<PAGE>
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 March 31, 1997
----------------------------------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to _______________________
Commission file number 0-5228
--------------------------
STRATEGIC DISTRIBUTION, INC.
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(Exact name of registrant as specified in its charter)
Delaware 22-1849240
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
1635-D Bustleton Pike, Feasterville, PA 19047
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(Address of principal executive offices) (Zip Code)
215-396-3088
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(Registrant's telephone number, including area code)
12136 W. Bayaud, Suite 320, Lakewood, CO 80228
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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
--- ---
Number of Common Shares outstanding at May 7, 1997: 30,228,949.
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TABLE OF CONTENTS
Part I - Financial Information
------------------------------
Item I Page No.
- ------ --------
Consolidated Financial Statements:
- Consolidated Balance Sheets - 1
March 31, 1997 (unaudited)
and December 31, 1996
- Consolidated Statements of Operations 2
(unaudited) - Three Months Ended
March 31, 1997 and 1996
- Consolidated Statements of Cash Flows 3
(unaudited) - Three Months Ended March 31,
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 11
Signatures 12
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STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands, except for share data)
<TABLE>
March 31, December 31,
1997 1996
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 19,726 $ 35,498
Accounts receivable, net 23,416 17,910
Inventories 18,451 15,720
Deferred tax asset 1,382 1,382
Prepaid expenses and other current assets 634 436
-------- --------
Total current assets 63,609 70,946
Property and equipment, net 3,015 2,251
Net assets of discontinued operations 16,278 16,614
Excess of cost over fair value of net assets acquired, net 2,495 2,525
Other intangible assets, net 6,531 -
Other assets 51 46
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Total assets $ 91,979 $ 92,382
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-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 21,966 $ 17,477
Current portion of long-term debt (related party $500 in 1997) 517 22
-------- --------
Total current liabilities 22,483 17,499
Long-term debt (related party $500 in 1996) 74 587
Subordinated debt (related party) 1,400 -
Deferred tax liability 342 342
-------- --------
Total liabilities 24,299 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 and outstanding:
30,213,499 and 29,523,361 shares 3,021 2,952
Additional paid-in capital 91,228 88,753
Accumulated deficit (26,519) (17,701)
Note receivable from related party (50) (50)
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Total stockholders' equity 67,680 73,954
-------- --------
Total liabilities and stockholders' equity $ 91,979 $ 92,382
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements
1
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STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
(dollars in thousands, except for share data)
<TABLE>
Three months ended March 31,
----------------------------
1997 1996
---------- ----------
<S> <C> <C>
Revenues $ 34,506 $ 16,508
Costs and expenses:
Cost of materials 27,570 13,329
Operating wages and benefits 3,330 1,409
Other operating costs 903 275
Selling, general and administrative expenses 3,864 2,276
Acquired in-process research and development 8,000 -
---------- ----------
Total costs and expenses 43,667 17,289
---------- ----------
Operating loss (9,161) (781)
Interest expense (income):
Interest expense 32 41
Interest income (375) (4)
---------- ----------
Interest expense (income), net (343) 37
---------- ----------
Loss from continuing operations (8,818) (818)
Loss from discontinued operations - (1,148)
---------- ----------
Net loss $ (8,818) $ (1,966)
---------- ----------
---------- ----------
Net loss per common share:
Loss from continuing operations $ (0.29) $ (0.04)
Loss from discontinued operations - (0.05)
---------- ----------
Net loss $ (0.29) $ (0.09)
---------- ----------
---------- ----------
Average number of shares of common stock outstanding 30,013,611 21,740,823
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements
2
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STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
(dollars in thousands)
<TABLE>
Three months ended March 31,
---------------------------
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Loss from continuing operations $ (8,818) $ (818)
Adjustments to reconcile loss from continuing operations
to net cash provided by (used in) operating activities:
Depreciation and amortization 397 159
Acquired in-process research and development 8,000 -
Changes in operating assets and liabilities,
net of effects of acquisition:
Accounts receivable (4,316) 1,348
Inventories (2,731) (1,134)
Prepaid expenses and other current assets (208) (182)
Accounts payable and accrued expenses 3,423 2,539
Other, net 1 (20)
-------- -------
Net cash provided by (used in) continuing operations (4,252) 1,892
Discontinued operations:
Net loss - (1,148)
Change in net assets 336 1,716
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Net cash provided by (used in) operating activities (3,916) 2,460
-------- -------
Cash flows from investing activities:
Acquisition of business, net of cash acquired (10,769) -
Additions of property and equipment (558) (444)
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Net cash used in investing activities (11,327) (444)
-------- -------
Cash flows from financing activities:
Proceeds from sale of common stock 139 57
Repayment of note payable (400) (1,735)
Repayment of loan to stockholders (250) -
Repayment of long-term obligations (18) (5)
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Net cash used in financing activities (529) (1,683)
-------- -------
Increase (decrease) in cash and cash equivalents (15,772) 333
Cash and cash equivalents, at beginning of the period 35,498 362
-------- -------
Cash and cash equivalents, at end of the period $ 19,726 $ 695
-------- -------
-------- -------
Supplemental cash flow information:
Taxes paid $ 1 $ 112
Interest paid 10 76
</TABLE>
See accompanying notes to consolidated financial statements
3
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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 ended March 31,
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, 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. The Company believes it will be possible to consummate the sale of
these two companies by June 30, 1997; there can be no guarantee, however, that
the sales will be consummated by June 30, 1997. The results of operations of
SSI and ATSG have, therefore, 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
utilization of available cash and cash equivalents. The method of accounting
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 research and development 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 three months ended March 31, 1997 and 1996. The applicable pro forma
adjustments give effect in 1996 and 1997 to the acquisition of INTERMAT as if
such acquisition occurred on January 1 of each period.
4
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Three Months Ended March 31,
----------------------------
1997 1996
---- ----
Revenues $34,884 $17,423
Loss from continuing operations $(8,963) $(1,740)
Net loss per common share from
continuing operations $ (0.30) $ (0.08)
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-Registered Trademark- customer (with which the Company
operates under six separate contracts) represented approximately 21% and 22% of
pro forma revenues for the three months ended March 31, 1997 and 1996. Another
In-Plant Store customer (with which the Company operates under three separate
contracts) represented approximately 12% of pro forma revenues for the three
months ended March 31, 1996, but less than 10% for the three months ended March
31, 1997. A third customer (with which the Company operates under one contract)
represented approximately 11% of pro forma revenues for the three months ended
March 31, 1996, but less than 10% for the three months ended March 31, 1997.
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 Item 2 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-Registered Trademark- 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 March 31, 1997, the
Company had 80 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 quarters ended March 31, 1997 and 1996 represented less than
1% of 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. The Company believes it will be possible to consummate the
sale of these two companies by June 30, 1997; there can be no guarantee,
however, that the sales will be consummated by June 30, 1997. The results of
operations of SSI and ATSG have, therefore, been presented in the Company's
consolidated financial statements for the three months ended March 31, 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.
6
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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.
Three Months ended
---------------------
1997 1996
------- -------
(dollars in thousands)
Revenues $34,506 $16,508
100.0% 100.0%
Cost of materials 79.9 80.7
Operating wages and benefits 9.7 8.5
Other operating expenses 2.6 1.7
Selling, general and administrative expenses 11.2 13.8
Acquired in-process research and development 23.2 -
Operating loss (26.6) (4.7)
Interest expense (income), net (1.0) (0.2)
Loss from continuing operations (25.6) (4.9)
Loss from discontinued operations - (7.0)
Net loss (25.6) (11.9)
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
Revenues for the three months ended March 31, 1997 increased 109% to
$34,506 from $16,508 for the three months ended March 31, 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 35 at March 31, 1996 to 80 at March 31, 1997.
One In-Plant Store customer (with which the Company operates under six separate
contracts) represented approximately 22% and 23% of revenues for the three
months ended March 31, 1997 and 1996. Another In-Plant Store customer (with
which the Company operates under three separate contracts) represented
approximately 13% of revenues for the three month ended March 31, 1996, but less
than 10% for the three months ended March 31, 1997. A third customer (with
which the Company operates under one contract) represented approximately 11% of
revenues for the three months ended March 31, 1996, but less than 10% for the
three months ended March 31, 1997.
Cost of materials as a percentage of revenues decreased to 79.9% for the
three months ended March 31, 1997 from 80.7% in 1996. This decrease is a result
of INTERMAT having a lower cost of materials, as a percentage of revenues, than
ISA. This
7
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percentage may vary depending upon the sales mix of the two subsidiaries.
Operating wages and benefits expense as a percentage of revenues increased
to 9.7% for the three months ended March 31, 1997 from 8.5% in 1996. Other
operating expenses as a percentage of revenue increased to 2.6% for the three
months ended March 31, 1997 from 1.7% in 1996. These increases resulted
primarily from operating expenses for new In-Plant Store facilities, as a
percentage of revenues, being higher than those of more mature facilities.
During the start-up phase of new facilities, operating expenses generally
increase at a higher rate than revenues are recognized. As new In-Plant Store
facilities are added, the Company will continue to incur these high start-up
costs, and operating expenses as a percentage of revenues may continue to
increase, depending upon the rate at which the Company adds new In-Plant Store
facilities. The increase also resulted from the inclusion of INTERMAT's
results of operations which reflect a higher percentage of these expenses than
In-Plant Store operations.
Selling, general and administrative expenses as a percentage of revenues
decreased to 11.2% for the three months ended March 31, 1997 from 13.8% in 1996.
As the In-Plant Store program continues to expand, this expense will continue to
increase; however, as a percentage of revenue, it may decrease as the ratio of
new In-Plant Store facilities to more mature facilities decreases.
The Company recorded a non-recurring charge of $8,000 in the quarter ended
March 31, 1997 for acquired in-process research and development in connection
with the acquisition of INTERMAT.
Interest income, net increased by $380 to $343 for the three months ended
March 31, 1997 from interest expense, net of $37 in 1996. The increase resulted
primarily from the sale of 7,630,000 shares of Common Stock in May 23, 1996 and
the interest on the net proceeds.
Loss from discontinued operations was $1,148 for the three months ended
March 31, 1996. The Company has decided to sell SSI and ATSG in order to focus
exclusively on the growth of its In-Plant Store business. Results of operations
of SSI and ATSG for the three months ended March 31, 1997 have been included in
the provision for loss on sale of discontinued operations established at
December 31, 1996.
Net loss for the three months ended March 31, 1997 was $8,818, compared to
a net loss of $1,966 in 1996, as a result of the items previously discussed.
8
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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 March 31, 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
March 31, 1997 there were no borrowings outstanding under the credit facility.
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. This acquisition
resulted in a decline in cash and cash equivalents, and an increase in
indebtedness.
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.
The net cash used in continuing operations was $4,252 for the three
months ended March 31, 1997 compared to net cash provided by continuing
operations of $1,892 in 1996. The change resulted primarily from an increase
in net loss, accounts receivable and inventories, which were partially offset
by an increase in accounts payable and accrued expenses. The net loss was
offset by the non-cash charge for acquired in-process research and
development. Accounts receivable increased primarily as a result of a few
large customers not paying their balances until early April 1997 and an
increase in the number of In-Plant Store facilities. 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.
9
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The results of the discontinued operations for the three months ended
March 31, 1997 have been included in the provision for loss on sale of
discontinued operations established at December 31, 1996.
The change in net assets of discontinued operations was a decrease of
$336 for the three months ended March 31, 1997 compared to a decrease of
$1,716 in 1996. The reduction in this amount was a result of a smaller
decrease in working capital for the three months ended March 31, 1997 as
compared to 1996.
The net cash used in investing activities was $11,327 for the three
months ended March 31, 1997 compared to $444 in 1996. The increased resulted
primarily from the cash portion of the purchase price for the acquisition of
INTERMAT.
The net cash used in financing activities was $529 for the three months
ended March 31, 1997 compared to $1,683 in 1996. This decrease resulted
primarily from the repayment of the Company's indebtedness with the net
proceeds from the Offering.
The Company believes that cash on hand, cash generated from future
operations, 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.
CHANGES IN ACCOUNTING PRINCIPALS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") 128, "Earning 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.
10
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PART II
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). Exhibits:
3.1 Second Restated Certificate of Incorporation of the Company filed
June 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
June 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 supplementally copies of these
instruments to the Commission upon request.
10.1 Agreement and Plan of Merger, dated as of January 28, 1997, by
and among Strategic Distribution, Inc., INTERMAT Acquisition
Corp., INTERMAT International Materials Management
Engineers, Inc., Jeffery O. Beauchamp, Toni R. Beauchamp,
Gregory A. Enders, Winston Gilpin, Gary Johnson and John
Miday (incorporated by reference to Exhibit 2 of the
Company's January 28, 1997 Current Report on Form 8-K).
10.2 Employment Agreement, dated as of January 28, 1997, by and among
Strategic Distribution, Inc., INTERMAT Acquisition Corp. and
Jeffery O. Beauchamp.
(b). Reports on Form 8-K:
During the quarter ended March 31, 1997, the Company filed the following
Current Report on Form 8-K with the Securities and Exchange Commission
On February 12, 1997, the Company filed a Current Report on
Form 8-K with respect to the Company's acquisition of all of
the outstanding common stock of INTERMAT International
Materials Management Engineers, Inc. This transaction was
completed on January 28, 1997
11
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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: May 12, 1997 By: /s/ Andrew M. Bursky
-------------------------------
Andrew M. Bursky
Chairman of the Board
Date: May 12, 1997 By: /s/ Charles J. Martin
-------------------------------
Charles J. Martin,
Vice President, Controller and
Chief Accounting Officer
12
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EXHIBIT INDEX
Page No.
in Manually
Signed Copy
-----------
3.1 Second Restated Certificate of Incorporation
of the Company filed June 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 June 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). --
10.1 Agreement and Plan of Merger, dated as of
January 28, 1997, by and among Strategic
Distribution, Inc., INTERMAT Acquisition
Corp., INTERMAT International Materials
Management Engineers, Inc., Jeffery O.
Beauchamp, Toni R. Beauchamp, Gregory A.
Enders, Winston Gilpin, Gary Johnson and
John Miday (incorporated by reference to
Exhibit 2 of the Company's January 28, 1997
Current Report on Form 8-K). --
10.2 Employment Agreement, dated as of January
28, 1997, by and among Strategic Distribution,
Inc., INTERMAT Acquisition Corp. and
Jeffery O. Beauchamp. 16
13
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EMPLOYMENT AGREEMENT
AGREEMENT dated as of January 28, 1997 by and among Strategic
Distribution, Inc., a Delaware corporation (hereinafter called "SDI"),
INTERMAT Acquisition Corp., a Delaware corporation (hereinafter called the
"Company"), and Jeffery O. Beauchamp (hereinafter called the "Employee").
EMPLOYMENT. SDI and the Company hereby employ the Employee and the
Employee hereby accepts employment upon the terms and conditions hereinafter
set forth.
2. TERM. The term of this Agreement shall be for a period of
three (3) years commencing on the date hereof, subject to early termination
by SDI or the Company for "Cause". For purposes of this Agreement, the SDI
or Company shall have Cause to terminate the Employee's employment hereunder
upon (a) the Employee having been convicted of any felony or crime involving
moral turpitude (excluding minor traffic violations); (b) the continued and
habitual use of narcotics or alcohol to an extent which materially impairs
the Employee's performance of his duties hereunder; (c) the willful
malfeasance or gross negligence by the Employee in the performance of his
duties hereunder; (d) the knowing violation by the Employee of any material
provision of this Agreement; (e) gross misconduct by the Employee injurious
to SDI or the Company; or (f) the continued failure by the Employee to
perform his duties hereunder. In the event that this Agreement shall be
terminated for Cause, the Company shall continue to make payments hereunder
for all services rendered by the Employee up to the date of termination.
In addition to the foregoing, SDI or the Company may terminate this
Agreement in the event that the Employee becomes ill or is injured so that he
is unable to perform the duties required of him hereunder for a period of 150
days and such inability is continuing on the date the notice referred to in
the next sentence shall be given. SDI or the Company shall give the Employee
thirty (30) days' prior notice of termination pursuant to this paragraph,
such notice to be given upon the expiration of such 150 day period. SDI or
the Company shall continue to make payments hereunder to the Employee during
the 150 day period referred to above, provided that the amount of such
payments shall be reduced by any amounts payable to the Employee under any
group disability program sponsored by the Company.
3. SALARY. For all services rendered by the Employee under this
Agreement (including for all services rendered as the Executive Vice
President of SDI), the Company shall pay the Employee at a salary rate of not
less than $150,000 per year, payable in accordance with the Company's then
current payroll practice.
<PAGE>
4. DUTIES. The Employee is engaged as Chairman Emeritus of the
Company and Executive Vice President of SDI and hereby promises to perform
and discharge well and faithfully the duties which may be assigned to him
from time to time by the Board of Directors of the Company and the President
of SDI, which duties shall be commensurate with such positions.
The Employee shall not be required as a condition of employment to
relocate from the City of Houston, Texas.
5. EXTENT OF SERVICES. (a) The Employee shall devote his full
business time, attention and energies to the business of SDI and the Company
or their affiliates and shall not during the term of this Agreement be
engaged in any other substantial business activity, whether or not such
business activity is pursued for gain, profit or other pecuniary advantage;
but this shall not be construed as preventing the Employee from investing his
personal assets in businesses which do not compete with SDI or the Company or
their affiliates in such form or manner as will not require any substantial
services on the part of the Employee in the operation of the affairs of the
companies in which such investments are made and in which his participation
is solely that of an investor and except that the Employee may purchase
securities in any corporation whose securities are regularly traded, provided
that such purchases shall not result in his collectively owning beneficially
at any time more than 5% of any class of securities of any corporation
engaged in a business competitive with that of SDI or the Company. As used
in this Agreement, "affiliate" shall mean any person, firm or corporation
that, directly or indirectly, through one or more intermediaries, controls,
is controlled by, or is under common control with, SDI or the Company,
whether such control is through stock ownership, contract or otherwise.
(b) The Employee shall maintain an office at his place of residence (the
"Home Office") and may spend such portion of his time working from the Home
Office as may reasonably be determined by the SDI or Company. Subject to
Section 13 hereof, the Employee shall be reimbursed for the reasonable and
necessary expenses associated with operating the Home Office in connection
with the performance of the Employee's duties hereunder.
6. LICENSES. During the term of this Agreement, the Employee
shall keep in full force and effect such appropriate licenses as may be
required to enable him to render services in connection with SDI's and the
Company's businesses as they may exist from time to time; however, the
Company shall reimburse the Employee for all costs incurred by him to
maintain such licenses.
7. COVENANTS NOT TO COMPETE OR INTERFERE. For a period ending on
the later of (a) five (5) years from and after the date hereof or (b) two (2)
years from and after the termination of the Employee's employment hereunder,
the Employee
2
<PAGE>
will not, directly or indirectly, as a sole proprietor, member of a
partnership, or stockholder, investor, officer or director of a corporation,
or as an employee, agent, associate or consultant of any person, firm or
corporation:
(a) Solicit or accept business (x) from any clients or prospects of
SDI, the Company or their affiliates or (y) from any former client who was
such within the last two (2) years prior to the date of this Agreement, if
the business solicited or accepted is competitive with the business
conducted by SDI, the Company or their affiliates or the solicitation or
acceptance of such business would interfere with the customer relationships
maintained by SDI, the Company or their affiliates; or
(b) Engage in the business of the type performed by SDI, the Company
or their affiliates.
It is the desire and intent of the parties that the provisions of
this paragraph 7 shall be enforced to the fullest extent permissible under
the laws and public policies applied in each jurisdiction in which
enforcement is sought. Accordingly, if any particular portion of this
paragraph 7 shall be adjudicated to be invalid or unenforceable, this
paragraph 7 shall be deemed amended to delete therefrom the portion thus
adjudicated to be invalid or unenforceable, such deletion to apply only with
respect to the operation of this paragraph in the particular jurisdiction in
which such adjudication is made.
8. DISCLOSURE OF INFORMATION; EMPLOYEE NONDISCLOSURE AGREEMENT.
(a) The Employee recognizes and acknowledges that SDI's and the
Company's (including their affiliates') trade secrets and confidential or
proprietary information, including such trade secrets or information as may
exist from time to time, and information as to the identity of customers of
SDI, the Company and their affiliates and other similar items, are
valuable, special and unique assets of the Company's business, access to
and knowledge of which are essential to the performance of the duties of
the Employee hereunder. The Employee will not, during or after the term
hereof, in whole or in part, disclose, and has not prior to the
commencement of the term hereof disclosed, such secrets or confidential or
proprietary information to any person, firm, corporation, association or
other entity for any reason or purpose whatsoever, except in furtherance of
the Employee's duties under this Agreement. The Employee will not make use
of any such property for his own purposes or for the benefit of any person,
firm, corporation or other entity (except SDI and the Company) under any
circumstances, during or after the term hereof, and the Employee has not
prior to the commencement of the term hereof made such use, provided
3
<PAGE>
that after the term hereof these restrictions shall not apply to such
secrets or information which are then in the public domain (provided
that the Employee was not responsible, directly or indirectly, for such
secrets or information entering the public domain without SDI's or the
Company's consent).
(b) The Employee has executed that certain Employee Nondisclosure
Agreement (the "Nondisclosure Agreement") dated the date hereof, a copy of
which is attached hereto and which document is hereby incorporated in its
entirety and made a part hereof for all purposes.
9. INTELLECTUAL PROPERTY.
(a) The Employee has no proprietary, financial or other interest,
direct or indirect, in whole or in part, in any Intellectual Property or in
any application therefor which SDI or the Company (or any of their
affiliates) owns, possesses or uses in their business as now and heretofore
conducted. As used in this paragraph 9, "Intellectual Property" shall mean
all (i) trademarks and service marks (registered or unregistered) and trade
names, and all goodwill associated therewith; (ii) patents, patentable
inventions, discoveries, improvements, ideas, know-how, processes and
computer programs, software and databases (including source code); (iii)
trade secrets and the right to limit the use or disclosure thereof; (iv)
copyrights in all works, including software programs and mask works; and
(v) domain names.
(b) Worldwide rights in all Intellectual Property owned or used in
the business of SDI or the Company which are eligible for protection under
the present or future intellectual property laws, worked on or conceived
during the term of this Agreement or within six months thereafter by the
Employee, alone or in conjunction with others, shall belong solely and
exclusively to SDI or the Company, as applicable. If conceived or worked
on together with another who is not employed or otherwise engaged by SDI or
the Company, these such rights shall belong exclusively to SDI or the
Company, as applicable, to the fullest extent possible. The Employee
agrees to assign all rights referred to in this paragraph to SDI or the
Company, as applicable.
(c) At any time during or after the term of this Agreement, the
Employee shall execute all papers and perform any other actions which are
deemed by SDI or the Company or their attorneys to be reasonable and
necessary for the application, issuance and/or maintenance, enforcement or
assignment of any Intellectual Property owned or used in the business of
SDI or the Company in the United States and internationally, in the name of
SDI or the Company, as
4
<PAGE>
applicable. The Employee shall, if requested, execute a form of
assignment necessary for the assignment of any and all Intellectual
Property or applications and/or registrations for such Intellectual
Property.
(d) The Employee will not knowingly use any methods, techniques or
software that are proprietary to a third party or which would infringe the
Intellectual Property rights of a third party. The Employee shall perform
his duties under this Agreement in accordance with ethical professional
standards.
10. CONFLICTS OF INTEREST.
(a) In keeping with the Employee's fiduciary duties to SDI and the
Company, the Employee agrees that he shall not, directly or indirectly,
become involved in a conflict of interest, or upon discovery thereof, allow
such a conflict to continue.
(b) It is agreed that any direct or indirect interest in, connection
with, or benefit from any outside activities, particularly commercial
activities, which interest might in any way adversely affect SDI, the
Company or any of their affiliates, involves a possible conflict of
interest. Circumstances in which a conflict of interest on the part of the
Employee would or might arise, and which should be reported immediately by
the Employee to the Boards of Directors of SDI or the Company, as
applicable, include, without limitation, the following:
(i) ownership of a material interest in, acting in any capacity
for, or accepting directly or indirectly any payments, services or
loans from a supplier, contractor, subcontractor, customer or other
entity with which SDI, the Company or any of their affiliates does
business;
(ii) misuse of information or facilities to which the Employee
has access in a manner which will be detrimental to SDI, the Company's
or any of their affiliates interests;
(iii) disclosure or other misuse of information of any kind
obtained through the Employee's connection with SDI, the Company or
any of their affiliates;
(iv) acquiring or trading in, directly or indirectly, other
properties or interests connected with the development or marketing of
products or services in competition with those marketed by SDI, the
Company or any of their affiliates;
5
<PAGE>
(v) the appropriation to the Employee or the diversion to others,
directly or indirectly, of any opportunity in which it is known or
could reasonably be anticipated that SDI, the Company or any of their
affiliates would be interested; and
(vi) the ownership, directly or indirectly, of a material
interest in an enterprise which is or through the assistance of the
Employee could become in competition with SDI, the Company or any of
their affiliates or any of their respective dealers and distributors
or acting as a director, officer, partner, consultant, employee or
agent of any enterprise which is or through the assistance of the
Employee could become in competition with SDI, the Company or any of
their affiliates or any of their respective dealers or distributors.
11. INJUNCTIVE RELIEF. If there is a breach or threatened breach of
the provisions of paragraph 7,8,9 or 10 of this Agreement, SDI and the Company
shall be entitled to an injunction restraining the Employee from such breach.
Nothing herein shall be construed as prohibiting SDI or the Company from
pursuing any other remedies for such breach.
12. EFFECT OF TERMINATION. Upon the termination of this Agreement,
this Agreement shall thereupon be and become void and of no further force or
effect, except as otherwise sets forth herein and except that the Nondisclosure
Agreement shall survive any said termination and shall continue to bind the
Employee. Any payments due pursuant to the terms of this Agreement for services
rendered prior to the termination shall be made as provided in this Employment
Agreement.
13. BUSINESS EXPENSES. During the term of this Agreement, and so
long as the Employee is not in default of any obligations hereunder, the Company
shall pay or reimburse the Employee for any and all reasonable and necessary
expenses, properly receipted in accordance with the requirements of the Internal
Revenue Code of 1986, as amended, and Company policies (which shall include
appropriate written itemization and substantiation of expenses incurred)
incurred by the Employee in the performance of his duties hereunder.
14. EMPLOYEE BENEFITS. During the term of this Agreement, the
Employee shall participate in all employee benefit plans of SDI and the Company
as of the date hereof or the employee benefit plans of any present or future
affiliated corporations which are made generally available to employees of SDI
or the Company, and shall have the opportunity to participate in the SDI
Incentive Stock Option and Executive Compensation Plans, subject
6
<PAGE>
to the eligibility, enrollment and other requirements of all such plans.
15. NOTICES. Any notice required or permitted to be given under this
Agreement shall be in writing and shall be deemed to have been duly given or
delivered if delivered personally or mailed by registered or certified mail,
return receipt requested, with first class postage prepaid, to his residence in
the case of the Employee and to their principal offices in the case of SDI and
the Company.
16. BREACH, WAIVER OF BREACH. The waiver by SDI or the Company of a
breach of any provision of this Agreement by the Employee shall not operate or
be construed as a waiver of any subsequent breach by the Employee.
17. LAW TO GOVERN. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of Texas, without regard
to principles of conflict of laws.
18. ASSIGNMENT. The rights and obligations of SDI and the Company
under this Agreement shall inure to the benefit of and shall be binding upon
their successors and may be assigned, for all or any part of the term hereof, by
SDI or the Company to any corporation, (a) which at the time controls the
capital stock of SDI or the Company, (b) which succeeds to substantially all the
assets of SDI or the Company or (c) the controlling capital stock of which is at
the time owned by SDI or the Company; PROVIDED, HOWEVER, that in the event of
any transaction specified in subparagraphs (a), (b) or (c), SDI or the Company,
as applicable, shall remain liable with respect to their obligations under this
Agreement. In the event of such assignment, any and all references to "SDI" or
the "Company" in other paragraphs of this Agreement shall be deemed to mean and
include an assignee corporation. This Agreement shall not be assignable by the
Employee.
19. ENTIRE AGREEMENT. This instrument contains the entire agreement
of the parties with respect to employment. It may not be changed orally but
only an agreement in writing signed by both parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day first hereinabove written.
STRATEGIC DISTRIBUTION, INC.
By: /s/ WILLIAM L. MAHONE
------------------------------
Name: William L. Mahone
Title: Assistant Secretary
INTERMAT ACQUISITION CORP.
7
<PAGE>
By: /s/ WILLIAM L. MAHONE
------------------------------
Name: William L. Mahone
Title: Assistant Secretary
/s/ JEFFERY O. BEAUCHAMP
------------------------------
Jeffery O. Beauchamp
8
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