<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 September 30, 1998
------------------------------------------------
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
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STRATEGIC DISTRIBUTION, INC.
- -------------------------------------------------------------------------------
(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.)
3220 Tillman Drive, Suite 200, Bensalem, PA 19020
- ----------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
215-396-3088
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(Registrant's telephone number, including area code)
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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 October 28, 1998: 31,280,963
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TABLE OF CONTENTS
Part I - Financial Information
<TABLE>
<CAPTION>
Item 1 Page No.
- ------ --------
<S> <C>
Consolidated Financial Statements:
- Consolidated Balance Sheets -
September 30, 1998 (unaudited)
and December 31, 1997 ...................... 1
- Consolidated Statements of Operations
(unaudited) - Three Months and Nine Months
Ended September 30, 1998 and 1997 .......... 2
- Consolidated Statements of Cash Flows
(unaudited) - Nine Months Ended
September 30, 1998 and 1997 ................ 3
- Notes to Consolidated Financial Statements
(unaudited) ................................ 4
Item 2
- ------
Management's Discussion and Analysis of Financial
Condition and Results of Operations .............. 7
Part II - Other Information
Item 6
- ------
Exhibits and Reports on Form 8-K ................. 13
Signatures ...................................................... 14
</TABLE>
<PAGE>
STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except for share data)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(unaudited)
<S> <C> <C>
Assets
------
Current assets:
Cash and cash equivalents .................................... $ 1,872 $ 15,941
Short-term investments ....................................... -- 2,997
Accounts receivable, net ..................................... 36,616 28,772
Notes receivable ............................................. 361 230
Inventories .................................................. 28,784 23,712
Prepaid expenses and other current assets .................... 601 301
Deferred income taxes ........................................ 1,141 1,141
-------- --------
Total current assets .................................... 69,375 73,094
Notes receivable ............................................... 2,494 2,941
Property and equipment, net .................................... 9,434 5,290
Net assets of discontinued operations .......................... -- 915
Intangible assets, net ......................................... 7,541 8,327
Other assets ................................................... 788 115
-------- --------
Total assets ............................................ $ 89,632 $ 90,682
-------- --------
-------- --------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable and accrued expenses ........................ $ 25,447 $ 26,499
Current portion of long-term debt (related party $500 in 1997) 20 519
-------- --------
Total current liabilities ............................... 25,467 27,018
Long-term debt ................................................. 53 69
Subordinated debt to related party ............................. 1,400 1,400
Net liabilities of discontinued operations ..................... 621 --
Deferred income taxes .......................................... 101 101
-------- --------
Total liabilities ....................................... 27,642 28,588
-------- --------
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: 31,293,463 and 31,101,054 shares ............. 3,129 3,110
Additional paid-in capital ................................... 94,254 93,540
Accumulated deficit .......................................... (34,040) (33,506)
Notes receivable from related parties ........................ (1,303) (1,000)
Treasury stock, at cost (12,500 shares) ...................... (50) (50)
-------- --------
Total stockholders' equity .............................. 61,990 62,094
-------- --------
Total liabilities and stockholders' equity .............. $ 89,632 $ 90,682
-------- --------
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</TABLE>
See accompanying notes to consolidated financial statements.
1
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STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
(in thousands, except for share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------ ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues ..................................................... $ 57,389 $ 45,280 $ 160,251 $ 121,056
Costs and expenses:
Cost of materials .......................................... 44,204 34,709 124,693 95,213
Operating wages and benefits ............................... 4,859 4,077 13,487 10,996
Other operating expenses ................................... 1,849 1,931 5,395 4,345
Selling, general and administrative expenses ............... 6,243 5,340 17,760 13,752
Acquired in-process research and development ............... -- -- -- 8,000
------------ ------------ ------------ ------------
Total costs and expenses ..................................... 57,155 46,057 161,335 132,306
------------ ------------ ------------ ------------
Operating income (loss) ............................ 234 (777) (1,084) (11,250)
Interest income (expense):
Interest expense ........................................... (33) (41) (99) (114)
Interest income ............................................ 129 399 649 1,095
------------ ------------ ------------ ------------
Interest income, net ......................................... 96 358 550 981
------------ ------------ ------------ ------------
Income (loss) from continuing operations ........... 330 (419) (534) (10,269)
Loss from sale of discontinued operations .................... -- -- -- (4,500)
------------ ------------ ------------ ------------
Net income (loss) .................................. $ 330 $ (419) $ (534) $ (14,769)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net income (loss) per common share - basic and diluted:
Income (loss) from continuing operations ........... $ 0.01 $ (0.01) $ (0.02) $ (0.34)
Loss from sale of discontinued operations .......... -- -- -- (0.15)
------------ ------------ ------------ ------------
Net income (loss) .................................. $ 0.01 $ (0.01) $ (0.02) $ (0.49)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average number of shares of common stock outstanding:
Basic ............................................... 31,283,891 30,688,401 31,214,224 30,369,615
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Diluted ............................................. 31,425,868 30,688,401 31,214,224 30,369,615
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
2
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STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Loss from continuing operations ........................................... $ (534) $(10,269)
Adjustments to reconcile loss from continuing operations
to net cash used in continuing operations:
Depreciation and amortization ......................................... 1,972 1,448
Acquired in-process research and development .......................... -- 8,000
Changes in operating assets and liabilities, net of effects of acquisition:
Short-term investments ................................................ 2,997 --
Accounts receivable ................................................... (7,844) (7,222)
Inventories ........................................................... (5,072) (7,876)
Prepaid expenses and other current assets ............................. (300) (613)
Accounts payable and accrued expenses ................................. (1,052) 10,074
Other, net ............................................................ (449) (48)
-------- --------
Net cash used in continuing operations ................................. (10,282) (6,506)
Discontinued operations:
Net loss .............................................................. -- (4,500)
Change in net assets and liabilities .................................. 526 4,824
-------- --------
Net cash used in operating activities .............................. (9,756) (6,182)
-------- --------
Cash flows from investing activities:
Acquisition of business, net of cash acquired ......................... -- (10,769)
Proceeds from sales of discontinued operations ........................ 1,010 7,458
Additions of property and equipment ................................... (5,238) (1,598)
-------- --------
Net cash used in investing activities .............................. (4,228) (4,909)
-------- --------
Cash flows from financing activities:
Proceeds from sale of common stock .................................... 430 1,078
Repayment of note payable ............................................. -- (400)
Repayment of long-term obligations .................................... (515) (266)
-------- --------
Net cash provided by (used in) financing activities ................ (85) 412
-------- --------
Decrease in cash and cash equivalents .............................. (14,069) (10,679)
Cash and cash equivalents, beginning of the period .......................... 15,941 35,498
-------- --------
Cash and cash equivalents, end of the period ................................ $ 1,872 $ 24,819
-------- --------
-------- --------
Supplemental cash flow information:
Taxes paid ......................................................... $ 47 $ 4
Interest paid ...................................................... 67 70
</TABLE>
See accompanying notes to consolidated financial statements.
3
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STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(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,
1998 and 1997 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, 1997. The
results for the nine months ended September 30, 1998 are not necessarily
indicative of the results that may be expected for a full fiscal year.
2. On November 11, 1996, the Company announced its intention to sell its
Strategic Supply, Inc. ("SSI") and American Technical Services Group, Inc.
("ATSG") subsidiaries in order to focus more directly on the development of
the Company's In-Plant Store -Registered Trademark- business. The Company has
reflected SSI and ATSG as discontinued operations in the accompanying
financial statements.
On June 2, 1997, the Company sold substantially all of the assets and
business of SSI to DXP Acquisition, Inc., a wholly-owned subsidiary of DXP
Enterprises, Inc. (collectively referred to as "DXP") (excluding accounts
receivable of $5,669,000, which were retained by the Company and which were
substantially collected as of December 31, 1997). DXP also assumed certain
obligations and liabilities of SSI in connection with the sale. Consideration
for the sale consisted of $4,269,000 in cash, promissory notes from DXP in the
aggregate amount of $3,189,000, as adjusted, and an earn-out (contingent
payment), which could result in additional consideration to the Company of up to
$3,500,000. Total consideration in the sale approximated the carrying value of
the net assets divested, however, due to the contingent nature of a portion of
the consideration, the Company recorded a charge of $3,500,000 to loss on sale
of discontinued operations in the second quarter of 1997.
On June 4, 1998, the Company sold substantially all of the assets and
certain liabilities of ATSG to SPEC/ATS, Inc. Consideration for the sale
approximated the carrying value of the net assets sold, and consisted of
$1,010,000 in cash, with a purchase price adjustment based on closing net worth
and collected accounts receivable to be determined. The sale agreement also
provides for an earn-out (contingent payment), which could result in additional
consideration to the Company. Due to the contingent nature of the earn-out, no
benefit was recognized related to this portion of the consideration. In the
second quarter of 1997, the Company recorded a $1,000,000 charge to loss on sale
of discontinued operations, which included estimated
4
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losses of ATSG through the date of sale and the write-off of certain
intangible assets in connection with the sale.
3. On January 28, 1997, the Company, through a newly formed subsidiary,
acquired all of the outstanding common stock of INTERMAT International
Materials Management Engineers, Inc. In November 1997, the subsidiary changed
its name to INTERMAT, Inc. ("INTERMAT-Registered Trademark-"). The purchase
price consisted of $10,800,000 in cash, a $1,400,000 subordinated note, and
625,000 newly issued shares of the Company's common stock with a fair market
value of $2,406,000. The method of accounting for the acquisition was the
purchase method. The excess of purchase cost over the fair value of the
underlying net assets acquired was allocated to intangible assets, including
in-process research and development, technology, customer list, trademarks,
and assembled workforce, based on their respective fair values as determined
by an independent appraisal. In connection with the acquisition, the Company
recorded a charge of $8,000,000 in the first quarter of 1997, as a result of
the write-off of in-process research and development. The holder of the
subordinated note is an officer and director of the Company.
The results of operations of INTERMAT are included in the Company's
statements of operations from date of acquisition. The following unaudited pro
forma consolidated results of operations of the Company assume the acquisition
occurred on January 1, 1997.
<TABLE>
<CAPTION>
Nine months ended
September 30,1997
-----------------
<S> <C>
Revenues ....................................... $121,434
Net loss from continuing operations ............ $(10,409)
Net loss per common share from
continuing operations ........................ $ (0.34)
</TABLE>
The pro forma consolidated results do not purport to be indicative of
results that would have occurred had the acquisition been in effect from January
1, 1997.
4. Effective as of May 8, 1998, the Company entered into a new revolving credit
agreement with its bank providing maximum borrowings of $50,000,000. Borrowings
bear interest at the bank's reference rate (8.25% as of September 30, 1998)
and/or a Eurodollar rate, with a commitment fee over the term of the agreement
which ranges from 0.125% to 0.25% on the unused portion of the credit available.
The credit facility expires on May 8, 2001. The amount that the Company may
borrow under the credit facility is based upon eligible accounts receivable and
inventories. 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 September
30, 1998, there were no borrowings outstanding under the credit facility.
5. For the three months ended September 30, 1998, the weighted average number of
shares used to calculate diluted net income per
5
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common share, includes the assumed exercise of stock options and warrants
equivalent to 141,977 shares under the treasury stock method. Options to
purchase approximately 2,900,000 shares at prices ranging from $3.45 to $8.00
per share were outstanding during the three months ended September 30, 1998, but
were not included in the computation of diluted net income per common share
because the market price of the common shares did not exceed the options'
exercise prices for substantially all of three consecutive months ending on
September 30, 1998.
The weighted average number of shares used to calculate diluted net income per
common share for the three months ended September 30, 1997 and for the nine
months ended September 30, 1998 and 1997, do not include the assumed exercise of
stock options or warrants because the effect is antidilutive. As of September
30, 1998 and 1997, there were stock options and warrants outstanding for
approximately 3,100,000 and 2,900,000 shares of common stock.
6
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 related
to the Company's ability to manage growth, termination of contracts by the
Company's customers, competition in the Company's business, the Company's
dependence on key personnel, the Company's ability to deal with problems
associated with the Year 2000 issue and the effects of recession on the
Company and its customers. In the event of an economic downturn, the Company
could experience reduced volume of business from its existing customers, as
well as lost volume due to plant shutdowns or consolidations by the Company's
customers.
The Company provides proprietary maintenance, repair and operating
("MRO") 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 in 1994 and conducts
its operations primarily through its wholly owned subsidiaries, Industrial
Systems Associates, Inc.-Registered Trademark- ("ISA-Registered Trademark-")
and INTERMAT, Inc. ("INTERMAT-Registered Trademark-"). At September 30, 1998,
the Company had 131 In-Plant Store facilities.
Results of Operations
The following table of revenues and percentages sets forth selected items
of the results of operations.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------- -------------------------
1998 1997 1998 1997
--------- --------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Revenues ................................ $ 57,389 $ 45,280 $ 160,251 $ 121,056
100.0% 100.0% 100.0% 100.0%
Cost of materials ....................... 77.0 76.7 77.8 78.7
Operating wages and benefits ............ 8.5 9.0 8.4 9.1
Other operating expenses ................ 3.2 4.3 3.4 3.6
Selling, general and administrative
expenses .............................. 10.9 11.8 11.1 11.4
Acquired in-process research and
development ........................... -- -- -- 6.6
Operating income (loss) ................. 0.4 (1.8) (0.7) (9.4)
Interest income, net .................... 0.1 0.8 0.3 0.8
Income (loss) from continuing operations 0.5 (1.0) (0.4) (8.6)
Loss from sale of discontinued operations -- -- -- (3.7)
Net income (loss) ....................... 0.5 (1.0) (0.4) (12.3)
</TABLE>
7
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Three Months Ended September 30, 1998 Compared to Three Months Ended
September 30, 1997
Revenues for the three months ended September 30, 1998 increased 26.7%
to $57,389,000 from $45,280,000 for the three months ended September 30,
1997. This growth resulted primarily from the implementation of new In-Plant
Store facilities. The number of In-Plant Store facilities increased from 97
at September 30, 1997 to 131 at September 30, 1998. One In-Plant Store
customer represented approximately 13% of revenues for the three months ended
September 30, 1997, but less than 10% for the three months ended September
30, 1998.
Cost of materials as a percentage of revenues increased to 77.0% for the
three months ended September 30, 1998 from 76.7% in 1997. This increase is
primarily a result of higher material costs for ISA's Mexican In-Plant Store
facilities in 1998 as compared to 1997.
Operating wages and benefits expense as a percentage of revenues
decreased to 8.5% for the three months ended September 30, 1998 from 9.0% in
1997. 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, 1998 than in 1997. 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.
Other operating expenses as a percentage of revenues decreased to 3.2% for
the three months ended September 30, 1998 from 4.3% in 1997. The decrease
reflects utilization of software technology at INTERMAT to increase productivity
and lower temporary labor costs.
Selling, general and administrative expenses as a percentage of revenues
decreased to 10.9% for the three months ended September 30, 1998 from 11.8% in
1997. Recruiting costs were higher in 1997, as ISA invested in management talent
to meet the needs of its clients and the expansion of the In-Plant Store
program. Productivity improvements also resulted in lower temporary labor costs
in 1998 than were incurred in 1997.
Interest income, net decreased by $262,000 to $96,000 for the three months
ended September 30, 1998 when compared with interest income, net of $358,000 in
1997. The decrease resulted primarily from the use of cash and cash equivalents
to finance the working capital requirements of new In-Plant Store facilities,
thereby reducing the funds available to earn interest income.
Net income for the three months ended September 30, 1998 was $330,000,
compared to a net loss of $(419,000) in 1997, as a result of the items
previously discussed.
8
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Nine Months Ended September 30, 1998 Compared to Nine Months Ended
September 30, 1997
Revenues for the nine months ended September 30, 1998 increased 32.4% to
$160,251,000 from $121,056,000 for the nine months ended September 30, 1997.
This growth resulted primarily from the implementation of new In-Plant Store
facilities. The number of In-Plant Store facilities increased from 97 at
September 30, 1997 to 131 at September 30, 1998. One In-Plant Store customer
represented approximately 16% of revenues for the nine months ended September
30, 1997, but less than 10% for the nine months ended September 30, 1998.
Cost of materials as a percentage of revenues decreased to 77.8% for the
nine months ended September 30, 1998 from 78.7% in 1997. This decrease is
primarily a result of lower material costs for ISA.
Operating wages and benefits expense as a percentage of revenues decreased
to 8.4% for the nine months ended September 30, 1998 from 9.1% in 1997. 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 nine months ended September 30,
1998 than in 1997. 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.
Other operating expenses as a percentage of revenues decreased to 3.4% for
the nine months ended September 30, 1998 from 3.6% in 1997. The decrease
reflects utilization of software technology at INTERMAT to increase productivity
and lower temporary labor costs.
Selling, general and administrative expenses as a percentage of revenues
decreased to 11.1% for the nine months ended September 30, 1998 as compared to
11.4% in 1997. The nine months ended September 30, 1997 included higher
corporate costs related to the closing of the Company's Colorado office and
consolidation of the Company's corporate headquarters.
Interest income, net decreased by $431,000 to $550,000 for the nine months
ended September 30, 1998 when compared with interest income, net of $981,000 in
1997. The decrease resulted primarily from the use of cash and cash equivalents
to finance the working capital requirements of new In-Plant Store facilities,
thereby reducing the funds available to earn interest income.
In the nine months ended September 30, 1997, the Company incurred a
non-recurring charge of $8,000,000 for acquired in-process research and
development in connection with the acquisition of INTERMAT.
Loss on sale of discontinued operations in 1997 included a $3,500,000
charge related to the sale of the Company's Strategic
9
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Supply, Inc. ("SSI") subsidiary and a $1,000,000 charge for estimated
losses of the Company's American Technical Services Group, Inc. ("ATSG")
subsidiary.
Net loss for the nine months ended September 30, 1998 was $(534,000),
compared to a net loss of $(14,769,000) in 1997, as a result of the items
previously discussed.
Liquidity and Capital Resources
At December 31, 1997, the Company was party to a revolving bank credit
agreement which permitted maximum borrowings of $5,000,000, and under which
there were no borrowings outstanding. Effective as of May 8, 1998, the Company
entered into a new revolving credit agreement with its bank providing maximum
borrowings of $50,000,000. Borrowings bear interest at the bank's reference rate
(8.25% as of September 30, 1998) and/or a Eurodollar rate, with a commitment fee
over the term of the agreement which ranges from 0.125% to 0.25% on the unused
portion of the credit available. The credit facility expires on May 8, 2001. The
amount that the Company may borrow under the credit facility is based upon
eligible accounts receivable and inventories. 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. Borrowings under the facility are expected to be used primarily to
fund working capital requirements for the expansion of the In-Plant Store
program.
On January 28, 1997, the Company completed the acquisition of INTERMAT for
a purchase price consisting of $10,800,000 in cash, a $1,400,000 subordinated
note and 625,000 newly issued shares of the Company's common stock. The cash
portion of the purchase price was funded from available cash and cash
equivalents.
On June 2, 1997, the Company sold substantially all of the assets and
business of SSI. Consideration for the sale consisted of $4,269,000 in cash,
promissory notes in the aggregate amount of $3,189,000, as adjusted, and an
earn-out (contingent payment), which could result in additional consideration to
the Company of up to $3,500,000.
On June 4, 1998, the Company sold substantially all of the assets and
certain liabilities of ATSG. Consideration for the sale consisted of $1,010,000
in cash, with a purchase price adjustment based on closing net worth and
collected accounts receivable to be determined. The sale agreement also provides
for an earn-out (contingent payment), which could result in additional
consideration to the Company.
The net cash used in operating activities was $9,756,000 for the nine
months ended September 30, 1998 compared to $6,182,000 in 1997. The Company had
a smaller loss from continuing operations and a smaller increase in working
capital required for inventories in 1998 as compared to 1997, for the Company's
In-Plant Store program. The Company also shifted available funds from short-term
investments to
10
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cash equivalents. With its available funds, the Company reduced accounts
payable to take greater advantage of prompt pay discounts and to strengthen
supplier relations.
The net cash used in investing activities was $4,228,000 for the nine
months ended September 30, 1998 compared to $4,909,000 in 1997. The decrease
reflects higher expenditures for computer systems and related equipment in 1998,
offset by the net effect of the INTERMAT acquisition and the SSI sale in 1997.
The net cash used in financing activities was $85,000 for the nine months
ended September 30, 1998 compared to net cash provided of $412,000 in 1997. The
net cash used in 1998 includes payment of a $500,000 note to an officer of the
Company less proceeds from issuances of stock. In 1997, cash was provided
primarily from the sale of stock to an officer of the Company and the exercise
of stock options.
The Company believes that cash on hand, cash generated from future
operations, and cash from the Company's new bank credit facility will generate
sufficient funds to permit the Company to support the anticipated expansion of
the In-Plant Store program.
Year 2000 Issue
The Year 2000 issue arises from the fact that many existing computer
software programs use only two digits to identify the year in date fields
and, as such, could fail or create erroneous results by or at the Year 2000.
In late 1997, the Company began a planned project to replace its operating
and financial data processing systems, in order to provide better access to
business information, to meet the service requirements of its customers and
to allow for the expansion of its In-Plant Store program. This initiative is
using Year 2000 compliant software. The system replacement project is
currently on schedule, with the completion of the major financial systems
anticipated in the first quarter of 1999 and roll out of the operating
systems to In-Plant Stores during the second and third quarters of 1999.
In addition to the systems replacement project, the Company is in the
process of evaluating Year 2000 compliance for its non-technology systems,
its computer hardware and for major third parties with which the Company
conducts business. Testing of non-technology systems is in process and
the Company does not believe that any of these systems create any material
risks for the Company. Computer hardware testing was substantially complete
as of September 30, 1998. Hardware requiring replacement or upgrade was not
significant and remediation is expected to be completed in a timely manner.
Evaluation of third party readiness commenced in the third quarter of 1998.
Costs associated with the Company's Year 2000 compliance effort, which exclude
its planned systems replacement project, are not expected to be material.
The Company has also performed Year 2000 compliance testing on its
existing In-Plant Store operating system and believes the system to be
Year 2000 compliant. Therefore, the Company expects to be able to use this
system in the event of a delay in the systems replacement project. The Company
believes that its efforts to ensure Year 2000 readiness, in conjunction with its
systems replacement project, will significantly reduce the risk associated
with Year 2000 systems failures. However, due primarily to uncertainties
surrounding the Year 2000 readiness of third parties, there can be no
assurance that Year 2000 systems failures will not occur. Such failures could
have a material adverse effect on the Company's results of operations and
financial condition.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in financial statements. SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997. For the
nine months ended September 30, 1998 and 1997, the Company had no items of other
comprehensive income required to be disclosed by the statement.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information". SFAS No. 131 requires that public
business enterprises report certain information about operating segments,
products and services, geographic areas and major customers in financial
statements. SFAS No. 131 is effective for fiscal years beginning after December
15, 1997. This statement addresses presentation and disclosure matters and
adoption of the
11
<PAGE>
statement will have no effect on the Company's financial position or results
of operations.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SOP 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use". SOP 98-1
provides guidance on accounting for the costs of internal use software projects.
The statement is effective for fiscal years beginning after December 15, 1998,
however the Company has elected to apply the provisions of the statement to all
internal use software projects effective January 1, 1998, as encouraged. The
provisions of SOP 98-1 are not materially different from the Company's previous
method of accounting for such costs.
12
<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
June 21, 1996 with the Secretary of State of the 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, dated July 24, 1986,
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:
The Company did not file any reports on Form 8-K during the third quarter
of 1998.
13
<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 3, 1998 By: /s/ John M. Sergey
------------------------
John M. Sergey
President and Chief
Executive Officer
Date: November 3, 1998 By: /s/ David L. Courtright
------------------------
David L. Courtright,
Controller and
Chief Accounting Officer
14
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