 20 of the Exchange Act) any Underwriter (any of the persons referred to in this clause (ii) being hereinafter referred to as a "controlling person"), and (iii) the respective officers, directors, partners, employees, representatives and agents of each Underwriter or any controlling person (any person referred to in clause (i), (ii) or (iii) in such capacity may hereinafter be referred to as an "Indemnified Person") to the fullest extent lawful, from and against any and all losses, claims, damages, liabilities, judgments, actions and expenses (including, without limitation and as incurred, reimbursement of all reasonable costs of investigating, preparing, pursuing or defending any claim or action, or any investigation or proceeding by any governmental agency or body, commenced or threatened, including the fees and expenses of counsel to any Indemnified Person) directly or indirectly caused by, related to, based upon, arising out of or in connection with any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the information deemed to be a part of the Registration Statement pursuant to Rule 430A(b) promulgated under the Act, if applicable, or the Prospectus (including any amendment or supplement thereto) or any preliminary prospectus, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of the Prospectus, in light of the circumstances under which they were made) not misleading, except insofar as such losses, claims, damages, liabilities or expenses are caused by an untrue statement or omission or alleged untrue statement or omission that is (i) made in reliance upon and in conformity with information relating to any Underwriter furnished 15 in writing to the Company by or on behalf of such Underwriter through the Representatives expressly for use in the Registration Statement (or any amendment thereto) or the Prospectus (or any amendment or supplement thereto) or any preliminary prospectus or (ii) made in any preliminary prospectus if a copy of the Prospectus (as amended or supplemented, if the Company shall furnish such amendment or supplement thereto) was not sent or given by or on behalf of such Underwriter to the person asserting any such loss, claim, damage, liability or expense, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Shares as required by the Act and the Prospectus (as so amended or supplemented) would have corrected in all material respects such untrue statement or omission. The Company shall notify the Underwriters promptly of the institution, threat or assertion of any claim, proceeding (including any governmental investigation) or litigation in connection with the matters addressed by this Agreement which involves the Company, any of the Subsidiaries, any Selling Shareholder or an Indemnified Person. (b) Each Selling Shareholder also agrees to indemnify and hold harmless each Indemnified Person to the fullest extent lawful, from and against any and all losses, claims, damages, liabilities, judgments, actions and expenses (including, without limitation and as incurred, reimbursement of all reasonable costs of investigating, preparing, pursuing or defending any claim or action, or any investigation or proceeding by any governmental agency or body, commenced or threatened, including the fees and expenses of counsel to any Indemnified Person) directly or indirectly caused by, related to, based upon, arising out of or in connection with any breach of the representations, warranties and agreements made by such Selling Shareholder in Sections 7 and 8. (c) In case any action or proceeding (including any governmental investigation) shall be brought or asserted against any of the Indemnified Persons with respect to which indemnity may be sought against the Company or the Selling Shareholders, such Indemnified Person shall promptly notify the Company or the Selling Shareholders, as the case may be, in writing (provided, that the failure to give such notice shall not relieve the Company or the Selling Shareholders, as the case may be, of their obligations pursuant to this Agreement) and the Company or the Selling Shareholders, as the case may be, shall assume the defense thereof, including the employment of counsel reasonably satisfactory to such Indemnified Person and payment of all fees and expenses (regardless of whether it is ultimately determined that an Indemnified Person is not entitled to indemnification hereunder). Such Indemnified Person shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Person unless (i) the employment of such counsel shall have been specifically authorized in writing by the Company or the Selling Shareholders, as the case may be, (ii) the Company or the Selling Shareholders, as the case may be, shall have failed to assume the defense and employ counsel or (iii) the named parties to any such action (including any impleaded parties) include both such Indemnified Person and the Company (or any of its Subsidiaries) or the Selling Shareholders, as the case may be, and such Indemnified Person shall have been advised by such counsel that there may be one or more legal defenses available to it which are different from or additional to 16 those available to such indemnifying party (in which case such indemnifying party shall not have the right to assume the defense of such action on behalf of such Indemnified Person, it being understood, however, that such indemnifying party shall not, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for all such Indemnified Persons, which firm shall be designated in writing by DLJ, provided, that such firm be reasonably satisfactory to the Indemnified Parties, and that all such fees and expenses shall be reimbursed as they are incurred). The Company or the Selling Shareholders, as the case may be, shall not be liable for any settlement of any such action or proceeding effected without the prior written consent of such indemnifying party, but if settled with the written consent of such indemnifying party, which consent will not be unreasonably withheld, such indemnifying party agrees to indemnify and hold harmless any Indemnified Person from and against any loss, claim, damage, liability or expense by reason of any such settlement. Notwithstanding the foregoing sentence, if at any time an Indemnified Person shall have requested the Company or the Selling Shareholders to reimburse the Indemnified Person for fees and expenses of counsel as contemplated by the second sentence of this paragraph, such indemnifying party agrees to be liable for any settlement of any proceeding effected without the written consent of such indemnifying party if (i) such settlement is entered into more than 20 business days after receipt by the Company of the aforesaid request, and (ii) such indemnifying party shall not have reimbursed the Indemnified Person in accordance with such request prior to the date of such settlement. The Company or the Selling Shareholders shall not, without the prior written consent of each Indemnified Person, settle or compromise or consent to the entry of judgment in or otherwise seek to terminate any pending or threatened action, claim, litigation or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not any Indemnified Person is a party thereto), unless such settlement, compromise, consent or termination includes an unconditional release of each Indemnified Person from all liability arising out of such action, claim, litigation or proceeding. (d) Each Underwriter, severally and not jointly, agrees to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement, any person controlling (within the meaning of Section 15 of the Act or Section 20 of the Exchange Act) the Company, each Selling Shareholder, and the officers, directors, partners, employees, representatives and agents of each such person to the same extent as the foregoing indemnity from the Company and the Selling Shareholders to each of the Indemnified Persons, but only with respect to claims and actions based on information relating to such Underwriter furnished in writing by or on behalf of such Underwriter expressly for use in the Prospectus. The Company and each of the Selling Shareholders acknowledge that the only written information furnished to the Company by any Underwriter expressly for use in the Prospectus is as set forth in Section 6(a) of this Agreement. 17 (e) If the indemnification provided for in this Section 9 is unavailable to an indemnified party in respect of any losses, claims, damages, liabilities or expenses referred to herein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities and expenses (i) in such proportion as is appropriate to reflect the relative benefits received by the indemnifying party on the one hand and the indemnified party on the other hand from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the indemnifying parties and the indemnified party, as well as any other relevant equitable considerations. The relative benefits received by the Company or the Selling Shareholders, as the case may be, on the one hand, and the Underwriters, on the other hand, shall be deemed to be in the same proportion as the total proceeds from the offering (net of underwriting discounts and commissions but before deducting expenses) received by the Selling Shareholders bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of the Company or the Selling Shareholders, as the case may be, and the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact related to information supplied by the Company or the Selling Shareholders, as the case may be, or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The indemnity and contribution obligations of the Company and the Selling Shareholders set forth herein shall be in addition to any liability or obligation the Company and the Selling Shareholders may otherwise have to any Indemnified Person. The Company, each of the Selling Shareholders and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 9(e) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or expenses referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 9, the Underwriters (and the Underwriters' related Indemnified Persons) shall not be required to contribute, in the aggregate, any amount in excess of the amount by which the total underwriting discount applicable to the Shares purchased by such Underwriter exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 18 (f) The indemnity and contribution agreements contained in this Section 9 are in addition to any liability which the Company and each of the Selling Shareholders may otherwise have to the Indemnified Persons. (g) Notwithstanding any other provision of this Section 9, the aggregate liability of each of the Selling Shareholders for any and all losses, claims, damages, liabilities, judgments, actions and expenses (including, without limitation, all reasonable costs of investigating, preparing, pursuing or defending any claim or action, or any investigation or proceeding by any governmental agency or body, commenced or threatened, including the fees and expenses of counsel to any Indemnified Person) pursuant to this Section 9 is limited to an amount equal to the gross proceeds from the sale of the Shares by such Selling Shareholder. (h) Each Selling Shareholder hereby designates the Company as its authorized agent upon which process may be served in any action, suit or proceeding which may be instituted in any state or federal court in the State of New York by any Underwriter or person controlling an Underwriter asserting a claim for indemnification or contribution under or pursuant to this Section 9, and each Selling Shareholder will accept the jurisdiction of such court in such action, and waives, to the fullest extent permitted by applicable law, any defense based upon lack of personal jurisdiction or venue. A copy of any such process shall be sent or given to such Selling Shareholder at the address for notices specified in Section 12 hereof. 10. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The several obligations of the Underwriters to purchase the Firm Shares under this Agreement are subject to the satisfaction of each of the following conditions: (a) All of the representations and warranties of the Company contained in this Agreement shall be true and correct in all material respects on the date hereof and on the Closing Date with the same force and effect as if made on and as of the date hereof and the Closing Date. The Company shall have performed or complied in all material respects with all of the obligations and agreements and satisfied all conditions to be performed, complied with or satisfied by it on or prior to the Closing Date. (b) (1) The Registration Statement shall have become effective (or if a post-effective amendment is required to be filed pursuant to Rule 430A promulgated under the Act, such post-effective amendment shall have become effective) not later than 5:00 P.M., New York City time, on the date of this Agreement or at such later date and time as the Underwriters may approve in writing; (2) no injunction, restraining order or order of any nature by a federal or state court of competent jurisdiction shall have been issued as of the Closing Date which would prevent the sale of the Shares; (3) at the Closing Date, no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been commenced or shall be pending before 19 or shall have been threatened by the Commission and every request for additional information on the part of the Commission shall have been complied with in all material respects, and (4) at the Closing Date, no stop order suspending the sale of the Shares in any jurisdiction contemplated by Section 5(g) hereof shall have been issued and no proceeding for that purpose shall have been commenced or be pending or threatened. (c) (1) Except as disclosed in the Prospectus, since the date hereof or since the dates as of which information is given in the Registration Statement and Prospectus, there shall not have been any event that had a Material Adverse Effect, or any development involving a prospective change that could have a Material Adverse Effect, whether or not arising in the ordinary course of business; (2) except as disclosed in the Prospectus, since the date of the latest balance sheet included in the Registration Statement and the Prospectus, there has not been any material change, or any development involving a prospective material change, in the capital stock or in the long-term debt of the Company and its Subsidiaries, taken as a whole, from that set forth in the Registration Statement and Prospectus; (3) the Company and its Subsidiaries shall have no material liability or obligation, direct or contingent, that is required to be disclosed on a balance sheet in accordance with GAAP and that is not disclosed on the latest balance sheet included in (or otherwise disclosed in) the Registration Statement and the Prospectus; and (4) the Company and its Subsidiaries shall have no material liability or obligation, direct or contingent, other than those reflected in the Prospectus. (d) The Underwriters shall have received a certificate of the Company (satisfactory to the Underwriters and counsel to the Underwriters) dated the Closing Date, executed on behalf of the Company by the Chief Executive Officer and the principal financial or accounting officer of the Company, confirming, to the best of such Officers' knowledge, as of the Closing Date, all matters set forth in Sections 10(a), 10(b) and 10(c). (e) All of the representations and warranties of each of the Selling Shareholders contained in this Agreement shall be true and correct on the Closing Date with the same force and effect as if made on and as of the date hereof and the Closing Date, and you shall have received a certificate to such effect, dated the Closing Date, from each Selling Shareholder. Each Selling Shareholder shall have performed or complied in all material respects with all of the obligations and agreements contained herein and satisfied all conditions to be performed, complied with or satisfied by it on or prior to the Closing Date. (f) The Underwriters shall have received on the Closing Date an opinion (satisfactory to the Underwriters and counsel to the Underwriters) dated the Closing Date, of Rosenman & Colin LLP, counsel for the Company and the Selling Shareholders ("R&C"), to the effect that: 20 (1) the Registration Statement, as of its effective date, and the Prospectus, as of its date, complied as to form in all material respects with the requirements of the Act and the applicable rules and regulations of the Commission thereunder, except that in each case such counsel expresses no opinion with respect to the financial statements or other financial and statistical data contained in the Registration Statement or the Prospectus; (2) the Registration Statement has become effective under the Act; (3) the Company has been duly organized and the Company and each of the Subsidiaries is validly existing as a corporation in good standing under the laws of the State of New York, has the corporate power to own, lease and operate its properties and to conduct its business as described in the Prospectus; (4) the Company has all necessary corporate power and authority to enter and perform its obligations under this Agreement; (5) the execution, delivery and performance of this Agreement by the Company and each Selling Shareholder and the sale of the Shares by the Selling Shareholders as contemplated by this Agreement and the Prospectus, will not, except as may be disclosed in the Registration Statement or the Prospectus and except as would not have a Material Adverse Effect, to the best knowledge of such counsel (except with respect to clause (B) below), (A) require any consent, approval, authorization or other order of any court, regulatory body, administrative agency or other governmental body (except as may be required under the Act or other securities or Blue Sky laws of various states or by the NASD); (B) conflict with or constitute a breach of any of the terms or provisions of, or default under, the charter or by-laws of the Company or any of its Subsidiaries; (C) require any consent or approval (which has not been obtained) of parties to, or constitute a breach of any of the terms or provisions of, or default under, any of the agreements filed as an exhibit to the Registration Statement (which has not been waived); (D) violate any laws or rules or regulations, rulings or court decrees as applicable to the Company or any of its Subsidiaries or any Selling Shareholder or their respective properties; or (E) result in the creation or imposition of any Lien on any material asset of the Company or any of its Subsidiaries or any Selling Shareholder under any of the agreements filed as an exhibit to the Registration Statement; (6) except as would not have a Material Adverse Effect, to the best knowledge of such counsel, the Company and its Subsidiaries are not in violation of any of their respective charters or by-laws and neither the Company nor any of its Subsidiaries are in default in the performance of any obligation, agreement or condition contained in any of the agreements filed as an exhibit to the Registration Statement to which the Company or its Subsidiaries are a party or by which their properties are bound or to which any of the property or assets of the Company or its Subsidiaries are subject which have not been waived; 21 (7) this Agreement has been duly authorized and validly executed by the Company and each of the Selling Shareholders; (8) all the outstanding shares of Common Stock (including, without limitation, the Shares to be sold by the Selling Shareholders) have been duly authorized and validly issued and are fully paid, non-assessable and not subject to any preemptive or similar statutory or, except as described in the Prospectus or contained in contracts filed as exhibits to the Registration Statement, contractual rights; (9) all the outstanding shares of common stock in each of the Subsidiaries have been duly authorized and validly issued and are fully paid, non-assessable and not subject to any preemptive or similar statutory or, except as described in the Prospectus or contained in contracts filed as exhibits to the Registration Statement, contractual rights, and are held of record by the Company; (10) the authorized capital stock of the Company, including the Common Stock, conforms as to legal matters to the description thereof contained in the Prospectus; (11) any required filing of the Prospectus pursuant to Rule 424(b)(1) under the Act has been made in the manner and within the time period required thereunder and, to the knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending before or have been threatened by the Commission; (12) to the best knowledge of such counsel, there is no contract concerning the Company or any of the Subsidiaries of a character required to be described in the Registration Statement or in the Prospectus or to be filed as an exhibit to the Registration Statement that is not so described or filed as required; (13) to the best knowledge of such counsel, no holder of any security of the Company has or will have any right to require registration of any security of the Company by virtue of the transactions contemplated by this Agreement; (14) the statements contained in Items 14 and 15 of Part II of the Registration Statement, insofar as such statements constitute a summary of legal matters, documents or proceedings referred to therein, fairly present the information called for with respect to such legal matters, documents and proceedings; (15) the Company is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended; and (16) immediately prior to the Closing Date, each Selling Shareholder was the sole registered owner of the Shares to be sold by such Selling Shareholder; upon registration of the Shares in the names of the Underwriters in the stock records of the 22 Company, and the issuance of new certificates registered in the names of the Underwriters representing such Shares, assuming the Underwriters purchased the Shares in good faith and without notice of any adverse claim within the meaning of the Uniform Commercial Code, the Underwriters will have acquired all rights of such Selling Shareholder in the Shares free of any adverse claim, any lien in favor of the Company and any restrictions on transfer imposed by the Company, and the owner of the Shares, if other than such Selling Shareholder, will be precluded from asserting against the Underwriters the ineffectiveness of any unauthorized endorsement. In addition, R&C shall state that such counsel has participated in conferences with directors, officers and other representatives of the Company, representatives of the independent public accountants of the Company, the Underwriters' representatives and counsel for the Underwriters, in connection with the preparation of the Registration Statement and Prospectus and has considered the matters required to be stated therein and the statements included therein, and, although such counsel has not independently verified the accuracy, completeness or fairness of the statements contained in the Registration Statement and Prospectus (except as indicated above) and relying on Company officers regarding materiality, such counsel advises the Representatives that, on the basis of the foregoing, no facts have come to such counsel's attention which led it to believe that the Registration Statement (as amended or supplemented, if applicable), on the effective date thereof, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements contained therein not misleading or that the Prospectus (as amended or supplemented, if applicable), on the date thereof or on the Closing Date, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary to make the statements contained therein, in the light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no view with respect to the financial statements and related notes, the financial statement schedules and other financial, statistical and accounting data included in or omitted from the Registration Statement or Prospectus). It is also understood that such counsel is opining only as to the laws of the United States and New York and that such counsel may assume the capacity of all natural persons and the genuineness of all signatures. (g) The Underwriters shall have received on the Closing Date an opinion, dated the Closing Date, of Latham & Watkins, counsel for the Underwriters, in form and substance satisfactory to the Underwriters. (h) The Underwriters shall have received letters from Arthur Andersen LLP, independent public accountants, on the date hereof as well as on the Closing Date (in the latter case constituting an affirmation of the statements set forth in the former), in form and substance reasonably satisfactory to the Underwriters, with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus. (i) The Shares shall have been approved for listing on the New York Stock Exchange, subject to official notice of issuance. 23 (j) Latham & Watkins, counsel to the Underwriters, shall have been furnished with such documents and opinions, in addition to those set forth above, as they may reasonably require for the purpose of enabling them to review or pass upon the matters referred to in this Section 10 and in order to evidence the accuracy, completeness or satisfaction in all material respects of any of the representations, warranties or conditions herein contained. (k) The Underwriters shall have received executed copies of each of the Lock-up Agreements. (l) Prior to the Closing Date, the Company shall have furnished to the Underwriters such further information, certificates and documents as the Underwriters may reasonably request. The several obligations of the Underwriters to purchase any Additional Shares hereunder are subject to the delivery to the Representatives on the applicable Option Closing Date of such documents as the Representatives may reasonably request with respect to the good standing of the Company and its Subsidiaries, the due authorization and issuance of such Additional Shares, the ownership, title and transferability of and absence of adverse claims with respect to any Additional Shares and other matters related to the issuance of such Additional Shares including, without limitation, a letter from Arthur Andersen LLP, constituting an affirmation of the statements set forth in the letters described in Section 10(h) above. 11. EFFECTIVE DATE OF AGREEMENT AND TERMINATION. This Agreement shall become effective upon the later of the time that (i) the Company and the Underwriters execute this Agreement, (ii) the Commission releases notification of the effectiveness of the Registration Statement and (iii) if a post-effective amendment is required to be filed pursuant to Rule 430A under the Act, the effectiveness of such post-effective amendment. (a) The Underwriters may terminate this Agreement at any time on or prior to the Closing Date by notice to the Company and the Selling Shareholders if any of the following has occurred: (i) since the respective dates as of which information is given in the Registration Statement and the Prospectus and except as disclosed or contemplated therein, any adverse change or development involving a prospective adverse change which would cause a Material Adverse Effect, whether or not arising in the ordinary course of business, which would, in the Representatives' sole judgment make it impracticable or inadvisable to market the Shares; (ii) any outbreak or escalation of hostilities or other national or international calamity or crisis or material adverse change in the financial markets of the United States or elsewhere or any other substantial national or international calamity or emergency, if the effect of such outbreak, escalation, calamity, crisis, change or 24 emergency would, in the Representatives' sole judgment, make it impracticable or inadvisable to market the Shares or to enforce contracts for the sale of securities; (iii) any suspension or limitation of trading in securities generally on the New York Stock Exchange, the American Stock Exchange or the Nasdaq National Market or general limitation on prices for securities on either of the exchanges or the Nasdaq National Market; (iv) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of any court or other governmental authority which in the Representatives' sole judgement causes or will cause a Material Adverse Effect; (v) the declaration of a general banking moratorium by either federal or New York State authorities; or (vi) the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in the Representatives' sole judgement has a material adverse effect on the financial markets in the United States and makes it impracticable or inadvisable to sell the Shares. If on the Closing Date or on an Option Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase the Firm Shares or Additional Shares, as the case may be, which it or they have agreed to purchase hereunder on such date and the aggregate number of Firm Shares or Additional Shares, as the case may be, which such defaulting Underwriter or Underwriters, as the case may be, agreed but failed or refused to purchase is not more than one-tenth of the total number of Shares to be purchased on such date by all Underwriters, each non-defaulting Underwriter shall be obligated severally, in the proportion which the number of Firm Shares set forth opposite its name in Schedule I hereto bears to the total number of Firm Shares which all the non-defaulting Underwriters, as the case may be, have agreed to purchase, or in such other proportion as the Underwriters may specify, to purchase the Firm Shares or Additional Shares, as the case may be, which such defaulting Underwriter or Underwriters, as the case may be, agreed but failed or refused to purchase on such date; provided that in no event shall the number of Firm Shares or Additional Shares, as the case may be, which any Underwriter has agreed to purchase pursuant to Section 2 hereof be increased pursuant to this Section 11 by an amount in excess of one-ninth of such number of Firm Shares or Additional Shares, as the case may be, without the written consent of such Underwriter. If on the Closing Date or on an Option Closing Date, as the case may be, any Underwriter or Underwriters shall fail or refuse to purchase Firm Shares, or Additional Shares, as the case may be, and the aggregate number of Firm Shares or Additional Shares, as the case may be, with respect to which such default occurs is more than one-tenth of the aggregate number of Shares to be purchased on such date by all Underwriters and arrangements satisfactory to the Representatives and the applicable Selling Shareholders for purchase of such Shares are not made within 48 hours after such default, this Agreement will terminate 25 without liability on the part of any non-defaulting Underwriter and the applicable Selling Shareholders. In any such case which does not result in termination of this Agreement, either the Representatives or the applicable Selling Shareholders shall have the right to postpone the Closing Date or the applicable Option Closing Date, as the case may be, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and the Prospectus or any other documents or arrangements may be effected. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of any such Underwriter under this Agreement. (b) The indemnities and contribution provisions and the other agreements, representations and warranties of the Company, its officers and directors, the Selling Shareholders, and of the several Underwriters set forth in or made pursuant to this Agreement shall remain operative and in full force and effect, and will survive delivery of and payment for the Shares, regardless of (i) any investigation, or statement as to the results thereof, made by or on behalf of any Underwriter or by or on behalf of the Selling Shareholders, the officers or directors of the Company or any controlling person of the Company or the Selling Shareholders, (ii) acceptance of the Shares and payment for them hereunder and (iii) termination of this Agreement. (c) If this Agreement shall be terminated by the Underwriters pursuant to clause (i) of Section 11(a) or because of the failure or refusal on the part of the Selling Shareholders to comply with the terms or to fulfill any of the conditions of this Agreement, the Selling Shareholders agree to reimburse the Underwriters for all out-of-pocket expenses (including the reasonable fees and disbursements of counsel) incurred by the Underwriters. Notwithstanding any termination of this Agreement, the Company shall be liable for all expenses which it has agreed to pay pursuant to Section 5(k) hereof and the Selling Stockholders shall be liable for all expenses which they have agreed to pay pursuant to Section 8(b) hereof. 12. NOTICES. Notices given pursuant to any provision of this Agreement shall be addressed as follows: (i) if to the Company, to MSC Industrial Direct Co., Inc., 151 Sunnyside Blvd., Plainview, New York 11803-1592, Attention: Chief Financial Officer, (ii) if to any of the Selling Shareholders, to Mitchell Jacobson c/o MSC Industrial Direct Co., Inc., 151 Sunnyside Blvd., Plainview, New York 11803-1592 and (iii) if to the Underwriters, to Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park Avenue, New York, New York 10172, Attention: Syndicate Department, and, in each case, with a copy to Rosenman & Colin LLP, 575 Madison Avenue, New York, New York 10022, Attention: Joseph L. Getraer, Esq. and Latham & Watkins at 885 Third Avenue, Suite 1000, New York, New York 10022, Attention: Philip E. Coviello, Esq., or in any case to such other address as the person to be notified may have requested in writing. 13. SUCCESSORS. Except as otherwise provided, this Agreement has been and is made solely for the benefit of and shall be binding upon the Company, the Selling Shareholders, the 26 Underwriters, any Indemnified Person referred to herein and their respective successors and assigns, all as and to the extent provided in this Agreement, and no other person shall acquire or have any right under or by virtue of this Agreement. 14. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, CONSTRUED, INTERPRETED AND THE RIGHTS OF THE PARTIES DETERMINED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK AS APPLIED TO CONTRACTS MADE AND PERFORMED ENTIRELY WITHIN THE STATE OF NEW YORK WITHOUT REFERENCE TO ITS CHOICE OF LAW PROVISIONS. 15. JURISDICTION. Each party to this Agreement hereby irrevocably consents to the personal jurisdiction of the courts of the State of New York located in the borough of Manhattan and of the United States of America sitting in the Southern District of New York, in any action to enforce, interpret or construe any provision of this Agreement, and also hereby irrevocably waives any defense of improper venue or forum non conveniens to any such action brought in either of those courts. Each party further irrevocably agrees that any action to enforce, interpret or construe any provision of this Agreement will be brought only in either of those courts and not in any other court. 16. COUNTERPARTS. This Agreement may be signed in various counterparts which together shall constitute one and the same instrument. [SIGNATURES PAGES FOLLOW] 27 Please confirm that the foregoing correctly sets forth the agreement between the Company, each of the Selling Shareholders and the several Underwriters. Very truly yours, MSC INDUSTRIAL DIRECT CO., INC. By: ------------------------------- Name: Title: SELLING SHAREHOLDERS: ------------------------------- Mitchell Jacobson ------------------------------- Marjorie Gershwind ------------------------------- Jacobson Family Foundation By: Accepted to and agreed by: DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION PRUDENTIAL SECURITIES INCORPORATED Acting severally on behalf of themselves and the several Underwriters named in Schedule I hereto BY: DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION By: ------------------------------- Name: Title: 29 SCHEDULE I UNDERWRITERS Underwriters Firm Shares - ------------ ----------- Donaldson, Lufkin & Jenrette Securities Corporation............... Prudential Securities Incorporated................................ ---------- 1,550,000 SCHEDULE II PART A SELLING SHAREHOLDERS Firm Shares ----------- Jacobson Family Foundation........................................ 50,000 Mitchell Jacobson................................................. 750,000 Marjorie Gershwind................................................ 750,000 1,550,000 PART B OPTION SELLING SHAREHOLDERS Additional Shares ---------- Jacobson Family Foundation.......................................... 7,500 Mitchell Jacobson ................................................ 112,500 Marjorie Gershwind................................................ 112,500 232,500 ANNEX I LOCK-UP AGREEMENTS Shareholders (180 Days) - ----------------------- Mitchell Jacobson Marjorie Gershwind Erik Gershwind Stacey Gershwind Joshua Jacobson 1994 Trust Marjorie Diane Gershwind 1994 Qualified Seven Year Annuity Trust Marjorie Diane Gershwind 1994 Qualified Fifteen Year Annuity Trust Marjorie Diane Gershwind 1995 Qualified Three Year Annuity Trust The Mitchell Jacobson 1995 Qualified Three Year Annuity Trust The Stacey Gershwind 1995 Trust The Erik Gershwind 1995 Trust 32 EX-5.01 3 OPINION OF ROSENMAN & COLIN LLP July 28, 1997 Securities and Exchange Commission Judiciary Plaza 450 Fifth Street, N.W. Washington, D.C. 20549 Gentlemen: We have been requested by MSC Industrial Direct Co., Inc. (the "Company"), a New York corporation, to furnish our opinion in connection with the registration statement (the "Registration Statement") on Form S-3 (Registration Number 333-31837), with respect to the registration of 1,782,500 shares (the "Shares") of the Company's Class A Common Stock, par value $.001 per share. We have made such examination as we have deemed necessary for the purpose of this opinion. Based upon such examination, it is our opinion that, when the Registration Statement has become effective under the Securities Act of 1933 and when the Shares have been qualified as required under the laws of those jurisdictions in which they are to be issued and sold and when the Shares have been sold and paid for in the manner described in the Registration Statement, the Shares will have been validly issued and will be fully paid and non-assessable. We hereby consent to the use of this opinion as an exhibit to the Registration Statement and to the reference to our name under the caption "Legal Matters" in the prospectus included in the Registration Statement. Very truly yours, ROSENMAN & COLIN LLP By: EX-10.05 4 CREDIT AGREEMENT EXECUTION CREDIT AGREEMENT dated as of June 12, 1997 among MSC INDUSTRIAL DIRECT CO., INC. the Banks signatory hereto and FLEET BANK, NATIONAL ASSOCIATION as Agent and as Issuing Bank TABLE OF CONTENTS
Page ARTICLE 1. DEFINITIONS; ACCOUNTING TERMS....................................................................... 2 Section 1.01. Definitions ..................................................................................... 2 Section 1.02. Accounting Terms................................................................................. 14 Section 1.03. Interpretation................................................................................... 14 ARTICLE 2. THE LOANS........................................................................................... 14 Section 2.01. The Loans Generally.............................................................................. 14 Section 2.02. The Notes ..................................................................................... 16 Section 2.03. Use of Proceeds.................................................................................. 16 Section 2.04. Borrowing Procedures for Pro Rata Loans.......................................................... 16 Section 2.05. Bid Procedure.................................................................................... 17 Section 2.06. Interest on Loans................................................................................ 19 Section 2.07. Reductions in Commitments........................................................................ 20 Section 2.08. Adjustments to Applicable Margin................................................................. 20 ARTICLE 2A. LETTERS OF CREDIT.................................................................................. 20 Section 2A.01. Agreement to Issue.............................................................................. 20 Section 2A.02. Amounts; Tenor.................................................................................. 20 Section 2A.03. Conditions ..................................................................................... 21 Section 2A.04. Issuance of Letters of Credit................................................................... 21 Section 2A.05. Letter of Credit Obligations; Duties of Issuing Bank............................................ 22 Section 2A.06. Participations.................................................................................. 23 Section 2A.07. Payment of Letter of Credit Reimbursement Obligations........................................... 24 Section 2A.08. Indemnification; Exoneration.................................................................... 25 Section 2A.09. Sid Tool Letters of Credit...................................................................... 26 ARTICLE 3. GENERAL CREDIT PROVISIONS; FEES AND PAYMENTS........................................................ 26 Section 3.01. Certain Notices.................................................................................. 26 Section 3.02. Prepayments ..................................................................................... 27 Section 3.03. Agency Fees ..................................................................................... 27 Section 3.04. Facility Fee..................................................................................... 27 Section 3.05. Compensation for Letters of Credit............................................................... 27 Section 3.06. Payments Generally............................................................................... 28 Section 3.07. Conversion and Continuation of Pro Rata Loans.................................................... 30 ARTICLE 4. YIELD PROTECTION, ETC............................................................................... 32 Section 4.01. Additional Costs................................................................................. 32 Section 4.02. Limitation on Types of Loans..................................................................... 34
Page Section 4.03. Illegality ..................................................................................... 34 Section 4.04. Certain Loans Pursuant To Sections 4.01, 4.02 and 4.03........................................... 34 Section 4.05. Certain Compensation............................................................................. 35 ARTICLE 5. CONDITIONS PRECEDENT................................................................................ 36 Section 5.01. Documentary Conditions Precedent................................................................. 36 Section 5.02. Additional Conditions Precedent.................................................................. 38 ARTICLE 6. REPRESENTATIONS AND WARRANTIES...................................................................... 40 Section 6.01. Incorporation, Good Standing and Due Qualification; Compliance with Law.......................... 40 Section 6.02. Power and Authority; No Conflicts................................................................ 41 Section 6.03. Legally Enforceable Agreements................................................................... 41 Section 6.04. Litigation....................................................................................... 42 Section 6.05. Financial Statements............................................................................. 42 Section 6.06. Ownership and Liens.............................................................................. 42 Section 6.07. Taxes............................................................................................ 43 Section 6.08. ERISA............................................................................................ 43 Section 6.09. Subsidiaries and Ownership of Stock.............................................................. 43 Section 6.10. Credit Arrangements.............................................................................. 44 Section 6.11. Operation of Business............................................................................ 44 Section 6.12. No Default on Outstanding Judgments or Orders.................................................... 44 Section 6.13. No Defaults on Other Agreements.................................................................. 45 Section 6.14. Labor Disputes and Acts of God................................................................... 45 Section 6.15. Governmental Regulation.......................................................................... 45 Section 6.16. Partnerships..................................................................................... 45 Section 6.17. No Forfeiture Proceedings........................................................................ 45 Section 6.18. No Default or Event of Default................................................................... 46 Section 6.19. Solvency......................................................................................... 46 Section 6.20. Material Adverse Change.......................................................................... 46 Section 6.21. Name............................................................................................. 46 Section 6.22. Debt............................................................................................. 46 Section 6.23. Nature of Business............................................................................... 46 Section 6.24. Fiscal Year End.................................................................................. 46 ARTICLE 7. AFFIRMATIVE COVENANTS............................................................................... 47 Section 7.01. Maintenance of Existence......................................................................... 47 Section 7.02. Conduct of Business.............................................................................. 47 Section 7.03. Maintenance of Properties........................................................................ 48 Section 7.04. Maintenance of Records........................................................................... 48 Section 7.05. Maintenance of Insurance......................................................................... 48 Section 7.06. Compliance with Laws............................................................................. 48 Section 7.07. Right of Inspection.............................................................................. 48 Section 7.08. Reporting Requirements........................................................................... 48 Section 7.09. Payment of Obligations........................................................................... 51 Section 7.10. Subsidiary Guarantee............................................................................. 52 Section 7.11. Notices With Respect to Certain Debts............................................................ 52
Page Section 7.12. Use of Proceeds.................................................................................. 52 Section 7.13. Solvency......................................................................................... 52 ARTICLE 8. NEGATIVE COVENANTS.................................................................................. 52 Section 8.01. Debt............................................................................................. 52 Section 8.02. Liens............................................................................................ 53 Section 8.03. Investments ..................................................................................... 54 Section 8.04. Sale of Assets................................................................................... 55 Section 8.05. Transactions with Affiliates..................................................................... 55 Section 8.06. Mergers, Etc..................................................................................... 56 Section 8.07. Acquisitions..................................................................................... 56 Section 8.08. No Activities Leading to Forfeiture.............................................................. 56 Section 8.09. Corporate Documents; Fiscal Year................................................................. 56 Section 8.10. Redemptions, Etc................................................................................. 56 Section 8.11. Creation of Subsidiaries, Etc.................................................................... 56 Section 8.12. Real Estate Loans to Affiliates.................................................................. 57 Section 8.13. Loans to Affiliates; Distributions............................................................... 57 Section 8.14. Broker's Fees.................................................................................... 57 Section 8.15. Dividends........................................................................................ 57 Section 8.16. Nature of Business............................................................................... 57 ARTICLE 9. FINANCIAL COVENANTS................................................................................. 57 Section 9.01. Minimum Effective Net Worth...................................................................... 57 Section 9.02. Current Ratio.................................................................................... 58 Section 9.03. Maximum Leverage................................................................................. 58 Section 9.04. Maximum Capital Expenditures..................................................................... 58 Section 9.05. Minimum Interest Coverage Ratio.................................................................. 58 Section 9.06. Positive Earnings................................................................................ 59 ARTICLE 10. EVENTS OF DEFAULT.................................................................................. 59 Section 10.01. Events of Default............................................................................... 59 Section 10.02. Remedies........................................................................................ 61 ARTICLE 11. THE AGENT AND THE ISSUING BANK; RELATIONS AMONG BANKS.............................................. 62 Section 11.01. Appointment, Powers and Immunities of Agent..................................................... 62 Section 11.02. Reliance by Agent and Issuing Bank.............................................................. 63 Section 11.03. Defaults........................................................................................ 63 Section 11.04. Rights of Agent and Issuing Bank................................................................ 64 Section 11.05. Indemnification of Agent........................................................................ 64 Section 11.06. Documents....................................................................................... 65 Section 11.07. Non-Reliance on Agent, Issuing Bank and Other Banks............................................. 65 Section 11.08. Failure of Agent or the Issuing Bank to Act..................................................... 66 Section 11.09. Resignation or Removal of Agent................................................................. 66 Section 11.10. Amendments Concerning Agency and Issuing Bank Function.......................................... 66
Page Section 11.11. Liability of Agent, Issuing Bank and Banks...................................................... 67 Section 11.12. Transfer of Agency Function..................................................................... 67 Section 11.13. Non-Receipt of Funds by the Agent............................................................... 67 Section 11.14. Withholding Taxes............................................................................... 67 Section 11.15. Several Obligations and Rights of Banks......................................................... 68 Section 11.16. Pro Rata/Non Pro Rata Treatment of Loans........................................................ 69 Section 11.17. Sharing of Payments Among Banks................................................................. 69 ARTICLE 12. MISCELLANEOUS ..................................................................................... 70 Section 12.01. Amendments and Waivers.......................................................................... 70 Section 12.02. Usury........................................................................................... 71 Section 12.03. Expenses........................................................................................ 71 Section 12.04. Survival........................................................................................ 71 Section 12.05. Assignment; Participation....................................................................... 72 Section 12.06. Special Provisions with Respect to Permitted Acquisitions....................................... 73 Section 12.07. Notices......................................................................................... 73 Section 12.08. Setoff.......................................................................................... 74 Section 12.09. JURISDICTION; WAIVER OF JURY TRIAL; IMMUNITIES.................................................. 75 Section 12.10. Table of Contents; Headings..................................................................... 76 Section 12.11. Severability.................................................................................... 76 Section 12.12. Counterparts.................................................................................... 76 Section 12.13. Integration..................................................................................... 76 Section 12.14. Governing Law................................................................................... 76 Section 12.15. Treatment of Certain Information................................................................ 76 Section 12.16. Further Rights of the Agent..................................................................... 77
EXHIBITS Exhibit A Form of Note Exhibit B-1 Form of Bid Request Exhibit B-2 Form of Bid Exhibit B-3 Form of Bid Acceptance/Rejection Exhibit C Form of Subsidiary Guarantee Exhibit D [Intentionally Omitted] Exhibit E-1 Form of Notice of Borrowing Exhibit E-2 Form of Notice of Conversion/Continuation Exhibit F Opinion of New York Counsel for the Borrower and its Subsidiaries SCHEDULES Schedule 6.01 Good Standing Schedule 6.02 Consents; Conflicts Schedule 6.04 Litigation Schedule 6.08 Unfunded Vested Liabilities Schedule 6.09 Subsidiaries Schedule 6.10 Indebtedness/Liens Schedule 6.16 Partnerships Schedule 6.17 Forfeiture Proceedings Schedule 6.21 Names; Trade Styles CREDIT AGREEMENT dated as of June 12, 1997, among MSC INDUSTRIAL DIRECT CO., INC., a corporation organized under the laws of New York (the "Borrower"), each of the banks now or hereafter parties hereto and FLEET BANK, NATIONAL ASSOCIATION, a national banking association organized under the laws of the United States of America, as agent for the Banks (in such capacity, together with its successors in such capacity, the "Agent") and as issuing bank (in such capacity, together with its successors in such capacity, the "Issuing Bank"). W I T N E S S E T H: WHEREAS, Sid Tool Co., Inc. ("Sid Tool") and certain of its affiliates (the "Real Estate Borrowers"), certain banks parties thereto (the "Sid Tool Banks") and the Agent entered into a Credit Agreement dated as of April 27, 1992, as amended and restated by an Amended and Restated Credit Agreement dated as of April 27, 1995, as further amended by the First Amendment to Credit Agreement dated as of August 25, 1995, the Waiver and Second Amendment to Credit Agreement dated as of December 12, 1995 and the Third Amendment to Credit Agreement dated as of January 5, 1996 (as so amended, the "Sid Tool Credit Agreement"), pursuant to which the Sid Tool Banks made certain financial accommodations thereunder on the terms and subject to the conditions contained therein; and WHEREAS, the Borrower has completed the Reorganization (as defined below) and initial public offering of its Class A common stock; and WHEREAS, upon consummation of the Reorganization, Sid Tool became a wholly-owned Subsidiary (as defined below) of the Borrower; and WHEREAS, the Borrower intends to finance (i) the working capital and Capital Expenditures needs of its Consolidated Subsidiaries (as defined below) and (ii) Permitted Acquisitions by the Borrower and any of its Acquisition Affiliates and (iii) to refinance revolving credit loans made to Sid Tool, in each such case by obtaining Loans and the issuance of Letters of Credit for the account of the Borrower and on behalf of the Borrower and its Subsidiaries; and WHEREAS, the Borrower has requested the Banks to provide a commitment to make Loans to the Borrower and issue the aforementioned Letters of Credit; and WHEREAS, the Banks are willing to make such Loans and issue such Letters of Credit on the terms and subject to the conditions contained herein. NOW, THEREFORE, the parties hereto hereby agree as follows: ARTICLE 1. DEFINITIONS; ACCOUNTING TERMS Section 1.01. Definitions. As used in this Agreement the following terms have the following meanings (terms defined in the singular to have a correlative meaning when used in the plural and vice versa): "Acquisition Affiliate" shall have the meaning given to that term in Section 12.06 hereof. "Additional Costs" shall have the meaning given to that term in Article 4 hereof. "Affiliate" means any Person: (a) which directly or indirectly controls, or is controlled by, or is under common control with, the Borrower; (b) which directly or indirectly beneficially owns or holds 5% or more of any class of voting stock of the Borrower; (c) 5% or more of the voting stock of which is directly or indirectly beneficially owned or held by the Borrower; or (d) which is a partnership in which the Borrower is a general partner. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract, or otherwise. "Aggregate Bid Loan Outstandings" means, at a particular time, the aggregate principal amount of the Borrower's obligations to the Banks, or any of them, in connection with Bid Loans. "Aggregate Letter of Credit Outstandings" means, at a particular time, the sum of (a) the aggregate maximum amount then available or available in the future to be drawn under all Letters of Credit outstanding and all Sid Tool Letters of Credit at such time plus (b) the aggregate amount of any payments made by the Issuing Bank or any Bank under, or with respect to, any Letter of Credit or Sid Tool Letter of Credit that has not theretofore been reimbursed by or on behalf of the Borrower or one or more of its Subsidiaries. "Aggregate Outstandings" means, without duplication, at a particular time, the sum of (a) the Aggregate Letter of Credit Outstandings at such time, plus (b) the Aggregate Pro Rata Loans Outstandings at such time, plus (c) the Aggregate Bid Loan Outstandings at such time. plus (d) the Aggregate Sid Tool Loan Outstandings. "Aggregate Pro Rata Loans Outstandings" means, at a particular time, the aggregate principal amount of the Borrower's obligations to the Banks, or any of them, in connection with Pro Rata Loans. "Aggregate Sid Tool Loan Outstandings" means, at a particular time, the aggregate principal amount of Sid Tool's obligations to the Banks, or any of them, in connection with the Sid Tool Loans. "Agreement" means this Credit Agreement, as amended or supplemented from time to time. References to Articles, Sections, Exhibits, Schedules and the like refer to the Articles, Sections, Exhibits, Schedules and the like of this Agreement unless otherwise indicated. "Banking Day" means any day on which commercial banks are not authorized or required to close in New York City and whenever such day relates to a LIBOR Loan or notice with respect to any LIBOR Loan, a day on which dealings in Dollar deposits are also carried out in the London interbank market. "Banks" means each Bank listed on the signature pages hereof under the caption "Banks" and any of their permitted assigns pursuant to Section 12.05 hereof, and any successors of any of the foregoing. "BA Rate" means, with respect to any Borrowing consisting of BA Rate Loans, the rate per annum quoted at approximately 11:00 a.m. (New York time) by the Principal Office on the first day of the Interest Period for such Borrowing for the acceptance of drafts by the Agent (in its capacity as a Bank) having a maturity and in a face amount comparable to such Interest Period and principal amount of the BA Rate Loan to be made by the Agent in its capacity as a Bank with respect to such Borrowing. "BA Rate Loan" means any Pro Rata Loan when and to the extent the interest rate therefor is based on the BA Rate. "Base Rate" means that rate of interest from time to time announced by the Agent at the Principal Office as its base commercial lending rate. "Base Rate Loan" means any Loan when and to the extent the interest rate therefor is based on the Base Rate. "Bid" means an offer by a Bank to make a Bid Loan pursuant to Section 2.05 hereof substantially in the form of Exhibit B-2 hereto. "Bid Acceptance/Rejection" means a notification made by the Borrower pursuant to Section 2.05 hereof substantially in the form of Exhibit B-3 hereto. "Bid Loan" means a Loan made pursuant to the bidding procedure described in Section 2.05 hereof. Each Bid Loan shall be a Fixed Rate Loan unless otherwise provided by Article 4, Article 10 or any other applicable provisions of this Agreement. "Bid Request" means a request made pursuant to Section 2.05 hereof substantially in the form of Exhibit B-1 hereto. "Borrowing" means the aggregate amount of Pro Rata Loans to be made by the Banks, or any of them, to the Borrower pursuant to any one Notice of Borrowing. "Capital Expenditures" means expenditures by the Borrower and the Borrower's Consolidated Subsidiaries for any fixed assets or improvements, replacements, substitutions, or additions thereto which have a useful life of more than one (1) year and which would be treated as capital expenditures under GAAP including, but not limited to, payments under any Capital Leases. "Capital Lease" means any lease which has been capitalized on the balance sheet of the lessee in accordance with GAAP. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Commitment" means, with respect to each Bank, the obligation of such Bank to extend credit to the Borrower hereunder in the aggregate principal amounts listed on the signature pages hereof with respect to such Bank or in the assignment agreement pursuant to which such Bank became a "Bank" hereunder in accordance with Section 12.05 hereof (as such amounts may be reduced or otherwise modified from time to time as provided in this Agreement). "Commitment Proportion" means, with respect to each Bank at the time of determination, that proportion that its Commitment bears to the Total Commitment. "Consolidated Subsidiary" means any Subsidiary of any Person the financial statements of which are, or should be, consolidated with the financial statements of such Person in accordance with GAAP. "Debt" means, with respect to any Person (without duplication): (a) indebtedness of such Person for borrowed money; (b) indebtedness for the deferred purchase price of property or services; (c) Unfunded Vested Liabilities of such Person; (d) the face amount of any outstanding letters of credit issued for the account of such Person and any unreimbursed amounts owing with respect to any letters of credit; (e) obligations arising under acceptance facilities; (f) guaranties, endorsements (other than for collection in the ordinary course of business) and other contingent obligations to purchase, to provide funds for payment, to supply funds to invest in any Person, or otherwise to assure a creditor against loss; (g) obligations secured by any Lien on property of such Person; (h) obligations of such Person as lessee under Capital Leases; and (i) indebtedness of such Person evidenced by a note, bond, indenture or similar instrument. "Default" means any event which with the giving of notice or lapse of time, or both, would become an Event of Default. "Default Rate" means, with respect to any Loan, a rate per annum equal to 2% above the rate of interest otherwise (assuming no Event of Default has occurred and is continuing) applicable to the relevant Loan and, with respect to each Letter of Credit, a rate per annum equal to 2% above the rate of commission fee otherwise (assuming no Event of Default has occurred and is continuing) applicable to such Letter of Credit. "Dividends" means, for any period, dividends paid by the Borrower, other than dividends payable solely in capital stock of the Borrower. "Dollars" and the sign "$" mean lawful money of the United States of America. "EBIT" means, at any particular date, Net Income plus (i) all taxes paid, accrued or payable to any government or government instrumentality (other than real estate taxes, franchise taxes not in the nature of income taxes, sales taxes, or use taxes), and (ii) all interest paid, accrued or payable to the Banks or any other holder of Debt. "Effective Date" means the date this Agreement has been executed by the Borrower, the Banks, the Issuing Bank and the Agent. "Effective Net Worth" means, at any particular date, (i) the amount of the excess of Total Assets over Total Liabilities, excluding, however, from the determination of Total Assets all intangible assets, including, without limitation, organizational expenses, patents, trademarks, copyrights, goodwill, covenants not to compete, research and developmental costs, training costs, and deferred charges, and excluding, however, from the determination of Total Liabilities the principal amount of, and the accrued interest with respect to, any Debt referenced in Section 8.01(c) hereof, less (ii) all amounts due at any time and from time to time from Affiliates (other than all amounts (the "Amounts") due at any time and from time to time from any Affiliates which have guaranteed the obligations of the Borrower to the Banks under the Facility Documents in form and substance (with respect to such guarantee) reasonably satisfactory to the Banks to the extent that such Amounts are included in the determination of Total Assets) less (iii) all treasury stock. "Environmental Law" has the meaning ascribed to such term in the Second Amended and Restated Credit Agreement. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, including any rules and regulations promulgated thereunder. "ERISA Affiliate" means any corporation or trade or business which is aggregated with the Borrower under Section 414(b), (c), (m) or (o) of the Code or Section 4001 of ERISA. "Eurocurrency Reserve Requirements" means, with respect to each Interest Period for each LIBOR Loan, the aggregate (without duplication) of the maximum rates (expressed as a decimal fraction) of reserve requirements current on the date two Banking Days prior to the beginning of such Interest Period (including, without limitation, basic, supplemental, marginal and emergency reserves under any regulations of the Federal Reserve Board or other governmental authority having jurisdiction with respect thereto), as now and/or from time to time hereafter in effect, dealing with reserve requirements prescribed for eurocurrency funding maintained by a member bank of such System. "Event of Default" has the meaning ascribed to such term in Section 10.01 hereof. "Facility Documents" means this Agreement, the Notes, the Subsidiary Guarantees and all other agreements, documents and instruments executed in connection herewith or therewith including, but not limited to, all documents and instruments executed by the Borrower or an Acquisition Affiliate in connection with a Permitted Acquisition. "Facility Fee" means the facility fee payable by the Borrower to the Agent for the account of the Banks pursuant to Section 3.04 hereof. "Federal Funds Rate" means, for any day, the rate per annum (expressed on an actual number of days to 365/366 days basis of calculation) equal to the weighted average of the rates on overnight federal funds transactions as published by the Federal Reserve Bank of New York for such day (or for any day that is not a Banking Day, for the immediately preceding Banking Day). "Federal Reserve Board" shall mean the Board of Governors of the Federal Reserve Board, and its successors. "Final Prospectus" means the final prospectus dated December 14, 1995, relating to the initial public offering of Class A Common Stock of the Borrower. "Fixed Rate" means, with respect to any Borrowing consisting of Fixed Rate Loans, the rate of interest established by each Bank as the rate of interest for the Bid Loan bearing interest at a fixed rate made or to be made by such Bank pursuant to a Bid Request. "Fixed Rate Loan" means each Bid Loan that bears interest at a Fixed Rate. "Forfeiture Proceeding" means the commencement of any action or proceeding affecting the Borrower or any of its Subsidiaries before any court, governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which may result in the seizure or forfeiture of any of their property which would cause a material adverse effect upon the operations, business, properties or financial condition of the Borrower and its Subsidiaries, taken as a whole, or, when the term (Forfeiture Proceeding) is used in Section 6.17 hereof, on the ability of the Borrower or any of its Subsidiaries to perform its obligations hereunder, or, when the term (Forfeiture Proceeding) is used in Section 10.01(h) hereof, on the ability of the Borrower and its Subsidiaries, taken as a whole, to perform their obligations hereunder. "GAAP" means generally accepted accounting principles in the United States of America as in effect from time to time, applied on a basis consistent with those used in the preparation of the financial statements referred to in Section 6.05. "Hazardous Substance" has the meaning ascribed to such term in the Second Amended and Restated Credit Agreement. "Interest Expense" means the Borrower's interest expense as reflected in its financial statements and calculated in accordance with GAAP. "Interest Payment Date" means (i) in the case of LIBOR Loans and BA Rate Loans, the last day of the Interest Period applicable thereto and, in the case of an Interest Period for any BA Rate Loan longer than 90 days or an Interest Period for any LIBOR Loan longer than three months, every 90 days and every three months, respectively, (ii) in the case of any Fixed Rate Loans and Base Rate Loans, the last day of each calendar month, commencing June 30, 1997, (iii) in the case of all Loans, no later than the Loan Maturity Date. "Interest Period" means (a) in the case of LIBOR Loans, the period commencing on the date a LIBOR Loan is made or deemed made pursuant to a conversion or continuation and ending, as the Borrower may select, on the numerically corresponding day in the first, second, third, or (as available) fourth or sixth calendar month thereafter, (b) in the case of BA Rate Loans, the period commencing on the date a BA Rate Loan is made or deemed made pursuant to a conversion or continuation and ending, as the Borrower may select, on the 30th, 60th, 90th or (as available) 120th or 180th day thereafter, and (c) in the case of Fixed Rate Loans, the period commencing on the date a Fixed Rate Loan is made and ending such number of days thereafter (which shall be not less than 30 days or more than 180 days after the date such Fixed Rate Loan is made), as the Borrower may select; provided that (x) if any Interest Period would otherwise end on a day that is not a Banking Day, such Interest Period shall be extended to the next succeeding Banking Day unless, in the case of an Interest Period pertaining to a LIBOR Loan, the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the immediately preceding Banking Day and (y) each such Interest Period which commences on the last Banking Day of a calendar month, or on any day for which there is no numerically corresponding day in the appropriate subsequent calendar month, shall end on the last Banking Day of the appropriate calendar month. In no event shall any Interest Period extend beyond the Loan Maturity Date. "Lending Office" means, for each Bank and for each type of Loan, the lending office of such Bank (or of an affiliate of such Bank) designated as such for such type of Loan on its signature page hereof or in an assignment agreement pursuant to Section 12.05 hereof or such other office of such Bank (or of an affiliate of such Bank) as such Bank may from time to time specify to the Agent and the Borrower as the office by which its Loans of such type are to be made and maintained. "Letter of Credit" means any letter of credit (including, without limitation, any Special Letter of Credit) issued by the Issuing Bank for the account of the Borrower directly or as a financial accommodation for a Subsidiary of the Borrower pursuant to the terms of this Agreement. "Letter of Credit Commission Fee" means the letter of credit commission fee payable by the Borrower to the Agent pursuant to Section 3.05(a) hereof. "L/C Subfacility" means that portion of the Total Commitment available for the issuance by the Issuing Bank of Letters of Credit, in an aggregate amount not to exceed $20,000,000 at any time. "LIBOR" means with respect to any Borrowing consisting of LIBOR Loans, the rate per annum (rounded upwards if necessary to the nearest 1/16 of 1%) quoted at approximately 11:00 a.m. London time by the principal London office of the Agent two Banking Days prior to the first day of the Interest Period for such Borrowing for the offering to leading banks in the London interbank market of Dollar deposits in immediately available funds, for a period, and in an amount, comparable to such Interest Period and principal amount of the LIBOR Loan which shall be made by the Agent (in its capacity as a Bank) with respect to such Borrowing. "LIBOR Loan" means any Pro Rata Loan when and to the extent the interest rate therefor is determined on the basis of Reserve Adjusted LIBOR Rate. "Lien" means any lien (statutory or otherwise), security interest, mortgage, deed of trust, priority, pledge, charge, conditional sale, title retention agreement, Capital Lease or other encumbrance or similar right of others, or any agreement to give any of the foregoing. "Loan" means any Pro Rata Loan or Bid Loan made by a Bank pursuant to Article 2 hereof or any Sid Tool Loan. "Loan Maturity Date" means the earlier of (a) the date on which the (i) Loans shall be indefeasibly paid in full, (ii) Letters of Credit shall be indefeasibly reimbursed in full, (iii) Commitments shall terminate hereunder and (iv) obligations of the Borrower in connection with the Loans, Letters of Credit and Commitments have been satisfied or (b) May 31, 2001; provided that if such date is not a Banking Day, the Loan Maturity Date shall be the next succeeding Banking Day (or, with respect to LIBOR Loans, if such next succeeding Banking Day falls in the next calendar month, the next preceding Banking Day). "Margin" means, with respect to BA Rate Loans and LIBOR Loans, (i) if the ratio of Total Liabilities to Effective Net Worth is less than 0.75:1.00, 0.45%; (ii) if the ratio of Total Liabilities to Effective Net Worth is equal to or greater than 0.75:1.00 but less than 1.00:1.00, 0.50%; (iii) if the ratio of Total Liabilities to Effective Net Worth is l.00:1.00 or greater but less than 1.25:1.00, 0.625%; and (iv) if the ratio of Total Liabilities to Effective Net Worth is 1.25:1.00 or greater, 0.75%. Nothing contained in this definition of "Margin" shall affect the rights of the Banks under Article 10 of this Agreement. "Multiemployer Plan" means a Plan defined as such in Section 4001(a)(3) of ERISA to which contributions have been made by the Borrower, any Subsidiary of the Borrower or any ERISA Affiliate and which is covered by Title IV of ERISA. "Net Income" means, with respect to any Person for any period, such Person's and its Consolidated Subsidiaries' net income for such period determined on a consolidated basis as reflected on such Person's consolidated financial statements. "Note" means a promissory note of the Borrower in the form of Exhibit A hereto evidencing the Pro Rata Loans made or to be made by a Bank hereunder and any other promissory note of the Borrower issued in addition thereto or in substitution therefor. "Notice of Borrowing" means an irrevocable notice, substantially in the form of Exhibit E-1 hereto, given by the Borrower to the Agent in connection with any Borrowing consisting of Pro Rata Loans. "Notice of Conversion/Continuation" means an irrevocable notice, substantially in the form of Exhibit E-2 hereto, given by the Borrower to the Agent with respect to the conversion of Base Rate Loans to LIBOR Loans or BA Rate Loans, BA Rate Loans to Base Rate Loans or LIBOR Loans or LIBOR Loans to Base Rate Loans or BA Rate Loans, as the case may be, or a continuation of Base Rate Loans, BA Rate Loans or LIBOR Loans as such, as the case may be. "Obligations" means all present and future loans, advances, liabilities, obligations, covenants, duties, and debts, owing by the Borrower to the Agent, the Issuing Bank or any Bank, arising under or relating to this Agreement or any other Facility Document, whether or not evidenced by any note, or other instrument or document, whether arising from an extension of credit, opening of a letter of credit, acceptance, loan, guaranty, indemnification or otherwise, whether direct or indirect (including, without limitation, those acquired by assignment from others, and any participation by the Banks in any of the Borrower's debts owing to others), absolute or contingent, due or to become due, primary or secondary, as principal or guarantor, and including, without limitation, all interest, charges, expenses, fees, attorneys' fees, filing fees and any other sums chargeable to the Borrower hereunder, under another Facility Document, or under any other agreement or instrument with the Agent, the Issuing Bank or any Bank. "PBGC" means the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA. "Permitted Acquisition" means an acquisition permitted by the terms of Section 12.06 hereof. "Permitted Assumed Acquisition Debt" means, with respect to any Subsidiary that is acquired in a Permitted Acquisition, any of the following Debt of such Subsidiary that was outstanding immediately prior to the closing of such Permitted Acquisition, was not created or incurred by such Subsidiary in contemplation of such Permitted Acquisition, remains outstanding Debt of such Subsidiary on and after such closing or is assumed by the Borrower or an Acquisition Affiliate, and does not breach (and does not cause or result in any breach of) any term of this Agreement: (a) Mortgage term loans secured by Liens on interests in real estate owned by or leased to such Subsidiary; (b) Debt in respect of industrial revenue bonds issued for the benefit of, or issued to finance projects for the benefit of, such Subsidiary, which Debt may be secured by Liens on interests in the projects so financed and owned by or leased to such Subsidiary; (c) Unsecured term debt evidenced by publicly-traded notes issued by such Subsidiary pursuant to a trust indenture and subject to the Trust Indenture Act of 1940, as amended; and (d) Debt arising in respect of revolving credit facilities, letter of credit facilities, bankers' acceptance facilities and other similar credit facilities, which Debt may be secured by Liens on current assets of such Subsidiary; provided, however, that (i) the maximum amount of all Debt outstanding and available under all of the foregoing facilities shall not exceed $10,000,000 in the aggregate at any time, and (ii) within six months after the date of the closing of such Permitted Acquisition, all of the foregoing facilities shall have been terminated, all Debt thereunder shall have been repaid in full or otherwise extinguished, and all Liens securing the same shall have been released and extinguished. "Permitted Liens" means those certain Liens defined in Section 8.02 hereof. "Person" means an individual, partnership, corporation, business trust, joint stock company, trust, unincorporated association, joint venture, governmental authority or other entity of whatever nature. "Plan" means any employee benefit or other plan established or maintained, or to which contributions have been made, by the Borrower or any ERISA Affiliate. "Principal Office" means the principal office of the Agent, presently located at 300 Broadhollow Road, Melville, New York 11747. "Pro Rata Loan" means any Loan made by a Bank pursuant to Section 2.01(a) hereof. Each Pro Rata Loan shall be a LIBOR Loan, a BA Rate Loan or a Base Rate Loan, unless otherwise provided by Article 4, Article 10 or any other applicable provisions of this Agreement. "Regulation D" means Regulation D of the Federal Reserve Board as the same may be amended or supplemented from time to time. "Regulatory Change" means, with respect to any Bank, any change in United States federal, state, municipal or foreign laws or regulations (including Regulation D) or the adoption or making of any interpretations, directives or requests applying to a class of banks including such Bank of or under any United States, federal, state, municipal or foreign laws or regulations (whether or not having the force of law) by any court or governmental or monetary authority charged with the interpretation or administration thereof. "Reorganization" has the meaning given such term in the Final Prospectus. "Reportable Event" means any of the events set forth in Section 4043(b) of ERISA as to which events the PBGC by regulation has not waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event, provided that a failure to meet the minimum funding standard of Section 412 of the Code or Section 302 of ERISA shall be a Reportable Event regardless of any waivers given under Section 412(d) of the Code. "Required Banks" means, at any time, Banks having at least 66-2/3% of the aggregate amount of the Commitments and, if the Commitments have been terminated, Banks having at least 66 2/3% of the Loans outstanding at such time and participation interests in Aggregate Letter of Credit Outstandings at such time. "Reserve Adjusted LIBOR Rate" means, with respect to the Interest Period for each LIBOR Loan, the rate per annum (rounded upwards to the nearest whole multiple of 1/100th of one percent) equal to the following: LIBOR 1.00 - Eurocurrency Reserve Requirements. "Revolving Credit Facility" means the Revolving Credit Facility provided for in Article 2 hereof. "Second Amended and Restated Credit Agreement" means the Sid Tool Credit Agreement as amended and restated by a Second Amended and Restated Credit Agreement dated as of the date hereof among Mitchmar Delaware Properties Inc., ESCO Management Corp., Sid Tool, Milford Industrial Tool Supply Co., Inc., the banks parties thereto and Fleet Bank, National Association, as agent for the banks parties thereto. "Sid Tool Letter of Credit" means all letters of credit issued under the Sid Tool Credit Agreement and not returned to the Issuing Bank (as defined in the Sid Tool Credit Agreement) and or prior to the date hereof. "Sid Tool Loan" means each BA Rate Loan or LIBOR Loan which is a Revolving Credit Loan (as each such term is defined in the Sid Tool Credit Agreement) made under the Sid Tool Credit Agreement and which are outstanding on the date hereof. "Solvent" means, when used with respect to any Person on a particular date, that on such date: (a) the fair saleable value of its assets is in excess of the total amount of its liabilities, including, without limitation, the reasonably expected amount of such Person's obligations with respect to contingent liabilities, (b) the present fair saleable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts and liabilities as they become absolute and matured, (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay as such debts and liabilities mature and (d) such Person is not engaged in business or a transaction for which such Person's property would constitute an unreasonably small capital. "Special Letter of Credit" means each standby Letter of Credit issued to the respective beneficiary thereof by the Issuing Bank for the account of the Borrower pursuant to the terms of this Agreement, having an expiration date not more than one (1) year after the date of issuance thereof and having a face amount which, when added to all Letters of Credit then outstanding or issued contemporaneously therewith, would not exceed the L/C Subfacility. "Special Letter of Credit Commission Fee" means the special letter of credit commission fee payable by the Borrower to the Agent pursuant to Section 3.05(c) hereof. "Subordinated Debt" means unsecured Debt of the Borrower that is subordinated on terms satisfactory to the Banks to the Borrower's obligations to the Banks under this Agreement and the other Facility Documents. "Subsidiary" means, as to any Person, any corporation or other entity of which at least a majority of the securities or other ownership interests having ordinary voting power (absolutely or contingently) for the election of directors or other persons performing similar functions are at the time owned directly or indirectly by such Person. "Subsidiary Guarantee" means the guarantees of the Obligations of the Borrower by each Subsidiary of the Borrower and in favor of the Agent and the Banks in the form of Exhibit C, as the same may be amended, supplemented or otherwise modified from time to time in accordance with its terms and executed as of the Effective Date or, if later, on the date of the Permitted Acquisition pursuant to which a Person became a Subsidiary of the Borrower. "Total Assets" means, at a particular date, all amounts which would, in conformity with GAAP, be included as assets on a balance sheet of the Borrower and its Consolidated Subsidiaries as at such date. "Total Commitment" means, at any time, the aggregate of the Commitments in effect at such time. On the Effective Date, the Total Commitment is $80,000,000. "Total Current Assets" means, at a particular time, all amounts which would, in conformity with GAAP, be included as current assets on a balance sheet of the Borrower and its Consolidated Subsidiaries as at such date. "Total Current Liabilities" means, at a particular date, all amounts which would, in conformity with GAAP, be included as current liabilities on a balance sheet of the Borrower and its Consolidated Subsidiaries as at such date and shall include, without limitation (a) all obligations payable on demand or within one year after the date on which the determination is made, and (b) all obligations of the Borrower under the Revolving Credit Facility. "Total Liabilities" means, at a particular date, all amounts which would, in conformity with GAAP, be included as liabilities on a balance sheet of the Borrower and its Consolidated Subsidiaries as at such date. "Unfunded Vested Liabilities" means, with respect to any Plan, the amount (if any) by which the present value of all vested benefits under the Plan exceeds the fair market value of all Plan assets allocable to such benefits, as determined on the most recent valuation date of the Plan and in accordance with the provisions of ERISA for calculating the potential liability of the Borrower or any ERISA Affiliate to the PBGC or the Plan under Title IV of ERISA. Section 1.02. Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP, and all financial data required to be delivered hereunder shall be prepared in accordance with GAAP. Section 1.03. Interpretation. All references in this Agreement to any other agreement or instrument shall include such other agreement or instrument as the same may be amended, modified or supplemented from time to time in accordance with this Agreement. In the computation of interest and fees payable from a specified date to a later specified date, unless otherwise indicated, the word "from" means "from and including" and the words "to" and "until" both mean "to but not including." Wherever appropriate in the context, terms used herein in the singular also include the plural, and vice versa, and each masculine, feminine or neuter pronoun shall also include the other genders. ARTICLE 2. THE LOANS Section 2.01. The Loans Generally (a) Subject to the terms and conditions of this Agreement (including, but not limited to, the provisions of Section 11.16 hereof) and in reliance upon the representations and warranties set forth herein and upon the provisions of each Subsidiary Guarantee, each of the Banks severally agrees to make revolving credit loans in Dollars on a pro rata basis based on its Commitment Proportion (the "Pro Rata Loans") to the Borrower and to purchase on a pro rata basis based on its Commitment Proportion participation interests in Aggregate Letter of Credit Outstandings from time to time from and including the Effective Date to but excluding the Loan Maturity Date up to but not exceeding at any one time outstanding the amount of its Commitment; provided, that (i) at no time shall any Pro Rata Loan be made if after giving effect to such Loan the sum of the Aggregate Outstandings at the time of such Loan plus the aggregate principal amount of Loans to be made pursuant to a Bid Acceptance/Rejection or a Notice of Borrowing would exceed the Total Commitment in effect at such time and (ii) at all times the outstanding aggregate principal amount of all Pro Rata Loans and Sid Tool Loans made by each Bank shall equal the product of (a) its Commitment Proportion times (b) the sum of (i) the aggregate outstanding principal amount of all Pro Rata Loans and (ii) the aggregate outstanding principal amount of all Sid Tool Loans. Subject to the foregoing limits, the Borrower may borrow, repay and reborrow, on or after the Effective Date and prior to the Loan Maturity Date, all or a portion of the Commitments hereunder. (b) Each Pro Rata Loan shall be made as part of a Borrowing consisting of Loans made by the Banks ratably in accordance with their respective Commitment; provided, however, that the failure of any Bank to make any Pro Rata Loan shall not in itself relieve any other Bank of its obligation to lend hereunder (it being understood, however, that no Bank shall be responsible for the failure of any other Bank to make any Loan required to be made by such other Bank). Each Bid Loan shall be made in accordance with the procedures set forth in Section 2.05. Each Borrowing of Pro Rata Loans or Bid Loans shall be (i) in the case of a Borrowing consisting of Bid Loans, in an aggregate principal amount which is not less than $2,000,000 and not more than $25,000,000 (or an aggregate principal amount equal to the remaining balance of the Total Commitment) and (ii) in the case of a Borrowing consisting of Pro Rata Loans, (A) with respect to BA Rate Loans, in an aggregate principal amount which is an integral multiple of $100,000 and not less than $1,500,000, (B) with respect to LIBOR Loans, in an aggregate principal amount which is an integral multiple of $100,000 and not less than $2,500,000 and (C) with respect to Base Rate Loans, in an aggregate principal amount which is not less than $250,000, and, if greater than $250,000, which is an integral multiple of $100,000 (or an aggregate principal amount equal to the remaining balance of the available Commitments). Subject to the provisions of Article 3 and Article 10 hereof, the Borrower shall pay the principal amount of each Pro Rata Loan and each Sid Tool Loan in full on the Loan Maturity Date. (c) Each Borrowing of Bid Loans shall be comprised entirely of Fixed Rate Loans, and each Borrowing consisting of Pro Rata Loans shall be comprised entirely of LIBOR Loans, BA Rate Loans or Base Rate Loans, as the Borrower may request pursuant to Section 2.04 hereof. Borrowings of more than one type of Loan may be outstanding at the same time. For purposes of the foregoing, Loans having different Interest Periods, regardless of whether they commence on the same date, shall be considered separate Loans. Section 2.02. The Notes. The Pro Rata Loans of each Bank shall be evidenced by a single Note in favor of such Bank, with appropriate insertions, duly executed and completed by the Borrower. Each Bank is hereby authorized to record the date and amount of each Pro Rata Loan, the date and amount of each payment of principal thereof, and the principal amount subject thereto and interest rate with respect thereto in such Bank's records and/or on the schedules annexed to and constituting a part of its Note, and, absent manifest error, any such recordation shall constitute conclusive evidence of the information so recorded; provided that the failure to make any such recordation shall not in any way affect the Borrower's obligation to repay the Pro Rata Loans. Each Note (a) shall be dated the Effective Date, (b) be stated to mature on the Loan Maturity Date and (c) shall bear interest from and including the Effective Date on the unpaid principal amount thereof from time to time outstanding as provided herein. Section 2.03. Use of Proceeds. The Borrower shall use the proceeds of the Loans solely to refinance the revolving credit loans made to Sid Tool and outstanding on the date hereof under the Sid Tool Credit Agreement, to finance the working capital and Capital Expenditures needs of its Consolidated Subsidiaries and to finance Permitted Acquisitions by the Borrower and any of its Acquisition Affiliates and to refinance any Loans made in connection with any of the foregoing. No part of the proceeds of any of the Loans will be used for any purpose which violates the provisions of Regulation G, T, U or X of the Federal Reserve Board as in effect on the date of making such Loans. Section 2.04. Borrowing Procedures for Pro Rata Loans. In order to request Pro Rata Loans, the Borrower shall give the Agent a duly completed Notice of Borrowing (i) for each Borrowing consisting of BA Rate Loans or Base Rate Loans, not later than 10:00 a.m. (New York time) on the date of such Borrowing; and (ii) for each Borrowing consisting of LIBOR Loans, not later than 10:00 a.m. (New York time) two Banking Days before the date of such Borrowing. Each such Notice of Borrowing shall specify: (i) the type of Loans comprising such Borrowing; (ii) the amount of such Borrowing; (iii) the date of such Borrowing, which shall be a Banking Day prior to the Loan Maturity Date; and (iv) in the case of a Borrowing consisting of LIBOR Loans or BA Rate Loans, the duration of the Interest Period applicable to the Loans comprising such Borrowing, which shall be a period permitted by the definition of "Interest Period" in Article 1 hereof. Each Borrowing consisting of Pro Rata Loans shall be made ratably from the Banks in proportion to each Bank's Commitment Proportion. Upon receipt by the Agent of a Notice of Borrowing as aforesaid, the Agent shall promptly advise each Bank thereof (i) by telephone (confirmed in writing), in the case of BA Rate Loans and Base Rate Loans and (ii) by telecopy, in the case of LIBOR Loans. Not later than 11:00 a.m. (New York time) on the date of such Borrowing, each Bank shall, through its Lending Office and subject to the conditions of this Agreement, make the amount of the Pro Rata Loan to be made by it on such day available to the Agent, at the Principal Office and in immediately available funds for the account of the Borrower. The amount received by the Agent shall, subject to the conditions of this Agreement, be made available by the Agent to the Borrower, not later than 1:00 p.m. on such date, in immediately available funds, by the Agent crediting an account of the Borrower designated by the Borrower and maintained with the Agent at 300 Broadhollow Road, Melville, New York 11747. Section 2.05. Bid Procedure. (a) In order to request Bid Loans, the Borrower shall hand deliver or telecopy to the Agent a duly completed Bid Request, to be received by the Agent not later than 10:00 a.m. (New York time) one Banking Day before such proposed Borrowing. A Bid Request that does not conform substantially to the format of Exhibit B-1 may be rejected in the Agent's sole discretion, and the Agent shall promptly notify the Borrower of such rejection by telecopy. Each Bid Request shall refer to this Agreement and specify (x) the date of such Borrowing of Bid Loans (which shall be a Banking Day) and the aggregate principal amount of such Borrowing which shall be in a minimum principal amount of $2,000,000 and a maximum principal amount of $25,000,000, subject to the provisions of Section 2.05(d) hereof and (y) the Interest Period with respect thereto. In no event shall the Aggregate Bid Loan Outstandings at any time exceed fifty percent (50%) of the Total Commitment at such time. Promptly after its receipt of a Bid Request that is not rejected as aforesaid, the Agent shall telecopy to the Banks a copy of the Bid Request inviting the Banks to bid, on the terms and conditions of this Agreement, to make Bid Loans. (b) Each Bank may, in its sole discretion, make one or more Bids to the Borrower responsive to such Borrower's Bid Request. Each Bid by a Bank must be received by the Agent by telecopy not later than 10:00 a.m. (New York time) on the day of such proposed Borrowing. Multiple Bids will be accepted by the Agent. Bids that do not conform substantially to the format of Exhibit B-2 may be rejected by the Agent, and the Agent shall notify the Bank making such nonconforming bid of such rejection as soon as practicable. Each Bid shall refer to this Agreement and specify (x) the principal amount (which shall be in a minimum principal amount of $2,000,000 and a maximum principal amount of $25,000,000 and which may equal the entire principal amount of the Bid Loans requested) of the Bid Loan or Bid Loans that the Bank is willing to make, (y) the Fixed Rate or Fixed Rates at which the Bank is prepared to make the Bid Loan or Bid Loans and (z) the Interest Period and the last day thereof. If any Bank invited to bid shall elect not to make a Bid, such Bank shall so notify the Agent by telecopy not later than 10:00 a.m. (New York time) on the day of such proposed Borrowing; provided, however, that failure by any Bank to give such notice shall be deemed to be an election not to make a Bid, and such failure shall accordingly not cause such Bank to be obligated to make any Bid Loan as part of such Borrowing. (c) The Agent shall promptly notify the Borrower, by telecopy, of all the conforming Bids made, the Fixed Rate and the principal amount of each Bid Loan in respect of which a Bid was made and the identity of the Bank that made each Bid. The Agent shall send a copy of all Bids to the Borrower for its records as soon as practicable after completion of the bidding process set forth in this Section 2.05. (d) The Borrower may in its sole and absolute discretion, subject only to the provisions of this paragraph (d), accept or reject any Bid referred to in paragraph (c) above. The Borrower shall notify the Agent by telephone, confirmed by telecopy in the form of a Bid Acceptance/Rejection, whether and to what extent it has decided to accept or reject any of or all the bids referred to in paragraph (c) above not more than one hour after it shall have been notified of such bids by the Agent pursuant to such paragraph (c); provided, however, that (i) the failure of the Borrower to give such notice shall be deemed to be a rejection of all the Bids referred to in paragraph (c) above, (ii) the Borrower shall not accept a Bid made at a particular Fixed Rate if it has decided to reject a Bid made at a lower Fixed Rate, (iii) the aggregate amount of the Bids accepted by the Borrower shall not exceed the principal amount specified in the Bid Request, (iv) if the Borrower shall accept a Bid or Bids made at a particular Fixed Rate but the amount of such Bid or Bids shall cause the total amount of Bids to be accepted to exceed the amount specified in the Bid Request, then the Borrower shall accept a portion of such Bid or Bids in an amount equal to the amount specified in the Bid Request less the amount of all other Bids accepted with respect to such Bid Request, which acceptance, in the case of multiple Bids at such Fixed Rate, shall be made pro rata in accordance with the amount of each such bid at such Fixed Rate, and (v) except pursuant to clause (iv) above, no Bid shall be accepted for a Bid Loan unless such Bid Loan is in a minimum principal amount of $2,000,000 and a maximum principal amount of $25,000,000 provided further, however, that if a Bid Loan must be in an amount less than $2,000,000 because of the provisions of clause (iv) above, such Bid Loan shall be for a minimum of $1,000,000, and in calculating the pro rata allocation of acceptances of portions of multiple Bids at a particular Fixed Rate pursuant to clause (iv) the amounts shall be rounded to integral multiples of $1,000,000 in a manner which shall be in the discretion of the Agent. (e) The Agent shall promptly notify each bidding Bank whether or not its Bid has been accepted (and if so, in what amount and at what Fixed Rate) by telecopy, and each successful bidder will thereupon become bound, subject to the other applicable conditions hereof, to make the Bid Loan in respect of which its bid has been accepted. (f) No Bid Loan shall be requested or made hereunder if after giving effect thereto any of the conditions set forth in clauses (i) or (ii) of Section 2.01(a) would not be met. (g) If the Agent shall elect to submit a Bid in its capacity as a Bank, it shall submit such Bid directly to the Borrower one quarter of an hour earlier than the latest time at which the other Banks are required to submit their bids to the Agent pursuant to paragraph (b) above. (h) All notices, submissions and other communications pursuant to this Section 2.05 shall be irrevocable. (i) Subject to the provisions of Article 3 and Article 10 hereof, the Borrower shall pay the principal amount of each Bid Loan in full on the last day of the Interest Period thereof. Section 2.06. Interest on Loans. (a) Subject to the provisions of subsection (e) of this Section 2.06, LIBOR Loans and BA Rate Loans shall bear interest (computed on the basis of the actual number of days elapsed over a year of 360 days) at a rate per annum equal to the LIBOR Rate or BA Rate, as the case may be, for the Interest Period in effect for such Loan plus the Margin from time to time in effect. (b) Subject to the provisions of subsection (e), Base Rate Loans shall bear interest (computed on the basis of the actual number of days elapsed over a year of 360 days) at a rate per annum equal to the Base Rate. Each change in the interest rate for any Base Rate Loans shall take effect simultaneously with the corresponding change in the Base Rate. (c) Subject to the provisions of subsection (e), each Fixed Rate Loan shall bear interest at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 360 days) equal to the fixed rate of interest offered by the Bank making such Loan and accepted by the Borrower pursuant to Section 2.05. (d) Interest on each Loan shall be payable on each Interest Payment Date applicable to such Loan except as otherwise provided in this Agreement. The applicable BA Rate for each Interest Period applicable to BA Rate Loans shall be determined by the Agent, and such determination shall be conclusive absent manifest error. (e) Any amount not paid when due (at maturity, on acceleration, or otherwise) shall bear interest thereafter until paid at the Default Rate. Such interest shall be payable on demand. Section 2.07. Reductions in Commitments. (a) At any time after the date twelve (12) months after the date of this Agreement, the Borrower shall have the right on three Banking Days prior written notice to reduce or terminate the amount of the unused Total Commitment, provided that: (i) the Borrower shall give notice of each such reduction or termination to the Agent as provided in Section 3.01; and (ii) each partial reduction shall be in an aggregate amount at least equal to $10,000,000 or, if greater, in integral multiples of $1,000,000. (b) The Total Commitment, once reduced or terminated, may not be reinstated or increased. (c) Each reduction in the Total Commitment pursuant to this Section 2.07 shall reduce each Bank's obligation to make Loans proportionately in accordance with its Commitment Proportion. Section 2.08. Adjustments to Applicable Margin. The applicable Margin shall be reset quarterly for the next succeeding fiscal quarter, based upon the Borrower's ratio of Total Liabilities to Effective Net Worth, as reflected in the Borrower's quarterly and year-end financial statements, effective, in each case, as of the date such financial statements are required to be delivered hereunder. ARTICLE 2A. LETTERS OF CREDIT Section 2A.01. Agreement to Issue. Subject to the terms and conditions of this Agreement and in reliance upon the representations and warranties of the Borrower herein set forth and upon the provisions of each Subsidiary Guarantee, the Issuing Bank hereby agrees to issue for the account of the Borrower and as a financial accommodation for the Borrower's Subsidiaries, or any of them, one or more Letters of Credit in accordance with this Article 2A, from time to time during the period commencing on the Effective Date and ending on the Loan Maturity Date. Section 2A.02. Amounts; Tenor. The Issuing Bank shall not have any obligation to issue any Letter of Credit at any time: (a) if, after giving effect to the issuance of the requested Letter of Credit, (i) the sum of the Aggregate Letter of Credit Outstandings of the Borrower would exceed the L/C Sub-facility then in effect, or (ii) the Aggregate Outstandings would exceed the Total Commitment; or (b) (i) in the case of any Special Letter of Credit, if such Letter of Credit has an expiration date more than one (1) year after the date of issuance thereof, and (ii) in the case of any other Letter of Credit, if such Letter of Credit has an expiration date more than 180 days after the date of issuance thereof. Section 2A.03. Conditions. In addition to being subject to the satisfaction of the conditions precedent contained in Article 5 hereof, the obligation of the Issuing Bank to issue any Letter of Credit is subject to the following conditions precedent having been satisfied in a manner satisfactory to the Issuing Bank and the Agent: (a) The Borrower shall have delivered to the Issuing Bank at such times and in such manner as the Issuing Bank may prescribe an application in form and substance satisfactory to the Issuing Bank for the issuance of the Letter of Credit and such documents as may be required pursuant to the terms thereof, and the form and terms of the proposed Letter of Credit shall be satisfactory to the Agent and the Issuing Bank; (b) as of the date of issuance, no order of any court, arbitrator or public authority having jurisdiction or authority over the proposed issuer shall purport by its terms to enjoin or restrain money center banks generally from issuing letters of credit of the type and in the amount of the proposed Letter of Credit and no law, rule or regulation applicable to money center banks generally and no request or directive (whether or not having the force of law) from any public authority with jurisdiction over money center banks generally shall prohibit, or request that the Issuing Bank refrain from, the issuance of letters of credit generally or the issuance of such Letter of Credit, as the case may be; and (c) the Borrower shall have appointed the Agent as its attorney, with full power and authority: (i) to sign and/or endorse the Borrower's name upon any warehouse or other receipts or Letter of Credit applications; (ii) to sign the Borrower's name on bills of lading; (iii) to clear inventory through U.S. Customs in the Borrower's name or the name of the Agent, and to sign and deliver to U.S. Customs officials powers of attorney in the Borrower's name for such purpose; (iv) to complete in the Borrower's name or Agent's name any order, sale or transaction, obtain the necessary documents in connection therewith and collect the proceeds thereof; and (v) to do such other acts and things as are necessary to carry out the terms of this Agreement in order to enable the Agent to obtain payment of all obligations of the Borrower hereunder. Section 2A.04. Issuance of Letters of Credit. (a) Request for Issuance. The Borrower shall give the Agent written notice, no later than one (1) Banking Day prior to the proposed date of issuance of the Letter of Credit, containing the original signature of an authorized officer of the Borrower, of the Borrower's request for the issuance of a Letter of Credit. Such notice shall be irrevocable and shall specify the face amount of the Letter of Credit requested, the effective date (which date shall be a Banking Day) of issuance of such requested Letter of Credit, the date on which such requested Letter of Credit is to expire (which date shall be a Banking Day), the purpose for which such Letter of Credit is to be issued, the beneficiary of the requested Letter of Credit, whether such Letter of Credit may be drawn in a single or in partial draws and whether such Letter of Credit is to be issued to replace a letter of credit (including letters of credit issued other than pursuant to this Agreement). The Borrower shall attach to such notice the form of the Letter of Credit that the Borrower requests that the Issuing Bank issue. (b) Responsibilities of the Agent; Issuance. The Agent shall determine, as of the Banking Day immediately preced- ing the requested effective date of issuance of the Letter of Credit set forth in the notice from the Borrower, the amount of the unused L/C Subfacility and the unused Total Commitment as of such date. If (i) the form of the Letter of Credit delivered by the Borrower to the Agent is acceptable to the Agent in its reasonable discretion, (ii) the undrawn face amount of the requested Letter of Credit is less than or equal to each of such unused L/C Subfacility and the unused Total Commitment, and (iii) the applicable conditions set forth in Article 5 hereof have been satisfied, then the Agent shall direct the Issuing Bank to issue such Letter of Credit for the account of the Borrower. Section 2A.05. Letter of Credit Obligations; Duties of Issuing Bank. (a) Reimbursement. Notwithstanding any provisions to the contrary in any document or documents delivered pursuant to Section 2A.03 hereof, the Borrower shall reimburse the Issuing Bank for any drawings or payments (whether partial or full) under any Letter of Credit immediately after the payment by the Issuing Bank. Any drawings not paid when due under the terms of such Letter of Credit or any document pertaining thereto shall bear interest, payable on demand, at the Default Rate until the Issuing Bank is reimbursed in full. (b) Duties of Issuing Bank. Any action taken or omitted to be taken by the Issuing Bank under or in connection with any Letter of Credit, if taken or omitted in the absence of gross negligence or willful misconduct, shall not put the Issuing Bank under any resulting liability to any Bank, or relieve any Bank of its obligations hereunder to the Issuing Bank. In determining whether to pay under any Letter of Credit, the Issuing Bank shall have no obligation relative to any Bank other than to confirm that any documents required to have been delivered under such Letter of Credit appear to comply on their face with the requirements of such Letter of Credit. Section 2A.06. Participations. (a) Purchase of Participations. Immediately upon issuance by the Issuing Bank of any Letter of Credit in accordance with Section 2A.04 hereof, each Bank shall be deemed to have irrevocably and unconditionally purchased and received, without recourse or warranty, an undivided interest and participation in such Letter of Credit equal to such Bank's Commitment Proportion of the face amount thereof (including, without limitation, all obligations of the Borrower with respect thereto, other than amounts owing to the Issuing Bank under Section 3.05 hereof, and any security therefor or guaranty pertaining thereto). (b) Sharing of Letter of Credit Payments. In the event that the Issuing Bank makes a payment under any Letter of Credit and the Issuing Bank shall not have been repaid such amount pursuant to Section 2A.07 hereof, the Agent shall notify each Bank, and each Bank shall unconditionally pay to the Agent at its principal office for the account of the Issuing Bank, as and when provided hereinbelow, an amount equal to such Bank's Commitment Proportion of the amount of such payment in Dollars and in immediately available funds. If the Agent so notifies the Banks by not later than 11:00 a.m. (New York time) on any Banking Day, each Bank shall make available to the Agent the amount of such payment, as provided in the immediately preceding sentence, on such Banking Day. If the Agent so notifies the Banks after 11:00 a.m. (New York time) on any Banking Day, each Bank shall make available to the Agent the amount of such payment, as provided in the second preceding sentence, together with interest thereon at the Federal Funds Rate, by not later than 11:00 a.m. (New York time) on the next Banking Day. Such amounts paid by the Banks to the Agent shall constitute Loans which shall be deemed to have been requested by the Borrower pursuant to Article 2 hereof. (c) Sharing of Reimbursement Obligation Payments. Whenever the Agent receives a payment from the Borrower on account of a reimbursement obligation as to which the Agent has previously received for the account of the Issuing Bank payment from a Bank pursuant to this Section 2A.06, the Agent shall promptly pay to such Bank, such Bank's Commitment Proportion of such payment from the Borrower in Dollars. Each such payment shall be made by the Agent on the Banking Day on which the Agent receives immediately available funds paid to such Person pursuant to the immediately preceding sentence, if received prior to 11:00 a.m. (New York time) on such Banking Day and otherwise on the next succeeding Banking Day. (d) Obligations Irrevocable. The obligations of each Bank to make payments to the Agent with respect to any Letter of Credit or with respect to any guaranty or reimbursement obligation of the Agent with respect to any Letter of Credit, and the obligations of the Borrower to make payments to the Agent, for the account of the Banks, shall be irrevocable, not subject to any qualification or exception whatsoever and shall be made in accordance with the terms and conditions of this Agreement (assuming, in the case of the obligations of the Banks to make such payments, that the Agent has caused such Letter of Credit to be issued in accordance with Section 2A.04 hereof), including, without limitation, any of the following circumstances: (i) Any lack of validity or enforceability of this Agreement or any of the other Facility Documents; (ii) The existence of any claim, set-off, defense or other right which the Borrower may have at any time against a beneficiary named in a Letter of Credit or any transferee of any Letter of Credit (or any Person for whom any such transferee may be acting), any Bank, the Issuing Bank, or any other Person, whether in connection with this Agreement, any Letter of Credit, the transactions contemplated herein or any unrelated transactions (including any underlying transactions between the Borrower or any other Person and the beneficiary named in any Letter of Credit) or any failure of the Agent to notify a Bank of the issuance, extension or renewal of a Letter of Credit; (iii) Any draft, certificate or any other document presented under any Letter of Credit upon which payment has been made in good faith and according to its terms proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iv) The surrender or impairment of any security for the performance or observance of any of the terms of any of the Facility Documents; or (v) The occurrence of any Default or Event of Default. Section 2A.07. Payment of Letter of Credit Reimbursement Obligations. (a) Payment to Issuing Bank. The Borrower absolutely and unconditionally agrees to pay to the Agent the amount of all Letter of Credit reimbursement obligations and other amounts payable to the Issuing Bank under or in connection with any Letter of Credit immediately when due in immediately available funds, irrespective of any claim, set-off, defense or other right which the Borrower may have at any time against the Issuing Bank or any other Person. The obligation of the Borrower to reimburse or pay the Agent, the Issuing Bank or the Banks as provided hereunder in respect of drawings under Letters of Credit shall rank pari passu with the obligation of the Borrowers to repay the Loans hereunder, and shall be absolute and unconditional under any and all circumstances. Without limiting the generality of the foregoing, the obligation of the Borrower to reimburse the Agent in respect of drawings under Letters of Credit shall not be subject to any defense based on the non-application or misapplication by the beneficiary of any of the proceeds of any such payment or the legality, validity, regularity or enforceability of the Letters of Credit or any related document or any dispute between or among the Borrowers, the beneficiary of any Letter of Credit or any financing institution or other party to which any Letter of Credit may be transferred. (b) Recovery or Avoidance of Payments. In the event any payment by or on behalf of the Borrower received by the Agent with respect to any Letter of Credit (or any guaranty or reimbursement obligation relating thereto) and distributed by the Agent to the Banks on account of their respective participations therein is thereafter set aside, avoided or recovered from the Agent or the Issuing Bank in connection with any receivership, liquidation or bankruptcy proceeding, the Banks shall, upon demand by the Agent, pay to the Agent, for its account or the account of the Issuing Bank, their respective Commitment Proportions of such amount set aside, avoided or recovered together with interest at the rate required to be paid by the Agent or the Issuing Bank upon the amount required to be repaid by it. Section 2A.08. Indemnification; Exoneration. (a) Indemnification. In addition to amounts payable as elsewhere provided in this Article 2A, the Borrower agrees to protect, indemnify, pay and save the Banks, the Issuing Bank and the Agent harmless from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable attorneys' fees) which any Bank, the Issuing Bank or the Agent may incur or be subject to as a consequence, directly or indirectly, of (i) the issuance of any Letter of Credit other than as a result of its gross negligence or willful misconduct, or (ii) the failure of the Issuing Bank to honor a drawing under any Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto public authority (all such acts or omissions being hereinafter referred to collectively as "Government Acts"). (b) Assumption of Risk by the Borrower. As among the Borrower, the Banks, the Issuing Bank and the Agent, the Borrower assumes all risks of the acts and omissions of, or misuse of any Letter of Credit by, the respective beneficiaries of such Letter of Credit. In furtherance and not in limitation of the foregoing, subject to the provisions of the applications for the issuance of Letters of Credit, the Banks, the Issuing Bank and the Agent shall not be responsible for: (i) the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any Person in connection with the application for and issuance of and presentation of drafts with respect to any of the Letters of Credit, even if it should prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (ii) the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (iii) errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (iv) errors in interpretation of technical terms; (v) any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any Letter of Credit or of the proceeds thereof; (vi) the misapplication by the beneficiary of any Letter of Credit or the proceeds of any drawing under any Letter of Credit; or (vii) any consequences arising from causes beyond the control of the Banks, the Issuing Bank or the Agent, including, without limitation, any Government Acts. None of the foregoing shall affect, impair or prevent the vesting of any of the Issuing Bank's, the Agent's or any Bank's rights or powers under this Section 2A.08. (c) Exoneration. In furtherance and extension, and not in limitation, of the specific provisions set forth above, any action taken or omitted by the Agent or Issuing Bank under or in connection with any Letter of Credit or any related certificates, if taken or omitted in good faith, shall not put any Bank, the Issuing Bank or the Agent under any resulting liability to the Borrower or relieve the Borrower of any of its obligations hereunder to any such Person. Section 2A.09. Sid Tool Letters of Credit. In the event that any Sid Tool Letter of Credit is outstanding on the date hereof, all provisions of Section 2A.05, 2A.06, 2A.07, 2A.08 and 10.02 hereof shall apply to each such Sid Tool Letter of Credit to the same extent as if it were a Letter of Credit issued pursuant to the terms of this Agreement and, for purposes of determining the available L/C Subfacility at any time, the face amount of such Sid Tool Letters of Credit shall be added to the face amount of all Letters of Credit then outstanding or to be issued at such time. ARTICLE 3. GENERAL CREDIT PROVISIONS; FEES AND PAYMENTS; NOTICE OF CONVERSION/CONTINUATION Section 3.01. Certain Notices. Notices by the Borrower to the Agent of each Borrowing pursuant to Section 2.04 or Section 2.05 hereof, each Notice of Conversion/Continuation pursuant to Section 3.07 hereof, each prepayment pursuant to Section 3.02 hereof and each reduction or termination of Commitments pursuant to Section 2.07 hereof shall be in writing and shall be irrevocable. The Agent shall promptly notify the Banks of the contents of each such notice. Section 3.02. Prepayments. (a) Mandatory Prepayment on Reduction of Total Commitment. On the date of any reduction of the Commitments as provided in Section 2.07, the Borrower shall pay or prepay so much of the Loans and the Aggregate Letter of Credit Outstandings as shall be necessary in order that the Aggregate Outstandings will not exceed the Total Commitment after giving effect to such reduction. Such prepayment shall be accompanied by any and all amounts related thereto under Article 4 hereof. (b) Application of Mandatory Prepayments. All prepayments required by paragraph (a) above shall be applied pro rata to Loans outstanding and Aggregate Letter of Credit Outstandings. (c) Accrued Interest. All prepayments made pursuant to this Section 3.02 shall be accompanied by the payment of all accrued interest on the amount so prepaid. Section 3.03. Agency Fees. (a) The Borrower shall pay to the Agent, for the Agent's own account, the agency fees set forth in the letter agreement dated April 4, 1995, as the same has been or hereafter may be amended, supplemented, restated or otherwise modified, between the Borrower and the Agent. Section 3.04. Facility Fee. The Borrower shall pay to the Agent for the account of each Bank a facility fee for the period from and including the Effective Date to the Loan Maturity Date equal to such Bank's Commitment Proportion of one-eighth of one percent (0.125%) of the average daily difference of (a) the Total Commitment minus (b) the Aggregate Outstandings. The facility fee shall be calculated on the basis of a year of 360 days for the actual number of days elapsed. The facility fee shall be due and payable monthly in arrears on the last day of each calendar month in respect of such calendar month, commencing June 30, 1997, and on the Loan Maturity Date. The facility fee shall be earned as accrued and be non-refundable when paid. Section 3.05. Compensation for Letters of Credit. (a) In connection with the establishment of each Letter of Credit which is not also a Special Letter of Credit, the Borrower agrees to pay to the Agent, for the sole account of the Issuing Bank, such fees and other charges as are charged by the Issuing Bank for Letters of Credit issued by it, including, without limitation, its standard fees for issuing, administering, amending, renewing, paying and cancelling letters of credit, as and when assessed. (b) Notwithstanding subsection (a) of this Section 3.05 and except as otherwise provided in subsection (c) of this Section 3.05, commission fees on Letters of Credit (e.g., payment commissions) which are less than or equal to the normal and customary minimum payment commission charged by the Agent shall be allocated by the Agent to the Banks as follows: (i) the portion of the minimum fee paid by the Borrower equal to the actual payment commission shall be allocated by the Agent to the Banks pro rata in accordance with their respective Commitment Proportions; and (ii) that portion of the minimum fee paid by the Borrower over the actual payment commission shall be retained by the Agent for its own account. Commission fees on Letters of Credit (e.g., payment commissions) in excess of the normal and customary minimum payment commission charged by the Agent shall be allocated by the Agent to the Banks pro rata in accordance with their respective Commitment Proportions. (c) In connection with the establishment of each Special Letter of Credit, the Borrower agrees to pay to the Agent a commission fee (the "Special Letter of Credit Commission Fee") equal to one percent (1.0%) per annum of the undrawn face amount of such Special Letter of Credit. The Special Letter of Credit Commission Fee shall be payable in advance (i) upon the issuance of each Special Letter of Credit for the number of days remaining in the month during which such Special Letter of Credit was issued and (ii) thereafter, monthly, on the first day of each month or part thereof during which such Special Letter of Credit remains outstanding. The Letter of Credit Fee shall be computed on the basis of a 360-day year for the actual number of days elapsed and shall be allocated by the Agent to the Banks pro rata in accordance with their respective Commitment Proportions. Section 3.06. Payments Generally. (a) Unless otherwise specified in this Agreement, all payments under this Agreement or the Notes, other than payments of fees and expenses with respect to Letters of Credit which shall be made directly by the Borrower to the Issuing Bank pursuant to the procedures and requirements of the Issuing Bank and the terms of this Agreement, shall be made in Dollars in immediately available funds not later than 1:00 p.m. (New York time) on the relevant dates specified above (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Banking Day) to the Agent, at 300 Broadhollow Road, Melville, New York 11747 for the benefit of the applicable Lending Office of each Bank. The Borrower will notify each of the Banks of any payment to the Agent pursuant to the provisions of this section at the same time it makes any such payment and will notify the Agent of any payment to the Issuing Bank of any amounts payable with respect to a Letter of Credit hereunder at the same time it makes any such payment. The Agent may (but shall not be obligated to) debit the amount of any such payment which is not made by such time to any ordinary deposit account of the Borrower with the Agent and the Agent may (but shall not be obligated to) require each of the Banks to debit its pro rata portion (subject to Section 11.16 hereof) of the amount of any such payment which is not made by such time to any ordinary deposit account of the Borrower with any such Bank; provided, however, that no Bank shall be required to debit any funds which are not available to the Borrower other than on an overdraft basis. The Borrower shall, at the time of making each payment under this Agreement or the Notes, specify to the Agent the principal or other amount payable by the Borrower under this Agreement or the Notes to which such payment is to be applied; provided, however, that in the event that the Borrower fails to so specify, or if (x) a Default has occurred and is continuing, or (y) an Event of Default pursuant to any of Section 10.01(a), Section 10.01(b) (only if due to fraud), any of Sections 10.01(c)(i)(A)-(B), Section 10.01(e) or Section 10.01(h) of this Agreement has occurred, or (z) an Event of Default pursuant to any of Section 10.01(b) (only if not due to fraud), any of Sections 10.01(c)(i)(C) or (ii), Section 10.01(d), Section 10.01(f), Section 10.01(g), Section 10.01(i) or Section 10.01(j) of this Agreement has occurred and is continuing, the Agent shall apply such payment as it may elect in its sole discretion (subject to Section 11.16 hereof). If the due date of any payment under this Agreement or the Notes would otherwise fall on a day which is not a Banking Day, such date shall be extended to the next succeeding Banking Day and interest shall be payable for any principal so extended for the period of such extension. Each payment received by the Agent hereunder or under any Note for the account of a Bank or the Issuing Bank shall be paid promptly to such Bank or to the Issuing Bank, as the case may be, in immediately available funds, for the account of such Bank's Lending Office or for the account of the office specified by the Issuing Bank to the Agent, as the case may be. (b) All payments made by the Borrower under this Agreement, the Notes or the other Facility Documents shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any governmental or taxing authority of any jurisdiction located outside of the United States, excluding, in the case of the Agent, the Issuing Bank and each Bank, income taxes and franchise taxes (imposed in lieu of income taxes) imposed on the Agent, the Issuing Bank or such Bank, as the case may be, as a result of a connection between the jurisdiction of the government or the taxing authority imposing such tax and the Agent, the Issuing Bank or such Bank (excluding a connection arising solely from the Agent, the Issuing Bank or such Bank having executed, delivered, or performed its obligations or received a payment under, or enforced, this Agreement, the Notes or the other Facility Documents) or any political subdivision or taxing authority thereof or therein (all such non-excluded taxes, levies, imposts, duties, charges, fees, deductions and withholdings being hereinafter called "Taxes"). If any Taxes are withheld from any amounts payable to the Agent, the Issuing Bank or any Bank hereunder or under the Facility Documents, the amounts so payable to the Agent, the Issuing Bank or such Bank shall be increased to the extent necessary to yield to the Agent, the Issuing Bank or such Bank (after payment of all Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement, the Notes and the other Facility Documents. Whenever any Taxes are payable by the Borrower, as promptly as possible thereafter, the Borrower shall send to the Agent, the Issuing Bank for its own account or for the account of the Issuing Bank or such Bank, as the case may be, a certified copy of an original official receipt received by such entity showing payment thereof. If the Borrower fails to pay any Taxes when due to the appropriate taxing authority or fails to remit to the Agent the required receipts or other required documentary evidence, the Borrower shall indemnify the Agent, the Issuing Bank and the Banks for any incremental taxes, interest or penalties that may become payable by the Agent, the Issuing Bank or any Bank as a result of any such failure. Section 3.07. Conversion and Continuation of Pro Rata Loans. The Borrower shall have the right at any time upon prior irrevocable notice to the Agent (i) not later than 10:00 a.m. (New York time) on the day of the conversion, to convert all or any part of any Borrowing consisting of LIBOR Loans or BA Rate Loans into a Borrowing consisting of Base Rate Loans and (ii) not later than 10:00 a.m. (New York time) two Banking Days prior to conversion or continuation, to convert any Borrowing consisting of Base Rate Loans into a Borrowing consisting of LIBOR Loans or BA Rate Loans, to convert any Borrowing consisting of BA Rate Loans or LIBOR Loans into a Borrowing consisting of LIBOR Loans or BA Rate Loans, respectively, or to continue any Borrowing consisting of LIBOR Loans or BA Rate Loans for an additional Interest Period, subject in each case to the following: (a) if less than all the outstanding principal amount of any Borrowing shall be converted into or continued (i) as BA Rate Loans, the aggregate principal amount of the Borrowing so converted or continued as BA Rate Loans shall be an integral multiple of $100,000 and not less than $1,500,000, (ii) as LIBOR Loans, the aggregate principal amount of the Borrowing so converted or continued as LIBOR Loans shall be an integral multiple of $100,000 and not less than $2,500,000 or (iii) as Base Rate Loans, the aggregate principal amount of the Borrowing so converted or continued as Base Rate Loans shall be not less than $250,000, and, if greater than $250,000, shall be an integral multiple of $100,000; (b) accrued interest on a Borrowing (or portion thereof) being converted shall be paid by the Borrower at the time of conversion; (c) if any Borrowing consisting of LIBOR Loans or BA Rate Loans is converted at a time other than the end of the Interest Period applicable thereto, the Borrower shall pay, upon demand, any amounts due to the Banks pursuant to Article 4; (d) (i) any portion of a Borrowing maturing or required to be repaid in less than one month may not be converted into or continued as a Borrowing consisting of LIBOR Loans and (ii) any portion of a Borrowing maturing or required to be repaid in less than 30 days may not be converted into or continued as a Borrowing consisting of BA Rate Loans; (e) any portion of a Borrowing consisting of LIBOR Loans or BA Rate Loans which cannot be continued as such by reason of clause (d) above shall be automatically converted at the end of the Interest Period in effect for such Borrowing into a Borrowing consisting of Base Rate Loans; (f) no Interest Period may be selected for any Borrowing consisting of LIBOR Loans or BA Rate Loans that would end later than the Loan Maturity Date except with the prior written consent of all Banks; (g) all conversions and continuations shall be subject to the provisions of Section 4.04 hereof; and (h) no conversion of any Borrowing consisting of Base Rate Loans into a Borrowing consisting of LIBOR Loans or BA Rate Loans and no continuation of any Borrowing consisting of LIBOR Loans or BA Rate Loans shall be effective if a Default or Event of Default has occurred and is continuing. Each notice pursuant to this Section 3.07 shall be irrevocable and shall refer to this Agreement and specify (i) the identity and amount of the Borrowing to be converted or continued, (ii) whether such Borrowing is to be converted to or continued as a Borrowing consisting of LIBOR Loans, BA Rate Loans or Base Rate Loans, (iii) if such notice requests a conversion, the date of such conversion (which shall be a Banking Day) and (iv) if such Borrowing is to be converted to or continued as a Borrowing consisting of LIBOR Loans or BA Rate Loans, the Interest Period with respect thereto. If no Interest Period is specified in any such notice with respect to any conversion to or continuation as a Borrowing consisting of LIBOR Loans or BA Rate Loans, the Borrower shall be deemed to have selected an Interest Period of one month's duration, in the case of LIBOR Loans, or 30 days' duration, in the case of BA Rate Loans. If no notice shall have been given in accordance with this Section 3.07 to convert or continue any Borrowing, such Borrowing shall, at the end of the Interest Period applicable thereto (unless repaid pursuant to the terms hereof), automatically be continued as a Borrowing consisting of Base Rate Loans. ARTICLE 4. YIELD PROTECTION, ETC. Section 4.01. Additional Costs. (a) The Borrower shall pay directly to the Issuing Bank and each Bank from time to time, within two days of the demand of the Issuing Bank or such Bank, as the case may be, such amounts as the Issuing Bank or such Bank may reasonably determine to be necessary to compensate it for any costs which the Issuing Bank or such Bank reasonably determines are attributable to its issuing or making or maintaining any BA Rate Loans, Fixed Rate Loans, LIBOR Loans or Letters of Credit under this Agreement or its Note or its obligation under any such Loans or Letters of Credit hereunder, or any reduction in any amount receivable by the Issuing Bank or such Bank hereunder in respect of any such Loans or Letters of Credit or such obligation (such increases in costs and reductions in amounts receivable being herein called "Additional Costs"), resulting from any Regulatory Change which: (i) changes the basis of taxation of any amounts payable to the Issuing Bank or such Bank under this Agreement or its Note in respect of any of such Loans or Letters of Credit or obligations (other than taxes imposed on the overall net income of the Issuing Bank or such Bank or of its Lending Office for any of such Loans or Letters of Credit by the jurisdiction in which the Issuing Bank or such Bank has its principal office or such Lending Office); or (ii) imposes or modifies any reserve, special deposit, deposit insurance or assessment, minimum capital, capital ratio or similar requirements relating to any extensions of credit or other assets of, or any deposits with or other liabilities of, the Issuing Bank or such Bank (including any of such Loans or any deposits referred to in the definition of "LIBOR" in Section 1.01); or (iii) imposes any other condition affecting this Agreement, any Note (or any of such extensions of credit or liabilities) or any Letter of Credit. The Issuing Bank and each Bank will notify the Agent of any event occurring after the date of this Agreement which will entitle the Issuing Bank or such Bank to compensation pursuant to this Section 4.01(a) as promptly as practicable after it obtains knowledge thereof and determines to request such compensation and the Agent on behalf of the Issuing Bank or such Bank will promptly notify the Borrower of such event. If the Issuing Bank or any Bank requests compensation from the Borrower under this Section 4.01(a), or under Section 4.01(c), the Borrower may, by notice to the Agent (with a copy to the Issuing Bank or such Bank), suspend the obligation of the Issuing Bank to issue Letters of Credit or the obligation of such Bank to make Loans (but not to purchase participation interests in reimbursement obligations under Letters of Credit) or to otherwise extend credit of the type with respect to which such compensation is requested (in which case the provisions of Section 4.04 shall be applicable) provided that the provisions of this sentence shall not relieve the Borrower of its obligation to make payments pursuant to this Section 4.01; provided further that if at any time subsequent to such suspension, the causes therefor cease to exist, the Issuing Bank or such Bank shall so notify the Borrower and the obligation of the Issuing Bank to issue Letters of Credit, or such Bank's obligation to make Loans of the applicable type, as the case may be, shall, subject to the provisions of this Agreement, be reinstated. (b) Without limiting the effect of the foregoing provisions of this Section 4.01, in the event that, by reason of any Regulatory Change, any Bank either (i) incurs Additional Costs based on or measured by the excess above a specified level of the amount of a category of deposits or other liabilities of such Bank which includes deposits by reference to which the interest rate on LIBOR Loans is determined as provided in this Agreement or a category of extensions of credit or other assets of such Bank which includes LIBOR Loans or (ii) becomes subject to restrictions on the amount of such a category of liabilities or assets which it may hold, then, if such Bank so elects by notice to the Agent (with a copy to the Borrower), the obligation of such Bank to make LIBOR Loans hereunder shall be suspended until the date such Regulatory Change ceases to be in effect (in which case the provisions of Section 4.04 shall be applicable). (c) Without limiting the effect of the foregoing provisions of this Section 4.01 (but without duplication), the Borrower shall pay directly to the Issuing Bank and to each Bank from time to time on request such amounts as the Issuing Bank or such Bank may reasonably determine to be necessary to compensate the Issuing Bank or such Bank for any costs which it reasonably determines are attributable to the maintenance by it or any of its affiliates pursuant to any law or regulation of any jurisdiction or any interpretation, directive or request (whether or not having the force of law and whether in effect on the date of this Agreement or thereafter) of any court or governmental or monetary authority of capital in respect of the Letters of Credit (or any reimbursement obligations with respect thereto) or any Loans or other obligations hereunder (such compensation to include, without limitation, an amount equal to any reduction in return on assets or equity of the Issuing Bank or such Bank to a level below that which it could have achieved but for such law, regulation, interpretation, directive or request). The Issuing Bank and each Bank will notify the Agent if it is entitled to compensation pursuant to this Section 4.01(c) as promptly as practicable after it determines to request such compensation, and the Agent on behalf of the Issuing Bank or such Bank will promptly notify the Borrower. (d) Determinations and allocations by the Issuing Bank or a Bank for purposes of this Section 4.01 of the effect of any Regulatory Change pursuant to subsections (a) or (b), or of the effect of capital maintained pursuant to subsection (c), on its costs of making or maintaining Loans or Letters of Credit (or any reimbursement obligations with respect thereto) or its obligation to make Loans or Letters of Credit (or any reimbursement obligations with respect thereto), or on amounts receivable by, or the rate of return to, it in respect of Loans or Letters of Credit (or any reimbursement obligations with respect thereto), and of the additional amounts required to compensate the Issuing Bank or such Bank under this Section 4.01, shall be conclusive absent manifest error. Section 4.02. Limitation on Types of Loans. Anything herein to the contrary notwithstanding, if: (a) the Agent determines (which determination shall be conclusive) that quotations of interest rates for the relevant deposits referred to in the definitions of "BA Rate" or "LIBOR" in Section 1.01 are not being provided in the relevant amounts or for the relevant maturities for purposes of determining the rate of interest for any BA Rate Loans or LIBOR Loans, as the case may be, as provided in this Agreement; or (b) any Bank determines (which determination shall be conclusive absent manifest error) and notifies the Agent that the relevant rates of interest referred to in the definitions of "BA Rate" or "LIBOR" in Section 1.01 upon the basis of which the rate of interest for any type of BA Rate Loans or LIBOR Loans, as the case may be, is to be determined do not adequately cover the cost to such Bank of making or maintaining such Loans; then the Agent shall give the Borrower and each other Bank prompt notice thereof, and so long as such condition remains in effect, such Bank shall be under no obligation to make BA Rate Loans or LIBOR Loans, as the case may be. Section 4.03. Illegality. Notwithstanding any other provision in this Agreement, in the event that it becomes unlawful for the Issuing Bank to issue any Letters of Credit or for any Bank or its Lending Office to honor its obligation to make or maintain BA Rate Loans or LIBOR Loans hereunder, then the Issuing Bank or such Bank shall promptly notify the Agent thereof (with a copy to the Borrower) and the Issuing Bank's obligation to issue Letters of Credit, or such Bank's obligation to make or maintain BA Rate Loans or LIBOR Loans hereunder shall be suspended until such time as the Issuing Bank may again issue Letters of Credit or such Bank may again make and maintain such affected Loans in which case the provisions of Section 4.04 shall be applicable, and any such request for a Borrowing consisting of LIBOR Loans or BA Rate Loans, as the case may be, shall, with respect to such Bank, be deemed a request for a Base Rate Loan from such Bank. Section 4.04. Certain Loans Pursuant To Sections 4.01, 4.02 and 4.03. If an event referred to in Section 4.01(b), 4.02 or 4.03 has occurred with respect to any Bank and such Bank so requests by notice to the Agent (with a copy to the Borrower), all BA Rate Loans, Fixed Rate Loans or LIBOR Loans, as the case may be, of such Bank then outstanding shall be automatically converted into Base Rate Loans on the date specified by such Bank in such notice, and, to the extent that BA Rate Loans, Fixed Rate Loans or LIBOR Loans, as the case may be, are so made as (or converted into) Base Rate Loans, all payments of principal which would otherwise be applied to such Bank's BA Rate Loans, Fixed Rate Loans or LIBOR Loans, as the case may be, shall be applied instead to its Base Rate Loans. In the event of any conversion of any BA Rate Loan, Fixed Rate Loan or LIBOR Loan to a Base Rate Loan pursuant to this Section 4.04 prior to the maturity date with respect to such BA Rate Loan, Fixed Rate Loan or LIBOR Loan, the Borrower shall pay to the Agent for the account of the relevant Bank all amounts required to be paid pursuant to Section 4.05 hereof. Section 4.05. Certain Compensation. The Borrower shall pay to any Bank for the account of such Bank, within two days after the demand of any such Bank through the Agent, such amount or amounts as shall be sufficient (in the reasonable opinion of such Bank) to compensate it for any loss, cost or expense which such Bank determines is attributable to: (a) any prepayment or conversion (on a date other than the maturity date with respect to BA Rate Loans, Fixed Rate Loans or LIBOR Loans) by the Borrower of any such Loans made by such Bank (whether by reason of the mandatory or voluntary prepayment provisions of this Agreement or otherwise) or any failure by the Borrower to pay principal or interest on any such Loan made by such Bank when due or any conversion of any such Loan pursuant to Section 3.07 or Section 4.04 hereof; or (b) any failure by the Borrower to borrow or continue any BA Rate Loan, Fixed Rate Loan or LIBOR Loan to be made by such Bank on the date specified therefor in the relevant notice under this Agreement; or (c) any failure by the Borrower to prepay any BA Rate Loan, Fixed Rate Loan or LIBOR Loan on the date specified therefor in the relevant notice under Section 3.02. Without limiting the foregoing, such compensation shall include an amount equal to the excess, if any, of: (i) the amount of interest which otherwise would have accrued on the principal amount so paid, or converted or not borrowed for the period from and including the date of such payment or conversion or failure to borrow to, but excluding the maturity date or the Loan Maturity Date, as applicable, in the case of BA Rate Loans, Fixed Rate Loans or LIBOR Loans (or, in the case of a failure to borrow, to but excluding the maturity date or the Loan Maturity Date, as applicable, in the case of any other BA Rate Loans, Fixed Rate Loans or LIBOR Loans which would have commenced on the date specified therefor in the relevant notice) at the applicable rate of interest for such Loan provided for herein; over (ii) the amount of interest (as reasonably determined by such Bank) such Bank would have bid in the London interbank market (if such Loan is a LIBOR Loan) or, if relevant, such other applicable market (if such Loan is a BA Rate Loan or Fixed Rate Loan) for Dollar deposits for amounts comparable to such principal amount and maturities comparable to such period. A determination of any Bank as to the amounts payable pursuant to this Section 4.05 shall be conclusive absent manifest error provided that such determination is made on a reasonable basis and provided further that such Bank provides the Borrower with copies of the calculations made by such Bank in making such determination. ARTICLE 5. CONDITIONS PRECEDENT Section 5.01. Documentary Conditions Precedent. The obligations of the Banks to make the Loans constituting the initial Borrowing are subject to the conditions precedent that: (a) the Agent shall have received on or before the date of such Loans each of the following, in form and substance reasonably satisfactory to the Agent and its counsel: (i) the Notes duly executed by the Borrower; (ii) the return, from the respective beneficiaries thereof, of all letters of credit, if any, issued under the Sid Tool Credit Agreement that are to be returned to the Issuing Bank (as defined in the Sid Tool Credit Agreement) on or before the date of the initial Borrowing; (iii) a certificate of the Secretary or Assistant Secretary of the Borrower and of each Subsidiary of the Borrower, dated the Effective Date, attesting to all corporate action taken by such Person, including resolutions of its respective Board of Directors authorizing, as applicable, the execution, delivery and performance of the Facility Documents and each other document to be delivered pursuant to this Agreement, together with certified copies of the certificate or articles of incorporation and the by-laws of the Borrower and each Subsidiary of the Borrower; and, such certificate shall state that the resolutions and corporate documents thereby certified have not been amended, modified, revoked or rescinded as of the date of such certificate; (iv) a certificate of the Secretary or Assistant Secretary of the Borrower and of each Subsidiary of the Borrower, dated the Effective Date, certifying the names and true signatures of the officers of such entity authorized to sign the Facility Documents and the other documents to be delivered by such entity under this Agreement; (v) a certificate of a duly authorized officer of the Borrower and each Subsidiary of the Borrower dated the Effective Date, stating that (i) the representations and warranties in Article 6 are true and correct on such date as though made on and as of such date, (ii) no Default or Event of Default (as such terms are defined in the Sid Tool Credit Agreement) has occurred or is continuing under the Sid Tool Credit Agreement and (iii) no Default or Event of Default has occurred or is continuing or would occur as a result of the making of any Loan or the issuance of any Letter of Credit; (vi) favorable opinions of counsel for the Borrower and each Subsidiary of the Borrower, dated the Effective Date, in substantially the form of Exhibit F; (vii) evidence that the Borrower and each of the Subsidiaries of the Borrower is duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation; (viii) an audited consolidated and consolidating balance sheet of the Borrower and its Consolidated Subsidiaries as at August 31, 1996, and a consolidated income statement and statement of cash flows of the Borrower and its Consolidated Subsidiaries for the fiscal year then ended, all prepared in accordance with GAAP together with unaudited interim consolidated and consolidating financial statements of the Borrower and its Consolidated Subsidiaries as of and for the period ending February 28, 1997; (ix) a Subsidiary Guarantee duly executed by each Subsidiary of the Borrower; (x) a copy of the Final Prospectus relating to the issuance of the Class A Common Stock of the Borrower; (xi) such other documents, financial statements, instruments, approvals, opinions and evidence as the Agent may reasonably require. (b) the Borrower shall have paid or caused to be paid all fees required to be paid hereunder or in connection herewith and all accrued fees and expenses of the Agent, the Issuing Bank and each of the Banks (subject to the limitations set forth herein) in connection with the preparation, execution and delivery of this Agreement, and the other Facility Documents and the consummation of the transactions contemplated thereby; (c) all amounts due and payable under the Sid Tool Credit Agreement as of the Effective Date and the amount of accrued but unpaid facility fees pursuant to Section 4.04 of the Sid Tool Credit Agreement shall have been paid in full; (d) the Borrower and each of the Subsidiaries of the Borrower shall have obtained all consents, permits and approvals required in connection with the execution, delivery and performance by the Borrower and such Subsidiaries of their obligations hereunder and such consents, permits and approvals shall continue in full force and effect; (e) all legal matters in connection with this financing shall be reasonably satisfactory to the Issuing Bank, the Banks and their respective counsel; (f) no material adverse change in the business, condition (financial or otherwise), operations, performance or properties of the Borrower and its Subsidiaries taken as a whole, shall have occurred since August 31, 1996; (g) there shall exist no action, suit, investigation, litigation or proceeding pending or threatened in any court or before any arbitrator or governmental instrumentality that could (i) have a material adverse effect on the business, condition (financial or otherwise), operations, performance, properties or prospects of the Borrower and its Subsidiaries, taken as a whole, or (ii) impair the Borrower or any such Subsidiary's ability to perform satisfactorily under the Facility Documents to which it is a party; (h) the Agent, the Issuing Bank and the Banks shall have received reasonably satisfactory evidence that (i) neither the Borrower nor any of its Subsidiaries is in default with respect to any contractual obligations to which it is a party, the effect of which may be material and adverse to the Borrower and the Subsidiaries of the Borrower, taken as a whole, or to the ability of the Borrower or any such Subsidiary to perform its respective obligations hereunder or under the other Facility Documents, (ii) no Default or Event of Default (as such terms are defined in the Sid Tool Credit Agreement) has occurred or is continuing under the Sid Tool Credit Agreement and (iii) no Default or Event of Default has occurred or is continuing or would occur as a result of the making of any Loan or the issuance of any Letter of Credit; and (i) all conditions precedent with respect to the effectiveness of the Second Amended and Restated Credit Agreement shall have been satisfied in full. Section 5.02. Additional Conditions Precedent. The obligations of the Banks to make any Loan or of the Issuing Bank to issue any Letter of Credit shall be subject to the further conditions precedent (which shall be in addition to, and shall not be deemed to limit or modify, any of the other terms and conditions hereunder) that on the date of the making of such Loan or the issuance of such Letter of Credit: (a) the following statements shall be true: (i) (A) with respect to any Loan made to, and any Letter of Credit issued for the account of, the Borrower on the Effective Date, the representations and warranties contained in Article 6 hereof are true and correct on and as of the date, (B) and with respect to any Loan made and any Letter of Credit issued after the Effective Date, the representations and warranties contained in Article 6 hereof are true and correct in all material respects on and as of the date of such Loan or Letter of Credit, as the case may be, as though made on and as of such date; provided that for the purposes of this Section 5.02(a)(i)(B) only, (x) whenever any of the representations or warranties contained in Article 6 hereof are qualified by the phrase "material adverse effect on the operations, business, property or financial condition of the Borrower or any Subsidiary of the Borrower or on the ability of the Borrower or Subsidiary of the Borrower to perform its obligations hereunder" or by any phrase having a substantially similar meaning, any such phrase shall be deemed deleted and the phrase "material adverse effect on the operations, business, property or financial condition of the Borrower and its Subsidiaries, taken as a whole, or on the ability of the Borrower and its Subsidiaries, taken as a whole, to perform their obligations hereunder" or a phrase of substantially similar meaning shall be deemed inserted in lieu thereof, and (y) the representation/ warranty contained in Section 6.19 hereof shall be deemed deleted and in lieu thereof "The Borrower and its Subsidiaries, taken as a whole, are Solvent." shall be deemed inserted. (ii) no Default has occurred and is continuing or would result from any such Loan or Letter of Credit, no Event of Default pursuant to any of Section 10.01(a), Section 10.01(b) (only if due to fraud), any of Sections 10.01(c)(i)(A)-(B), Section 10.01(e) or Section 10.01(h) of this Agreement has occurred or would result from any such Loan or Letter of Credit and no Event of Default pursuant to any of Section 10.01(b) (only if not due to fraud), any of Sections 10.01(c)(i)(C) or (ii), Section 10.01(d), Section 10.01(f), Section 10.01(g), Section 10.01(i) or Section 10.01(j) of this Agreement has occurred and is continuing or would result from such Loan or Letter of Credit; and (iii) no material adverse change shall have occurred in the business, financial condition or operations of the Borrower and its Subsidiaries, taken as a whole, or, with respect to any Loan made to, or any Letter of Credit issued on behalf of, the Borrower on the Effective Date, in the ability of the Borrower or any such Subsidiary to perform any of its obligations under this Agreement or under any of the Facility Documents (the phrase "under this Agreement or under any of the Facility Documents" is hereinafter, "hereunder") or, with respect to any Loan made and any Letter of Credit issued after the Effective Date, in the ability of the Borrower and its Consolidated Subsidiaries, taken as a whole, to perform their obligations hereunder, since the date of the most recent financial statements of the Borrower and its Subsidiaries delivered to the Agent hereunder or in connection herewith; and (b) the Agent shall have received such approvals, opinions, documents or instruments as the Agent, the Issuing Bank or any Bank may reasonably request. Section 5.03. No Default Certificate and Deemed Representations. Each notice of a Loan shall be accompanied by a certificate of the president or chief financial officer of the Borrower certifying that the statements contained in Section 5.02(a) are true and correct on the date of such notice or submission and, unless the Borrower otherwise notifies the Agent prior to such Borrowing or issuance of any Letter of Credit, the acceptance by the Borrower of the proceeds of any Loan thereof and the request by such Borrower for any Letter of Credit shall constitute a representation and warranty that such statements are true and correct as of the date of such Loan or Letter of Credit, as the case may be. ARTICLE 6. REPRESENTATIONS AND WARRANTIES The Borrower hereby represents and warrants that: Section 6.01. Incorporation, Good Standing and Due Qualification; Compliance with Law. Except as set forth in Schedule 6.01, the Borrower and each of its Subsidiaries is duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own its assets and to transact the business in which it is now engaged or presently proposes to be engaged, and is duly qualified as a foreign corporation and in good standing under the laws of each other jurisdiction in which such qualification is required except where the failure to so qualify and/or be in good standing would not in any case or in the aggregate, have a material adverse effect on the operations, business, property or financial condition of the Borrower or such any Subsidiary or on the ability of the Borrower or any such Subsidiary to perform its obligations hereunder or under its respective Subsidiary Guarantee, as the case may be. In addition, the Borrower and each of its Subsidiaries is in compliance with all laws, treaties, rules or regulations, or determination of an arbitration or a court or other governmental authority, in each case applicable to or binding upon it or any of its material property or to which it or any of its material property is subject, except to the extent that the failure to so comply would not, in any case or in the aggregate, have a material adverse effect on the operations, business, property or financial condition of the Borrower or any such Subsidiary or on the ability of the Borrower or any such Subsidiary to perform its obligations hereunder or under its respective Subsidiary Guarantee, as the case may be. Section 6.02. Power and Authority; No Conflicts. Except as set forth in Schedule 6.02, the execution, delivery and performance by the Borrower of each of the Facility Documents to which it is a party and by each Subsidiary of the Borrower of its respective Subsidiary Guarantee have been duly authorized by all necessary corporate action and do not and will not: (a) require any consent or approval of its stockholders; (b) contravene its charter or by-laws; (c) violate any provision of, or require any filing, registration, consent or approval under, any law, rule, regulation (including, without limitation, the provisions of Regulation G, T, U or X of the Federal Reserve Board as in effect from time to time), order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to the Borrower or any such Subsidiary; (d) result in a breach of or constitute a default or require any consent under any indenture or loan or credit agreement or any other agreement, lease or instrument to which the Borrower or any Subsidiary of the Borrower is a party or by which any of its properties may be bound or affected; (e) result in or require the creation or imposition of any Lien upon or with respect to any of the properties now owned or hereafter acquired by the Borrower or any of its Subsidiaries except in favor of the Agent for the benefit of the Banks and the Issuing Bank as herein provided; or (f) cause the Borrower or any of its Subsidiaries to be in default under any such rule, regulation, order, writ, judgment, injunction, decree, determination or award or any such indenture, agreement, lease or instrument, except, in the case of clauses (c), (d), (e) and (f) above, where such violation, failure to satisfy such requirement, breach, default, failure to obtain consent or creation or imposition of a Lien, as the case may be, would not, in any case or in the aggregate, have a material adverse effect upon the operations, business, property or financial condition of the Borrower or any of its Subsidiaries or on the ability of the Borrower or any of its Subsidiaries to perform its obligations hereunder or under its respective Subsidiary Guarantee, as the case may be. Section 6.03. Legally Enforceable Agreements. Each Facility Document to which the Borrower or any Subsidiary of the Borrower is a party is, or when delivered under this Agreement will be, a legal, valid and binding obligation of the Borrower or such Subsidiary, as the case may be, enforceable against the Borrower or such Subsidiary, as the case may be, in accordance with its respective terms, except to the extent that such enforcement may be limited by applicable bankruptcy, insolvency and other similar laws affecting creditors' rights generally. Section 6.04. Litigation. Except as set forth in Schedule 6.04, there are no actions, suits or proceedings pending or, to the knowledge of the Borrower or any of its Subsidiaries, threatened, against or affecting the Borrower or any of its Subsidiaries before any court, governmental agency or arbitrator, which may, in any one case or in the aggregate, materially adversely affect the financial condition, operations, properties or business of the Borrower or on the ability of the Borrower or any such Subsidiary to perform its obligations hereunder or under its respective Subsidiary Guarantee, as the case may be. Section 6.05. Financial Statements. The balance sheet of the Borrower and its Consolidated Subsidiaries as at August 31, 1996, and the related income statements and statements of cash flow of the Borrower and its Consolidated Subsidiaries for the fiscal year then ended, and the accompanying notes, together with the opinion thereon, of Arthur Andersen & Co., independent certified public accountants, and the interim financial statements of the Borrower and its Consolidated Subsidiaries as at and as of (as the case may be) November 30, 1996, copies of which have been furnished to the Issuing Bank and each of the Banks, are complete and correct in all material respects and fairly present the financial condition of the Borrower and its Consolidated Subsidiaries as at such date and the results of the operations of the Borrower and its Consolidated Subsidiaries for the periods covered by such statements, all in accordance with GAAP consistently applied (subject, in the case of interim financial statements, to year-end adjustments and except, in the case of such interim financial statements, for the absence of GAAP notes thereto). As of the date hereof, there are no liabilities of the Borrower or any of its Consolidated Subsidiaries, fixed or contingent, which are material but are not reflected in the financial statements referred to above, or in the notes thereto, other than liabilities arising in the ordinary course of business since August 31, 1996, and the liabilities created by this Agreement and the Subsidiary Guarantees. No information, exhibit or report furnished by the Borrower or any Subsidiary of the Borrower to the Issuing Banks or the Banks in connection with the negotiation of this Agreement contained any material misstatement of fact or omitted to state any fact necessary to make the statements contained therein not materially misleading. Since the date of the most recent financial statements delivered to the Banks hereunder, there has been no material adverse change in the condition (financial or otherwise), business or operations of the Borrower and its Subsidiaries, taken as a whole. Section 6.06. Ownership and Liens. The Borrower and each of its Subsidiaries has title to, or valid leasehold interests in, all of its material properties and assets, real and personal, including the properties and assets, and leasehold interests reflected in the financial statements referred to in Section 6.05, and none of the property in which the Borrower or its Subsidiaries, or any of them, has any right, title or interest and none of their leasehold interests is subject to any Lien, except as disclosed in Schedule 6.10 or Permitted Liens. Section 6.07. Taxes. Each of the Borrower, its Subsidiaries and their respective Affiliates has filed all tax returns (federal, state and local) required to be filed except where the failure to file would not, in any case, or in the aggregate, have a material adverse effect upon the operations, business, property or financial condition of the Borrower and its Subsidiaries, taken as a whole, or on the ability of the Borrower or any of its Subsidiaries to perform its obligations hereunder or under its respective Subsidiary Guarantee, as the case may be and each of the Borrower, its Subsidiaries and their respective Affiliates has paid all taxes, assessments and governmental charges and levies shown thereon to be due, including interest and penalties, other than taxes, assessments and governmental charges and levies being contested in good faith by appropriate proceedings and with respect to which adequate reserves in conformity with GAAP shall have been provided on the books of the Borrower, its Subsidiaries or their respective Affiliates, as the case may be. Section 6.08. ERISA. Each of the Borrower, its Subsidiaries and their respective Affiliates is in compliance in all material respects with all applicable provisions of ERISA and the employee benefit provisions of the Code (including, without limitation, any provisions of the Code, compliance with which is necessary for any intended favorable tax treatment). No Reportable Event has occurred with respect to any Plan; no notice of intent to terminate a Plan has been filed nor has any Plan subject to Title IV of ERISA been terminated; no circumstance exists which constitutes grounds under Section 4042 of ERISA entitling the PBGC to institute proceedings to terminate, or appoint a trustee to administer, a Plan, nor has the PBGC instituted any such proceedings; neither the Borrower, its Subsidiaries nor any ERISA Affiliate has completely or partially withdrawn under Sections 4201 or 4204 of ERISA from a Multiemployer Plan and the liability thereof in the event of a withdrawal from all Multiemployer Plans would not exceed $3,000,000; each of the Borrower, its Subsidiaries and each of their ERISA Affiliates has met its minimum funding requirements under ERISA with respect to all of its Plans and except as otherwise set forth on Schedule 6.08, there are no Unfunded Vested Liabilities; and neither the Borrower, its Subsidiaries nor any ERISA Affiliate has incurred any liability to the PBGC under ERISA; and except as otherwise set forth on Schedule 6.08, neither the Borrower, its Subsidiaries nor any its Affiliates have liability for welfare plan coverage of employees after termination of employment except as may be required by the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended. Section 6.09. Subsidiaries and Ownership of Stock. The Borrower has no Subsidiaries except for those Subsidiaries set forth on Schedule 6.09 and other Subsidiaries which, after the date hereof, shall have been established pursuant to Section 8.11 hereof and which shall have been theretofore disclosed in writing to the Agent and the Banks. Section 6.10. Credit Arrangements. Schedule 6.10 is a complete and correct list of all material credit agreements, indentures, purchase agreements (other than agreements for the purchase or sale of inventory entered into in the ordinary course of business), guaranties, Capital Leases and other investments, agreements and arrangements in effect on the date of this Agreement providing for or relating to extensions of credit to the Borrower, its Subsidiaries, or any of them (including agreements and arrangements for the issuance of letters of credit or for acceptance financing but excluding the Facility Documents) in respect of which the Borrower, its Subsidiaries, or any of them, is in any manner directly or contingently obligated (collectively, "Debt Agreements"); and the maximum principal or face amounts of the credit in question, outstanding and which can be outstanding, are correctly stated, and all Liens of any nature given or agreed to be given as security therefor are correctly described or indicated in such Schedule. For the purposes of this Section 6.10, a Debt Agreement shall be deemed material if it either has a noncancellable term which exceeds one (1) year in length or requires payments by the Borrower, its Subsidiaries or any of them in an aggregate amount of $100,000 or more. The aggregate amount of payments by the Borrower, its Subsidiaries or any of them required under all Debt Agreements which are not material Debt Agreements does not exceed $1,000,000. Section 6.11. Operation of Business. Each of the Borrower and its Subsidiaries possesses all licenses, permits, franchises, patents, copyrights, trademarks and trade names, or rights thereto, to conduct its business substantially as now conducted and as presently proposed to be conducted except where the failure to do so would not, in any case or in the aggregate, have a material adverse effect upon the operations, business, property or financial condition of the Borrower and its Subsidiaries, taken as a whole, or on the ability of the Borrower or any Subsidiary to perform its obligations hereunder or under its respective Subsidiary Guarantee, as the case may be. Section 6.12. No Default on Outstanding Judgments or Orders. Each of the Borrower and its Subsidiaries has satisfied all judgments and none of the Borrower nor any of its Subsidiaries is in default with respect to any judgment, writ, injunction, decree, rule or regulation of any court, arbitrator or federal, state, municipal or other governmental authority, commission, board, bureau, agency or instrumentality, domestic or foreign except to the extent that such defaults would not, in any case or in the aggregate, have a material adverse effect on the operations, business, property or financial condition of the Borrower and its Subsidiaries, taken as a whole, or on the ability of the Borrower or any of its Subsidiaries to perform its obligations hereunder or under the respective Subsidiary Guarantee, as the case may be. Section 6.13. No Defaults on Other Agreements. Neither the Borrower nor any of its Subsidiaries is a party to any indenture, loan or credit agreement or any lease or other agreement or instrument or subject to any charter or corporate restriction which would in any case or in the aggregate have a material adverse effect on the business, properties, assets, operations or condition, financial or otherwise, of the Borrower or any of its Subsidiaries or on the ability of the Borrower or any of its Subsidiaries to perform its obligations hereunder or under its respective Subsidiary Guarantee, as the case may be. Neither the Borrower nor any of its Subsidiaries is in default in any respect in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement or instrument material to its business to which it is a party except where such default would not, in any case or in the aggregate, have a material adverse effect on the business, properties, assets, operations or condition, financial or otherwise of the Borrower or any of its Subsidiaries or on the ability of the Borrower or any of its Subsidiaries to perform its obligations hereunder or under its respective Subsidiary Guarantee, as the case may be. Section 6.14. Labor Disputes and Acts of God. Neither the business nor the properties of the Borrower or of any of its Subsidiaries are affected by any fire, explosion, accident, strike, lockout or other labor dispute, drought, storm, hail, earthquake, embargo, act of God or of the public enemy or other casualty (whether or not covered by insurance), materially and adversely affecting such business or properties or the operations of the Borrower and its Subsidiaries, taken as a whole, or the ability of the Borrower or any of its Subsidiaries to perform its obligations hereunder or under its respective Subsidiary Guarantee, as the case may be. Section 6.15. Governmental Regulation. Neither the Borrower nor any of its Subsidiaries is subject to regulation under the Public Utility Holding Company Act of 1935, the Investment Company Act of 1940 or any other statute or regulation limiting its ability to incur indebtedness for money borrowed as contemplated hereby. Section 6.16. Partnerships. Except as disclosed on Schedule 6.16 hereto, neither the Borrower nor any of its Subsidiaries is a partner in any partnership. Section 6.17. No Forfeiture Proceedings. Neither the Borrower nor any of its Subsidiaries is engaged in nor proposes to be engaged in the conduct of any business or activity which is likely to result in a Forfeiture Proceeding and no Forfeiture Proceeding against any of them is pending or, to the best knowledge of the Borrower or any of its Subsidiaries, threatened, except as set forth on Schedule 6.17. Section 6.18. No Default or Event of Default. No Default or Event of Default has occurred and is continuing. Section 6.19. Solvency. The Borrower is Solvent. Each of the Borrower's Subsidiaries, before and after giving effect to its respective Subsidiary Guarantee, is Solvent. Section 6.20. Material Adverse Change. (a) No event or series of events (including without limitation the Reorganization) has occurred which would result in a material adverse effect on the operations, business, property or financial condition of the Borrower and its Subsidiaries, taken as a whole, or on the ability of the Borrower or any of its Subsidiaries to perform its obligations hereunder or under the other Facility Documents to which it is a party. Section 6.21. Name. During the five years prior to the Effective Date, neither the Borrower nor any of its Subsidiaries has been known under, or transacted business using, any name or trade style except for the name set forth above such entity's signature on this Agreement and except insofar as such entity has used trade styles all of which are described on Schedule 6.21. The Borrower possesses valid and enforceable rights to use (without payment) each of the foregoing names and trade styles within the respective jurisdictions in which such names or trade styles are currently being used and the Borrower has no reason to believe that any of such names or trade styles conflict with any rights of others. Section 6.22. Debt. The Borrower and its Subsidiaries have no Debt, except (a) the Obligations, (b) the Debt described on Schedule 6.10 and (c) other Debt permitted by Section 8.01 hereof. Section 6.23. Nature of Business. The Borrower has no business except its business as a holding company and any business in connection with the transactions contemplated by this Agreement. Section 6.24. Fiscal Year End. (a) Except as otherwise provided in Section 6.24(b) hereof, the Borrower's fiscal years set forth below will end on the dates set forth below opposite such fiscal year: Fiscal Year Ending Date 1996 August 31, 1996 1997 August 30, 1997 1998 August 29, 1998 1999 August 28, 1999 2000 September 2, 2000 2001 September 1, 2001 (b) The Borrower may, with the prior written consent of the Agent (which consent shall not be withheld unreasonably), change its fiscal year end dates set forth in Section 6.24(a) hereof for either or both of fiscal years 2000 and 2001, subject to the following conditions: and limitations: (i) The Borrower shall notify the Agent that it proposes to make such proposed change not later than the last day of fiscal year 1998, in the case of a change respecting fiscal year 2000, and not later than the last day of fiscal year 1999, in the case of a change respecting fiscal year 2001; (ii) The change of fiscal year end date for either such year shall not result in the new fiscal year end date being more than ten days prior or subsequent to the date set forth in Section 6.24(a) hereof for such fiscal year; and (iii) In the event that the Borrower elects to change the fiscal year end date for either of such fiscal years, the certificates required to be delivered to the Agent, the Issuing Bank and each of the Banks pursuant to Section 7.08 hereof demonstrating compliance with the covenants contained herein for such fiscal period shall, at the election of the Borrower or upon the request of the Agent or the Required Banks, include calculations setting forth the adjustments necessary to demonstrate how the Borrower is in compliance with the financial covenants based upon the fiscal year end date set forth in Section 6.24(a) hereof for such fiscal year. ARTICLE 7. AFFIRMATIVE COVENANTS So long as any of the Notes shall remain unpaid, or any Bank shall have any Commitment under this Agreement or any Aggregate Letter of Credit Outstandings shall be outstanding, the Borrower shall and shall cause each of its Subsidiaries to: Section 7.01. Maintenance of Existence. Except as otherwise provided in this Agreement, preserve and maintain, its corporate existence and remain in good standing in the jurisdiction of its organization, and qualify and remain qualified, as a foreign corporation in each jurisdiction in which such qualification is required except where the failure to so qualify and/or be in good standing would not in any case or in the aggregate have a material adverse effect on the operations, business, property or financial condition of the Borrower or such Subsidiary or on the ability of the Borrower or such Subsidiary to perform its obligations hereunder or under the other Facility Documents to which it is a party. Section 7.02. Conduct of Business. Continue to engage in the business conducted by it (or related businesses) on the date hereof. Section 7.03. Maintenance of Properties. Maintain, keep and preserve, all of its properties (tangible and intangible) necessary or useful in the proper conduct of its business in good working order and condition, ordinary wear and tear excepted, except where to do so would not in any case or in the aggregate have a material adverse effect on the operations, business, property or financial condition of the Borrower or such Subsidiary or on the ability of the Borrower or such Subsidiary to perform its obligations hereunder or under the other Facility Documents to which it is a party. Section 7.04. Maintenance of Records. Keep adequate records and books of account, in which complete entries, reflecting all financial transactions of such entity, will be made. Section 7.05. Maintenance of Insurance. Maintain insurance with financially sound and reputable insurance companies or associations in such amounts and covering such risks as are usually carried by companies engaged in the same or a similar business and similarly situated and as are required by the Facility Documents. The Borrower shall provide the Agent notice that such policies have been paid in full and shall deliver the policy or policies of such insurance or certificates of insurance to the Agent if the Agent so requests and, in any event, at least once per calendar year. Section 7.06. Compliance with Laws. Comply with all applicable laws, rules, regulations and orders ("Laws"), except to the extent that the failure to so comply would not have a material adverse effect on the operations, business, property or financial condition of the Borrower or such Subsidiary or on the ability of the Borrower or such Subsidiary to perform its obligations hereunder or under the other Facility Documents to which it is a party; and cause to be conducted, at the sole cost of the Borrower or its Subsidiaries, or any of them, any real estate appraisals that may be required to be conducted pursuant to any applicable Laws. Section 7.07. Right of Inspection. Subject to the provisions of Section 12.15 hereof, at any reasonable time upon reasonable notice during normal business hours and from time to time, permit the Agent, the Issuing Bank or any Bank or any agent or representative thereof, to examine and make copies and abstracts from the records and books of account of, and visit the properties of, such entity and to discuss the affairs, finances and accounts of such entity with any of its officers and directors and such entity's independent accountants. Section 7.08. Reporting Requirements. Furnish directly to the Agent, the Issuing Bank and each of the Banks: (a) as soon as available and in any event within 105 days after the end of each fiscal year of the Borrower, audited consolidated and unaudited consolidating financial statements of the Borrower and its Consolidated Subsidiaries which shall include a balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such fiscal year, together with a consolidated and consolidating income statement, and statement of cash flows of the Borrower and its Consolidated Subsidiaries for such fiscal year and such other reports as the Agent, on behalf of the Issuing Bank and the Banks, shall reasonably require, all in reasonable detail and stating in comparative form the respective figures for the corresponding date and period in the prior fiscal year and all prepared in accordance with GAAP and accompanied by an unqualified opinion thereon by Arthur Andersen & Co., or other independent certified public accountants reasonably acceptable to the Agent and the Required Banks together with an executive summary of the management letter prepared by such independent certified public accountants; provided, however, that if a Default or Event of Default has occurred and is continuing, the full text of such management letter shall be provided to the Agent, the Issuing Bank and the Banks; (b) as soon as available and in any event within 60 days after the end of each fiscal quarter of the Borrower, an unaudited consolidated and consolidating balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such quarter, together with a consolidated and consolidating income statement of the Borrower and its Consolidated Subsidiaries for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, all in reasonable detail and stating in comparative form (with respect to the first two financial statements to be furnished hereunder only) the respective figures for the corresponding date and period in the previous fiscal year and all (with respect to all financial statements to be furnished hereunder, including the first two) prepared in accordance with GAAP (subject to year-end adjustments and except for the absence of GAAP notes thereto) and attested to by the president or chief financial officer of the Borrower, each in form and substance reasonably satisfactory to the Agent; (c) simultaneously with the delivery of the financial statements referred to in Sections 7.08(a) and (b) above, a certificate of the president or chief financial officer of the Borrower (i) certifying that to the best of his knowledge no Default or Event of Default has occurred and is continuing or, if a Default or Event of Default has occurred and is continuing, a statement as to the nature thereof and the action which is proposed to be taken with respect thereto, and (ii) with computations demonstrating compliance with the covenants contained in Article 9; (d) simultaneously with the delivery of the annual financial statements referred to in Section 7.08(a), a certificate of the independent public accountants who audited such statements to the effect that, in making the examination necessary for the audit of such statements, they have obtained no knowledge of any condition or event which constitutes a Default or Event of Default, or if such accountants shall have obtained knowledge of any such condition or event, specifying in such certificate each such condition or event of which they have knowledge and the nature and status thereof; (e) as soon as available and in any event not more than 120 days after the end of each fiscal year of the Borrower, copies of the Borrower's consolidated annual financial projections in form similar to those provided to the Agent, the Issuing Bank and the Banks prior to the Effective Date for the then current fiscal year, for information purposes only; (f) promptly after the Borrower or any of its Subsidiaries becomes aware of the commencement thereof, notice of all actions, suits, and proceedings before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, affecting the Borrower or any Subsidiary of the Borrower which could (i) have a material adverse effect on the business, condition (financial or otherwise), operations, performance or properties of the Borrower and its Subsidiaries, taken as a whole, (ii) impair the Borrower or any such Subsidiary's ability to perform under the Facility Documents to which it is a party, or (iii) subject the Borrower or any Subsidiary to monetary liability in an amount of $100,000 or more; (g) as soon as possible and in any event within five days after any of (i) a Default has occurred and is continuing, or (ii) an Event of Default pursuant to any of Section 10.01(a), Section 10.01(b) (only if due to fraud), any of Sections 10.01(c)(i)(A)-(B), Section 10.01(e) or Section 10.01(h) of this Agreement has occurred, or (iii) an Event of Default pursuant to any of Section 10.01(b) (only if not due to fraud), any of Sections 10.01(c)(i)(C) or (ii), Section 10.01(d), Section 10.01(f), Section 10.01(g), Section 10.01(i) or Section 10.01(j) of this Agreement has occurred and is continuing, a written notice setting forth the details of such Default or Event of Default and the action which is proposed to be taken by the Borrower with respect thereto; (h) as soon as possible and in any event within five days after the Borrower or any of its Subsidiaries knows or has reason to know that any of the events or conditions specified below with respect to any Plan or Multiemployer Plan have occurred or exist, a statement signed by a senior financial officer of the Borrower or such Subsidiary setting forth details respecting such event or condition and the action, if any, which the Borrower, such Subsidiary or any ERISA Affiliate proposes to take with respect thereto (and a copy of any report or notice required to be filed with or given to PBGC by the Borrower, any of its Subsidiaries or an ERISA Affiliate with respect to such event or condition): (i) any Reportable Event; (ii) the filing under Section 4041 of ERISA of a notice of intent to terminate any Plan or the termination of any Plan; (iii) the institution by PBGC of proceedings under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Borrower, or any of its Subsidiaries or any ERISA Affiliate of a notice from a Multiemployer Plan that such action has been taken by PBGC with respect to such Multiemployer Plan; (iv) the complete or partial withdrawal by the Borrower, any of its Subsidiaries or any ERISA Affiliate under Section 4201 or 4204 of ERISA from a Multiemployer Plan, or the receipt by the Borrower, any of its Subsidiaries or any ERISA Affiliate of notice from a Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA or that it intends to terminate or has terminated under Section 4041A of ERISA; and (v) the institution of a proceeding by a fiduciary or any Multiemployer Plan against the Borrower, any of its Subsidiaries or any ERISA Affiliate to enforce Section 515 of ERISA, which proceeding is not dismissed within 30 days; (i) promptly after the furnishing thereof, copies of any statement or report furnished to any other party pursuant to the terms of any indenture, loan or credit or similar agreement and not otherwise required to be furnished to the Agent, the Banks and the Issuing Bank pursuant to any other clause of this Section 7.08; (j) promptly after the commencement thereof or promptly after the Borrower or any of its Subsidiaries know of the commencement or threat thereof, notice of any Forfeiture Proceeding; (k) promptly after the sending or filing thereof, copies of all reports which Borrower sends to its security holders generally, and copies of all reports and registration statements which Borrower or any of its Subsidiaries files with the Securities and Exchange Commission or any national securities exchange; and (l) such other information respecting the condition or operations, financial or otherwise of the Borrower, any of its Subsidiaries or any Affiliates of any of the foregoing as the Agent may from time to time reasonably request. Section 7.09. Payment of Obligations. Pay, discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all of its material Debt and other material obligations of whatever nature (including any obligation for taxes or wages), except for any Debt or other material obligation which is being contested in good faith and with respect to which, on a consolidated basis, adequate reserves in conformity with GAAP shall have been provided on the books of the Borrower or the applicable Subsidiary. Section 7.10. Subsidiary Guarantee. In the event that aggregate loans, Dividends or other distributions from the Borrower or any of its Subsidiaries to any Affiliate thereof (excluding Dividends made by the Borrower to any of its shareholders in accordance with Section 8.15 hereof) exceed $5,000,000 in principal amount at any time, the Borrower shall cause such Affiliate to immediately, and in any event, within 10 Banking Days thereafter, execute and deliver to the Agent a guarantee of the Debt of the Borrower hereunder, which guarantee shall be substantially in a form approved by the Agent and the Required Banks. Section 7.11. Notices With Respect to Certain Debts. Promptly notify each of the Banks of the failure of any of the Borrower, any Subsidiary or any Acquisition Affiliate to (a) pay any Debt or Debts when due and payable, after giving effect to any applicable grace period, in the aggregate (with respect to the Borrower, its Subsidiaries and the Acquisition Affiliates) amount of $250,000 or more, or (b) perform or observe any term, covenant or condition on the part of any of the foregoing entities to be performed or observed under any agreement or instrument relating to any such Debt or Debts. Section 7.12. Use of Proceeds. Use the proceeds of the Loans only for the purposes enumerated in Section 2.03 hereof, in the case of the Borrower. Section 7.13. Solvency. The Borrower shall continue to be Solvent and ensure that it and each of its Subsidiaries continues to be Solvent. Section 7.14. Subsidiary Guarantees After Effective Date. The Borrower shall cause each Person which becomes a Subsidiary of the Borrower after the Effective Date hereof to execute and deliver a Subsidiary Guarantee to the Agent. ARTICLE 8. NEGATIVE COVENANTS So long as any of the Notes shall remain unpaid or any Bank shall have any Commitment under this Agreement or any Aggregate Letter of Credit Outstandings shall be outstanding, the Borrower shall not and shall not permit its Subsidiaries to: Section 8.01. Debt. Create, incur, assume or suffer to exist any Debt, except: (a) The Obligations; (b) Debt described in Schedule 6.10, and any renewals, extensions or refinancings thereof provided, that such renewals, extensions or refinancings are on terms no less favorable to the Borrower or the relevant Subsidiary of the Borrower than the original terms of such Debt; provided, however, that neither the Borrower nor its Subsidiaries shall cause or permit any letter of credit or other financial accommodation to be issued for its account on or after December 1, 1997, under either of the credit facilities described in Items 10 and 11 of Schedule 6.10; (c) Subordinated Debt; (d) Debt incurred in connection with operating leases entered into by the Borrower or its Subsidiaries, or any of them, consistent with past practice or in the ordinary course of business; (e) Debt of the Borrower or its Subsidiaries, or any of them, secured by Permitted Liens; (f) Current liabilities in respect of taxes, assessments and governmental charges and levies incurred, or claims for labor, materials, inventory, services, supplies and rentals incurred, or for goods or services purchased, incurred in the ordinary course of business; (g) Capital Leases, provided that the aggregate initial present value of such Capital Leases does not exceed $1,000,000 in any fiscal year; (h) Debt of the Borrower to any Subsidiary, or of any Subsidiary to the Borrower or any other Subsidiary; (i) Permitted Assumed Acquisition Debt, but only so long as such Debt remains Permitted Assumed Acquisition Debt; and (j) Additional unsecured Debt not contemplated by clauses (a) through (i) above, so long as such Debt shall not exceed $5,000,000 in the aggregate for the Borrower and all Subsidiaries at any one time outstanding. Section 8.02. Liens. Create, incur, assume or suffer to exist any Lien, upon or with respect to any of its property, now owned or hereafter acquired, except the following Liens ("Permitted Liens"): (a) Liens in favor of the Agent (on behalf and for the ratable benefit of the Banks) securing the Loans hereunder; (b) Liens for taxes or assessments or other government charges or levies if not yet due and payable or if due and payable if they are being contested in good faith by appropriate proceedings and for which appropriate reserves are maintained in conformity with GAAP; (c) Liens imposed by law, such as mechanic's, materialmen's, landlord's, warehousemen's and carrier's Liens, and other similar Liens, securing obligations incurred in the ordinary course of business which are not past due for more than 30 days, or which are being contested in good faith by appropriate proceedings and for which appropriate reserves in accordance with GAAP have been established; (d) Liens under workers' compensation unemployment insurance, social security or similar legislation (other than ERISA); (e) Liens, deposits or pledges to secure the performance of bids, tenders, contracts (other than contracts for the payment of money), leases, public or statutory obligations, surety, stay, appeal, indemnity, performance or other similar bonds, or other similar obligations arising in the ordinary course of business; (f) judgment and other similar Liens arising in connection with court proceedings; provided that the execution or other enforcement of such Liens is effectively stayed and the claims secured thereby are being actively contested in good faith and by appropriate proceedings; (g) easements, rights-of-way, restrictions and other similar encumbrances which, in the aggregate, do not materially interfere with the occupation, use and enjoyment by the Borrower or any of its Subsidiaries of the property or assets encumbered thereby in the normal course of its business or materially impair the value of the property subject thereto; (h) purchase money Liens on any personal property heretofore or hereafter acquired or the assumption of any Lien on property existing at the time of such acquisition, or a Lien incurred in connection with any conditional sale or other title retention agreement or a Capital Lease; provided, that such Liens attach only to the property as acquired and do not extend to any additional property of the Borrower or of any of its Subsidiaries; (i) Liens securing Permitted Assumed Acquisition Debt to the extent described in the definition of Permitted Assumed Acquisition Debt; and (j) Liens existing on the date hereof and described on Schedule 6.10 hereto. Section 8.03. Investments. Make any loan or advance to any person or purchase or otherwise acquire, any capital stock, assets, obligations or other securities of, make any capital contribution to, or otherwise invest in, or acquire any interest in any Person (each of the foregoing, an "Investment"). Notwithstanding the foregoing, the Borrower and its Subsidiaries shall be entitled to make loans and advances to their vendors in an amount up to $500,000 in the aggregate at any one time outstanding, loans and other distributions to Affiliates in accordance with Section 8.13 hereof, Investments in Acquisition Affiliates in accordance with Section 12.06 hereof and Investments in Subsidiaries existing on the date hereof; and the Borrower and each of its Subsidiaries shall be entitled to make the following Investments: (i) obligations issued or guaranteed by states or municipalities within the United States of America; (ii) obligations issued or guaranteed by the United States of America or any agency or subdivision thereof; (iii) certificates of deposit, time deposits, Eurodollar certificates of deposit, bankers acceptances and other "money market instruments" issued by any bank, trust company or financial institution organized under the laws of the United States of America or any state thereof (or, in the case of Eurodollar certificates of deposit, a branch of any such bank, trust company or financial institution) having capital and surplus in an aggregate amount not less than $100,000,000; (iv) commercial paper rated at least Prime-1 by Moody's Investors Service, Inc. or A-1 by Standard & Poor's Ratings Group; (v) repurchase agreements entered into with any bank, trust company or financial institution organized under the laws of the United States of America or any state thereof having capital and surplus in an aggregate amount not less than $100,000,000 and relating to any of the obligations referred to in clauses (i), (ii) and (iii) above; in each case maturing or being due or payable in full not more than one year after the Borrower's or such Subsidiary's acquisition thereof; and (vi) other prudent investments in readily-marketable publicly-traded securities, provided that the amount of cash and other property invested in such other investments does not exceed $5,000,000 in the aggregate and the making of such other investments has been approved by the outside directors on the Borrower's Board of directors. Section 8.04. Sale of Assets. Sell, lease, assign, transfer or otherwise dispose of, any of its now owned or hereafter acquired assets, except: (a) for assets disposed of in the ordinary course of business; (b) the sale or other disposition of assets no longer used or useful in the conduct of its business; (c) sales or dispositions of assets in arm's length transactions, provided that the aggregate net proceeds of any such sale, when added to all other sales made by the Borrower and its Subsidiaries in any fiscal year, shall not exceed $500,000 in such fiscal year. Section 8.05. Transactions with Affiliates. Enter into any transaction, including, without limitation, the purchase, sale or exchange of property or the rendering of any service, with any Affiliate, except (a) (unless elsewhere restricted hereunder) in the ordinary course of and pursuant to the reasonable requirements of the Borrower's or its relevant Subsidiary's business and (except with respect to intercompany transfer pricing transactions between the Borrower and a Subsidiary or between two Subsidiaries) upon fair and reasonable terms no less favorable to the Borrower or its relevant Subsidiary, as the case may be, than would be obtained in a comparable arm's length transaction with a Person not an Affiliate, (b) transactions described in the Final Prospectus, and (c) Debt transactions permitted pursuant to Section 8.01(e). Additionally, and subject to the other provisions of this Agreement (including, but not limited to, Section 8.03 hereof), the Borrower and its Subsidiaries may continue to lease its existing facilities from the relevant Real Estate Borrowers; the Borrower may make loans, Dividends and other distributions in accordance with Sections 8.13 and 8.15 hereof; and the Borrower and its Subsidiaries may engage in transactions with the Acquisition Affiliates as provided in Section 12.06 hereof. Section 8.06. Mergers, Etc. (a) Merge or consolidate with, or sell, assign, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired) to, any Person, except for mergers, consolidations, sales, assignments, leases or other dispositions described in the Final Prospectus or (b) acquire all or substantially all of the assets or the business of any Person (or enter into any agreement to do any of the foregoing), except for Permitted Acquisitions. Section 8.07. Acquisitions. Acquire or commit or agree to acquire any material portion of the stock, securities or assets of any other Person, except in the context of a Permitted Acquisition or except as contemplated in the Final Prospectus. Section 8.08. No Activities Leading to Forfeiture. Engage in the conduct of any business or activity which would be likely to result in a Forfeiture Proceeding. Section 8.09. Corporate Documents; Fiscal Year. Amend, modify or supplement its certificate or articles of incorporation or by-laws in any way which would materially adversely affect the ability of the Borrower or such Subsidiary to perform its obligations hereunder or under its respective Subsidiary Guarantee, as the case may be, or change its fiscal year. Section 8.10. Redemptions, Etc. Notwithstanding Section 8.15 hereof, (a) purchase or redeem any of its stock or other securities, or retire any of its stock, or take any action which would have an effect equivalent to any of the foregoing or (b) pay any cash Dividends, make any capital distribution in cash or other property or take any action which would have an effect equivalent to any of the foregoing, if a Default or Event of Default has occurred and is continuing or would result therefrom. Section 8.11. Creation of Subsidiaries, Etc. Except as permitted by Section 12.06 hereof, create any direct or indirect subsidiary or divest itself of any material assets by transferring them to any existing or future subsidiary or by entering into a partnership, joint venture or similar arrangement, or make any material change to its capital structure or enter into any management contract permitting any third party to have management rights with respect to its business. Section 8.12. Real Estate Loans to Affiliates. Make any loan or otherwise extend credit to any Affiliate to provide funds to permit such Affiliate to purchase real property. Section 8.13. Loans to Affiliates; Distributions. Except as permitted by Section 8.15 hereof in the case of the Borrower, permit loans or Dividends or other distributions from the Borrower or any of its Subsidiaries to any Affiliate thereof to exceed $500,000 at any time with respect to such Affiliate, unless such Affiliate shall have executed a guarantee of the obligations of the Borrower in accordance with Section 7.10 hereof. Section 8.14. Broker's Fees. Pay any broker or finder any compensation for services rendered with respect to the transactions contemplated by this Agreement or any other Facility Document. Section 8.15. Dividends. Subject to Section 8.10 hereof, the Borrower shall not (a) declare or pay in any fiscal year Dividends in excess of the sum of (i) fifty percent (50%) of the accrued net income reflected in the immediately preceding fiscal year's financial statements plus (ii) $10,000,000, or (b) pay in any fiscal year Dividends in excess of the sum of (i) fifty percent (50%) of the accrued net income reflected in the immediately preceding fiscal year's financial statements plus (ii) all Dividends declared in accordance with clause (a) above in respect of any prior fiscal year to the extent not previously paid plus (iii) $10,000,000. Section 8.16. Nature of Business. In the case of the Borrower, enter into any business other than the business contemplated by Section 6.23 hereof, and in the case of each Subsidiary, enter into any business except such business except such business which is comparable to the business in which Sid Tool is engaged as of the Effective Date. ARTICLE 9. FINANCIAL COVENANTS So long as any of the Notes shall remain unpaid, or any Bank shall have any Commitment or any Aggregate Letter of Credit Outstandings shall be outstanding under this Agreement: Section 9.01. Minimum Effective Net Worth. The Borrower and its Consolidated Subsidiaries shall maintain at all times during each of the periods set forth below, an Effective Net Worth of not less than the amount set forth below opposite such period:
======================================================================================================================== Period Amount - ------------------------------------------------------------------------------------------------------------------------ From and including the Effective $115,000,000 Date through and including the day immediately preceding the last day of fiscal year 1996 - ------------------------------------------------------------------------------------------------------------------------ From and including the last day of $130,000,000 fiscal year 1996 through and including the day immediately preceding the last day of fiscal year 1997 - ------------------------------------------------------------------------------------------------------------------------ From and including the last day of $145,000,000 fiscal year 1997 through and including the day immediately preceding the last day of fiscal year 1998 - ------------------------------------------------------------------------------------------------------------------------ From and including the last day of $160,000,000 fiscal year 1998 through and including the Loan Maturity Date ========================================================================================================================
Section 9.02. Current Ratio. The Borrower and its Consolidated Subsidiaries shall maintain at all times a ratio of Total Current Assets to Total Current Liabilities (which shall include any and all Aggregate Outstandings for purposes of this Section 9.02) of not less than 1.25:1.00. Section 9.03. Maximum Leverage. The Borrower and its Consolidated Subsidiaries shall maintain at all times a ratio of Total Liabilities to Effective Net Worth of not more than 1.25:1.0. Section 9.04. Maximum Capital Expenditures. The Borrower and its Consolidated Subsidiaries shall not be permitted to make Capital Expenditures averaging, on a cumulative basis through September 2, 2000 in excess of $25,000,000 with respect to any fiscal year commencing September 1, 1996; provided, however, that if it is determined that Capital Expenditures in an amount in excess of $25,000,000 have been made by the Borrower and its Consolidated Subsidiaries for the fiscal year ending August 30, 1997, the amount of such excess shall be subtracted from the amount of Capital Expenditures otherwise permitted to be made by this Section 9.04. Section 9.05. Minimum Interest Coverage Ratio. The Borrower and its Consolidated Subsidiaries shall maintain at all times a ratio of EBIT to Interest Expense of at least 2.50 to 1.0, as determined at the end of each fiscal quarter for the then preceding four fiscal quarters. Section 9.06. Positive Earnings. The Borrower and its Consolidated Subsidiaries shall maintain at all times positive Net Income (after taxes, dividends and other distributions and excluding the effect of extraordinary items and any changes in accounting policies), as determined at the end of each fiscal quarter for the then preceding four fiscal quarters. Compliance with all of the financial covenants contained in this Article 9 shall be determined by reference to the financial statements of the Borrower delivered to the Banks in accordance with Section 7.08 hereof. All financial covenants shall be applicable at all times and shall be tested on a quarterly basis and on a combined (not combining) basis. ARTICLE 10. EVENTS OF DEFAULT Section 10.01. Events of Default. Any of the following events shall be an "Event of Default": (a) The Borrower or any Subsidiary or any Acquisition Affiliate shall: (i) fail to pay the principal of or interest on any Loan as and when due and payable or (ii) fail to pay any fee or other amount (including, without limitation, any unreimbursed amount with respect to any Letter of Credit) due hereunder as and when due and payable; if any such failure referred to in this clause (ii) shall continue for two consecutive Banking Days after delivery to the Borrower of notice (pursuant to Section 12.07 hereof) of such failure; (b) Any representation or warranty made or deemed made by the Borrower, any Subsidiary or any Acquisition Affiliate in this Agreement or in any other Facility Document or which is contained in any certificate, document, opinion, financial or other statement furnished at any time under or in connection with any Facility Document shall prove to have been incorrect in any material respect on or as of the date made or deemed made; (c) The Borrower, any Subsidiary or any Acquisition Affiliate shall: (i) fail to perform or observe any term, covenant or agreement contained in any of (A) Section 2.03, (B) Article 9 hereof or (C) any Facility Document (with respect to any such Facility Documents, other than the obligations specifically referred to in Section 10.01(a) hereof, and in any event, after the expiration of any applicable grace period provided in any such Facility Document); or (ii) fail to perform or observe any term, covenant or agreement on its part to be performed or observed (other than the obligations specifically referred to in any of Section 10.01(a), Section 10.01(b), Section 10.01(c)(i) or any of Sections 10.01(d)-(j) hereof) in this Agreement and (in the case of this Section 10.01(c)(ii) only) such failure shall continue for 30 consecutive days; (d) The Borrower or any Subsidiary or any Acquisition Affiliate shall: (i) fail to pay any Debt or Debts for borrowed money (other than the payment obligations described in (a) above or under the Second Amended and Restated Credit Agreement) in the aggregate amount of $500,000 or more, as the case may be, or any interest or premium thereon, when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) after giving effect to any applicable grace period; or (ii) fail to perform or observe any term, covenant or condition on its part to be performed or observed, including the obligation to make payment, under any agreement or instrument relating to any Debt or Debts (other than the payment obligations described in (a) above and other than certain failures which exist at the date hereof and described in Schedule 6.02) in the aggregate amount of $500,000 or more, when required to be performed or observed, and the effect of such failure to perform or observe is to accelerate the maturity of such Debt, after giving effect to any applicable grace period; (e) The Borrower, any Subsidiary or any Acquisition Affiliate (i) shall generally not, or be unable to, or shall admit in writing its or their inability to, pay its or their debts as such debts become due; or (ii) shall make an assignment for the benefit of creditors, petition or apply to any tribunal for the appointment of a custodian, receiver or trustee for it or a substantial part of its assets; or (iii) shall commence any proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect; or (iv) shall have had any such petition or application filed or any such proceeding shall have been commenced, against it or them, in which an adjudication or appointment is made or order for relief is entered, or which petition, application or proceeding remains undismissed for a period of 45 days or more; or shall be the subject of any proceeding under which its assets may be subject to seizure, forfeiture or divestiture (other than a proceeding in respect of a Permitted Lien under Section 8.02(b)); or (v) by any act or omission shall indicate its consent to, approval of or acquiescence in any such petition, application or proceeding or order for relief or the appointment of a custodian, receiver or trustee for all or any substantial part of its property; (vi) shall suffer any such custodianship, receivership or trusteeship to continue discharged for a period of 30 days or more; or (vii) the Borrower, its Subsidiaries and the Acquisition Affiliates, taken as a whole, shall cease to be Solvent; (f) One or more judgments, decrees or orders for the payment of money in excess of $500,000 in the aggregate shall be rendered against the Borrower and/or any Subsidiary and/or any Acquisition Affiliate and such judgments, decrees or orders shall continue unsatisfied and in effect for a period of 45 consecutive days without being vacated, discharged, satisfied or stayed or bonded pending appeal; (g) An event or condition specified in Section 7.08(h) hereof shall occur or exist with respect to any Plan or Multiemployer Plan and, as a result of such event or condition, together with all other such events or conditions and all other events or conditions relating to a Plan or Multiemployer Plan, the Borrower or any Subsidiary or any Acquisition Affiliate or any ERISA Affiliate shall incur or in the opinion of the Required Banks shall be reasonably likely to incur a liability to a Plan, a Multiemployer Plan, the Internal Revenue Service or PBGC (or any combination of the foregoing) in excess of $2,000,000 in the aggregate; (h) Any Forfeiture Proceeding shall have been commenced against the Borrower, any Subsidiary or any Acquisition Affiliate unless such Borrower, Subsidiary or Acquisition Affiliate, as the case may be, timely contests any such proceeding in good faith by appropriate proceedings and such proceeding is dismissed within 30 days after the commencement thereof; provided, however, that until such proceeding is dismissed as aforesaid, and notwithstanding anything contained in this Agreement to the contrary, the Banks will be under no obligation to make Loans available to, and the Issuing Bank will be under no obligation to issue Letters of Credit for the account of, the Borrower after the commencement of any such proceeding unless and until such time as any such proceeding shall have been dismissed pursuant to the foregoing provisions; (i) (i) Any of the Subsidiaries shall fail to perform or observe any term, covenant or agreement contained in the Subsidiary Guarantee; or (ii) any Subsidiary Guarantee or any provision of any Subsidiary Guarantee shall cease to be in full force and effect for any reason; or (j) Sid Tool Co., Inc. shall cease to be a wholly-owned direct Subsidiary of the Borrower for any reason. Section 10.02. Remedies. If any Event of Default pursuant to any of Section 10.01(a), Section 10.01(b) (only if due to fraud) or any of Sections 10.01(c)(i)(A)-(B) hereof shall occur, or if any Event of Default pursuant to any of Section 10.01(b) (only if not due to fraud), any of Sections 10.01(c)(i)(C) or (ii), Section 10.01(d), Section 10.01(f), Section 10.01(g), Section 10.01(i) or Section 10.01(j) hereof shall occur and be continuing the Agent, after it has received notice or has become aware of any such Event of Default, shall notify the Banks of the same, and if instructed by the Required Banks, the Agent shall, by notice to the Borrower, (i) declare the Commitments to be terminated, whereupon the same shall forthwith terminate, and (ii) declare the outstanding principal of the Loans, all interest thereon and all other amounts payable under this Agreement and the Notes (including, without limitation, amounts payable in respect of any Letter of Credit) to be forthwith due and payable, whereupon the Loans, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower; provided that, in the case of an Event of Default referred to in Section 10.01(e) or Section 10.01(h) above, the Commitments shall be immediately terminated, and the Loans, all interest thereon and all other amounts payable under this Agreement and the Notes (including amounts payable in respect of any Letter of Credit) shall be immediately due and payable without notice, presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Borrower. With respect to all Letters of Credit that shall not have matured or with respect to which presentment for honor shall not have occurred, the Borrower shall deposit in a cash collateral account opened by the Agent an amount equal to the aggregate undrawn amount of Letters of Credit, and the unused portion thereof, if any, shall be returned to the Borrower after the respective expiration dates of the Letters of Credit and after all obligations of the Borrower hereunder and under the Facility Documents are paid in full. Furthermore, if an Event of Default pursuant to any of Section 10.01(a), Section 10.01(b) (only if due to fraud), any of Sections 10.01(c)(i)(A)-(B), Section 10.01(e) or Section 10.01(h) of this Agreement has occurred, or if an Event of Default pursuant to any of Section 10.01(b) (only if not due to fraud), any of Sections 10.01(c)(i)(C) or (ii), Section 10.01(d), Section 10.01(f), Section 10.01(g), Section 10.01(i) or Section 10.01(j) of this Agreement has occurred and is continuing, interest and each Letter of Credit Commission Fee and Special Letter of Credit Commission Fee payable hereunder in connection with Loans, Letters of Credit and Special Letters of Credit shall automatically be increased to the Default Rate. ARTICLE 11. THE AGENT AND THE ISSUING BANK; RELATIONS AMONG BANKS Section 11.01. Appointment, Powers and Immunities of Agent. Each Bank and the Issuing Bank hereby irrevocably (but subject to removal by the Required Banks pursuant to Section 11.09) appoint and authorize the Agent to act as its agent hereunder and under any other Facility Document with such powers as are specifically delegated to the Agent or any similar Person by the terms of this Agreement and any other Facility Document, together with such other powers as are reasonably incidental thereto. Neither the Agent nor the Issuing Bank shall have any duties or responsibilities except those expressly set forth in this Agreement and any other Facility Document, and shall not by reason of this Agreement be a trustee for any Bank. Neither the Agent nor the Issuing Bank shall be responsible to the Banks for any recitals, statements, representations or warranties made by the Borrower or any Subsidiary or any officer or official of the Borrower, any Subsidiary or any other Person contained in this Agreement or any other Facility Document, or in any certificate or other document or instrument referred to or provided for in, or received by any of them under, this Agreement or any other Facility Document, or for the value, legality, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Facility Document or any other document or instrument referred to or provided for herein or therein, or for any failure by the Borrower or its Subsidiaries, or any of them, to perform any of their or its respective obligations hereunder or thereunder. The Agent and the Issuing Bank may employ agents and attorneys-in-fact and shall not be responsible, except as to money or securities received by it or its authorized agents, for the negligence or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. Neither the Agent, nor the Issuing Bank, nor any of their respective directors, officers, employees or agents shall be liable or responsible for any action taken or omitted to be taken by it or them hereunder or under any other Facility Document or in connection herewith or therewith, except for its or their own gross negligence or willful misconduct. Section 11.02. Reliance by Agent and Issuing Bank. Each of the Agent and the Issuing Bank shall be entitled to rely upon any certification, notice or other communication (including any thereof by telephone, telex, telegram, telecopier or cable) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by the Agent or the Issuing Bank, as the case may be. Each of the Agent and the Issuing Bank may deem and treat each Bank as the holder of the Loans made by it for all purposes hereof unless and until a notice of the assignment or transfer thereof reasonably satisfactory to the Agent and the Issuing Bank signed by such Bank shall have been furnished to the Agent and the Issuing Bank but neither the Agent nor the Issuing Bank shall be required to deal with any Person who has acquired a participation in any Loan from a Bank. As to any matters not expressly provided for by this Agreement or any other Facility Document, the Agent and the Issuing Bank shall in all cases be fully protected in acting, or in refraining from acting, hereunder in accordance with instructions signed by the Required Banks, and such instructions of the Required Banks and any action taken, or failure to act, pursuant thereto shall be binding on all of the Banks and any other holder of all or any portion of any Loan. Section 11.03. Defaults. Neither the Agent nor the Issuing Bank shall be deemed to have knowledge of the occurrence of a Default or Event of Default (other than, in the case of the Agent, the non-payment of principal of or interest on the Loans to the extent the same is required to be paid to the Agent for the account of the Banks and other than, in the case of the Issuing Bank, the non-payment of any reimbursement obligation under a Letter of Credit) unless the Agent or the Issuing Bank, as the case may be, has actual knowledge of such Default or Event of Default or has received notice from a Bank or the Borrower specifying such Default or Event of Default and stating that such notice is a "Notice of Default." In the event that the Agent or the Issuing Bank, as the case may be, has actual knowledge of an Event of Default or receives such a notice of the occurrence of a Default or Event of Default, the Agent or the Issuing Bank shall give prompt notice thereof to the Banks (and shall give each Bank prompt notice of each such non-payment). The Agent shall (subject to Section 12.08) take such action with respect to such Default or Event of Default which is continuing as shall be directed by the Required Banks; provided that, unless and until the Agent shall have received such directions, the Agent may take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interest of the Banks and the Issuing Bank; and provided further that the Agent shall not be required to take any such action which it determines to be contrary to law. Section 11.04. Rights of Agent and Issuing Bank. With respect to its Commitment and the Loans made by it, the Agent and the Issuing Bank in its capacity as a Bank hereunder shall have the same rights and powers hereunder as any other Bank and may exercise the same as though it were not acting as the Agent or the Issuing Bank, and the term "Bank" or "Banks" shall, unless the context otherwise indicates, include the Agent and the Issuing Bank in its capacity as a Bank. The Agent, the Issuing Bank or any Bank and their respective Affiliates may (without having to account therefor to any other Bank) accept deposits from, lend money to (on a secured or unsecured basis), and generally engage in any kind of banking, trust or other business with, the Borrower or any Subsidiaries of the Borrower (and any of their respective Affiliates). In the case of the Agent or the Issuing Bank, it may do so as if it were not acting as the Agent or the Issuing Bank, respectively, and the Agent and the Issuing Bank may accept fees and other consideration from the Borrower or any Subsidiaries of the Borrower for services in connection with this Agreement or otherwise without having to account for the same to the Banks. Although the Agent, the Issuing Bank or a Bank or any of their respective Affiliates may in the course of such relationships and relationships with other Persons acquire information about the Borrower or any Subsidiaries of the Borrower, their respective Affiliates and such other Persons, neither the Agent, the Issuing Bank nor such Bank shall have any duty to disclose such information to the other Banks except as required under this Agreement or the Facility Documents. Section 11.05. Indemnification of Agent. The Banks (including the Agent and the Issuing Bank in its capacity as a Bank) agree to indemnify the Agent and the Issuing Bank (to the extent not reimbursed under Section 12.03 or under the applicable provisions of any other Facility Document, but without limiting the obligations of the Borrower under Section 12.03 or such provisions), ratably in accordance with the aggregate unpaid principal amount of the Loans made by the Banks (without giving effect to any participation, in all or any portion of such Loans, sold by them to any other Person) (or, if no Loans are at the time outstanding, ratably in accordance with their respective Commitments), for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Agent or the Issuing Bank relating to or arising out of this Agreement, any other Facility Document or any other documents contemplated by or referred to herein or the transactions contemplated hereby or thereby (including, without limitation, the costs and expenses which the Borrower is obligated to pay under Section 12.03 or under the applicable provisions of any other Facility Document but excluding, unless a Default or Event of Default has occurred, normal administrative costs and expenses incidental to the performance of its agency duties hereunder) or the enforcement of any of the terms hereof or thereof or of any such other documents or instruments; provided that no Bank shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the party to be indemnified. Section 11.06. Documents. The Agent will forward to the Issuing Bank and each Bank, promptly after the Agent's receipt thereof, a copy of each report, notice or other document required by this Agreement or any other Facility Document to be delivered to the Agent for such Bank, to the extent not otherwise delivered to the Issuing Bank or such Bank pursuant to this Agreement or any other Facility Document. Section 11.07. Non-Reliance on Agent, Issuing Bank and Other Banks. Each Bank agrees that it has, independently and without reliance on the Agent, the Issuing Bank or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Borrower, its Subsidiaries and their respective Affiliates and decision to enter into this Agreement and that it will, independently and without reliance upon the Agent, the Issuing Bank or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement or any other Facility Document. Neither the Agent nor the Issuing Bank shall be required to keep itself informed as to the performance or observance by the Borrower or any of its Subsidiaries of this Agreement or any other Facility Document or any other document referred to or provided for herein or therein or to inspect the properties or books of the Borrower or any Affiliate. Except for notices, reports and other documents and information expressly required to be furnished to the Banks by the Agent or the Issuing Bank hereunder, neither the Agent nor the Issuing Bank shall have any duty or responsibility to provide any Bank with any credit or other information concerning the affairs, financial condition or business of the Borrower or any of its Subsidiaries (or any of their respective Affiliates) which may come into the possession of the Agent, the Issuing Bank or any of their respective Affiliates. Neither the Agent nor the Issuing Bank shall be required to file this Agreement, any other Facility Document or any document or instrument referred to herein or therein, for record or give notice of this Agreement, any other Facility Document or any document or instrument referred to herein or therein, to anyone except as specifically provided in this Agreement. Section 11.08. Failure of Agent or the Issuing Bank to Act. Except for action expressly required of the Agent or the Issuing Bank hereunder, the Agent and the Issuing Bank shall in all cases be fully justified in failing or refusing to act hereunder unless it shall have received further assurances (which may include cash collateral) of the indemnification obligations of the Banks under Section 11.05 in respect of any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. Section 11.09. Resignation or Removal of Agent. Subject to the appointment and acceptance of a successor Agent as provided below, the Agent may resign at any time by giving written notice thereof to the Issuing Bank, the Banks and the Borrower, and the Agent may be removed at any time with or without cause by Banks having at least 60% of the aggregate amount of the Commitments (the "Special Purpose Required Banks"); provided that the Borrower, the Issuing Bank and the other Banks shall be promptly notified thereof. Upon any such resignation or removal, the Special Purpose Required Banks shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Special Purpose Required Banks and shall have accepted such appointment within 30 days after the retiring Agent's giving of notice of resignation or the Special Purpose Required Banks' removal of the retiring Agent, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent, which shall be a commercial bank which has an office in New York, New York having a minimum capital and surplus of $500,000,000. The Special Purpose Required Banks or the retiring Agent, as the case may be, shall upon the appointment of a successor Agent promptly so notify the Borrower, the Issuing Bank and the other Banks. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from and after the date of such succession from its duties and obligations hereunder. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Article 11 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Agent. The retiring Agent shall pay to the successor Agent its pro-rated portion of any agency fee that had been paid for such year. Section 11.10. Amendments Concerning Agency and Issuing Bank Function. Neither the Agent nor the Issuing Bank shall be bound by any waiver, amendment, supplement or modification of this Agreement or any other Facility Document which affects its respective rights or obligations hereunder or thereunder unless it shall have given its prior consent thereto. Section 11.11. Liability of Agent, Issuing Bank and Banks. Neither the Agent, the Issuing Bank nor any Bank shall have any liabilities or responsibilities to the Borrower, any Subsidiary of the Borrower or any other Person on account of the failure of any other Bank to perform its obligations hereunder or to any other Bank on account of the failure of the Borrower or any of the Borrower's Subsidiaries to perform their obligations hereunder or under any other Facility Document. Section 11.12. Transfer of Agency Function. Without the consent of the Borrower, any Subsidiary of the Borrower, the Issuing Bank, or any Bank, the Agent may at any time or from time to time transfer its functions as Agent hereunder to any of its United States offices wherever located, provided that the Agent shall promptly notify the Borrower and the Banks thereof. Section 11.13. Non-Receipt of Funds by the Agent. Unless the Agent shall have been notified by (i) a Bank or (ii) the Borrower (the "Payor") prior to the date on which such Bank is to make payment hereunder to the Agent of the proceeds of a Loan or the Borrower is to make any payment hereunder to the Agent, as the case may be (either such payment being a "Required Payment"), which notice shall be effective upon receipt, that the Payor does not intend to make the Required Payment to the Agent, the Agent may assume that the Required Payment has been made and may, in reliance upon such assumption (but shall not be required to), make the amount thereof available to the intended recipient on such date and, if the Payor has not in fact made the Required Payment to the Agent, the recipient of such payment (and, if such recipient is the Borrower and the Payor Bank fails to pay the amount thereof to the Agent forthwith upon demand, the Borrower) shall, on demand, repay to the Agent the amount made available to it together with interest thereon for the period from the date such amount was so made available by the Agent until the date the Agent recovers such amount at a rate per annum equal to the average daily Federal Funds Rate for such period. Section 11.14. Withholding Taxes. Each Bank represents that it is entitled to receive any payments to be made to it hereunder without the withholding of any tax and will furnish to the Agent such forms, certifications, statements and other documents as the Agent may request from time to time to evidence such Bank's exemption from the withholding of any tax imposed by any jurisdiction or to enable the Agent to comply with any applicable laws or regulations relating thereto. Without limiting the effect of the foregoing, if any Bank is not created or organized under the laws of the United States of America or any state thereof, in the event that the payment of interest by the Borrower is treated for U.S. income tax purposes as derived in whole or in part from sources from within the U.S., such Bank will furnish to the Agent Form 4224 or Form 1001 of the Internal Revenue Service, or such other forms, certifications, statements or documents, duly executed and completed by such Bank as evidence of such Bank's exemption from the withholding of U.S. tax with respect thereto. The Agent shall not be obligated to make any payments hereunder to such Bank in respect of any Loan or such Bank's Commitment until such Bank shall have furnished to the Agent the requested form, certification, statement or document. Section 11.15. Several Obligations and Rights of Banks. The failure of any Bank to make any Loan to be made by it on the date specified therefor or to perform any of its other obligations hereunder (including, without limitation, its obligations to participate in any reimbursement obligations under a Letter of Credit) shall not relieve any other Bank of its obligation to make its Loan on such date or to perform its other obligations hereunder (including, without limitation, its obligation to participate in any reimbursement obligations under a Letter of Credit), but no Bank shall be responsible for the failure of any other Bank to make a Loan to be made by such other Bank or to perform any of such other obligations. If any Bank shall default in its obligations hereunder or under the Facility Documents, (i) such Bank shall not be entitled to (x) receive any payments to which it would otherwise be entitled hereunder, or (y) give any consent, instruction, approval or waiver hereunder (including, without limitation, pursuant to Section 10.02 and Section 12.01 hereof) or under any other Facility Document, and the Commitment Proportion of such Bank shall not be given any effect with respect to any such consent, instruction, approval or waiver and (ii) the Borrower and the non-defaulting Banks will endeavor in good faith to arrange for another lender or lenders to replace the defaulting Bank, which replacement lender or lenders must agree to participate in the Commitment to the extent of the defaulting Bank's obligations hereunder on the same terms and conditions applicable to such defaulting Bank at the time of such default and to purchase all of such defaulting Bank's Loans hereunder; provided, however, that none of such non-defaulting Banks will be deemed to have incurred or assumed any liabilities or obligations pursuant to this sentence if any replacement lender does not elect to participate as referenced above for any reason whatsoever. The amounts payable at any time hereunder to each Bank shall be a separate and independent debt and upon the written consent of the Required Banks, the Banks shall be entitled to protect and enforce their rights arising out of this Agreement, absent a waiver of any such rights in accordance with Section 12.01 hereof, in any proceeding in which all Banks are joined for any such purpose; provided, however, that the Agent shall be entitled to protect and enforce the rights of the Banks arising out of this Agreement, in accordance with this Agreement, and it shall not be necessary for any other Bank to be joined as an additional party in any proceeding for such purpose (though nothing shall preclude such joinder). Section 11.16. Pro Rata/Non Pro Rata Treatment of Loans. (a) Subject to the provisions of Article 3 and Article 4, each payment or prepayment of principal of any Borrowing consisting of Pro Rata Loans, each payment of interest on any Borrowing consisting of Pro Rata Loans, each payment of the Facility Fee, each reimbursement obligation under a Letter of Credit, each reduction of the Commitments and each refinancing or conversion of any Borrowing with a Borrowing consisting of Pro Rata Loans of any type, shall be allocated pro rata among Banks in accordance with their respective Commitments (or, if such Commitments shall have expired or been terminated, in accordance with the respective principal amounts of their outstanding Pro Rata Loans). Each payment of principal of any Borrowing consisting of Bid Loans shall be allocated pro rata among the Banks participating in such Borrowing in accordance with the respective principal amounts of their outstanding Bid Loans comprising such Borrowing. Each payment of interest on any Borrowing consisting of Bid Loans shall be allocated pro rata among the Banks participating in such Borrowing in accordance with the respective amounts of accrued and unpaid interest on their outstanding Bid Loans comprising such Borrowing. For purposes of determining the available Commitments of the Banks at any time, each outstanding Borrowing consisting of Bid Loans shall be deemed to have utilized the Commitments of the Banks (including those Banks which shall not have made Loans as part of such Borrowing consisting of Bid Loans) pro rata in accordance with such respective Commitments. Each Bank agrees that in computing such Bank's portion of any Borrowing to be made hereunder, the Agent may, in its discretion, round each Bank's percentage of such Borrowing to the next higher or lower whole dollar amount. (b) Each reduction or termination of the amount of the Commitments under Section 2.07 hereof shall be applied to the Commitments of the Banks pro rata in accordance with their respective Commitment Proportions. Section 11.17. Sharing of Payments Among Banks. If a Bank shall obtain payment of any principal of or interest on any Pro Rata Loan made or extended by it through the exercise of any right of setoff, banker's lien, counterclaim, or by any other means, it shall promptly purchase from the other Banks participations in (or, if and to the extent specified by such Bank, direct interests in) the Pro Rata Loans made by the other Banks in such amounts, and make such other adjustments from time to time as shall be equitable to the end that all the Banks shall share the benefit of such payment (net of any expenses which may be incurred by such Bank in obtaining or preserving such benefit) pro rata in accordance with the unpaid principal and interest on the Pro Rata Loans held by each of them. To such end the Banks shall make appropriate adjustments among themselves (by the sale of participations or otherwise) if such payment is rescinded or must otherwise be restored. The Borrower agrees that any Bank so purchasing a participation (or direct interest) in the Pro Rata Loans made by other Banks may exercise all rights of setoff, banker's lien, counterclaim or similar rights with respect to such participation (or direct interest). Nothing contained herein shall require any Bank to exercise any such right or shall affect the right of any Bank to exercise, and retain the benefits of exercising, any such right with respect to any other indebtedness of the Borrower. In the event that a Bank has both Bid Loans and Pro Rata Loans outstanding, such Bank shall deem and treat all payments obtained by it as payments of principal of or interest on such Pro Rata Loans and the excess of such payments, if any, as payments of principal of or interest on such Bid Loans. ARTICLE 12. MISCELLANEOUS Section 12.01. Amendments and Waivers. Except as otherwise expressly provided in this Agreement, any provision of this Agreement may be amended or modified only by an instrument in writing signed by the Borrower and the Required Banks (and, if the rights, obligations or duties of the Agent or the Issuing Bank are affected thereby, by the Agent or the Issuing Bank, as the case may be), and any provision of this Agreement may be waived by the Borrower (if such provision requires performance by the Agent, the Issuing Bank or the Banks, or any of them) or by an instrument signed by the Required Banks (if such provision requires performance by the Borrower), including, but not limited to, any Event of Default; provided that no amendment, modification or waiver of any provision of Section 8.01 or Section 8.02 shall, unless by an instrument signed by Banks having at least 75% of the aggregate amount of the Commitments at such time and, if the Commitments have been terminated, Banks having at least 75% of the Loans outstanding at such time and participation interests in Aggregate Letter of Credit Outstandings at such time, affect any provision of Section 8.01 or Section 8.02 hereof; and provided further that no amendment, modification or waiver shall, unless by an instrument signed by all of the Banks: (a) increase or extend the term, or extend the time or waive any requirement for the reduction or termination of the Commitments, (b) extend the date fixed for the payment of principal of or interest on any Loan, (c) reduce the amount of any payment of principal thereof or the rate at which interest is payable thereon or any fee payable hereunder, (d) alter the terms of this Section 12.01 or of Section 12.06 hereof, (e) amend the definition of the term "Required Banks", (f) change the Commitment of any Bank or the fees payable to any Bank except as otherwise provided herein, (g) permit the Borrower to transfer or assign any of its obligations hereunder or under the Facility Documents, (h) amend the provisions of Article 11 hereof, (i) amend the provisions of Section 3.07(f) hereof or any guarantee delivered pursuant to the terms hereof or the provisions of any Subordinated Debt agreement relating to subordination, or (j) release any guarantee delivered pursuant to the terms hereof. No failure on the part of the Agent, the Issuing Bank or any Bank to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof or preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. Section 12.02. Usury. Anything herein to the contrary notwithstanding, the obligations of the Borrower under this Agreement and the Notes shall be subject to the limitation that payments of interest shall not be required to the extent that receipt thereof would be contrary to provisions of law applicable to a Bank limiting rates of interest which may be charged or collected by such Bank. Section 12.03. Expenses. The Borrower shall reimburse the Agent and the Issuing Bank on demand for all reasonable costs, expenses, and charges (including, without limitation, reasonable fees and charges of external legal counsel for the Agent and the Issuing Bank) incurred by the Agent or the Issuing Bank or by the Agent on behalf of the Banks in connection with the preparation, execution and delivery of this Agreement and the Facility Documents. In addition, the Borrower shall reimburse the Agent, the Issuing Bank and each Bank for all of its reasonable costs and expenses (including, without limitation, reasonable fees and charges of external legal counsel for each such Person) in connection with the enforcement or preservation of any rights under this Agreement, the Notes or the other Facility Documents. The Borrower agrees to indemnify the Agent, the Issuing Bank and each Bank and their respective directors, officers, employees and agents from, and hold each of them harmless against, any and all losses, liabilities, claims, damages or expenses incurred by any of them arising out of or by reason of any investigation or litigation or other proceedings (including any threatened investigation or litigation or other proceedings) relating to any actual or proposed use by the Borrower or any of its Affiliates of the Letters of Credit or the proceeds of the Loans, or to the failure of the Borrower or any of its Subsidiaries to perform or observe any of the terms, covenants or conditions on its part to be performed or observed under this Agreement or any of the Facility Documents including, without limitation, the reasonable fees and disbursements of counsel incurred in connection with any such investigation or litigation or other proceedings (but excluding any such losses, liabilities, claims, damages or expenses incurred by reason of the gross negligence, willful misconduct or bad faith of the Person to be indemnified). Section 12.04. Survival. The obligations of the Borrower under Section 2A.08, Section 3.06, Article 4 and Section 12.03 shall survive the repayment of the Loans and the termination of the Commitments for a period corresponding to the maximum applicable statute of limitations in effect in the State of New York from time to time. Section 12.05. Assignment; Participation. This Agreement shall be binding upon, and shall inure to the benefit of, the Borrower, the Agent, the Issuing Bank, the Banks and their respective successors and assigns, except that the Borrower may not assign or transfer its rights or obligations hereunder. Each Bank may, (x) with the prior written consent of the Agent and the Borrower (which consents shall not be unreasonably withheld) and the Issuing Bank (which consent may be given or withheld in the sole and absolute discretion of the Issuing Bank) (except that with respect to assignments made by a Bank to an Affiliate thereof, no such consent of either the Agent or the Issuing Bank shall be required) assign or (y) sell participations in, all or any part of its Loans and its Commitment to another bank or other entity, in which event (a) in the case of an assignment, upon notice thereof by the Bank to the Borrower with a copy of the assignment agreement to the Agent, the assignee shall have, to the extent of such assignment (unless otherwise provided in the applicable assignment agreement), the same rights, benefits and obligations as it would have if it were a Bank hereunder; and (b) in the case of a participation, the participant shall have no rights under the Facility Documents, and all amounts payable by the Borrower under Article 3 shall be determined as if such Bank had not sold such participation. Such Bank may furnish any information concerning the Borrower and its Subsidiaries in the possession of such Bank from time to time to assignees and participants (including prospective assignees and participants); provided that such Bank shall require any such prospective assignee or such participant (prospective or otherwise) to agree in writing to maintain the confidentiality of such information on substantially the terms set forth in Section 12.15 hereof. The right of a Bank to assign or participate all or part of its Commitment to a third party shall be subject to the following limitations: (i) each assignment or participation shall be made pro rata between the Commitment and the Bid Loans, (ii) each assignee shall be a commercial bank having minimum capital and surplus of $500,000,000, (iii) each Bank (other than the Agent, in its capacity as a Bank) shall be permitted to make only one assignment and the Agent, in its capacity as a Bank, shall be permitted to make two assignments during the term of the Revolving Credit Facility provided that any such assignee shall also be an assignee under Section 11.05 of the Second Amended and Restated Credit Agreement concurrently with such assignment and such assignment shall be in the same ratable proportion as the assignment of the interests under Section 11.05 of the MSC Credit Agreement and provided further that the Agent by reason of any assignment shall not cease to be a Bank or Agent hereunder, and (iv) the holder of any participation shall not be entitled to any voting rights under this Agreement. There shall be no limit on the number of participations that may be granted by any Bank. Any permitted assignees or participants shall be bound by, and shall be subject to, the provisions of Section 12.01 hereof. Notwithstanding the foregoing, each Bank shall be permitted to assign all or part of its Commitment hereunder to any Federal Reserve Bank in connection with any collateral assignment thereto in the ordinary course of any such Bank's business. Section 12.06. Special Provisions with Respect to Permitted Acquisitions. (a) By Affiliates of the Borrower. Subject to the limitations set forth below, affiliated companies (the "Acquisition Affiliates") may be established by the Borrower and the Borrower may make loans to such affiliates to permit them to acquire equity interests in Persons and other assets provided that such Acquisition Affiliates and any Subsidiaries acquired by such Acquisition Affiliates shall have guaranteed the obligations of the Borrower to the Banks under the Facility Documents, in form and substance (with respect to such guarantee) reasonably satisfactory to the Agent and the Required Banks. (b) Limitations. No acquisition shall be permitted at any time pursuant to clause (a) unless (i) the aggregate purchase price and assumed liabilities for all such acquisitions is not greater than twenty-five percent (25%) of Effective Net Worth as reflected in the Borrower's most recent audited consolidated and consolidating financial statements available at such time and provided to the Banks, (ii) no Default or Event of Default shall have occurred and be continuing or would result from such acquisition, (iii) each acquired entity (or the assets being acquired, as the case may be) shall be engaged in (or, in the case of acquired assets, shall be used in) a business comparable to the business in which Sid Tool is engaged as of the Effective Date, (iv) the acquisition shall not be hostile and (v) the acquisition shall have been duly authorized by the acquired entity or the entity selling such assets, as the case may be. In the event that any acquisition is consummated, the Borrower shall be required to provide consolidated and consolidating financial statements reasonably acceptable to the Banks. Under no circumstances shall the Borrower or any Acquisition Affiliate of the Borrower be permitted to make any acquisition pursuant to this Section 12.06 if such acquisition includes an acquisition of real property unless, to the best knowledge of the Borrower and/or such Acquisition Affiliate, after reasonable investigation, such real property has not been used for conducting any manufacturing, industrial, commercial or retail business which involved in any way the introduction, manufacture, generation, processing or storage of any Hazardous Substance which is the subject of any Environmental Law. Section 12.07. Notices. Unless the party to be notified otherwise notifies the other party in writing as provided in this Section, and except as otherwise provided in this Agreement, notices shall be given to the Agent or the Issuing Bank by telephonic communication directly with Christopher J. Mendelsohn or any other person designated for such purpose by notice from the Agent or the Issuing Bank to the Borrower, confirmed by telecopy or other writing (with a copy of any such notice to be sent simultaneously by telecopy to Alan M. Christenfeld, Esq. at (212) 878-8375, and to the Banks and to the Borrower by certified or registered mail or by recognized overnight delivery services to such party at its address on the signature page of this Agreement; provided, however, that notwithstanding the foregoing to the contrary, notices to the Borrower shall be effective if delivered at the following address: 151 Sunnyside Boulevard, Plainview, New York 11803, Attention: President. Notices shall be effective: (a) if given by registered or certified mail, 72 hours after deposit in the mails with postage prepaid, addressed as aforesaid; or (b) if given by recognized overnight delivery service, on the business day following deposit with such service addressed as aforesaid; or (c) if given by telecopy, when the telecopy is transmitted to the telecopy number as aforesaid and confirmed with a confirmation receipt (with a copy of any such notice to be sent simultaneously to Joseph L. Getraer, Esq., at Rosenman & Colin, 575 Madison Avenue, New York, New York 10022, Telecopy No. (212) 940-8776; provided, however, that notwithstanding the foregoing to the contrary, all notices to the Agent, the Issuing Bank, the Banks, or any of them, shall only be effective upon receipt by all of the Agent, the Issuing Bank and the Banks pursuant to the other provisions of this Section, except that notice to any Bank other than a Bank which is a signatory hereto shall be effective upon receipt by the Agent of notice pursuant to the other provisions of this section; and further provided, however, that notwithstanding the foregoing to the contrary, notices to the Borrower pursuant to Section 10.01(a) hereof shall be effective upon delivery, by hand, of any such notice to the Borrower at the following address: 151 Sunnyside Boulevard, Plainview, New York 11803, Attention: Mitchell Jacobson, Thomas Eccleston and Shelley Boxer. In addition, any such notices shall also be given simultaneously by telephonic communication directly with either Mitchell Jacobson, Thomas Eccleston or Shelley Boxer at (516) 349-7100, provided, however, that delivery of any notice to the Borrower pursuant to Section 10.01(a) hereof shall be effective upon hand-delivery of any such notice as aforesaid, whether or not such telephonic communication is completed with any of the foregoing individuals. Furthermore, a copy of any such notice shall also be sent simultaneously by telecopy to Joseph L. Getraer, Esq. at (212) 940-8563, provided, however, that delivery of any notice to the Borrower pursuant to Section 10.01(a) hereof shall be effective upon hand-delivery of any such notice as aforesaid. Section 12.08. Setoff. The Borrower agrees that, in addition to (and without limitation of) any right of setoff, banker's lien or counterclaim a Bank or the Issuing Bank may otherwise have, each Bank and the Issuing Bank shall be entitled, at its option without any prior notice to the Borrower (any such notice being expressly waived by the Borrower to the extent permitted by applicable law), to offset balances (general or special, time or demand, provisional or final) held by it for the account of the Borrower at any of such Bank's or the Issuing Bank's, as the case may be, offices, in Dollars or in any other currency, against any amount payable by the Borrower to such Bank or the Issuing Bank, as the case may be, under this Agreement or such Bank's Note which is not paid when due (regardless of whether such balances are then due to the Borrower), in which case it shall promptly notify the Borrower and the Agent thereof; provided that such Bank's or the Issuing Bank's, as the case may be, failure to give such notice shall not affect the validity thereof. Payments by the Borrower hereunder shall be made without setoff or counterclaim. Section 12.09. JURISDICTION; WAIVER OF JURY TRIAL; IMMUNITIES. (a) THE BORROWER HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY NEW YORK STATE OR UNITED STATES FEDERAL COURT SITTING IN NEW YORK COUNTY OVER ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE NOTES OR THE OTHER FACILITY DOCUMENTS, AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH NEW YORK STATE OR FEDERAL COURT. THE BORROWER IRREVOCABLY CONSENTS TO THE SERVICE OF ANY AND ALL PROCESS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING (BY CERTIFIED OR REGISTERED MAIL) OF COPIES OF SUCH PROCESS TO THE BORROWER AT THE ADDRESS SPECIFIED IN SECTION 12.07. THE BORROWER AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. THE BORROWER FURTHER WAIVES ANY OBJECTION TO VENUE IN SUCH STATE AND ANY OBJECTION TO AN ACTION OR PROCEEDING IN SUCH STATE ON THE BASIS OF FORUM NON CONVENIENS. THE BORROWER FURTHER AGREES THAT ANY ACTION OR PROCEEDING BROUGHT AGAINST THE AGENT OR THE ISSUING BANK SHALL BE BROUGHT ONLY IN NEW YORK STATE OR UNITED STATES FEDERAL COURT SITTING IN NEW YORK COUNTY. (b) THE AGENT, THE ISSUING BANK, EACH OF THE BANKS AND THE BORROWER WAIVE ANY RIGHT THEY MAY HAVE TO JURY TRIAL WITH RESPECT TO THIS AGREEMENT AND THE OTHER FACILITY DOCUMENTS. (c) NOTHING IN THIS SECTION 12.09 SHALL AFFECT THE RIGHT OF THE AGENT, THE ISSUING BANK OR ANY BANK TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT THE RIGHT OF THE AGENT, THE ISSUING BANK OR ANY BANK TO BRING ANY ACTION OR PROCEEDING AGAINST THE BORROWER OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTIONS. (d) TO THE EXTENT THAT THE BORROWER HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT OR FROM ANY LEGAL PROCESS (WHETHER FROM SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION, EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS PROPERTY, IT HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS UNDER THIS AGREEMENT AND THE NOTES. Section 12.10. Table of Contents; Headings. Any table of contents and the headings and captions hereunder are for convenience only and shall not affect the interpretation or construction of this Agreement. Section 12.11. Severability. The provisions of this Agreement are intended to be severable. If for any reason any provision of this Agreement shall be held invalid or unenforceable in whole or in part in any jurisdiction, such provision shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without in any manner affecting the validity or enforceability thereof in any other jurisdiction or the remaining provisions hereof in any jurisdiction. Section 12.12. Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any party hereto may execute this Agreement by signing any such counterpart. Section 12.13. Integration. The Facility Documents set forth the entire agreement among the parties hereto relating to the transactions contemplated thereby and supersede any prior oral or written statements or agreements with respect to such transactions. SECTION 12.14. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND INTERPRETED AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. Section 12.15. Treatment of Certain Information. The Borrower (a) acknowledges that services may be offered or provided to it (in connection with this Agreement or otherwise) by each Bank or the Issuing Bank or by one or more of their respective Subsidiaries or Affiliates and (b) acknowledges that information delivered to each Bank or the Issuing Bank by such entity may be provided to each such Affiliate. Notwithstanding the foregoing, the Banks and the Issuing Bank agree to maintain and to endeavor to cause its Subsidiaries and Affiliates to maintain all non-public information which is furnished to them hereunder or under or in connection with any Facility Document in confidence and not to disclose any such information to third parties (except as provided in the preceding sentence); provided, however that neither Bank nor the Issuing Bank will be liable to the Borrower or to any of its Subsidiaries or Affiliates for the failure to cause such Bank's or the Issuing Bank's, as the case may be, Subsidiaries and Affiliates to maintain in confidence and not disclose any such information, in the absence of gross negligence or willful misconduct on the part of any such Bank or the Issuing Bank, as the case may be; and further provided, however, that the Banks, the Issuing Bank and their Affiliates referred to above may disclose such information (i) to their legal counsel, auditors, appraisers or consultants in connection with the transactions contemplated hereby (provided that such persons are advised of the confidential nature of such information and of the Banks' and the Issuing Bank's confidentiality obligations hereunder), (ii) to any regulatory authority having jurisdiction over them, (iii) to prospective participants or assignees of the Commitments (provided that such prospective participants or assignees execute a confidentiality agreement on substantially the terms hereof), (iv) as required by law or (v) in response to credit inquiries, provided that with respect to Section 12.15 (v) only, the Borrower has consented in writing to such disclosure. Section 12.16. Further Rights of the Agent. (a) The Borrower appoints such person or persons as Agent may designate as their attorney-in-fact to, upon and during the continuance of an Event of Default, to do all things necessary to carry out this Agreement and the Facility Documents. The powers granted herein, being coupled with an interest, are irrevocable, and the Borrower approves and ratifies all acts of the attorney-in-fact. Neither the Agent nor the attorney-in-fact shall be liable for any act or omission, error in judgment or mistake of law so long as the same is not willful misconduct or grossly negligent. (b) In the event that the Borrower or any of its Subsidiaries shall fail to purchase or maintain insurance (where applicable), or to pay any tax, assessment, government charge or levy, except as the same may be otherwise permitted hereunder, or in the event that any Lien prohibited hereby shall not be paid in full or discharged, or in the event that the Borrower or any of its Subsidiaries shall fail to perform or comply with any other covenant, promise or obligation to the Banks hereunder or under any Facility Document, the Agent may, but shall not be required to, perform, pay, satisfy, discharge or bond the same for the account of the Borrower and all monies so paid by the Agent, including reasonable attorneys' fees, shall be treated as an advance to the Borrower. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. BORROWER: MSC INDUSTRIAL DIRECT CO., INC. By: ____________________________ Name: Title: Address for Notices: MSC Industrial Direct Co., Inc. c/o Sid Tool Co., Inc. 151 Sunnyside Blvd. Plainview, New York 11803 Attn: Mitchell Jacobson President Telephone No.: (516) 349-0500, Ext. 1223 Telecopier No.: (516) 349-7096 AGENT and ISSUING BANK: FLEET BANK, NATIONAL ASSOCIATION By: ____________________________ Name: Title: Lending Office and Address for Notices: Fleet Bank, National Association 300 Broadhollow Road Melville, New York 11747 Attention: Christopher J. Mendelsohn Vice President Telephone No.: (516) 547-7777 Telecopier No.: (516) 547-7815 BANKS: FLEET BANK, NATIONAL ASSOCIATION By: ____________________________ Name: Title: Lending Office and Address for Notices: Fleet Bank, National Association 300 Broadhollow Road Melville, New York 11747 Attention: Christopher J. Mendelsohn Vice President Telephone No.: (516) 547-7777 Telecopier No.: (516) 547-7815 Commitment: $40,000,000 THE CHASE MANHATTAN BANK By: ____________________________ Name: Title: Lending Office and Address for Notices: The Chase Manhattan Bank Corporate Banking Group 395 North Service Road Melville, New York 11747 Attention: Emelia Teige Vice President Telephone No.: (516) 755-5046 Telecopier No.: (516) 755-5104 Commitment: $30,000,000 MELLON BANK By: ____________________________ Name: Title: Lending Office and Address for Notices: Mellon Bank 165 EAB Plaza West Tower - 6th Floor Uniondale, New York 11556-0165 Attention: Jeffrey B. Carstens Vice President Telephone No.: (516) 522-2689 Telecopier No.: (516) 522-2896 Commitment: $10,000,000 EX-23.01 5 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.01 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the inclusion in this registration statement of our report dated November 6, 1996, and to the incorporation by reference in this registration statement of our reports dated November 6, 1996 included in the Form 10-K of MSC Industrial Direct Co., Inc. for the year ended August 31, 1996 and to all references to our Firm included in this registration statement. ARTHUR ANDERSEN LLP Melville, New York July 29, 1997 -----END PRIVACY-ENHANCED MESSAGE-----