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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
--------------------------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-5228
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STRATEGIC DISTRIBUTION, INC.
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(Exact name of registrant as specified in its charter)
Delaware 22-1849240
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(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
3220 Tillman Drive, Suite 200, Bensalem, PA 19020
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(Address of principal executive offices) (Zip Code)
215-633-1900
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(Registrant's telephone number, including area code)
1635-D Bustleton Pike, Feasterville, PA 19047
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes x No
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Number of Common Shares outstanding at November 3, 1997: 31,087,473
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM I Page No.
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Consolidated Financial Statements:
- Consolidated Balance Sheets - 1
September 30, 1997 (unaudited)
and December 31, 1996
- Consolidated Statements of Operations 2
(unaudited) - Three Months and
Nine Months Ended September 30, 1997 and 1996
- Consolidated Statements of Cash Flows 3
(unaudited) - Nine Months Ended
September 30, 1997 and 1996
- Notes to Consolidated Financial Statements 4
(unaudited)
ITEM 2
Management's Discussion and Analysis of Financial 6
Condition and Results of Operations
PART II - OTHER INFORMATION
ITEM 6
Exhibits and Reports on Form 8-K 14
Signatures 15
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STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except for share data)
<TABLE>
September 30, December 31,
1997 1996
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(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 24,819 $ 35,498
Accounts receivable, net 26,322 17,910
Inventories 23,596 15,720
Prepaid expenses and other current assets 1,013 436
Notes receivable 256 -
Deferred tax asset 1,382 1,382
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Total current assets 77,388 70,946
Notes receivable 2,764 -
Property and equipment, net 3,553 2,251
Net assets of discontinued operations 1,308 16,614
Excess of cost over fair value of net assets
acquired, net 2,433 2,525
Other intangible assets, net 6,070 -
Other assets 103 46
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Total assets $ 93,619 $ 92,382
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 28,616 $ 17,477
Current portion of long-term debt (related party
$500 in 1997) 506 22
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Total current liabilities 29,122 17,499
Long-term debt (related party $500 in 1996) 87 587
Subordinated debt-related party 1,400 -
Deferred tax liability 342 342
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Total liabilities 30,951 18,428
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Stockholders' equity:
Preferred stock, par value $.10 per share.
Authorized: 500,000 shares; issued and
outstanding: none - -
Common stock, par value $.10 per share.
Authorized 50,000,000 shares; issued:
30,743,944 and 29,523,361 shares 3,074 2,952
Additional paid-in capital 93,114 88,753
Accumulated deficit (32,470) (17,701)
Note receivable from related party (1,000) (50)
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62,718 73,954
Treasury stock: 12,500 shares, at cost (50) -
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Total stockholders' equity 62,668 73,954
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Total liabilities and stockholders' equity $ 93,619 $ 92,382
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</TABLE>
See accompanying notes to consolidated financial statements
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STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
(in thousands, except for share data)
<TABLE>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 45,280 $ 25,700 $ 121,056 $ 61,726
Cost of materials 34,709 20,764 95,213 49,637
Operating wages and benefits 4,077 2,464 10,996 5,657
Other operating expenses 1,931 588 4,345 1,180
Selling, general and administrative expenses 5,340 2,810 13,752 7,858
Acquired in-process technology - - 8,000 -
----------- ----------- ----------- -----------
Total costs and expenses 46,057 26,626 132,306 64,332
----------- ----------- ----------- -----------
Operating loss (777) (926) (11,250) (2,606)
Interest expense (income):
Interest expense 41 11 114 89
Interest (income) (399) (624) (1,095) (920)
----------- ----------- ----------- -----------
Interest expense (income), net (358) (613) (981) (831)
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Loss from continuing operations (419) (313) (10,269) (1,775)
Discontinued operations:
Loss from discontinued operations - (1,007) - (3,173)
Loss from sale of discontinued operations - - (4,500) -
----------- ----------- ----------- -----------
Net loss $ (419) $ (1,320) $ (14,769) $ (4,948)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net loss per common share:
Loss from continuing operations $ (0.01) $ (0.01) $ (0.34) $ (0.07)
Loss from discontinued operations - (0.03) (0.15) (0.12)
----------- ----------- ----------- -----------
Net loss $ (0.01) $ (0.04) $ (0.49) $ (0.19)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Average number of shares of common stock outstanding 30,688,401 29,452,125 30,369,615 25,431,293
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements
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STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
<TABLE>
Nine months ended September 30,
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1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Loss from continuing operations $ (10,269) (1,775)
Adjustments to reconcile loss from continuing operations
to net cash used in operating activities:
Depreciation and amortization 1,448 513
Acquired in-process technology 8,000 -
Changes in operating assets and liabilities,
net of effects of acquisition:
Accounts receivable (7,222) (5,170)
Inventories (7,876) (5,312)
Prepaid expenses and other current assets (613) (516)
Accounts payable and accrued expenses 10,074 8,541
Other, net (48) (13)
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Net cash used in continuing operations (6,506) (3,732)
Discontinued operations:
Net loss (4,500) (3,173)
Decrease in net assets 4,824 134
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Net cash used in operating activities (6,182) (6,771)
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Cash flows from investing activities:
Acquisition of business, net of cash acquired (10,769) -
Additions of property and equipment (1,598) (1,397)
Proceeds from sale of discontinued operations 7,458 -
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Net cash used in investing activities (4,909) (1,397)
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Cash flows from financing activities:
Proceeds from sale of common stock 1,078 55,570
Repayment of note payable (400) (4,445)
Repayment of loan to stockholders (250) -
Repayment of long-term obligations (16) (13)
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Net cash provided by financing activities 412 51,112
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Increase (decrease) in cash and cash equivalents (10,679) 42,944
Cash and cash equivalents, at beginning of the period 35,498 362
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Cash and cash equivalents, at end of the period $ 24,819 $ 43,306
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Supplemental cash flow information:
Taxes paid $ 4 $ 42
Interest paid 70 214
</TABLE>
See accompanying notes to consolidated financial statements
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STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA)
(UNAUDITED)
1. The accompanying unaudited consolidated financial statements include the
accounts of Strategic Distribution, Inc. and subsidiaries (the "Company").
These financial statements have been prepared in accordance with the
instructions of Form 10-Q. In the opinion of management, all adjustments
(consisting of a normal and recurring nature) considered necessary for a fair
presentation of the results of operations for the three months and nine
months ended September 30, 1997 and 1996 have been included. The statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1996.
2. On November 11, 1996, the Company announced its intention to sell two of
its subsidiaries, Strategic Supply, Inc. ("SSI") and American Technical
Services Group, Inc. ("ATSG"), in order to focus more directly on the
development of the Company's In-Plant Store-R- business.
On June 2, 1997, the Company, SSI and Coulson Technologies, Inc., a
wholly-owned subsidiary of SSI ("Coulson"), sold, conveyed, transferred and
assigned to DXP Acquisition, Inc., a Nevada corporation ("DXP
Acquisition")and a wholly-owned subsidiary of DXP Enterprises, Inc., a Texas
corporation ("DXP"), substantially all of the assets and business of SSI and
Coulson (excluding, however, the accounts receivable of $5,669 which were
retained by SSI and Coulson). DXP Acquisition also assumed certain
obligations and liabilities of SSI and Coulson in connection with the
disposition. The disposition was made pursuant to the terms of that certain
Asset Purchase Agreement among the Company, SSI, Coulson, DXP Acquisition and
DXP dated May 27, 1997 with the purchase price determined as of May 31, 1997.
Total consideration for the acquisition (subject to adjustment) consisted of
$4,433 in cash, promissory notes from DXP Acquisition to SSI in the aggregate
principal amount of $3,025 and an earn-out (contingent payment) which could
result in additional compensation to SSI of up to $3,500.
The Company believes it will be possible to consummate the sale of ATSG
by December 31, 1997; there can be no guarantee, however, that the sale will
be consummated by that date. The results of operations of SSI and ATSG have
been presented in the Company's consolidated financial statements to conform
with discontinued operations treatment.
The presentation of the 1996 statement of operations has been
reclassified as a result of the discontinued operations.
3. On January 28, 1997, the Company acquired all of the outstanding common
stock of INTERMAT International Materials Management, Inc. ("INTERMAT"). The
purchase price consisted of $10,800 in cash, a $1,400 subordinated note, and
625,000 newly issued shares of the Company's common stock valued at $2,406.
The source of the cash portion of the purchase price was available cash and
cash equivalents. The method of accounting
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for this acquisition was the purchase accounting method. Accordingly, the
purchase price has been allocated to identifiable tangible and intangible
assets acquired and liabilities assumed based on their estimated fair values
and amounts allocated to acquired in-process technology have been expensed at
the time of acquisition. The results of operations of INTERMAT are included
in the Company's statements of operations from date of acquisition.
Presented below are unaudited pro forma consolidated results of
operations for the nine months ended September 30, 1997 and 1996. The
applicable pro forma adjustments give effect in 1997 and 1996 to the
acquisition of INTERMAT as if such acquisition occurred on January 1 of each
period.
Nine Months Ended September 30,
-------------------------------
1997 1996
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Revenues $121,434 $65,090
Loss from continuing operations $(10,409) $(3,502)
Net loss per common share from
continuing operations $ (0.34) $ (0.13)
The unaudited pro forma consolidated results of operations disclose the
results from continuing operations excluding charges or credits directly
attributable to the transaction.
One In-Plant Store-R- customer (with which the Company operates under six
separate contracts) represented approximately 16% and 23% of pro forma
revenues for the nine months ended September 30, 1997 and 1996.
4. The sale of SSI resulted in aggregate consideration to the Company of an
amount in excess of the Company's carrying value of the divested assets.
However, because of the contingent nature of a portion of the consideration,
the Company recorded a $3,500 charge to loss on sale of discontinued
operations. In addition, the Company has recorded a $1,000 charge to loss on
sale of discontinued operations which includes the estimated financial
results of ATSG through December 31, 1997. Both of these charges were
recorded during the quarter ended June 30, 1997. The Company anticipates
that the sale of ATSG will be consummated by December 31, 1997; there can be
no guarantee, however, that the sale will be consummated by that date.
5
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA)
GENERAL
Certain statements in this Form 10-Q constitute forward-looking
statements which involve risks and uncertainties. The Company's actual
results in the future could differ significantly from the results discussed
or implied in such forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those
discussed in the risk factors set forth under "Investment Considerations" in
the Company's prospectus, dated May 20, 1996, filed under the Securities Act
of 1933.
The Company provides proprietary industrial supply procurement and
handling solutions to industrial sites, primarily through its In-Plant
Store-R- program. The Company became a provider of the In-Plant Store
program on January 4, 1994. The Company conducts its operations primarily
through its subsidiaries, Industrial Systems Associates, Inc. ("ISA") and
INTERMAT International Materials Management, Inc. ("INTERMAT"), which was
acquired on January 28, 1997. At September 30, 1997, the Company had 97
In-Plant Store facilities.
In late 1995, the Company formed two subsidiaries to operate in Mexico,
Strategic Distribution Marketing de Mexico, S.A. de C.V. and Strategic
Distribution Services de Mexico, S.A. de C.V. (collectively "Mexico").
Mexico's operations are conducted in U.S. dollars and therefore the Company
is not exposed to foreign currency translation adjustments. Mexico's
revenues for the three months and nine months ended September 30, 1997 and
1996 represented less than 1% of the Company's consolidated revenues.
Two of the Company's subsidiaries, SafetyMaster Corporation
("SafetyMaster") and Lewis Supply (Delaware) Inc. were merged on May 24,
1996, with SafetyMaster the surviving corporation . SafetyMaster changed its
name to Strategic Supply, Inc. ("SSI") on May 24, 1996.
On November 11, 1996, the Company announced its intention to sell two of
its subsidiaries, SSI and American Technical Services Group, Inc. ("ATSG"),
in order to focus more directly on the development of the Company's In-Plant
Store business.
On June 2, 1997, the Company, SSI and Coulson Technologies, Inc., a
wholly-owned subsidiary of SSI ("Coulson"), sold, conveyed, transferred and
assigned to DXP Acquisition, Inc., a Nevada corporation ("DXP Acquisition")
and a wholly-owned subsidiary of DXP Enterprises, Inc., a Texas corporation
("DXP"), substantially all of the assets and business of SSI and Coulson
(excluding, however, the accounts receivable of $5,669 which were retained by
SSI and Coulson). DXP Acquisition also assumed certain obligations and
liabilities of SSI and Coulson in connection with the disposition. The
disposition was made pursuant to the terms of that certain Asset Purchase
Agreement among the Company, SSI, Coulson, DXP Acquisition and DXP dated May
27, 1997 with the purchase price determined as of May 31, 1997. Total
6
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consideration for the acquisition (subject to adjustment) consisted of $4,433
in cash, promissory notes from DXP Acquisition to SSI in the aggregate
principal amount of $3,025 and an earn-out (contingent payment) which could
result in additional compensation to SSI of up to $3,500.
The Company believes it will be possible to consummate the sale of ATSG
by December 31, 1997; there can be no guarantee, however, that the sale will
be consummated by that date. The results of operations of SSI and ATSG have
been presented in the Company's consolidated financial statements for the
nine months ended September 30, 1997 and 1996 to conform with discontinued
operations treatment.
The presentation of the 1996 statement of operations has been
reclassified as a result of the discontinued operations.
Cost of materials includes the cost of products. Operating wages and
benefits and other operating expenses are the operating costs of the In-Plant
Store facilities, as well as project related costs of INTERMAT. Selling,
general and administrative expenses are those expenses not directly
associated with operating activities.
RESULTS OF OPERATIONS
The following table of revenues and percentages sets forth selected items
of the results of operations.
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTMEMBER 30, SEPTMEMBER 30,
------------------ -----------------
1997 1996 1997 1996
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(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues $45,280 $25,700 $121,056 $61,726
100.0% 100.0% 100.0% 100.00%
Cost of materials 76.7 80.8 78.7 80.4
Operating wages and benefits 9.0 9.6 9.1 9.2
Other operating expenses 4.3 2.3 3.6 1.9
Selling, general and administrative expenses 11.8 10.9 11.4 12.7
Acquired in-process technology - - 6.6 -
Operating loss (1.8) (3.6) (9.4) (4.2)
Interest expense (income), net (0.8) (2.4) (0.8) (1.3)
Loss from continuing operations (1.0) (1.2) (8.6) (2.9)
Loss from discontinued operations - (3.9) - (5.1)
Loss from sale of discontinued operations - - (3.7) -
Net loss (1.0) (5.1) (12.3) (8.0)
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1996
Revenues for the three months ended September 30, 1997 increased 76% to
$45,280 from $25,700 for the three months ended September 30, 1996. This
growth resulted primarily from the implementation of new
7
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In-Plant Store facilities and the inclusion of the results of operations of
INTERMAT. The number of In-Plant Store facilities increased from 61 at
September 30, 1996 to 97 at September 30, 1997. One In-Plant Store customer
(with which the Company operates under six separate contracts) represented
approximately 13% and 24% of revenues for the three months ended September
30, 1997 and 1996.
Cost of materials as a percentage of revenues decreased to 76.7% for the
three months ended September 30, 1997 from 80.8% in 1996. This decrease is a
result of INTERMAT having a lower cost of materials, as a percentage of
revenues, than ISA. The decrease was partly offset by a higher cost of
materials for ISA because of a change in the product mix to In-Plant Store
facilities. This percentage may vary depending upon the relative sales of
the two subsidiaries.
Operating wages and benefits expenses as a percentage of revenues
decreased to 9.0% for the three months ended September 30, 1997 from 9.6% in
1996. This decrease is primarily a result of the percentage of revenues from
more mature In-Plant Store facilities as compared to the percentage of
revenues from new In-Plant Store facilities being greater for the three
months ended September 30, 1997 than in 1996. As new In-Plant Store
facilities are added, the operating wages and benefits expenses will continue
to increase, however, these expenses as a percentage of revenues will vary
depending upon the rate at which the Company adds new In-Plant Store
facilities. During the start-up phase of new facilities, these expenses
generally increase at a higher rate than revenues are recognized. The
inclusion of INTERMAT's results of operations, which reflect a higher
percentage of these expenses than In-Plant Store facilities, partially offset
this decrease.
Other operating expenses as a percentage of revenue increased to 4.3% for
the three months ended September 30, 1997 from 2.3% in 1996. This increase
resulted primarily from the inclusion of INTERMAT's results of operations
which reflect a much higher percentage of these expenses than In-Plant Store
operations.
Selling, general and administrative expenses as a percentage of revenues
increased to 11.8% for the three months ended September 30, 1997 from 10.9%
in 1996. Although ISA'S 1997 selling, general and administrative expenses as
a percentage of revenues were comparable to 1996, the increase resulted due
to the inclusion of INTERMAT's results of operations in 1997. INTERMAT's
selling, general and administrative expenses as a percentage of revenues is
higher than ISA's. This percentage may vary depending on the relative sales
of the two subsidiaries.
Interest income, net decreased by $255 to $358 for the three months ended
September 30, 1997 when compared with the interest income, net of $613 in
1996. The decrease resulted primarily from the
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usage of the net proceeds from the sale of 7,630,000 shares of Common Stock
on May 23, 1996, to finance the working capital requirements of new In-Plant
Store facilities and the acquisition of INTERMAT, thereby reducing the funds
available to earn interest income.
Loss from discontinued operations was $1,007 for the three months ended
September 30, 1996. The Company has decided to sell ATSG, and has sold SSI
in order to focus on the growth of its In-Plant Store business. Results of
operations of SSI and ATSG for the three months ended September 30, 1997 have
been included in the provisions for loss on sale of discontinued operations
established at December 31, 1996, and June 30, 1997.
The sale of SSI resulted in aggregate consideration to the Company of an
amount in excess of the Company's carrying value of the divested assets.
However, because of the contingent nature of a portion of the consideration,
the Company has recorded a $3,500 charge to loss on sale of discontinued
operations. In addition, the Company has recorded a $1,000 charge to loss on
sale of discontinued operations which includes the estimated financial
results of ATSG through December 31, 1997. Both of these charges were
recorded during the quarter ended June 30, 1997. The Company anticipates
that the sale of ATSG will be consummated by December 31, 1997; there can be
no guarantee, however, that the sale will be consummated by that date.
Net loss for the three months ended September 30, 1997 was $419, compared
to a net loss of $1,320 in 1996, as a result of the items previously
discussed.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
Revenues for the nine months ended September 30, 1997 increased 96% to
$121,056 from $61,726 for the nine months ended September 30, 1996. This
growth resulted primarily from the implementation of new In-Plant Store
facilities and the inclusion of the results of operations of INTERMAT. The
number of In-Plant Store facilities increased from 61 at September 30, 1996
to 97 at September 30, 1997. One In-Plant Store customer (with which the
Company operates under six separate contracts) represented approximately 16%
and 24% of revenues for the nine months ended September 30, 1997 and 1996.
Another In-Plant Store customer (with which the Company operates under three
separate contracts) represented approximately 10% of revenues for the nine
months ended September 30, 1996, but less than 10% for the nine months ended
September 30, 1997.
Cost of materials as a percentage of revenues decreased to 78.7% for the
nine months ended September 30, 1997 from 80.4% in 1996. This decrease is a
result of INTERMAT having a lower cost of materials, as a percentage of
revenues, than ISA. The decrease was partly offset by a higher cost of
materials for ISA because of a change in the product
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mix to In-Plant Store facilities. This percentage may vary depending upon
the relative sales of the two subsidiaries.
Operating wages and benefits expenses as a percentage of revenues
decreased slightly to 9.1% for the nine months ended September 30, 1997 from
9.2% in 1996. This decrease is primarily a result of the percentage of
revenues from more mature In-Plant Store facilities as compared to the
percentage of revenues for new In-Plant Store facilities being greater for
the nine months ended September 30, 1997 than in 1996. As new In-Plant Store
facilities are added, the operating wages and benefits expenses will continue
to increase, however, these expenses as a percentage of revenues will vary
depending upon the rate at which the Company adds new In-Plant Store
facilities. During the start-up phase of new facilities, these expenses
generally increase at a higher rate than revenues are recognized. The
inclusion of INTERMAT's results of operations, which reflect a higher
percentage of these expenses than In-Plant Store facilities, partly offset
the decrease in these expenses.
Other operating expenses as a percentage of revenue increased to 3.6%
for the nine months ended September 30, 1997 from 1.9% in 1996. This
increase resulted primarily from the inclusion of INTERMAT's results of
operations which reflect a much higher percentage of these expenses than
In-Plant Store operations.
Selling, general and administrative expenses as a percentage of revenues
decreased to 11.4% for the nine months ended September 30, 1997 from 12.7% in
1996. ISA's 1997 selling, general and administrative expenses as a percentage
of revenues decreased as compared to 1996. This decrease was partly offset
by the inclusion of INTERMAT's results of operations in 1997. INTERMAT's
selling, general and administrative expenses as a percentage of revenues is
higher than ISA's. This percentage may vary depending on the relative sales
of the two subsidiaries.
The Company incurred a non-recurring charge of $8,000 for acquired
in-process technology in connection with the acquisition of INTERMAT.
Interest income, net increased by $150 to $981 for the nine months ended
September 30, 1997 when compared with the interest income, net of $831 in
1996. The increase resulted primarily from the sale of 7,630,000 shares of
Common Stock on May 23, 1996 and the interest on the net proceeds. This
increase was partly offset by the usage of the net proceeds to finance the
working capital requirements of new In-Plant Store facilities and the
acquisition of INTERMAT, thereby reducing the funds available to earn
interest income.
Loss from discontinued operations was $3,173 for the nine months ended
September 30, 1996. The Company has decided to sell ATSG and
10
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has sold SSI in order to focus on the growth of its In-Plant Store business.
Results of operations of SSI and ATSG for the nine months ended September 30,
1997 have been included in the provisions for loss on sale of discontinued
operations established at December 31, 1996, and June 30, 1997.
The sale of SSI resulted in aggregate consideration to the Company of an
amount in excess of the Company's carrying value of the divested assets.
However, because of the contingent nature of a portion of the consideration,
the Company recorded a $3,500 charge to loss on sale of discontinued
operations. In addition, the Company recorded a $1,000 charge to loss on
sale of discontinued operations which includes the estimated financial
results of ATSG through December 31, 1997. Both of these charges were
recorded during the quarter ended June 30, 1997. The Company anticipates
that the sale will be consummated by December 31, 1997; there can be no
guarantee, however, that the sale will be consummated by that date.
Net loss for the nine months ended September 30, 1997 was $14,769,
compared to a net loss of $4,948 in 1996, as a result of the items previously
discussed.
LIQUIDITY AND CAPITAL RESOURCES
Effective as of December 31, 1995, the Company entered into a revolving
bank credit agreement providing maximum borrowings of $20,000. The credit
agreement was amended on September 9, 1996 to reduce the permitted maximum
outstanding borrowings to $5,000. Borrowings bear interest at the prime rate
(8.50% as of September 30, 1997) and/or a Eurodollar rate, with a 3/8%
commitment fee on the unused portion of the credit available. The credit
facility expires on January 31, 2000. The amount which the Company may
borrow under the credit facility is based upon eligible accounts receivable.
The credit facility contains customary financial and other covenants and is
collateralized by substantially all of the assets as well as the pledge of
the capital stock of the Company's subsidiaries. As of December 31, 1996 and
September 30, 1997, there were no borrowings outstanding under the credit
facility.
On May 23, 1996, the Company sold 7,630,000 shares of its common stock
in an underwritten public offering. The net proceeds to the Company were
approximately $55,332. A portion of the net proceeds were used to repay the
Company's bank indebtedness. The balance of the remaining net proceeds is
available for working capital, including the opening of In-Plant Store
facilities, for general corporate purposes and for possible acquisitions.
On January 28, 1997, the Company completed the acquisition of INTERMAT
for a purchase price consisting of $10,800 in cash, a $1,400 subordinated
note and 625,000 newly issued shares of Common Stock.
11
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This acquisition resulted in a decline in cash and cash equivalents, and an
increase in indebtedness.
On June 2, 1997, the Company sold the operating assets excluding,
however, accounts receivable of $5,669, of SSI and Coulson. As of September
30, 1997, the Company collected in excess of 90% of these accounts
receivable. The consideration for the sale (subject to adjustment) consisted
of $4,433 in cash, promissory notes from DXP Acquisition to SSI in the
aggregate principal amount of $3,025 and an earn-out (contingent payment)
which could result in additional compensation to SSI of up to $3,500. The
sale resulted in an increase in cash and an increase in notes receivable.
The net cash used in continuing operations was $6,506 for the nine
months ended September 30, 1997 compared to $3,732 in 1996. The change
resulted primarily from an increase in net loss from continuing operations,
accounts receivable and inventories, which were partially offset by an
increase in accounts payable and accrued expenses. The increase in net loss
from continuing operations was offset primarily by the non-cash charge for
acquired in-process technology. Accounts receivable and inventories
increased primarily from the increase in the number of In-Plant Store
facilities. Accounts payable and accrued expenses increased primarily from
higher inventory levels.
The results of the discontinued operations for the nine months ended
September 30, 1997 have been included in the provision for loss on sale of
discontinued operations established at December 31, 1996. The sale of SSI
resulted in aggregate consideration to the Company of an amount in excess of
the Company's carrying value of the divested assets. However, because of the
contingent nature of a portion of the consideration, the Company recorded a
$3,500 charge to loss on sale of discontinued operations. In addition, the
Company has recorded a $1,000 charge to loss on sale of discontinued
operations which includes the estimated financial results of ATSG through
December 31, 1997. The Company anticipates that the sale will be consummated
by December 31, 1997; there can be no guarantee, however, that the sale will
consummated by that date.
The decrease in net assets of discontinued operations was $4,824 for the
nine months ended September 30, 1997 compared to $134 in 1996. This change
resulted primarily from the sale of SSI to DXP Acquisition and collection of
the accounts receivable retained by the Company.
The net cash used in investing activities was $4,909 for the nine months
ended September 30, 1997 compared to $1,397 in 1996. The increase resulted
primarily from the cash portion of the purchase price for the acquisition of
INTERMAT which was partially offset by the proceeds from the sale of
discontinued operations.
12
<PAGE>
The net cash provided by financing activities was $412 for the nine
months ended September 30, 1997 compared to $51,112 in 1996. The net
decrease resulted primarily from the sale of common stock offset by the
repayment of the note payable to the bank during May 1996.
The Company believes that cash on hand and cash from the Company's bank
credit facility will generate sufficient funds to permit the Company to
support the anticipated expansion of the In-Plant Store program for the next
twelve months.
CHANGE IN ACCOUNTING PRINCIPLES
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") 128, "Earnings per
Share" which is effective for financial statements for both interim and
annual periods ending after December 15, 1997. SFAS 128 requires
presentation of basic and diluted per share amounts for income from
continuing operations and net income. The Company does not expect the
adoption of the pronouncement to materially impact earnings per share.
13
<PAGE>
PART II
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). Exhibits:
3.1 Second Restated Certificate of Incorporation of the Company filed
September 21, 1996 with the Secretary of State of Delaware (incorporated
by reference to Exhibit 3.2 of the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended September 30, 1996).
3.2 Amended and Restated Bylaws of the Company, as amended (incorporated by
reference to Exhibits 3.2 and 3.2(a) of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995).
4.1 The instruments defining the rights of holders of the long-term debt
securities of the Company are omitted pursuant to Section (b) (4) (iii)
(A) of Item 601 of Regulation S-K. The Company agrees to furnish
supplementary copies of these instruments to the Commission upon
request.
(b). Reports on Form 8-K: None
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Strategic Distribution, Inc.
Date: November 7, 1997 By: /s/ John M. Sergey
------------------------------
John M. Sergey
President and Chief
Executive Officer
Date: November 7, 1997 By: /s/ Charles J. Martin
------------------------------
Charles J. Martin,
Vice President, Controller and
Chief Accounting Officer
15
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 24,819
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<PP&E> 3,553
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<NET-INCOME> (14,769)
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