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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 [Fee Required] For the fiscal year ended December 31, 1997 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required]
For the transition period from
Commission file Number 0-5228
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)
Registrant's telephone number, including area code: (215) 633-1900
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.10 Per Share
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 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 _____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this 10-K or any amendment
to this Form 10-K. [X]
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The aggregate market value of the Registrant's Common Stock, par value
$.10 per share (the "Common Stock"), held by non-affiliates on March 20, 1998
was approximately $135,000,000, based upon the last sale price of the Common
Stock on such date as reported on the Nasdaq National Market. For purposes of
this calculation, the Registrant has defined "affiliate" to include persons who
are directors or executive officers of the Registrant and persons who singly,
or as a group, beneficially own 10% or more of the issued and outstanding Common
Stock.
As of March 20, 1998, the Registrant had outstanding 31,136,854 shares
of Common Stock, which is registered pursuant to Section 12(g) of the Securities
Exchange Act of 1934 (the "1934 Act"). The Common Stock is sometimes referred to
herein as the "Voting Stock" of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's Proxy Statement for the 1998 Annual Meeting of
Stockholders is incorporated by reference in Part III of this Annual Report on
Form 10-K.
PART I
Item 1. Business.
(a) General Development of Business.
Strategic Distribution, Inc. (the "Company") is a Delaware corporation
which was organized in 1968.
On January 4, 1994, the Company acquired Industrial Systems Associates,
Inc. ("ISA"). ISA is a provider of In-Plant Store(R) programs for the
distribution and sale of maintenance, repair and operating ("MRO") supplies to
large industrial customers in the United States.
In late 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 In-Plant
Store business. SSI was formerly known as SafetyMaster Corporation
("SafetyMaster") and was the surviving corporation from a 1996 merger of two
wholly-owned subsidiaries, SafetyMaster and Lewis Supply (Delaware), Inc.
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. On February 6, 1997, the subsidiary changed its name
to INTERMAT International Materials Management, Inc. and on November 13, 1997,
to INTERMAT, Inc.
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("INTERMAT"). INTERMAT(R) provides cataloging services and develops and supplies
software for MRO inventory cataloging.
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.
(b) Financial Information About Industry Segments.
Not applicable.
(c) Narrative Description of Business.
The Company's In-Plant Store program permits industrial sites
to outsource all aspects of their MRO procurement, storage and internal
distribution; the Company takes responsibility for purchasing, receiving,
stocking, issuing and delivering MRO supplies at the industrial site. INTERMAT's
proprietary software helps industrial customers create standardized descriptions
of their MRO inventory, permitting customers to eliminate redundancies, identify
obsolescence, better access MRO items, and locate alternative sourcing for MRO
items. The Company believes that its In-Plant Store customers are likely to
recognize, and be excellent prospects for, the MRO cataloging tools and services
provided by INTERMAT. Similarly, the Company believes that INTERMAT's customers
are likely to recognize, and be excellent prospects for, the MRO outsourcing
services provided by the In-Plant Store program.
In late 1996, the Company announced its intention to sell its SSI and
ATSG subsidiaries, and subsequently did sell substantially all of the assets and
business of its SSI subsidiary, in order to focus more directly on the
development of the Company's In-Plant Store business. See "Discontinued
Operations." In line with this strategy, in January 1997, the Company acquired
INTERMAT which has developed proprietary MRO inventory cataloging services. The
Company believes that INTERMAT's services provide an excellent complement to the
Company's In-Plant Store program.
In-Plant Store(R) Program
The Company provides proprietary MRO supply procurement and handling
solutions to industrial sites, primarily through its In-Plant Store program. The
Company sells a broad range of MRO supplies, replacement parts and selected
classes of production materials, which are described collectively as MRO
supplies. MRO supplies are frequently low price but critical items which
historically have been characterized by high procurement costs due to inherent
inefficiencies in traditional MRO supply distribution methods. The Company's
In-Plant Store program, in which large industrial sites outsource the
procurement and handling of MRO supplies to the Company, substantially mitigates
these inefficiencies by reducing both the process and product costs associated
with MRO supply procurement and handling. The Company's In-Plant
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Store program also helps customers achieve operational improvements, such as
reduced plant down-time resulting from unavailable parts and manufacturing
process improvements due to better tracking of critical parts. The Company
believes that its In-Plant Store program is superior to both traditional and
alternative methods of MRO supply distribution in that the In-Plant Store
program allows customers to get out of the MRO supply distribution and handling
business and concentrate on their core businesses.
The Company believes that increased recognition of the inefficiencies
associated with the traditional MRO supply distribution process has rapidly
increased the demand for the Company's In-Plant Store program in recent years.
From January 1, 1997 to December 31, 1997, the number of In-Plant Store sites
operated by the Company increased from 72 to 101.
The In-Plant Store program is a comprehensive outsourcing service
through which the Company manages all aspects of MRO supply procurement and
handling at a customer's industrial site. Prior to the implementation of an
In-Plant Store, the industrial site would typically obtain MRO supplies from as
many as 500 traditional industrial distributors. Through the In-Plant Store
program, the Company becomes responsible for servicing all of its customers' MRO
supply needs by establishing a dedicated, fully integrated store within the
customer's plant. The customer, in turn, generally purchases all of its MRO
supplies from the In-Plant Store. The Company staffs the In-Plant Store with its
own trained industrial procurement professionals, installs proprietary software
designed specifically for industrial procurement and identifies appropriate
inventory levels based on the supply needs of each site. Upon implementation,
the In-Plant Store purchases, receives, inventories and issues MRO supplies
directly to plant personnel, delivers ongoing technical support and provides the
customer with a comprehensive invoice twice per month, thereby reducing the
administrative burden of traditional MRO supply. In addition, with the In-Plant
Store program, the customer generally consumes MRO supplies before paying for
them, as opposed to traditional MRO supply that often requires the customer to
invest in substantial MRO supply inventories.
Cataloging Services
INTERMAT(R) provides cataloging services and develops and supplies
software for MRO inventory cataloging. INTERMAT's customers are located
primarily in North America, as well as the Middle East (including Saudi Arabia
and the United Arab Emirates), the United Kingdom, South and Central America,
and South Africa.
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Standard Modifier Dictionary(R)
INTERMAT's Standard Modifier Dictionary is an electronic dictionary
with over 2,000 formats for building standardized descriptions of MRO items.
INTERMAT has used these formats to describe over 1.5 million separate MRO items
for its customers, enabling customers to describe and maintain their MRO
inventories in an organized and consistent fashion. INTERMAT's customers have
typically found that this systemization process turns up significant
redundancies in their MRO inventory. For example, the same MRO item may be used
in several different departments at a manufacturing site; each department
describes the part differently and, therefore, the different departments do not
realize that they are using the same part. Once all MRO parts are systematically
described and redundancies are identified, the customer is able to consolidate
and reduce inventories, thereby reducing its capital investment. The customer
can also reduce handling and other expenses related to MRO procurement and gain
better pricing by consolidating purchases.
INTERMAT has developed other proprietary software which will scan a
customer's existing MRO database and automatically convert as many items as
possible to the Standard Modifier Dictionary formats. This automatic conversion
process can save customers substantial time and resources by reducing the number
of items that need to be manually converted to Standard Modifier Dictionary
formats.
StruxureTM Materials Cataloging Software
INTERMAT's Struxure software enables customers to manipulate the
Standard Modifier Dictionary formats to create a customized MRO catalog.
Initially, INTERMAT helps its new customers create a catalog of MRO items using
the Standard Modifier Dictionary formats, as well as item descriptions already
developed for and included in the Standard Modifier Dictionary. As MRO items are
added or deleted from a customer's inventory, the customer is able to add or
delete items from its MRO catalog. Struxure, an Oracle-based client-server
system, has many powerful cataloging features, including search tools, list
making capabilities, standard and custom reporting features, and network
capabilities.
Benefits of INTERMAT(R) Services
The initial and immediate benefit of INTERMAT's cataloging services is
the identification and elimination of redundant and obsolete inventory. In
addition, over time, customers are able to achieve significant value by (i) more
quickly and easily identifying and locating MRO items needed by different
departments at an industrial site, or by different industrial sites operated by
the same company, and (ii) helping customers locate alternative sources for
different MRO items. Once all MRO items are described using Standard Modifier
Dictionary formats, a customer may realize that different departments have been
purchasing equivalent parts from different suppliers at different costs. This
realization enables the customer to choose the best source and the best price.
In addition, Standard
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Modifier Dictionary formats enable the customer to more easily locate new
sources for a given product, since Standard Modifier Dictionary formats give
purchasing personnel the information they need to obtain price quotes from new
suppliers.
Customers
At December 31, 1997, the Company operated 101 In-Plant Store
facilities for 46 individual customers. INTERMAT provides its cataloging
services to a wide variety of customers in the United States and abroad.
INTERMAT's foreign revenues for the year ended December 31, 1997 amounted to
less than 1% of the Company's consolidated revenues. For the year ended December
31, 1997, Westinghouse Electric Corporation (with which the Company operates
under six separate contracts) represented approximately 15% of the Company's
revenues.
Products
The Company, through the In-Plant Store program, provides a broad range
of MRO supplies, replacement parts and selected classes of production materials,
including the following:
o Abrasives o Hoses, pipe fittings and valves
o Adhesives o HVAC and plumbing equipment
o Coatings, lubricants and o Janitorial supplies
compounds o Material handling products
o Cutting, hand, pneumatic and o Measuring instruments
power tools o Power transmission equipment
o Electrical supplies o Respiratory products
o Fasteners o Replacement parts
o Fire protection equipment and clothing o Safety products
o Welding materials
Because of the broad range of products sold by the Company, no single
product or class of products accounted for more than 10% of the Company's
revenues in 1997.
Suppliers
The Company purchases products for its In-Plant Store program from
numerous manufacturers and specialty distributors. The Company has distribution
agreements with numerous manufacturers and suppliers, all of which can be
canceled by the respective manufacturers and suppliers upon notice of one year
or less. Because no manufacturer or supplier provides products that account for
as much as 10% of the Company's revenues and because the Company believes that
it could quickly find alternative sources of supply if any distribution contract
were canceled, the Company does not believe that the loss of any one
distribution contract, or any small group of distribution contracts, would have
a material adverse impact on the Company's business.
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Competition
The Company's business is highly competitive. The Company competes with
a wide variety of traditional MRO supply distributors. Most of such distributors
are small enterprises selling to customers in a limited geographic area. The
Company also competes with several integrated supply consortiums, direct mail
suppliers and large warehouse stores, some of which have significantly greater
financial resources than the Company. The primary areas of competition include
price, breadth and quality of product lines distributed, ability to fill orders
promptly, technical knowledge of sales personnel and, in certain product lines,
service and repair capability. The Company believes that its ability to compete
effectively is dependent upon its ability to deliver value-added procurement
solutions to its customers through its In-Plant Store program, to respond to the
needs of its customers through quality service and to be price-competitive. The
Company believes that certain of its competitors have developed and implemented
programs which offer services similar to, and which compete with, the Company's
In-Plant Store program.
The Company also competes to some extent with the manufacturers of MRO
supplies. The Company believes, however, that most of such manufacturers sell
their products through traditional industrial distributors, because the limited
range of products that a manufacturer offers cannot compete effectively with the
broad product lines and additional services offered by traditional industrial
distributors and MRO supply service providers such as the Company.
The Company's cataloging services are built upon proprietary computer
software developed by INTERMAT. The Company is aware of a few companies that
have developed competing software, and it is possible that one or more larger
software companies will create competing software at some point in the future.
Government Regulation
In recent years, governmental and regulatory bodies have promulgated
numerous standards and regulations designed, among other things, to assure the
quality of certain classes of MRO items, to protect workers' well-being and to
make the work place safer. The Company reviews regulations governing its
customers in order to be able to distribute products that meet its customers'
needs, and some of the Company's past growth has been as a result of its
customers' compliance with this increasing level of regulation. The Company
cannot predict the level or direction of future regulation, but believes these
trends will continue to contribute to the Company's growth.
Employees
As of December 31, 1997, the Company had approximately 890 employees,
of whom approximately 190 were employed in selling and administrative capacities
and approximately 700 were involved in
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operations. None of the Company's employees were covered under collective
bargaining agreements. The Company considers its employee relations to be good.
Insurance
The Company maintains liability and other insurance that it believes to
be customary and generally consistent with industry practice. The Company is
also named as an additional insured under the products liability policies of
many of its suppliers and, with respect to In-Plant Store facilities, many of
its customers. The Company believes that such insurance is adequate to cover
potential claims relating to its existing business activities.
Discontinued Operations
On November 11, 1996, the Company announced its intention to sell its
SSI and ATSG subsidiaries in order to focus more directly on the development of
the Company's In-Plant Store business. The results of operations of SSI and ATSG
have, therefore, been presented in the Company's consolidated financial
statements for the three years ended December 31, 1997, to conform with
discontinued operations treatment ("Discontinued Operations"). See Item 8,
"Financial Statements and Supplementary Data - Notes to Consolidated Financial
Statements," Footnote No. 9.
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 compensation to the Company of up to
$3,500,000.
The Company is currently negotiating for the sale of substantially all
of the assets and certain liabilities of ATSG. The Company believes that it will
be able to complete the sale during the first half of 1998, however there can be
no assurance that the sale will be completed during that period. ATSG is a
supplier of instrumentation services in the United States.
Item 2. Properties.
The Company leases its corporate headquarters located in Bensalem,
Pennsylvania, as well as additional office space in Feasterville, Pennsylvania,
Houston, Texas, El Paso, Texas, Easton, Maryland and several small warehouses
located at In-Plant Store sites. The Company does not own or lease the space for
its other In-Plant Store facilities. The Company has the right to renew some of
these
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leases. The Company believes that the properties which are currently under lease
are adequate to serve the Company's business operations for the foreseeable
future. The Company believes that if it were unable to renew the lease on any of
these facilities, it could find other suitable facilities with no adverse effect
on the Company's business.
Item 3. Legal Proceedings.
The Company is currently involved in certain legal proceedings
incidental to the normal conduct of its business. The Company does not believe
that any liabilities relating to such proceedings are likely to be, individually
or in the aggregate, material to its consolidated financial position and results
of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
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PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
The Common Stock is quoted on the Nasdaq National Market ("NNM")
under the symbol "STRD". As of March 20, 1998, there were approximately 1,500
holders of record of the Common Stock. The following table sets forth the
high and low sale prices of the Common Stock on the NNM for the periods
indicated.
<TABLE>
<CAPTION>
Quarter Ended High Sales Price Low Sales Price
------------- ---------------- ---------------
<S> <C> <C>
March 31, 1996............ 8 1/4 5 5/8
June 30, 1996............. 9 1/8 5 3/4
September 30, 1996........ 7 7/8 4 3/8
December 31, 1996......... 8 1/2 4 11/16
March 31, 1997............ 7 3/4 3 3/16
June 30, 1997............. 5 1/4 3 3/8
September 30, 1997........ 5 15/16 3 1/2
December 31, 1997........ 6 13/16 4 1/8
</TABLE>
The Company has paid no cash dividends on the Common Stock for the
years ended December 31, 1996 and 1997 and does not intend to declare any
cash dividends in the foreseeable future. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources".
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Item 6. Selected Financial Data
(dollars in thousands, except for share data)
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------------------------
1993 1994 1995 1996 1997(a)
---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues.............................. $ - $31,247 $52,915 $ 92,423 $170,780
Operating income (loss)............... (634) 573 313 (3,956) (12,613)
Income (loss) before
income taxes......................... (608) 408 338 (2,589) (11,306)
Income tax (expense)
benefit.............................. - 850 (149) - -
Income (loss) from
continuing operations................ (608) 1,258 189 (2,589) (11,306)
Income (loss) from
discontinued
operations, net of tax............... 910 977 815 (6,519) (4,500)
Net income (loss)..................... 302 2,235 1,004 (9,108) (15,806)
Per Share Data:
Income (loss) from
continuing operations................ (0.05) 0.07 0.01 (0.10) (0.37)
Income (loss) from
discontinued operations.............. 0.07 0.06 0.04 (0.24) (0.15)
Net income (loss)..................... 0.02 0.13 0.05 (0.34) (0.52)
Weighted Average Number of Shares of
Common Stock Outstanding................ 12,684,911 16,993,971 21,689,653 26,449,079 30,534,635
Other Data:
Number of In-Plant Store
Facilities(b) - 17 31 72 101
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $ 929 $10,693 $12,252 $53,447 $46,076
Total assets 3,510 29,992 40,014 92,382 90,682
Long-term debt - 632 5,054 587 1,469
Stockholders' equity 3,448 24,721 27,391 73,954 62,094
</TABLE>
(a) Loss from continuing operations includes a non-cash charge of $8,000,000 as
a result of the write-off of acquired in-process research and development.
(b) As of the end of the year.
The Company has paid no cash dividends on its common stock for the years ended
December 31, 1993, 1994, 1995, 1996 and 1997. On December 6, 1995, the Company
declared a three percent stock dividend to the holders of record on December 18,
1995. The payment date was December 29, 1995.
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Certain statements in this Item 7 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 and the Company's dependence
on key personnel.
The Company provides proprietary maintenance, repair and operating
("MRO") 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 in 1994 and conducts it operations primarily through its
wholly-owned subsidiary, Industrial Systems Associates, Inc. ("ISA"). At
December 31, 1997, the Company had 101 In-Plant Store facilities.
In late 1995, the Company formed two subsidiaries (collectively
"Mexico") to operate in the country of Mexico. Mexico's operations are conducted
primarily in U.S. dollars, its functional currency, and, therefore, the Company
is not exposed to significant foreign currency fluctuations and has no foreign
currency translation adjustments. Mexico's revenues for the year ended December
31, 1997, represented less than 1% of consolidated revenues.
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 business. SSI was formerly known as SafetyMaster
Corporation ("SafetyMaster") and was the surviving corporation from a 1996
merger of two wholly-owned subsidiaries, SafetyMaster and Lewis Supply
(Delaware), Inc. (the "Merger"). As a result of the Company's decision to sell
SSI and ATSG, the Company's consolidated financial statements reflect SSI and
ATSG as discontinued operations.
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. On February 6, 1997, the subsidiary changed its name
to INTERMAT International Materials Management, Inc. and on November 13, 1997,
to INTERMAT, Inc. ("INTERMAT"). INTERMAT provides cataloging services and
develops and supplies software for MRO inventory cataloging. 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. In connection with the acquisition, the Company recorded a charge of
approximately $8,000,000 in the first
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quarter of 1997, as a result of the write-off of in-process research and
development.
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 compensation 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 1997.
The Company is currently negotiating for the sale of substantially all
of the assets and certain liabilities of ATSG. The Company believes it will be
able to complete the sale during the first half of 1998, however there can be no
assurance that the sale will be completed during that period. In 1997, the
Company recorded a $1,000,000 charge to loss on sale of discontinued operations,
which includes the estimated losses of ATSG through June 30, 1998.
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Results of Operations
The following table of revenues and percentages sets forth selected
items of the results of operations.
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
1995 1996 1997
---- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
Revenues $52,915 $92,423 $170,780
======= ======= ========
100.0% 100.0% 100.0%
Cost of materials................ 81.0 81.0 78.5
Operating wages and benefits..... 7.8 9.4 8.9
Other operating expenses......... 1.1 1.9 3.9
Selling, general and
administrative expenses........ 9.5 12.0 11.4
Acquired in-process research
and development................ -- -- 4.7
Operating income (loss) .6 (4.3) (7.4)
Interest expense (income), net... -- (1.5) (.8)
Income (loss) from continuing
operations before taxes........ .6 (2.8) (6.6)
Income tax expense............... .2 -- --
Income (loss) from continuing
operations..................... .4 (2.8) (6.6)
Income (loss) from discontinued
operations, net of tax......... 1.5 (4.9) --
Loss on sale of discontinued
operations..................... -- (2.2) (2.7)
Net income (loss)................ 1.9 (9.9) (9.3)
</TABLE>
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues for the year ended December 31, 1997 increased 84.8% to
$170,780,000 from $92,423,000 in 1996. This growth resulted primarily from
the implementation of new In-Plant Store facilities, growth of existing
In-Plant Store facilities and the acquisition of INTERMAT. The number of
In-Plant Store facilities increased from 72 at December 31, 1996 to 101 at
December 31, 1997. One In-Plant Store customer (with which the Company
operated under six separate contracts) represented approximately 23% and 15%
of the revenues for the years ended December 31, 1996 and 1997.
Cost of materials as a percentage of revenues decreased to 78.5% for
the year ended December 31, 1997, as compared to 81.0% 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 product mix to In-Plant Store
facilities. This percentage may vary depending on the relative sales of the
two subsidiaries.
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Operating wages and benefits as a percentage of revenues decreased
to 8.9% for the year ended December 31, 1997 from 9.4% 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 year ended December 31, 1997 than in
1996. As new In-Plant Store facilities are added, operating wages and
benefits will continue to increase, however these expenses as a percentage of
revenues will vary depending on 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 operations, partly offset
the overall percentage decrease.
Other operating expenses as a percentage of revenues increased to
3.9% for the year ended December 31, 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 year ended December 31, 1997 from 12.0%
in 1996. ISA's 1997 selling, general and administrative expenses as a
percentage of revenues decreased as compared to 1996, reflecting a higher mix
of revenues in 1997 from more mature In-Plant Store facilities versus new
In-Plant Store facilities, than in 1996. As the In-Plant Store program
expands, this expense will continue to increase; however, as a percentage of
revenue, it should decrease as the ratio of more mature In-Plant Store
facilities to new facilities increases. The decrease in the percentage of
selling, general and administrative expenses was partly offset by the
inclusion of INTERMAT's results of operations in 1997. INTERMAT has a much
higher percentage of these expenses than ISA. The percentage may vary
depending on the relative sales of the two subsidiaries.
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.
Interest income, net for the year ended December 31, 1997 was
$1,307,000 as compared to $1,367,000 in 1996. During 1996, the Company had
more funds available for investment, but for fewer months than in 1997,
primarily from the sale of 7,630,000 shares of common stock on May 23, 1996.
During 1997, a portion of the net proceeds from the stock sale were used to
finance the working capital requirements of new In-Plant Store facilities and
the acquisition of INTERMAT.
An income tax benefit was not recorded for the loss incurred in the
year ended December 31, 1997, as the Company did not believe there was a
sufficient basis for benefit recognition.
14
<PAGE>
Results of discontinued operations relate to SSI and ATSG and are
discussed above.
Net loss for the year ended December 31, 1997 was $(15,806,000)
compared to a net loss of $(9,108,000) in 1996, as a result of the items
previously discussed.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues for the year ended December 31, 1996 increased 74.7% to
$92,423,000 from $52,915,000 in 1995. This growth resulted primarily from the
implementation of new In-Plant Store facilities. The number of In-Plant Store
facilities increased from 31 at December 31, 1995 to 72 at December 31, 1996.
One In-Plant Store customer (with which the Company operated under six
separate contracts) represented approximately 19% and 23% of the revenues for
the years ended December 31, 1995 and 1996.
Cost of materials as a percentage of revenues remained at 81.0% for
the years ended December 31, 1996 and 1995.
Operating wages and benefits expense as a percentage of revenues
increased to 9.4% for the year ended December 31, 1996 from 7.8% in 1995.
Other operating expenses as a percentage of revenues increased to 1.9% for
the year ended December 31, 1996 from 1.1% in 1995. These increases resulted
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.
Selling, general and administrative expenses as a percentage of
revenues increased to 12.0% for the year ended December 31, 1996 from 9.5% in
1995. This increase resulted primarily from expenses incurred by the Company
in connection with its expansion of the systems and personnel necessary to
support the operations and marketing of the In-Plant Store program. As the
In-Plant Store program continues to expand, this expense will continue to
increase; however, as a percentage of revenue, it should decrease as the
ratio of new In-Plant Store facilities to more mature facilities decreases.
Interest income, net increased by $1,342,000 to $1,367,000 for the
year ended December 31, 1996 from $25,000 in 1995. The increase resulted
primarily from the sale of 7,630,000 shares of Common Stock on May 23, 1996
and the interest income earned on the net proceeds.
Loss from discontinued operations was $(4,519,000) for the year
ended December 31, 1996 and income from discontinued operations was $815,000
for the year ended December 31, 1995. The Company decided to
15
<PAGE>
sell SSI and ATSG in order to focus exclusively on the growth of its In-Plant
Store business. The loss from discontinued operations for the year ended
December 31, 1996, included a restructuring charge, one-time expenses
associated with the Merger and branch closing expenses of approximately
$1,362,000. This amount consisted primarily of employee termination benefits,
asset write-offs and lease payments.
Loss on sale of discontinued operations included the estimated
financial results of SSI and ATSG through June 30, 1997, (the original
anticipated date of sale of SSI and ATSG), and anticipated transaction costs
related to the sale of SSI and ATSG.
Income tax expense decreased by $149,000 to $0 for the year ended
December 31, 1996. An income tax benefit was not recorded for the loss
incurred in the year ended December 31, 1996, as the Company did not believe
there was a sufficient basis for benefit recognition.
Net loss for the year ended December 31, 1996 was $(9,108,000)
compared to net income of $1,004,000 in 1995, 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 $20,000,000.
The credit agreement was amended on September 9, 1996 to reduce the permitted
maximum outstanding borrowings to $5,000,000. Borrowings bear interest at the
prime rate (8.25% as of December 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
1997 there were no borrowings outstanding under the credit facility.
On May 23, 1996, the Company sold 7,630,000 shares of common stock
in an underwritten public offering. The net proceeds to the Company were
$55,332,000. A portion of the net proceeds was used to repay the Company's
bank indebtedness. The balance of the net proceeds at that time, was
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 $10,800,000 in cash, a $1,400,000
subordinated note and 625,000 newly issued shares of common stock.
On June 2, 1997, the Company sold substantially all of the assets
and business of SSI. Consideration for the sale consisted
16
<PAGE>
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 compensation to the Company of up to $3,500,000.
Excluded from the sale were accounts receivable of $5,669,000, which were
substantially collected in 1997.
The net cash used in continuing operations was $13,968,000 for the
year ended December 31, 1997, compared to $8,058,000 for the year ended
December 31, 1996. The increase resulted primarily from an increase in
short-term investments, accounts receivable and inventories, which were
partially offset by an increase in accounts payable and accrued expenses.
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 change in net assets of discontinued operations was a decrease
of $5,054,000 for the year ended December 31, 1997 compared to a decrease of
$475,000 for 1996. The change is primarily related to the collection of
accounts receivable excluded from the sale of SSI.
The net cash used in investing activities increased to $7,012,000
for the year ended December 31, 1997 from $1,848,000 for the comparable
period in 1996. The increase resulted primarily from the acquisition of
INTERMAT and expenditures related to computer systems and equipment,
partially offset by the sale of SSI.
The net cash provided by financing activities was $869,000 for the
year ended December 31, 1997, compared to $51,086,000 for the year ended
December 31, 1996. In 1997, cash was provided primarily from the sale of
stock to an officer of the Company and the exercise of stock options. In
1996, cash was provided primarily from the proceeds of the public offering of
common stock, partially offset by the repayment of the note payable to the
bank.
During 1998 and 1999, the Company will be implementing a
resystemization of its operating and financial data processing systems. This
initiative will utilize technology which addresses and mitigates any Year
2000 issue in the Company's current systems. The Year 2000 issue arises from
the fact 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. As of December 31, 1997, the total cost of
this project was not finally determined, but is expected to be in excess of
$5,000,000, substantially all of which will be capitalized.
During the first quarter of 1998, the Company signed a commitment
letter with a bank to provide a revolving credit facility for borrowings up
to $50,000,000. Borrowings under the facility are expected to be used
primarily to fund working capital requirements for the expansion of the
In-Plant Store program.
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.
17
<PAGE>
Inflation
The Company believes that any impact of general inflation has not
had a material effect on its results of operations. The Company's current
policy is to attempt to reduce any impact of inflation through price
increases and cost reductions.
Seasonality
The Company does not believe that its business is seasonal in nature.
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.
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.
Both of the statements are effective for fiscal years beginning
after December 15, 1997. These statements address presentation and disclosure
matters and adoption of the statements will have no effect on the Company's
financial position or results of operations.
Item 8. Financial Statements and Supplementary Data.
Financial statements of the Company are listed on the accompanying
Index to Financial Statements.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not Applicable.
18
<PAGE>
STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Index to Financial Statements
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December
31, 1996 and 1997. F-3
Consolidated Statements of Operations for
the Years Ended December 31, 1995, 1996
and 1997. F-4
Consolidated Statements of Stockholders'
Equity for the Years Ended December 31,
1995, 1996 and 1997. F-5
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1995, 1996
and 1997. F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
Schedules have been omitted because they are not applicable or
they are not required, because the required information has been included
elsewhere in the consolidated financial statements or notes thereto.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Strategic Distribution, Inc.:
We have audited the accompanying consolidated balance sheets of Strategic
Distribution, Inc. and subsidiaries as of December 31, 1996 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Strategic
Distribution, Inc. and subsidiaries as of December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
February 27, 1998
F-2
<PAGE>
STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1996 1997
------------------- -------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $35,498 $15,941
Short-term investments - 2,997
Accounts receivable, net 17,910 28,772
Notes receivable - 230
Inventories 15,720 23,712
Prepaid expenses and other current assets 436 301
Deferred income taxes 1,382 1,141
------------------- -------------------
Total current assets 70,946 73,094
Notes receivable - 2,941
Property and equipment, net 2,251 5,290
Net assets of discontinued operations 16,614 915
Intangible assets, net 2,525 8,327
Other assets 46 115
------------------- -------------------
Total assets $92,382 $90,682
=================== ===================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $17,477 $26,499
Current portion of long-term debt (related party $500 in 1997) 22 519
------------------- -------------------
Total current liabilities 17,499 27,018
Long-term debt (related party $500 in 1996) 587 69
Subordinated debt to related party - 1,400
Deferred income taxes 342 101
------------------- -------------------
Total liabilities 18,428 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: 29,523,361 and 31,101,054 shares 2,952 3,110
Additional paid-in capital 88,752 93,540
Accumulated deficit (17,700) (33,506)
Note receivable from related party (50) (1,000)
Treasury stock, at cost (12,500 shares) - (50)
------------------- -------------------
Total stockholders' equity 73,954 62,094
------------------- -------------------
Total liabilities and stockholders' equity $92,382 $90,682
=================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except share data)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
1995 1996 1997
--------------- --------------- ----------------
<S> <C> <C> <C>
Revenues $ 52,915 $ 92,423 $ 170,780
Costs and expenses:
Cost of materials 42,874 74,842 134,061
Operating wages and benefits 4,125 8,644 15,150
Other operating expenses 561 1,809 6,728
Selling, general and administrative expenses 5,042 11,084 19,454
Acquired in-process research and development - - 8,000
--------------- --------------- ----------------
Total costs and expenses 52,602 96,379 183,393
--------------- --------------- ----------------
Operating income (loss) 313 (3,956) (12,613)
Interest expense (income):
Interest expense 55 98 154
Interest (income) (80) (1,465) (1,461)
--------------- --------------- ----------------
Interest (income), net (25) (1,367) (1,307)
--------------- --------------- ----------------
Income (loss) before income taxes 338 (2,589) (11,306)
Income tax expense 149 - -
--------------- --------------- ----------------
Income (loss) from continuing operations 189 (2,589) (11,306)
Discontinued operations:
Income (loss) from discontinued operations,
net of tax 815 (4,519) -
Loss on sale of discontinued operations - (2,000) (4,500)
--------------- --------------- ----------------
Income (loss) from discontinued operations 815 (6,519) (4,500)
--------------- --------------- ----------------
Net income (loss) $ 1,004 $ (9,108) $ (15,806)
=============== =============== ================
Net income (loss) per common share:
Income (loss) from continuing operations $ 0.01 $ (0.10) $ (0.37)
Income (loss) from discontinued operations 0.04 (0.24) (0.15)
-------------- --------------- ----------------
Net income (loss) $ 0.05 $ (0.34) $ (0.52)
============== =============== ================
Net income (loss) per common share - assuming dilution:
Income (loss) from continuing operations $ 0.01
Income (loss) from discontinued operations 0.04
--------------
Net income (loss) $ 0.05
==============
Weighted average number of shares of common
stock outstanding 21,689,653 26,449,079 30,534,635
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(in thousands, except share data)
<TABLE>
<CAPTION>
Additional
Common Paid-In Accumulated Note Treasury
Stock Capital Deficit Receivable Stock
--------------- --------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 2,102 $ 28,154 $ (5,485) $ (50) $ -
Net income 1,004
Exercise of stock options 6 59
Tax benefit of stock options
exercised 43
Value of options issued in
connection with acquisition 1,560
Stock dividend (including cash
paid for fractional shares) 63 4,045 (4,111)
--------------- --------------- ----------------- --------------- ---------------
Balance at December 31, 1995 2,171 33,861 (8,592) (50) -
Net loss (9,108)
Exercise of stock options 16 204
Issuance of 14,328 shares 2 118
Sale of 7,630,000 shares, net 763 54,569
--------------- --------------- ----------------- --------------- ---------------
Balance at December 31, 1996 2,952 88,752 (17,700) (50) -
Net loss (15,806)
Exercise of stock options 55 785
Issuance of 625,000 shares
for acquisition 63 2,343
Issuance of 400,000 shares 40 1,660 (1,000)
Receipt of 12,500 shares in
settlement of note receivable 50 (50)
--------------- --------------- ----------------- --------------- ---------------
Balance at December 31, 1997 $ 3,110 $ 93,540 $ (33,506) $ (1,000) $ (50)
=============== =============== ================= =============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------
1995 1996 1997
------------- -------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Income (loss) from continuing operations $ 189 $ (2,589) (11,306)
Adjustments to reconcile income (loss) from continuing
operations to net cash used in continuing operations:
Depreciation and amortization 482 691 2,016
Acquired in-process research and development - - 8,000
Deferred income taxes 614 - -
Noncash directors compensation - 120 -
Changes in operating assets and liabilities, net of effects of acquisitions:
Short-term investments - - (2,997)
Accounts receivable (5,116) (8,066) (9,671)
Inventories (1,951) (8,175) (7,992)
Prepaid expenses and other current assets (296) (300) 109
Accounts payable and accrued expenses 2,772 10,277 7,921
Other, net (13) (16) (48)
------------ ------------- ------------
Net cash used in continuing operations (3,319) (8,058) (13,968)
Discontinued operations, net of effect of disposition:
Net income (loss) 815 (6,519) (4,500)
(Increase) decrease in net assets (3,928) 475 5,054
------------ ------------- ------------
Net cash used in operating activities (6,432) (14,102) (13,414)
------------ ------------- ------------
Cash flows from investing activities:
Acquisition of business, net of cash acquired - - (10,769)
Proceeds from sale of discontinued operations - - 7,458
Additions of property and equipment (457) (1,848) (3,701)
------------ ------------- ------------
Net cash used in investing activities (457) (1,848) (7,012)
------------ ------------- ------------
Cash flows from financing activities:
Proceeds from sale of common stock, net 65 55,552 1,540
Cash paid in lieu of fractional shares of stock dividend (3) - -
Proceeds from (repayment of) note payable 4,445 (4,445) (400)
Repayment of long-term obligations (18) (21) (271)
------------ ------------- ------------
Net cash provided by financing activities 4,489 51,086 869
------------ ------------- ------------
Increase (decrease) in cash and cash equivalents (2,400) 35,136 (19,557)
Cash and cash equivalents, beginning of the year 2,762 362 35,498
------------ ------------- ------------
Cash and cash equivalents, end of the year $ 362 $ 35,498 $ 15,941
============ ============= ============
Supplemental cash flow information:
Taxes paid $ 89 $ 67 $ 11
Interest paid 66 160 164
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Description of Business
The Company provides proprietary maintenance, repair and operating
("MRO") 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 in 1994 and conducts it operations
primarily through its wholly-owned subsidiary, Industrial Systems Associates,
Inc. ("ISA"). At December 31, 1997, the Company had 101 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 primarily in U.S. dollars, its
functional currency, and therefore the Company is not exposed to any
significant foreign currency fluctuations and has no foreign currency
translation adjustments. Mexico's revenues for the year ended December 31,
1997 represented less than 1% of consolidated revenues.
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 business. SSI was formerly known as
SafetyMaster Corporation ("SafetyMaster") and was the surviving corporation
from a 1996 merger of two wholly-owned subsidiaries, SafetyMaster and Lewis
Supply (Delaware), Inc. (the "Merger"). As a result of the Company's decision
to sell SSI and ATSG, 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 (see Note
9). The Company believes it will be possible to complete the sale of ATSG in
the first half of 1998, however, there can be no assurance that the sale will
be completed during that period.
On January 28, 1997, the Company acquired all of the outstanding
common stock of INTERMAT International Materials Management Engineers, Inc.
(see Note 8).
(2) Significant Accounting Policies
Principles of Consolidation and Use of Estimates
The consolidated financial statements include the accounts of
Strategic Distribution, Inc. and subsidiaries. All significant intercompany
accounts and transactions have been eliminated. The preparation of the
consolidated financial statements requires
F-7
<PAGE>
estimates and assumptions that affect amounts reported and disclosed in the
financial statements and related notes. Actual results could differ from
these estimates.
Cash Equivalents and Short-Term Investments
All highly liquid investments with a maturity of three months or
less when purchased, are considered to be cash equivalents. Investments
purchased with an original maturity greater than three months are classified
as short-term investments. At December 31, 1996 and 1997, the Company had
investments in cash equivalents of approximately $35,000,000 and $15,000,000.
Fair Value of Financial Instruments
The carrying amount of the Company's financial instruments
approximates fair value.
Inventories
Inventories, which consisted solely of finished goods, are stated at
the lower of cost (determined on the first-in, first-out basis) or market.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is
calculated using the straight-line method over the estimated useful lives of
the assets. Leasehold improvements are amortized on a straight-line basis
over the shorter of the remaining life of the asset or the lease term.
Maintenance and repairs are charged to expense. Major renewals and
improvements are capitalized and depreciated over the remaining useful lives
of the assets. Estimated useful lives are as follows:
<TABLE>
<CAPTION>
<S> <C>
Office equipment & software 3 to 8 years
Leasehold improvements 4 to 8 years
Transportation equipment 5 years
</TABLE>
Intangible Assets
Intangible assets include technology, customer list, trademarks,
assembled workforce and excess of costs over fair value of net assets of
businesses acquired. Technology, trademarks and assembled workforce are being
amortized over a 10 year period. Customer list is being amortized over a 4
year period. Excess costs over fair value are being amortized over a 10 to 25
year period. All intangible assets are amortized by the straight-line method.
The Company periodically reviews the value of its intangible assets to
determine if any impairment has occurred. The Company measures any potential
impairment by the projected undiscounted future operating cash flows. If the
review indicates the carrying value of an asset may not be recovered, an
impairment loss would be recognized and the asset reduced to its estimated
fair value.
F-8
<PAGE>
Deferred Income Taxes
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amount of assets and liabilities and their respective tax bases and
operating loss carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled.
Stock Options
The Company has adopted the disclosure-only provisions of Statement
of Financial Accounting Standards ("SFAS") No. 123 "Accounting for
Stock-Based Compensation". The Company measures compensation under its stock
option plans using the intrinsic value approach prescribed under Accounting
Principles Board Opinion No. 25.
(3) Accounts Receivable
Accounts receivable is net of an allowance for doubtful accounts of
$2,000 and $238,000 at December 31, 1996 and 1997.
(4) Property and Equipment
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1997
------ -----
(in thousands)
<S> <C> <C>
Office equipment & software $2,724 $5,741
Leasehold improvements 187 226
Transportation equipment 364 207
Systems development in process - 1,020
------ -----
3,275 7,194
Less: Accumulated depreciation
and amortization 1,024 1,904
------ -----
$2,251 $5,290
------ -----
------ -----
</TABLE>
F-9
<PAGE>
(5) Intangible Assets
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1997
------ -----
(in thousands)
<S> <C> <C>
Excess costs over fair value of
businesses acquired $2,894 $3,166
Technology - 3,000
Customer list - 1,700
Trademarks - 1,000
Assembled workforce - 800
------ -----
2,894 9,666
Less: Accumulated amortization 369 1,339
------ -----
$2,525 $8,327
------ -----
------ -----
</TABLE>
(6) Accounts Payable and Accrued Expenses
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1997
------ -----
(in thousands)
<S> <C> <C>
Accounts payable $15,439 $22,482
Payroll and related expenses 1,078 2,293
Other accrued expenses 960 1,724
------- -------
$17,477 $26,499
------- -------
------- -------
</TABLE>
(7) Long-Term Debt and Subordinated Debt
Long-term debt consists of several loans with weighted average
interest rates of 6.4% and 6.3% at December 31, 1996 and 1997. Subordinated
debt consists of a 9.0% note payable to an officer of the Company (see Note
8).
Principal payments due on long-term obligations during each of the
next five years are: 1998 - $519,000; 1999 - $21,000; 2000 - $1,422,000; 2001
- -$24,000; and 2002 - $2,000.
Effective as of December 31, 1995, the Company entered into a
revolving bank credit agreement providing maximum borrowings of $20,000,000.
The credit agreement was amended on September 9, 1996 to reduce the permitted
maximum outstanding borrowings to $5,000,000. Borrowings bear interest at the
prime rate (8.25% as of December 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
F-10
<PAGE>
pledge of the capital stock, of the Company's subsidiaries. As of December
31, 1996 and 1997 there were no borrowings outstanding under the credit
facility (see Note 19).
(8) Acquisitions
On May 12, 1995, the Company acquired all of the
outstanding common stock of ATSG. The purchase price consisted of options to
purchase an aggregate of 1,036,708 shares of common stock at a price of $5.82
per share. The fair market value of these options, as determined by an
independent investment bank, was $1,560,000. As of December 31, 1997, none of
the options had been exercised. The method of accounting for the acquisition
was the purchase method. The results of operations of ATSG are included in
the Company's statements of operations, as discontinued operations, from the
date of acquisition.
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. On February 6, 1997, the subsidiary
changed its name to INTERMAT International Materials Management, Inc. and on
November 13, 1997, to INTERMAT, Inc. ("INTERMAT(R)"). 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 approximately $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 the date of acquisition. The following
unaudited pro forma consolidated results of operations assume the acquisition
occurred at the beginning of the respective years.
<TABLE>
<CAPTION>
Year ended December 31,
------------------------
1996 1997
-------- --------
(in thousands)
<S> <C> <C>
Revenues $ 96,883 $ 171,158
Loss from continuing operations $ (5,050) $ (11,446)
Net loss per common share from
continuing operations $ (0.19) $ (0.37)
</TABLE>
F-11
<PAGE>
The pro forma consolidated results do not purport to be indicative
of results that would have occurred had the acquisition been in effect for
the periods presented, nor do they purport to be indicative of results that
will be obtained in the future.
(9) Discontinued Operations
On November 11, 1996, the Company announced its intention to sell
SSI and ATSG. As of December 31, 1996, the Company recorded a $2,000,000
charge to estimated loss on sale of operations, which included the estimated
financial results of SSI and ATSG through June 30, 1997 (the original
anticipated date of sale of SSI and ATSG), and anticipated transaction costs
related to the sales.
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 compensation 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 1997.
The Company is currently negotiating for the sale of substantially
all of the assets and certain liabilities of ATSG. The Company believes it
will be able to complete the sale during the first half of 1998, however
there can be no assurance that the sale will be completed during that period.
In 1997, the Company recorded a $1,000,000 charge to loss on sale of
discontinued operations, which includes the estimated losses of ATSG through
June 30, 1998.
Discontinued operations are summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1995 1996 1997(a)
-------- -------- ---------
(in thousands)
<S> <C> <C> <C>
Revenues $64,579 $ 58,535 $ 31,640
------- -------- --------
------- -------- --------
Income (loss) from operations:
Income (loss) before taxes $ 1,523 $ (4,519) $ -
Income tax expense 708 - -
------- -------- --------
Income (loss) from operations $ 815 $ (4,519) $ -
------- -------- --------
------- -------- --------
Loss on sale of operations $ - $ (2,000) $ (4,500)
------- -------- --------
------- -------- --------
</TABLE>
F-12
<PAGE>
(a) Includes SSI through the date of sale. Loss from operations, amounting to
approximately $853,000, was charged against the reserve for loss on sale of
operations.
The net assets of discontinued operations are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1997
----------- --------
(in thousands)
<S> <C> <C>
Current assets $17,640 $3,364
Property and equipment, net 2,618 227
Excess costs over fair value of
businesses acquired, net 3,069 722
Other assets 597 49
------- ------
Total assets 23,924 4,362
------- ------
Current liabilities 4,800 1,271
Estimated loss on sale of
discontinued operations 2,000 2,176
Long-term obligations 510 -
----- -----
Total liabilities 7,310 3,447
----- -----
Net assets of discontinued
operations $16,614 $ 915
------- ------
------- ------
</TABLE>
The net loss from operations for the year ended December 31, 1996
includes a restructuring charge, one-time expenses associated with the Merger
and branch closing expenses totaling approximately $1,362,000. This amount
primarily consists of employee termination benefits, asset write-offs and
lease payments.
The historical results for the discontinued operations include an
allocation for the Company's corporate and interest expense. Interest expense
is allocated based upon the pro rata share of the intercompany borrowings.
Corporate and interest expense allocated amounted to $270,000, $573,000 and
$527,000 for the years ended December 31, 1995, 1996 and 1997.
(10) Retirement Plan
The Company has a qualified defined contribution plan (the
"Retirement Savings Plan") for employees who meet certain eligibility
requirements. Contributions to the Retirement Savings Plan are at the
discretion of the Board of Directors of the Company (the "Board") and are
limited to the amount deductible for Federal income tax purposes. The expense
for the Retirement Savings Plan was approximately $23,000, $32,000 and
$71,000 for the years ended December 31, 1995, 1996 and 1997.
F-13
<PAGE>
(11) Income Taxes
The income tax expense from continuing operations is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------
1995 1996 1997
--------- ------------ ---------
(in thousands)
<S> <C> <C> <C>
Current
Federal $ (498) $ - $ -
State 33 - -
Deferred
Federal 609 - -
State 5 - -
------ ------ ------
$ 149 $ - $ -
------ ------ ------
------ ------ ------
</TABLE>
A reconciliation of the expected Federal income tax expense from continuing
operations at the statutory rate to the Company's income tax expense follows:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
1995 1996 1997
-------- ----------- ----------
(in thousands)
<S> <C> <C> <C>
Expected tax expense (benefit) $ 115 $ (880) $(3,844)
Increase (reduction) in tax
expense resulting from:
Valuation allowance - 818 3,746
State taxes 25 - -
Goodwill 28 30 42
Other (19) 32 56
------ ------ ------
$ 149 $ - $ -
------ ------ ------
------ ------ ------
</TABLE>
F-14
<PAGE>
The components of the net deferred tax asset were as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1997
--------- ---------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards
(available through periods ending 2012) $ 2,545 $ 5,464
Intangible assets - 3,179
Accounts receivable 99 275
Inventories 633 47
Accrued expenses 341 190
Estimated loss on sale of
discontinued operations 800 841
Other 295 65
Valuation allowance (3,331) (8,920)
--------- --------
Total deferred tax asset 1,382 1,141
Deferred tax liabilities:
Property and equipment 194 101
Other assets 135 -
Goodwill 13 -
--------- --------
Total deferred tax liability 342 101
--------- --------
Net deferred tax asset $ 1,040 $ 1,040
--------- --------
--------- --------
</TABLE>
At December 31, 1996 and 1997, valuation allowances were
established, when necessary, to reduce deferred tax assets to amounts that
are more likely than not to be realized. The net change in the valuation
allowance for the years ended December 31, 1996 and 1997 was an increase of
$3,331,000 and $5,589,000.
(12) Stockholders' Equity
The Company has authorized 500,000 shares of preferred stock, par
value $0.10 per share. No shares of preferred stock are currently issued or
outstanding. The Board may at any time fix by resolution any of the powers,
preferences and rights, and the qualifications, limitations, and restrictions
of the preferred stock, which may be issued in series, the designation of
each such series to be fixed by the Board. At this time the Board has not
fixed any powers, preferences or rights for any of the shares of preferred
stock.
On December 6, 1995 the Company declared a three percent stock
dividend to holders of record on December 18, 1995. The payment date was
December 29, 1995. The Company had accumulated net income of $4,148,000 since
July 1, 1990, when it became a leading provider of MRO supply services to
industrial and commercial customers in the western United States.
F-15
<PAGE>
On May 23, 1996, the Company sold 7,630,000 shares of common stock
in an underwritten public offering. The net proceeds to the Company were
$55,332,000. A portion of the proceeds was used to repay the Company's bank
indebtedness. The balance of the net proceeds, at the time, was available for
working capital, for general corporate purposes and for possible acquisitions.
On January 28, 1997, the Company issued 625,000 shares of common
stock in connection with the acquisition of INTERMAT (see Note 8).
On May 20, 1997, the Company sold 400,000 shares of common stock to
an officer of the Company at $4.25 per share. Pursuant to a Stock Purchase
Agreement between the officer and the Company, dated April 11, 1997,
$1,000,000 of the purchase price was evidenced by a 7% promissory note issued
by the officer to the Company. The note, plus accrued interest thereon, is
due May 20, 2002.
(13) Net Income (Loss) Per Share
Net income per common share - assuming dilution for the year ended
December 31, 1995 is based on 22,221,520 weighted average shares of common
stock outstanding, which includes 531,867 potential shares of common stock
under the treasury stock method. Net loss per common share -assuming dilution
is not presented for the years ended December 31, 1996 and 1997, because the
affect of the assumed issuance of potential shares of common stock is
antidilutive. As of December 31, 1996 and 1997, there were stock options and
warrants outstanding for 2,423,155 and 2,574,556 shares of common stock.
(14) Stock Compensation Plans
The Company has an Incentive Stock Option Plan (the "Plan") under
which the Board is authorized to grant certain directors, executives, key
employees, consultants and advisers, options for the purchase of up to
3,000,000 shares of common stock. The Plan provides for the granting of both
incentive stock options and options that do not qualify as incentive stock
options ("nonqualified options"). In the case of each incentive stock option
granted under the Plan, the option price must not be less than the fair
market value of the Company's common stock at the date of grant. To date, all
options granted under the Plan are exercisable at not less than the fair
market value of the common stock at the date of grant. A significant portion
of the options granted under the Plan are exercisable at various rates from
25.0% to 33.3% per year beginning on the first anniversary of the date of
grant, and a significant portion of the options granted under the Plan are
exercisable at 33.3% per year beginning on the third anniversary of the date
of grant. A smaller portion of the options granted under the Plan were
exercisable at date of grant.
F-16
<PAGE>
The following table summarizes the option information for options
granted under the Plan (as adjusted for the stock dividend):
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Prices
--------- --------
<S> <C> <C>
Options outstanding, December 31, 1994......... 1,002,256 $1.25
Options granted during 1995.................... 352,399 $3.47
Options canceled or expired.................... (99,815) $1.74
Options exercised.............................. (45,087) $1.02
---------
Options outstanding, December 31, 1995......... 1,209,753 $1.87
Options granted during 1996.................... 396,500 $6.88
Options canceled or expired.................... (124,060) $4.01
Options exercised.............................. (162,371) $1.36
---------
Options outstanding, December 31, 1996......... 1,319,822 $3.24
Options granted during 1997.................... 516,500 $4.07
Options canceled or expired.................... (240,406) $5.52
Options exercised.............................. (552,693) $1.51
---------
Options outstanding, December 31, 1997......... 1,043,223 $3.99
=========
Options exercisable............................ 325,975 $2.44
=========
</TABLE>
The Company has a Non-Employee Director Stock Plan (the "Director
Plan") under which the Board is authorized to grant 150,000 shares of common
stock. On June 30, 1996, the Company issued 14,328 shares of common stock
under the Director Plan. On December 31, 1996, the Company granted options
for 28,000 shares of common stock under the Director Plan with an exercise
price of $8.00 per share. On December 31, 1997, the Company granted options
for 28,000 shares of common stock under the Director Plan with an exercise
price of $4.50 per share. Options granted under the Director Plan are
immediately exercisable and expire five years from the date of grant. As of
December 31, 1997, no options had been exercised under the Director Plan.
The Company has an Executive Compensation Plan (the "Executive
Plan") under which the Board is authorized to grant up to 500,000 shares of
common stock. No shares of common stock have been issued under the Executive
Plan.
On April 11, 1997, the Company granted, to an officer of the
Company, nonqualified options for 400,000 shares of common stock with an
exercise price of $5.12 per share. The options granted are exercisable at a
rate of 25.0% per year beginning on the first anniversary of the date of
grant.
F-17
<PAGE>
The following table summarizes information about stock options
outstanding under all plans at December 31, 1997.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------ ---------------------------------
Weighted Average Weighted Weighted
Remaining Average Average
Range of Exercise Contractual Life Exercise Exercise
Prices Number Outstanding (years) Price Number Exercisable Price
- ----------------- ------------------ ------- ----- ------------------ ----------
<S> <C> <C> <C> <C> <C>
$0.97 - $2.00.............. 209,065 5.4 $1.09 209,065 $1.09
$2.01 - $4.00.............. 479,785 8.7 $3.83 68,553 $3.45
$4.01 - $6.00.............. 569,708 9.0 $4.92 31,708 $4.67
$6.01 - $8.00.............. 240,665 7.8 $7.04 72,649 $7.35
--------- -------
1,499,223 8.2 $4.38 381,975 $3.00
========= =======
</TABLE>
The weighted average fair value of options granted for the years
ended December 31, 1995, 1996 and 1997 was $1.86, $4.45 and $3.43.
The Company has adopted the disclosure-only provisions of SFAS No.
123. Accordingly, no compensation expense has been recognized for the
Company's stock compensation plans. Had compensation expense for the plans
been determined based on the fair value prescribed by SFAS No. 123, the
Company's pro forma net income (loss) and pro forma net income (loss) per
share would have been the amounts indicated below:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1995 1996 1997
------ ------ ------
(in thousands)
<S> <C> <C> <C>
Net income (loss) - as reported............... $1,004 $(9,108) $(15,806)
Net income (loss) - pro forma................. $ 871 $(9,788) $(16,766)
Net income (loss) per share - as reported..... $ 0.05 $ (0.34) $ (0.52)
Net income (loss) per share - pro forma....... $ 0.04 $ (0.37) $ (0.55)
</TABLE>
The fair value of the options at date of grant was estimated using
the Black-Scholes model with the following weighted average assumptions:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Expected life (years)............ 3.30 6.00 6.92
Interest rate.................... 6.25% 6.61% 6.77%
Volatility....................... 89.93% 72.31% 60.89%
Dividend yield................... 0.00% 0.00% 0.00%
</TABLE>
Warrants to purchase 38,625 shares of common stock for $1.46 per
share were outstanding at December 31, 1997 and expire in 1999.
F-18
<PAGE>
(15) Lease Commitments
The Company leases real estate, equipment and vehicles for initial
terms of three to eight years. The minimum future rental payments for
operating leases with initial noncancellable lease terms in excess of one
year as of December 31, 1997 are as follows (in thousands):
1998.............................. $1,174
1999.............................. $973
2000.............................. $800
2001.............................. $720
2002.............................. $673
Thereafter........................ $377
Rental expense for the years ended December 31, 1995, 1996 and 1997,
was approximately $125,000, $319,000, and $809,000.
(16) Customer Business Data
One In-Plant Store customer (with which the Company operated under
two separate contracts in 1995, and six contracts in both 1996 and 1997)
represented approximately 19%, 23% and 15% of revenues for the years ended
December 31, 1995, 1996 and 1997. Three In-Plant Store customers represented
approximately 22%, 15% and 13% of revenues, respectively, for the year ended
December 31, 1995, but less than 10% for the years ended December 31, 1996
and 1997.
(17) Quarterly Data (in thousands, except for per share data)--Unaudited
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
1996
- -----
Revenues.................... $16,508 $ 19,518 $ 25,700 $ 30,697 $ 92,423
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Loss from continuing
operations................ $ (817) $ (645) $ (313) $ (814) $(2,589)
Loss from discontinued
operations................ (1,148) (1,017) (1,007) (1,347) (4,519)
Loss on sale of
discontinued
operations................ - - - (2,000) (2,000)
-------- -------- -------- -------- --------
Net loss.................... $(1,965) $(1,662) $(1,320) $(4,161) $(9,108)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net loss per common
share(a):
Loss from continuing
operations.............. $(.04) $(.03) $(.01) $(.03) $(.10)
Loss from
discontinued
operations.............. (.05) (.04) (.03) (.11) (.24)
------ ------ ------ ------ ------
Net loss.................. $(.09) $(.07) $(.04) $(.14) $(.34)
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
F-19
<PAGE>
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
1997
- -----
Revenues.................... $ 34,506 $ 41,270 $ 45,280 $ 49,724 $ 170,780
--------- -------- -------- -------- ---------
--------- -------- -------- -------- ---------
Loss from continuing
operations (b)............ $ (8,818) $(1,033) $ (419) $(1,036) $(11,306)
Loss from discontinued
operations................ - - - - -
Loss on sale of
discontinued
operations................ - (4,500) - - (4,500)
-------- ------- ------- ------- ---------
Net loss.................... $ (8,818) $(5,533) $ (419) $(1,036) $(15,806)
-------- -------- -------- -------- ---------
-------- -------- -------- -------- ---------
Net loss per common
share(a):
Loss from continuing
operations.............. $(.29) $(.03) $(.01) $(.03) $(.37)
Loss from
discontinued
operations.............. - (.15) - - (.15)
------ ------ ------ ------ ------
Net loss $(.29) $(.18) $(.01) $(.03) $(.52)
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
(a) Each period is computed separately.
(b) The first quarter of 1997 includes a charge of $8,000,000, related to the
write-off of acquired in-process research and development. The fourth
quarter of 1997 includes a charge of $440,000 related to closing one
In-Plant Store.
(18) Related Party Transactions
During 1996 and 1997, the Company entered into agreements with a
company of which the Company's Chairman of the Board is an officer, one
director is the sole owner and another director is an officer. The agreements
provided for consulting and other services at fees of $400,000 in 1996 and
$200,000 in 1997, and investment transaction services in connection with the
sale of SSI, amounting to $265,000 in 1997. The agreement in effect at
December 31, 1997, extends to May 31, 2000, and requires monthly service fees
of $12,500, which will be reduced by any investment transaction fees paid.
(19) Subsequent Event
During the first quarter of 1998, the Company signed a commitment
letter with a bank to provide a revolving credit facility for borrowings up
to $50,000,000. The credit facility will contain customary financial and
other covenants and will be collateralized by substantially all of the
assets, as well as the pledge of the capital stock, of the Company's
subsidiaries.
F-20
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Company.
The information contained in the Company's Proxy Statement for the 1998
Annual Meeting of Stockholders, which will be filed not later than 120 days
after December 31, 1997 (the "Proxy Statement"), under the captions "Election of
Directors" and "Identification of Executive Officers" is incorporated herein by
reference.
Item 11. Executive Compensation.
The information contained in the Proxy Statement under the caption
"Executive Compensation" is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The information contained in the Proxy Statement under the caption
"Security Ownership of Certain Beneficial Owners and Management" is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information contained in the Proxy Statement under the captions
"Executive Compensation" and "Transactions with Affiliates" is incorporated
herein by reference.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.
(a) 1. CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY. Consolidated
Financial Statements of Company filed with this Report are listed on the
accompanying Index to Financial Statements.
(a) 2. FINANCIAL STATEMENT SCHEDULES. Financial Statement Schedules of
the Company filed with this Report are listed on the accompanying Index to
Financial Statements.
(a) 3. EXHIBITS (References below to an exhibit being filed with a
previous filing made by the Company are included for the purpose of
incorporating such previously filed exhibit by reference to such filing.
Previously unfiled exhibits are those marked with an asterisk.)
<TABLE>
<CAPTION>
Page No.
in Manually
Signed Copy
-----------
<S> <C> <S>
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).
10.1 Form of Strategic Distribution, Inc. --
Amended and Restated 1990 Incentive
Stock Option Plan (incorporated by
reference to Exhibit 10.1 of the Company's
Annual Report on Form 10-K for the fiscal
year ended December 31, 1995).
10.2 Form of Strategic Distribution, Inc. --
Executive Compensation Plan (incorporated by
reference to Exhibit 10.2 of the Company's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1996).
<PAGE>
10.3 Form of Amended and Restated Strategic --
Distribution, Inc. 1996 Non-Employee
Director Stock Plan (incorporated by
reference to Exhibit 10.3 of the Company's
Annual Report on Form 10-K for the fiscal
year ended December 31, 1996).
10.4 Stock Purchase Agreement, dated as of May 12, --
1995, between the Company and the selling
shareholders parties thereto (incorporated
by reference to the Company's May 12, 1995
Current Report on Form 8-K).
10.5 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).
10.6 Asset Purchase Agreement among Strategic --
Supply, Inc., Coulson Technologies, Inc. and
Strategic Distribution, Inc., DXP Acquisition,
Inc. and DXP Enterprises, Inc. dated May 27, 1997
(incorporated by reference to Exhibit 2.1 of the
Company's June 2, 1997 Current Report on Form 8-K).
10.7 Credit Agreement, dated as of December 31, --
1995, between Bank of America Illinois and
the Company (incorporated by reference to
Exhibit 10.6 of the Company's Annual Report
on Form 10-K for the fiscal year ended
December 31, 1995).
10.8 First Amendment to Credit Agreement, dated --
as of May 28, 1996, amending the Credit
Agreement described in Exhibit 10.6
(incorporated by reference to Exhibit 10.2
of the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended September
30, 1996).
10.9 Second Amendment to Credit Agreement, dated --
as of September 9, 1996, amending the
Credit Agreement described in Exhibit 10.6
(incorporated by reference to Exhibit 10.3
of the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended September
30, 1996).
<PAGE>
10.10 Third Amendment to Credit Agreement, dated --
as of December 20, 1996, amending the Credit
Agreement described in Exhibit 10.6
(incorporated by reference to Exhibit 10.9
of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31,
1996).
10.11 Executive Employment Agreement, dated as of --
April 11, 1997, by and between Strategic
Distribution, Inc. and John M. Sergey
(incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1997 (the "June 30,
1997 Form 10-Q"))
10.12 Employment letter, dated as of April 11, 1997, --
by and between Strategic Distribution, Inc.
and John M. Sergey (incorporated by reference
to the June 30, 1997 Form 10-Q).
10.13 Stock Purchase Agreement, dated as of April 11, --
1997, by and between Strategic
Distribution, Inc. and John M. Sergey
(incorporated by reference to the June 30,
1997 Form 10-Q).
10.14 Amendment to Stock Purchase Agreement, dated --
as of May 5, 1997, amending the Stock
Purchase Agreement dated as of April 11,
1997, by and between Strategic Distribution,
Inc. and John M. Sergey (incorporated by
reference to the June 30, 1997 Form 10-Q).
10.15 Amended Loan and Pledge Agreement, dated as --
of May 5, 1997, by and between Strategic
Distribution, Inc. and John M. Sergey
(incorporated by reference to the June 30,
1997 Form 10-Q).
10.16 Secured Non-Recourse Promissory Note, dated --
May 20, 1997, made by John M. Sergey in
favor of Strategic Distribution, Inc.
(incorporated by reference to the June 30,
1997 Form 10-Q).
10.17 Non-Qualified Stock Option Agreement, dated --
as of April 11, 1997, by and between
Strategic Distribution, Inc. and John M.
Sergey (incorporated by reference to the
June 30, 1997 Form 10-Q).
21. List of Subsidiaries of the Company *
23. Consent of KPMG Peat Marwick LLP *
</TABLE>
<PAGE>
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the
last quarter of 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, this 27th
day of March, 1998.
Strategic Distribution, Inc.
By:/s/ Andrew M. Bursky
---------------------------------
Andrew M. Bursky
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of
1934, this report on Form 10-K has been signed below by the following persons in
the capacities and on the date(s) indicated.
/s/ Andrew M. Bursky Chairman of the Board and
- -------------------- Director
Andrew M. Bursky March 27, 1998
/s/ John M. Sergey President and Chief Executive Officer and
- ------------------ Director
John M. Sergey March 27, 1998
/s/ Michael F. Devine III Chief Financial Officer, Secretary and
- ------------------------- Treasurer
Michael F. Devine March 27, 1998
/s/ Jeffery O. Beauchamp Executive Vice President and
- ------------------------ Director
Jeffery O. Beauchamp March 27, 1998
/s/ George E. Krauter Executive Vice President and
- --------------------- Director
George E. Krauter March 27, 1998
/s/ David L. Courtright Controller and
- ----------------------- Chief Accounting Officer
David L. Courtright March 27, 1998
/s/ William R. Berkley
- ---------------------- Director
William R. Berkley March 27, 1998
/s/ Arnold W. Donald
- -------------------- Director
Arnold W. Donald March 27, 1998
/s/ Catherine B. James
- ---------------------- Director
Catherine B. James March 27, 1998
/s/ Jack H. Nusbaum
- ------------------- Director
Jack H. Nusbaum March 27, 1998
/s/ Joshua A. Polan
- ------------------- Director
Joshua A. Polan March 27, 1998
/s/ Mitchell I. Quain
- --------------------- Director
Mitchell I. Quain March 27, 1998
<PAGE>
EXHIBIT 21
<TABLE>
<CAPTION>
Wholly-Owned United States State of
Subsidiaries of the Company Incorporation
- --------------------------- -------------
<S> <C>
Strategic Supply, Inc. Delaware
Coulson Technologies, Inc. Delaware
(wholly-owned subsidiary of
Strategic Supply, Inc.)
FastenMaster Corporation, Inc. Delaware
(wholly-owned subsidiary of
Strategic Supply, Inc.)
Industrial Systems Associates, Inc. Pennsylvania
American Technical Services Group, Inc. Delaware
ATS Phoenix, Inc.
(wholly-owned subsidiary of
American Technical Services
Group, Inc.) Delaware
National Technical Services Group, Inc.
(wholly-owned subsidiary of
American Technical Services
Group, Inc.) Delaware
<CAPTION>
Wholly-Owned Foreign Subsidiaries Country
- ---------------------------------
<S> <C>
Strategic Distribution Services De
Mexico, S. A. De C. V. Mexico
(subsidiary of the Company)
Strategic Distribution Marketing De
Mexico, S. A. De C. V. Mexico
(subsidiary of the Company)
</TABLE>
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Stockholders
Strategic Distribution, Inc.:
We consent to incorporation by reference in the registration statements
(No. 33-57578, No. 333-01715 and No. 333-06973) on Form S-8 of Strategic
Distribution, Inc. of our report dated February 27, 1998, relating to the
consolidated balance sheets of Strategic Distribution, Inc. and subsidiaries
as of December 31, 1996 and 1997 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1997, which report appears in the
December 31, 1997 Annual Report on Form 10-K of Strategic Distribution, Inc.
KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 15,941
<SECURITIES> 2,997
<RECEIVABLES> 28,772
<ALLOWANCES> 0
<INVENTORY> 23,712
<CURRENT-ASSETS> 73,094
<PP&E> 5,290
<DEPRECIATION> 0
<TOTAL-ASSETS> 90,682
<CURRENT-LIABILITIES> 27,018
<BONDS> 1,469
0
0
<COMMON> 3,110
<OTHER-SE> 93,540
<TOTAL-LIABILITY-AND-EQUITY> 90,682
<SALES> 170,780
<TOTAL-REVENUES> 170,780
<CGS> 134,061
<TOTAL-COSTS> 155,939
<OTHER-EXPENSES> 27,454
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,307)
<INCOME-PRETAX> (11,306)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,306)
<DISCONTINUED> (4,500)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,806)
<EPS-PRIMARY> (.52)
<EPS-DILUTED> (.52)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 362,031
<SECURITIES> 0
<RECEIVABLES> 9,844,683
<ALLOWANCES> 0
<INVENTORY> 7,545,046
<CURRENT-ASSETS> 19,472,248
<PP&E> 811,092
<DEPRECIATION> 0
<TOTAL-ASSETS> 40,014,284
<CURRENT-LIABILITIES> 7,220,614
<BONDS> 5,053,730
0
0
<COMMON> 2,171,666
<OTHER-SE> 33,861,694
<TOTAL-LIABILITY-AND-EQUITY> 40,014,284
<SALES> 52,914,568
<TOTAL-REVENUES> 52,914,568
<CGS> 42,874,266
<TOTAL-COSTS> 47,559,983
<OTHER-EXPENSES> 5,042,185
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (25,035)
<INCOME-PRETAX> 337,435
<INCOME-TAX> 149,000
<INCOME-CONTINUING> 188,435
<DISCONTINUED> 815,491
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,003,926
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
