The Strober Organization, Inc.

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The Strober Organization, Inc.

Pier 3, Furman Street
Brooklyn, New York 11201
U.S.A.
Telephone: (732) 819-7049
Fax: (718) 246-3070
Web site: http://www.strober.com

Wholly Owned Subsidiary of Pro-Build Holdings Inc.
Founded: 1912
Employees: 1,200
Sales: $1 billion (2005 est.)
NAIC: 444190 Other Building Material Dealers

Based in Brooklyn, New York, the Strober Organization, Inc., is a leading building supplies provider to builders, contractors, and remodeling professionals, shying away from the do-it-yourself market dominated by the likes of Home Depot and Lowe's. Strober operates more than 90 locations under the Strober Building Supply Center and The Contractor Yard names, located in 15 states along the East Coast and as far west as Ohio and Mississippi. Name-brand products offered include lumber, plywood, gypsum and drywall, roofing, mill-work products, acoustical products, masonry, flooring products, insulation, siding, windows and skylights, kitchen and bath cabinets and sinks, hardware, and power tools. In addition, the Strober Organization includes U.S. Components, a Mt. Holly, New Jersey-based company with three manufacturing plants producing roof, floor, and wall trusses.

Strober also is involved in a joint venture, Architectural Wall Systems L.L.C., which distributes Dryvit exterior wall systems, Tremco Sealants, Windlock Tools, and Driangle Foam Shapes. Strober is part of Pro-Build Holdings Inc., the United States' largest professional building materials supplier, which in turn is a subsidiary of Fidelity Capital, the business development component of mutual fund company Fidelity Investments. Strober's chief executive officer, Frederick M. Marino, also heads Pro-Build, which was established in 2006 by Fidelity to acquire professional materials dealers in midwestern and western states.

STROBER'S FOUNDING AS FAMILY BUSINESS IN 1912

The Strober Organization grew out of a single building supply store founded in Brooklyn in 1912. It was not until the third generation, under Eric D. Strober, that the business began to expand. He was just 20 years old and a recent graduate of Boston University when he took over for his late father. For another decade the business remained a single location, mostly serving the New York City roofing market. Starting in 1972 Strober began broadening its product lines to attract increased business from building subcontractors and remodelers, as well as some do-it-yourself customers. The company also added two more locations by 1980. In 1981 the company prepared for even greater growth when it raided the ranks of competitor L&W Supply Corp. to bring in seven managers to serve as the foundation of a talented young staff.

Over the next five years Strober added another six building supply centers. In 1986 the business was divided into five regions, New York City, which included the top-selling, flagship location in Brooklyn; Long Island; New York's Hudson Valley; New Jersey; and New Haven. Strober took advantage of central buying power and focused on a market that offered some predictability. It also offered extra customer service, such as providing customers with a detailed computer printout of all the materials a job required. Strober was able to build sales to $77.9 million in 1985 and $92.4 million in 1986, while net income during this period increased from $3.4 million to $5 million. Far from satisfied, the company looked to opportunities in New England, Pennsylvania, and Washington, D.C., as well as the enlargement of some of its centers. To help finance these aims, the company went public in November 1986, making an initial public offering (IPO) of stock at $12 a share, netting some $11 million. The Strober family maintained a slight controlling interest, and all told, the company's top 11 officers held 82 percent of the stock.

Following the offering, the company took out a $5 million key-man life insurance policy on Eric Strober as well as a $15 million term life insurance policy. The officers and directors of the company also took out another $20 million in life insurance on his life. In addition, the company adopted a provision that in the event of Strober's death the company was obligated to purchase shares from the Strober family in the amount of $15 million or the amount of the life insurance policy, if that was less. In this way, the family was guaranteed a buyer and the top officers would gain control of the business without fear of a hostile takeover attempt. These were far from unusual provisions, all spelled out in the prospectus for the IPO. Because Eric Strober was in good health in his mid-40s, these arrangements seemed to be nothing more than the kind of careful planning a company could expect from its lawyers. Instead, they would soon come into play.

ERIC STROBER'S MYSTERIOUS DEATH: 1988

In October 1987 Strober arranged its first acquisition since going public 11 months earlier, agreeing to pay $22 million to East Hartford, Connecticut-based General Building Supply Co. It was a move that would add two locations in Strober's existing market, $43 million in annual sales, and provide a kitchen and bath operation that could be introduced to Strober's other nine locations. These showrooms could then be used to attract some do-it-yourself repair and remodeling business. The deal closed in January 1988, and by all accounts Eric Strober, who had headed the acquisition effort, was quite pleased. A short time later, on the afternoon of January 26, 1988, he paid a visit to his lawyer and a director of the company, David W. Bernstein, at a midtown Manhattan office building. He left to use the men's room and minutes later was found dead in the courtyard 22 floors below. The initial finding of the medical examiner was suicide.

According to the Wall Street Journal, "Police detectives who investigated Mr. Strober's death believe he took the metal top off a trash can in the men's room and went into the service area at the end of the hall. The service area has two freight elevators and a thick, opaque window. The window was nailed shut. 'Our final determination agreed with the finding of the medical examiner that Mr. Strober committed suicide by smashing out the window and leaping to his death.'"

A few days after Strober's death, Bernstein was named the company's new chairman and President Gary F. Kulick assumed the additional role of chief executive officer. Over the next several months the company considered some offers to buy the business but nothing came of them. It also had to contend with a softening in residential and commercial construction in the Northeast, which began to affect earnings. However, management was fighting with the insurance companies, which were attempting to avoid paying off the policies taken out on the life of Eric Strober. The company maintained that his death was the result of an accident, insisting that he had no reason to kill himself, while the insurers claimed it was suicide, something that was always difficult to prove.

COMPANY PERSPECTIVES

Since 1912 the Strober Organization, Inc., has been assisting builders, remodelers and contractors in both the residential and commercial markets.

According to the Wall Street Journal, "The insurers suggest an organized-crime link to Mr. Strober's death. They contend that Mr. Strober committed suicide rather than face possible prosecution and disgrace in an investigation by the federal Organized Crime Strike Force in Brooklyn." The link was to one of Strober's customers, Cambridge Drywall & Carpentry, a firm reported to have once been owned by Vincent DiNapoli, a "captain" in the Genovese crime family, who sold his share of the business to Larry Wecker when he went to prison. In 1982 DiNapoli was sentenced to five years in prison on labor racketeering charges, and in 1988 received another 24-year sentence for racketeering charges that included, according to the Wall Street Journal, "a scheme to rig bids in the New York construction industry." On the day that he died Eric Strober was scheduled to have a dinner meeting with Wecker. According to Kulick, the meeting was set up in part to discuss how Wecker planned to take care of a $20,000 check that had been returned for insufficient funds. Ku-lick maintained that the insurers pursued the organized crime connection as a way to avoid paying the claims, telling the Wall Street Journal, "For $40 million, they'll do an awful lot."

Given that there was no suicide note and no discernible fingerprints from anyone, let alone Eric Strober, on the trash can that may have been used to break out the window from which he fell, the insurance companies had a difficult task in overcoming the law's presumption against suicide. It was no surprise that the two parties eventually reached an out-of-court settlement in November 1990. The company received $11.3 million on the $20 million worth of life insurance policies it took out, while the $20 million with the officers listed as beneficiaries was settled for an amount that was not publicly disclosed. There were no determinations regarding the circumstances of Eric Strober's death. Of the $11.3 million received, the company retained $2.8 million for corporate purposes and used the rest to purchase shares of the company held by the estate of Eric Strober.

The construction industry, hurt by a recession, continued to slump in the early 1990s, adversely impacting the Strober balance sheet. In fact, were it not for the insurance payment, the company would have suffered a $2.6 million net loss in 1990. The company was forced to cut costs by consolidating operations, closing two of its smaller facilities, one of which was located close to a newly opened Home Depot store in New Jersey. The other was closed to consolidate the New Haven and Hartford, Connecticut, operations. Strober also saw a change in management in 1991 when Robert J. Gaites, who headed the New York City business, took over as CEO and Kulick assumed the chairmanship, a post he would hold only briefly. In January 1992 he died of a heart attack, and Gaites became chairman as well.

Sales bottomed out at $100 million in 1991 and slowly rose as the economy improved, reaching $105 million in 1992, $119 million in 1993, and $125.4 million in 1994, this despite a harsh winter in 1994. During this time, in 1992, Strober opened a very successful unit in Kingston, Pennsylvania, prompting management to consider further expansion in the state. A second Pennsylvania location was launched in November 1995 in the city of Bethlehem, giving Strober 11 units. Also in 1995, Strober moved its Farmingdale, New York, store to a larger site.

Although Strober had enjoyed some success, the company lacked the resources to spur further growth. In February 1996 the company retained Hill Thompson Capital Markets Inc. as a financial advisor to sort through options to maximize stockholder value, and it was clear that management was open to selling the business. A few months later, Strober agreed to acquire Rowley Building Products Corporation, a building material supply company with operations in five locations in the Hudson Valley of New York. The deal was scuttled, however, when Strober agreed in November 1996 to be sold to Fidelity Ventures for approximately $32 million. Although Fidelity planned to take a hands-off approach to the running of the business, the purchase agreement called for the installation of Frederick Marino, a Fidelity investor, as chairman and CEO. He was hardly a newcomer to the business, however, having served as the CEO of a Strober supplier, Marino-Ware Industries, a New Jersey company that manufactured steel framing products.

KEY DATES

1912:: The company is founded as single store in Brooklyn, New York.
1962:: The founder's grandson, Eric D. Strober, takes charge at age 20.
1986:: The company is taken public.
1988:: Eric Strober dies.
1997:: Fidelity Ventures takes Strober private.
2003:: Contractor Yard is acquired.
2006:: Newly created Pro-Build Holdings becomes Strober's corporate parent.

BEING TAKEN PRIVATE: 1997

The sale was completed in March 1997 and Strober was taken private. Marino did not hide his intention to grow Strober into the top professional lumberyard chain in the Northeast and wasted little time in pursuing that goal. After posting sales of $152 million from 11 yards in 1997, Strober began 1998 by acquiring the Bayport Lumber facility in Long Island and opened a pair of start-up yards in Leola, Pennsylvania, and Fishkill, New York. Then, in April 1998, it reached a tentative agreement to acquire New Jersey-based Haddonfield Lumber and doubled the size of Strober. Haddonfield owned 14 lumberyards in New Jersey, Pennsylvania, and Delaware, as well as three building material component plants, only one of which, U.S. Components, would be included in the deal completed eight months later. The result was a regional powerhouse boasting 19 yards in six states.

With the Haddonfield units in the fold, Strober posted revenues of $400 million in 1999. The company looked to add to those totals and expand southward in 2000 by acquiring Arkay Building Supply with two yards in Catonville and Gaithersburg, Maryland, that served the Baltimore and Washington, D.C., markets. However, this deal paled in comparison with Strober's next transaction, the 2004 purchase of the 26 units of North Carolina-based The Contractor Yard, a division of Lowe's Corporation that operated 26 locations in nine states: North Carolina, South Carolina, Virginia, Tennessee, Florida, Maryland, Ohio, Mississippi, and Georgia. With 71 yards, Strober became the seventh largest professional building supply dealer in the United States.

More acquisitions were to follow. In November 2004, Strober added another 19 yards in the mid-Atlantic region, 11 in Virginia alone, by acquiring Moore's Lumber and Building Supplies, based in Roanoke, Virginia. These yards would be folded into The Contractor Yard business. It was at this point that Strober organized its business into three principal subsidiaries: Strober Building Supply, The Contractor Yard, and U.S. Components. Contractor Yard grew further in 2005 with the purchase of Northlake Lumber, a yard that provided Contractor with a presence in both the northern and southern parts of the thriving Charlotte market.

In 2006 Strober's parent company, Fidelity Capital, pleased with its investment in the professional building materials business, looked to become a national player. It created Pro-Build Holdings Inc. and promptly purchased Lanoga Corporation, the country's third largest dealer of professional building materials. Doing business under a number of regional brands, Lanoga operated 320 centers in 24 midwestern and western states. Strober's Marino was made CEO and vice-chairman of Pro-Build and commented on the acquisition: "Lanoga's divisions are an excellent strategic fit with our current Strober divisions. Although the companies will continue to operate separately, this new relationship creates the opportunity for Pro-Build to provide nationwide coverage." Four months later, in June 2006, Pro-Build furthered its national aspirations by acquiring Tulsa, Oklahoma-based Hope Lumber, which operated 49 yards in nine southeastern and south central states.