<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
-----------------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-5228
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STRATEGIC DISTRIBUTION, INC.
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(Exact name of registrant as specified in its charter)
Delaware 22-1849240
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(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
3220 Tillman Drive, Suite 200, Bensalem, PA 19020
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(Address of principal executive offices) (Zip Code)
215-396-3088
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
Number of Common Shares outstanding at May 4, 1998: 31,143,133
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TABLE OF CONTENTS
Part I - Financial Information
Item 1 Page No.
- ------ --------
Consolidated Financial Statements:
- Consolidated Balance Sheets - 1
March 31, 1998 (unaudited)
and December 31, 1997
- Consolidated Statements of Operations 2
(unaudited) - Three Months Ended March 31,
1998 and 1997
- Consolidated Statements of Cash Flows 3
(unaudited) - Three Months Ended
March 31, 1998 and 1997
- Notes to Consolidated Financial Statements 4
(unaudited)
Item 2
Management's Discussion and Analysis of Financial 6
Condition and Results of Operations
Part II - Other Information
Item 6
Exhibits and Reports on Form 8-K 10
Signatures 11
<PAGE>
STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except for share data)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
-------- --------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 11,923 $ 15,941
Short-term investments 3,707 2,997
Accounts receivable, net 29,734 28,772
Notes receivable 230 230
Inventories 25,682 23,712
Prepaid expenses and other current assets 362 301
Deferred income taxes 1,141 1,141
-------- --------
Total current assets 72,779 73,094
Notes receivable 2,933 2,941
Property and equipment, net 6,148 5,290
Net assets of discontinued operations 886 915
Intangible assets, net 8,065 8,327
Other assets 127 115
-------- --------
Total assets $ 90,938 $ 90,682
-------- --------
-------- --------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 28,204 $ 26,499
Current portion of long-term debt (related party $500 in 1997) 19 519
-------- --------
Total current liabilities 28,223 27,018
Long-term debt 64 69
Subordinated debt to related party 1,400 1,400
Deferred income taxes 101 101
-------- --------
Total liabilities 29,788 28,588
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Stockholders' equity:
Preferred stock, par value $.10 per share
Authorized: 500,000 shares; issued and outstanding: none -- --
Common stock, par value $.10 per share
Authorized 50,000,000 shares; issued and
outstanding: 31,149,354 and 31,101,054 shares 3,115 3,110
Additional paid-in capital 93,748 93,540
Accumulated deficit (34,562) (33,506)
Notes receivable from related parties (1,101) (1,000)
Treasury stock, at cost (12,500 shares) (50) (50)
-------- --------
Total stockholders' equity 61,150 62,094
-------- --------
Total liabilities and stockholders' equity $ 90,938 $ 90,682
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
- 1 -
<PAGE>
STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
(in thousands, except for share data)
<TABLE>
<CAPTION>
Three months ended March 31,
1998 1997
------------ ------------
<S> <C> <C>
Revenues $ 50,458 $ 34,506
Cost and expenses:
Cost of materials 39,878 27,570
Operating wages and benefits 4,249 3,330
Other operating expenses 1,669 903
Selling, general and administrative expenses 5,992 3,864
Acquired in-process research and development -- 8,000
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Total costs and expenses 51,788 43,667
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Operating loss (1,330) (9,161)
Interest expense (income):
Interest expense 33 32
Interest (income) (307) (375)
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Interest (income), net (274) (343)
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Net loss $ (1,056) $ (8,818)
------------ ------------
------------ ------------
Net loss per common share $ (0.03) $ (0.29)
------------ ------------
------------ ------------
Weighted average number of shares of common
stock outstanding 31,144,956 30,013,611
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
- 2 -
<PAGE>
STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three months ended March 31,
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Loss from continuing operations $ (1,056) $ (8,818)
Adjustments to reconcile loss from continuing operations
to net cash used in continuing operations:
Depreciation and amortization 571 397
Acquired in-process research and development -- 8,000
Changes in operating assets and liabilities,
net of effects of acquisition:
Short-term investments (710) --
Accounts receivable (962) (4,316)
Inventories (1,970) (2,731)
Prepaid expenses and other current assets (61) (208)
Accounts payable and accrued expenses 1,705 3,423
Other, net (4) 1
-------- --------
Net cash used in continuing operations (2,487) (4,252)
Decrease in net assets of discontinued operations 29 336
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Net cash used in operating activities (2,458) (3,916)
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Cash flows from investing activities:
Acquisition of business, net of cash acquired -- (10,769)
Additions of property and equipment (1,167) (558)
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Net cash used in investing activities (1,167) (11,327)
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Cash flows from financing activities:
Proceeds from sale of common stock 112 139
Repayment of note payable -- (400)
Repayment of long-term obligations (505) (268)
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Net cash used in financing activities (393) (529)
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Decrease in cash and cash equivalents (4,018) (15,772)
Cash and cash equivalents, beginning of the period 15,941 35,498
-------- --------
Cash and cash equivalents, end of the period $ 11,923 $ 19,726
-------- --------
-------- --------
Supplemental cash flow information:
Taxes paid $ 18 $ 1
Interest paid 2 10
</TABLE>
See accompanying notes to consolidated financial statements.
- 3 -
<PAGE>
STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(unaudited)
1. The accompanying unaudited consolidated financial statements include the
accounts of Strategic Distribution, Inc. and subsidiaries (the "Company"). These
financial statements have been prepared in accordance with the instructions of
Form 10-Q. In the opinion of management, all adjustments (consisting of a normal
and recurring nature) considered necessary for a fair presentation of the
results of operations for the three months ended March 31, 1998 and 1997 have
been included. The statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.
2. On November 11, 1996, the Company announced its intention to sell its
Strategic Supply, Inc. ("SSI") and American Technical Services Group, Inc.
("ATSG") subsidiaries in order to focus more directly on the development of the
Company's In-Plant Store(R) business. The Company has reflected SSI and ATSG as
discontinued operations in the accompanying financial statements.
On June 2, 1997, the Company sold substantially all of the assets and
business of SSI to DXP Acquisition, Inc., a wholly-owned subsidiary of DXP
Enterprises, Inc. (collectively referred to as "DXP")(excluding accounts
receivable of $5,669,000, which were retained by the Company and which were
substantially collected as of December 31, 1997). DXP also assumed certain
obligations and liabilities of SSI in connection with the sale. Consideration
for the sale consisted of $4,269,000 in cash, promissory notes from DXP in the
aggregate amount of $3,189,000, as adjusted, and an earn-out (contingent
payment), which could result in additional 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 the second quarter of 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 the second
quarter of 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.
3. On January 28, 1997, the Company, through a newly formed subsidiary, acquired
all of the outstanding common stock of INTERMAT International Materials
Management Engineers, Inc. In November 1997, the subsidiary changed its name to
INTERMAT, INC. ("INTERMAT(R)"). The
4
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purchase price consisted of $10,800,000 in cash, a $1,400,000 subordinated note,
and 625,000 newly issued shares of the Company's common stock with a fair market
value of $2,406,000. The method of accounting for the acquisition was the
purchase method. The excess of purchase cost over the fair value of the
underlying net assets acquired was allocated to intangible assets, including
in-process research and development, technology, customer list, trademarks, and
assembled workforce, based on their respective fair values as determined by an
independent appraisal. In connection with the acquisition, the Company recorded
a charge of $8,000,000 in the first quarter of 1997, as a result of the
write-off of in-process research and development. The holder of the subordinated
note is an officer and director of the Company.
The results of operations of INTERMAT are included in the Company's
statements of operations from date of acquisition. The following unaudited pro
forma consolidated results of operations assume the acquisition occurred on
January 1, 1997.
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1997
------------------
<S> <C>
Revenues $34,884
Net loss $(8,963)
Net loss per common share $ (0.30)
</TABLE>
The pro forma consolidated results do not purport to be indicative of
results that would have occurred had the acquisition been in effect from January
1, 1997.
4. Effective as of May 8, 1998, the Company entered into a new revolving credit
agreement with its bank providing maximum borrowings of $50,000,000. Borrowings
bear interest at the bank's reference rate (8.50% as of May 8, 1998) and/or a
Eurodollar rate, with a commitment fee over the term of the agreement which
ranges from 0.125% to 0.25% on the unused portion of the credit available. The
credit facility expires on May 8, 2001. The amount which the Company may borrow
under the credit facility is based upon eligible accounts receivable and
inventories. The credit facility contains customary financial and other
covenants and is collateralized by substantially all of the assets, as well as
the pledge of the capital stock, of the Company's subsidiaries.
5. Net loss per common share - assuming dilution is not presented for the three
months ended March 31, 1998 and 1997, because the affect of the assumed issuance
of potential shares of common stock is antidilutive. As of March 31, 1998, there
were stock options and warrants outstanding for 3,050,699 shares of common
stock.
5
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Certain statements in this Form 10-Q constitute forward-looking
statements which involve risks and uncertainties. The Company's actual results
in the future could differ significantly from the results discussed or implied
in such forward-looking statements. Factors that could cause or contribute to
such differences include, but are not limited to, those related to the Company's
ability to manage growth, termination of contracts by the Company's customers,
competition in the Company's business 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 its operations primarily through its
wholly-owned subsidiaries, Industrial Systems Associates, Inc. ("ISA") and
INTERMAT, Inc. ("INTERMAT(R)"). At March 31, 1998, the Company had 111 In-Plant
Store facilities.
Results of Operations
The following table of revenues and percentages sets forth selected items
of the results of operations.
<TABLE>
<CAPTION>
Three Months ended
March 31,
1998 1997
--------- ---------
(dollars in thousands)
<S> <C> <C>
Revenues $ 50,458 $ 34,506
--------- ---------
--------- ---------
100.0% 100.0%
Cost of materials 79.0 79.9
Operating wages and benefits 8.4 9.7
Other operating expenses 3.3 2.6
Selling, general and administrative expenses 11.9 11.2
Acquired in-process research and development -- 23.2
Operating loss (2.6) (26.6)
Interest income, net 0.5 1.0
Net loss (2.1) (25.6)
</TABLE>
6
<PAGE>
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
Revenues for the three months ended March 31, 1998 increased 46.2% to
$50,458,000 from $34,506,000 for the three months ended March 31, 1997. This
growth resulted primarily from the implementation of new In-Plant Store
facilities. The number of In-Plant Store facilities increased from 80 at March
31, 1997 to 111 at March 31, 1998. One In-Plant Store customer (with which the
Company operates under six separate contracts) represented approximately 12% and
22% of revenues for the three months ended March 31, 1998 and 1997.
Cost of materials as a percentage of revenues decreased to 79.0% for the
three months ended March 31, 1998 from 79.9% in 1997. This decrease is primarily
a result of including three months of INTERMAT revenues in 1998 as compared to
two months in 1997. INTERMAT's direct material costs are insignificant, so the
consolidated percentage may vary depending upon the relative revenues of ISA and
INTERMAT.
Operating wages and benefits expenses as a percentage of revenues decreased
to 8.4% for the three months ended March 31, 1998 from 9.7% in 1997. This
decrease is primarily a result of the percentage of revenues from more mature
In-Plant Store facilities as compared to the percentage of revenues from new
In-Plant Store facilities being greater for the three months ended March 31,
1998 than in 1997. As new In-Plant Store facilities are added, the operating
wages and benefits expenses will continue to increase, however, these expenses
as a percentage of revenues will vary depending upon the rate at which the
Company adds new In-Plant Store facilities. During the start-up phase of new
facilities, these expenses generally increase at a higher rate than revenues are
recognized.
Other operating expenses as a percentage of revenues increased to 3.3% for
the three months ended March 31, 1998 from 2.6% in 1997. This increase resulted
primarily from including three months of INTERMAT revenues in 1998 as compared
to two months in 1997. INTERMAT's results of operations reflect a much higher
percentage of these expenses than In-Plant Store operations.
Selling, general and administrative expenses as a percentage of revenues
increased to 11.9% for the three months ended March 31, 1998 from 11.2% in 1997.
This increase is primarily the result of higher recruiting and travel costs
associated with the expansion of the In-Plant Store program.
Interest income, net decreased by $69,000 to $274,000 for the three months
ended March 31, 1998 when compared with the interest income, net of $343,000 in
1997. The decrease resulted primarily from the usage of the cash and cash
equivalents to finance the working capital requirements of new In-Plant Store
facilities and the acquisition of INTERMAT, thereby reducing the funds available
to earn interest income.
7
<PAGE>
In the three months ended March 31, 1997, the Company incurred a
non-recurring charge of $8,000,000 for acquired in-process research and
development in connection with the acquisition of INTERMAT.
Net loss for the three months ended March 31, 1998 was $(1,056,000),
compared to a net loss of $(8,818,000) in 1997, as a result of the items
previously discussed.
Liquidity and Capital Resources
At December 31, 1997 and March 31, 1998, the Company was party to a
revolving bank credit agreement which permitted maximum borrowings of
$5,000,000, and under which there were no borrowings outstanding. Effective as
of May 8, 1998, the Company entered into a new revolving credit agreement with
its bank providing maximum borrowings of $50,000,000. Borrowings bear interest
at the bank's reference rate (8.25% as of May 8, 1998) and/or a Eurodollar rate,
with a commitment fee over the term of the agreement which ranges from 0.125% to
0.25% on the unused portion of the credit available. The credit facility expires
on May 8, 2001. The amount which the Company may borrow under the credit
facility is based upon eligible accounts receivable and inventories. The credit
facility contains customary financial and other covenants and is collateralized
by substantially all of the assets, as well as the pledge of the capital stock,
of the Company's subsidiaries. Borrowings under the facility are expected to be
used primarily to fund working capital requirements for the expansion of the
In-Plant Store program.
On January 28, 1997, the Company completed the acquisition of INTERMAT for
a purchase price consisting of $10,800,000 in cash, a $1,400,000 subordinated
note and 625,000 newly issued shares of common stock. The cash portion of the
purchase price was funded from available cash and cash equivalents.
On June 2, 1997, the Company sold substantially all of the assets and
business of its Strategic Supply, Inc. ("SSI") subsidiary. Consideration for the
sale consisted of $4,269,000 in cash, promissory notes in the aggregate amount
of $3,189,000, as adjusted, and an earn-out (contingent payment), which could
result in additional compensation to the Company of up to $3,500,000.
The net cash used in operating activities was $2,458,000 for the three
months ended March 31, 1998 compared to $3,916,000 in 1997. The decrease in cash
used in operations resulted primarily from lower increases in working capital
requirements in 1998 as compared to 1997, for the Company's In-Plant Store
program. This was partially offset in 1998, by an increase in short-term
investments.
The net cash used in investing activities was $1,167,000 for the three
months ended March 31, 1998 compared to $11,327,000 in 1997, which included the
cash portion of the purchase price for the acquisition of INTERMAT.
8
<PAGE>
The net cash used in financing activities was $393,000 for the three months
ended March 31, 1998 compared to $529,000 in 1997. The net cash used in 1998
reflected payment of a $500,000 note to an officer of the Company.
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. Costs incurred in connection with this project will be accounted for
in accordance with the provisions of Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" (see below).
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.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in financial statements. SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997. For the
three months ended March 31, 1998 and 1997, the Company had no items of other
comprehensive income required to be disclosed by the statement.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information". SFAS No. 131 requires that public
business enterprises report certain information about operating segments,
products and services, geographic areas and major customers in financial
statements. SFAS No. 131 is effective for fiscal years beginning after December
15, 1997. This statement addresses presentation and disclosure matters and
adoption of the statement will have no effect on the Company's financial
position or results of operations.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SOP 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use". SOP 98-1
provides guidance on accounting for the costs of internal use software projects.
The statement is effective for fiscal years beginning after December 15, 1998,
however the Company has elected to apply the provisions of the statement to all
internal use software projects effective January 1, 1998, as encouraged. The
provisions of SOP 98-1 are not materially different from the Company's previous
method of accounting for such costs.
9
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PART II
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). Exhibits:
3.1 Second Restated Certificate of Incorporation of the Company filed June 21,
1996 with the Secretary of State of the State of Delaware (incorporated by
reference to Exhibit 3.2 of the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended June 30, 1996).
3.2 Amended and Restated Bylaws of the Company, dated July 24, 1986, as amended
(incorporated by reference to Exhibits 3.2 and 3.2(a) of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1995).
4.1 The instruments defining the rights of holders of the long-term debt
securities of the Company are omitted pursuant to Section (b) (4) (iii) (A)
of Item 601 of Regulation S-K. The Company agrees to furnish supplementary
copies of these instruments to the Commission upon request.
(b). Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the first quarter
of 1998.
10
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Strategic Distribution, Inc.
Date: May 11, 1998 By: /s/ John M. Sergey
-----------------------------
John M. Sergey
President and Chief
Executive Officer
Date: May 11, 1998 By: /s/ David L. Courtright
-----------------------------
David L. Courtright,
Controller and
Chief Accounting Officer
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 11,923
<SECURITIES> 3,707
<RECEIVABLES> 29,734
<ALLOWANCES> 0
<INVENTORY> 25,682
<CURRENT-ASSETS> 72,779
<PP&E> 6,148
<DEPRECIATION> 0
<TOTAL-ASSETS> 90,938
<CURRENT-LIABILITIES> 28,223
<BONDS> 1,464
0
0
<COMMON> 3,115
<OTHER-SE> 93,748
<TOTAL-LIABILITY-AND-EQUITY> 90,938
<SALES> 50,458
<TOTAL-REVENUES> 50,458
<CGS> 39,878
<TOTAL-COSTS> 45,796
<OTHER-EXPENSES> 5,992
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (274)
<INCOME-PRETAX> (1,056)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,056)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,056)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
