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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1999
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to ______________________
Commission file number 0-5228
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STRATEGIC DISTRIBUTION, INC.
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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
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Number of Common Shares outstanding at April 28, 1999: 31,006,285
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1 PAGE NO.
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Consolidated Financial Statements:
- Consolidated Balance Sheets - 1
March 31, 1999 (unaudited)
and December 31, 1998
- Consolidated Statements of Operations 2
(unaudited) - Three Months Ended
March 31, 1999 and 1998
- Consolidated Statements of Cash Flows 3
(unaudited) - Three Months Ended
March 31, 1999 and 1998
- Notes to Consolidated Financial Statements 4
(unaudited)
ITEM 2
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Management's Discussion and Analysis of Financial 6
Condition and Results of Operations
ITEM 3
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Quantitative and Qualitative Disclosures About
Market Risk 12
PART II - OTHER INFORMATION
ITEM 6
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Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
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STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
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(unaudited)
Assets
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<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,080 $ 1,322
Accounts receivable, net 45,032 41,819
Current portion of notes receivable 361 361
Inventories 37,565 31,060
Prepaid expenses and other current assets 682 401
Deferred income taxes 1,165 1,165
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Total current assets 85,885 76,128
Notes receivable 2,486 2,486
Property and equipment, net 14,300 12,854
Intangible assets, net 7,017 7,279
Other assets 666 697
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Total assets $ 110,354 $ 99,444
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Liabilities and Stockholders' Equity
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Current liabilities:
Accounts payable and accrued expenses $ 37,093 $ 27,966
Current portion of long-term debt 21 20
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Total current liabilities 37,114 27,986
Long-term debt 9,343 7,548
Subordinated debt to related party 1,400 1,400
Net liabilities of discontinued operations 1,093 797
Deferred income taxes 125 125
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Total liabilities 49,075 37,856
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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: 31,294,285 shares 3,129 3,129
Additional paid-in capital 94,255 94,255
Accumulated deficit (34,368) (34,443)
Notes receivable from related parties (1,303) (1,303)
Treasury stock, at cost (183,000 and 12,500 shares) (434) (50)
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Total stockholders' equity 61,279 61,588
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Total liabilities and stockholders' equity $ 110,354 $ 99,444
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</TABLE>
See accompanying notes to consolidated financial statements.
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STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
Three months ended March 31,
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1999 1998
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<S> <C> <C>
Revenues $ 64,983 $ 50,458
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Cost and expenses:
Cost of materials 50,942 39,878
Operating wages and benefits 5,369 4,249
Other operating expenses 1,851 1,669
Selling, general and administrative expenses 6,673 5,992
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Total costs and expenses 64,835 51,788
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Operating income (loss) 148 (1,330)
Interest income (expense):
Interest expense (146) (33)
Interest income 73 307
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Interest income (expense), net (73) 274
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Net income (loss) $ 75 $ (1,056)
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Net income (loss) per common share - basic and diluted $ 0.00 $ (0.03)
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Weighted average number of shares of common
stock outstanding:
Basic 31,243,896 31,144,956
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Diluted 31,343,169 31,144,956
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</TABLE>
See accompanying notes to consolidated financial statements.
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STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three months ended March 31,
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1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Income (loss) from continuing operations $ 75 $ (1,056)
Adjustments to reconcile income (loss) from continuing operations
to net cash provided by (used in) continuing operations:
Depreciation and amortization 897 571
Changes in operating assets and liabilities:
Short-term investments - (710)
Accounts receivable (3,213) (962)
Inventories (6,505) (1,970)
Prepaid expenses and other current assets (281) (61)
Accounts payable and accrued expenses 9,127 1,705
Other, net (23) (4)
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Net cash provided by (used in) continuing operations 77 (2,487)
Increase in net liabilities of discontinued operations 252 29
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Net cash provided by (used in) operating activities 329 (2,458)
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Cash flows from investing activities:
Proceeds from sale of discontinued operations 44 -
Additions of property and equipment (2,027) (1,167)
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Net cash used in investing activities (1,983) (1,167)
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Cash flows from financing activities:
Sale (repurchase) of common stock (384) 112
Proceeds from notes payable 1,800 -
Repayment of long-term obligations (4) (505)
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Net cash provided by (used in) financing activities 1,412 (393)
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Decrease in cash and cash equivalents (242) (4,018)
Cash and cash equivalents, beginning of the period 1,322 15,941
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Cash and cash equivalents, end of the period $ 1,080 $ 11,923
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Supplemental cash flow information:
Taxes paid $ 17 $ 18
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Interest paid $ 74 $ 2
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</TABLE>
See accompanying notes to consolidated financial statements.
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STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(unaudited)
1. The accompanying unaudited consolidated financial statements include the
accounts of Strategic Distribution, Inc. and subsidiaries (the "Company"). These
financial statements have been prepared in accordance with the instructions of
Form 10-Q. In the opinion of management, all adjustments (consisting of a normal
and recurring nature) considered necessary for a fair presentation of the
results of operations for the three months ended March 31, 1999 and 1998 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, 1998. The results for
the three months ended March 31, 1999 are not necessarily indicative of the
results that may be expected for a full fiscal year.
2. On November 11, 1996, the Company announced its intention to sell its
Strategic Supply, Inc. subsidiary ("SSI") (which was sold in 1997) and its
American Technical Services Group, Inc. subsidiary ("ATSG") 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 4, 1998, the Company sold
substantially all of the assets and certain liabilities of ATSG.
Consideration for the sale approximated the carrying value of the net assets
sold, and consisted of $1,069,000 in cash. The sale agreement also provides
for an earn-out (contingent payment), which could result in additional
compensation to the Company. Due to the contingent nature of the earn-out, no
benefit was recognized related to this portion of the consideration.
3. Effective as of May 8, 1998, the Company entered into a revolving Loan and
Security Agreement (the "credit facility") with its bank, providing maximum
borrowings of $50,000,000. Borrowings bear interest at the bank's reference rate
(7.75% as of March 31, 1999) and/or a Eurodollar rate, with a commitment fee
during the term of the agreement which ranges from 0.125% to 0.25% per annum on
the unused portion of the credit available. The credit facility expires on May
8, 2001. The amount that the Company may borrow under the credit facility is
based upon eligible accounts receivable and inventories. The credit facility
contains customary financial and other covenants and is collateralized by
substantially all of the assets, as well as the pledge of the capital stock, of
the Company's subsidiaries. As of March 31, 1999, there was $9,300,000 of
borrowings outstanding under the credit facility.
4. For the three months ended March 31, 1999, the weighted average number of
shares used to calculate diluted net income per common share includes the
assumed exercise of stock options equivalent to 99,273 shares under the treasury
stock method. Options to purchase
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approximately 3,462,000 shares at prices ranging from $2.50 to $8.00 per share
were outstanding during the three months ended March 31, 1999, but were not
included in the computation of diluted net income per common share because the
market price of the common shares did not exceed the options' exercise prices
for substantially all of the three consecutive months ending on March 31, 1999.
Net loss per common share - basic and diluted are equal for the three months
ended March 31, 1998, because the effect of the assumed issuance of common
shares is antidilutive. As of March 31, 1999 and 1998, there were stock options
and warrants outstanding for approximately 3,640,000 and 3,050,000 common
shares.
5. The Company operates in one reportable segment and substantially all of its
revenues are derived from the procurement, handling and data management of MRO
supplies for large industrial customers. The Company provides inventory
management technology and services ("data management services") to In-Plant
Store customers and to industrial users other than In-Plant Store customers.
Total revenues derived from data management services is not determinable because
fees charged to In-Plant Store customers do not differentiate data management
services from other In-Plant Store services. During the three months ended March
31, 1999 and 1998, revenues from data management services to customers other
than In-Plant Store customers amounted to $1,898,000 and $1,441,000.
6. Effective March 11, 1999, the Company adopted an Incentive Stock Option Plan
(the "1999 Plan") subject to shareholder ratification at the Company's Annual
Meeting on May 18, 1999. Under the 1999 Plan, the Board is authorized to grant
certain directors, executives and key employees options for the purchase of up
to 1,500,000 shares of common stock.
On March 11, 1999, the Company granted to an officer of the Company,
nonqualified options under the 1999 Plan for 400,000 shares of common stock with
an exercise price of $2.81 per share, subject to shareholder ratification of the
1999 Plan. The options may be exercised in amounts not to exceed 25.0% per year
beginning on the first anniversary of the date of grant, if the per share
selling price of the Company's common stock exceeds certain benchmarks. The
options granted become exercisable in any case on December 16, 2005.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Certain statements in this Form 10-Q constitute forward-looking
statements, which involve risks and uncertainties. The Company's actual results
in the future could differ significantly from the results discussed or implied
in such forward-looking statements. Factors that could cause or contribute to
such differences include, but are not limited to, those related to the Company's
ability to manage growth, termination of contracts by the Company's customers,
competition in the Company's business, the Company's dependence on key
personnel, the Company's ability to deal with problems associated with the Year
2000 issue and the effects of recession on the Company and its customers. In the
event of an economic downturn, the Company could experience reduced volume of
business from its existing customers, as well as lost volume due to plant
shutdowns or consolidations by the Company's customers.
The Company provides proprietary maintenance, repair and operating
("MRO") supply procurement, handling and data management 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, 1999, the Company
had 145 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
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MARCH 31,
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1999 1998
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(dollars in thousands)
<S> <C> <C>
Revenues $64,983 $50,458
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100.0% 100.0%
Cost of materials 78.4 79.0
Operating wages and benefits 8.3 8.4
Other operating expenses 2.8 3.3
Selling, general and administrative expenses 10.3 11.9
Operating income (loss) 0.2 (2.6)
Interest income (expense), net (0.1) 0.5
Net income (loss) 0.1 (2.1)
</TABLE>
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THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Revenues for the three months ended March 31, 1999 increased 28.8%
to $64,983,000 from $50,458,000 for the three months ended March 31, 1998.
This growth resulted primarily from the maturation of In-Plant Store
facilities opened over the last six quarters. The number of In-Plant Store
facilities increased from 111 at March 31, 1998 to 145 at March 31, 1999. One
In-Plant Store customer represented approximately 12% of revenues for the
three months ended March 31, 1998, but less than 10% for the three months
ended March 31, 1999.
Cost of materials as a percentage of revenues decreased to 78.4% for
the three months ended March 31, 1999 from 79.0% in 1998. The Company was able
to leverage its expanding purchasing power, resulting in lower material costs
sold to In-Plant Store customers.
Operating wages and benefits expenses as a percentage of revenues
decreased to 8.3% for the three months ended March 31, 1999 from 8.4% in 1998.
The decrease reflects utilization of improved software technology at INTERMAT to
increase productivity.
Other operating expenses as a percentage of revenues decreased to 2.8%
for the three months ended March 31, 1999 from 3.3% in 1998. The decrease
reflects utilization of improved software technology at INTERMAT to increase
productivity and lower temporary labor costs.
Improved software technology at INTERMAT is related to the successful
completion of in-process research and development ("IPR&D"). As of the date
INTERMAT was acquired by the Company (January 28, 1997), INTERMAT was working on
three projects, involving major new enhancements and technological extensions
necessary to compete in the marketplace: Definity Client/Server, AutoCon II, and
SMD II. The Definity Client/Server project consisted of the development of a
Windows Client/Server-based version of the functionality that existed in
INTERMAT's DOS-based Definity product. This product allows the Company and its
clients to develop and maintain catalogs and part descriptions. AutoCon II
represented a complete re-development of an existing DOS-based application.
AutoCon is a process to perform the efficient conversion of client source data
to identify and extract Nouns, Modifiers and Characteristic Values in accordance
with the Standard Modifier Dictionary ("SMD"). The third project, SMD II,
involved the expansion and refinement of INTERMAT's electronic dictionary of
structured parts descriptions.
The three projects were designed to provide the resources for substantially
all of the Company's data management services. The Definity Client/Server and
AutoCon II projects required INTERMAT to develop an entirely new skills base,
both in the development environment and in Client/Server technology. As of the
acquisition date, key elements that existed for these two projects were a proven
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methodology and an extensive rules base that captured years of knowledge of
cataloging and automated conversion. Also as of the acquisition date, the
complete re-design of the database structure was nearing completion. However, at
that time INTERMAT had still not proven that the technology could be migrated
from a desktop environment to Client/Server. Remaining to be accomplished were
the primary tasks of migrating the database to Oracle and Microsoft SqlServer,
and the task of creating the interdependence across the projects that would be
required to make extensive improvements in the value association component of
the software. The SMD II project differed from the others in that it involved
data, rather than software development; it involved an electronic dictionary
containing thousands of formats for structured parts descriptions. The market
for materials search environments had evolved to the use of more structured
data. This change gave rise to the need to re-develop the formats to optimize
their use in these developing environments, most notably Enterprise Resource
Planning ("ERP") system vendors and Reference Database solution providers.
As of the acquisition date, these projects were anticipated to be
completed by December 1997, with the benefits from the projects expected to
begin in the first quarter of 1998. The projected cost to complete the projects
was estimated to be approximately $500,000. The two Client/Server based projects
were substantially completed at December 31, 1997. During 1997, management
observed that some of the pressure that was being felt in the marketplace in
late 1996 for alternative formats had eased, which allowed the Company to extend
the completion date for the data redevelopment project without significant
additional risk. As of March 31, 1999, the Company had spent approximately
$415,000 on the IPR&D projects, with an additional $135,000 expected to be spent
primarily in the second quarter of 1999 to complete expansion and refinement of
structured parts descriptions for the data redevelopment project. The two IPR&D
projects completed for 1998 have received market acceptance and have delivered
the expected improvements in operating efficiency, including decreased
utilization of temporary labor at INTERMAT, which decrease has helped to reduce
the Company's operating expenses as a percentage of revenues, as described
above.
The IPR&D projects and their timely completion were critical factors
for the Company in acquiring INTERMAT. On-time completion was expected to give
the Company a competitive edge in its field. Risks of not completing these
projects on time included the potential loss of key customers to competitors
that developed their own solutions.
The Company arrived at the IPR&D valuation based upon a number of
assumptions. Material net cash inflows were projected to begin in 1998. Revenues
and the resulting cash inflows were projected for nine years for valuation
purposes. A Weighted Average Cost of Capital ("WACC") of 16% was calculated for
INTERMAT reflecting its business risk. However, a higher risk adjusted rate of
23% was used in valuing the IPR&D because of the risks inherent in assimilating
the new technology and the market risks associated with the completion and
market acceptance of the new technology.
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For the IPR&D valuation it was assumed that all three projects would
start generating revenues in the beginning of 1998. The IPR&D revenues were
assumed to grow at a 63% growth rate through the year 2000. The assumed growth
rate during this period was based on increased demand for INTERMAT's services
due to Year 2000 system compliance issues. The growth rate after year 2000 was
assumed to be 12%. IPR&D revenues for 1998 were 10% less than estimated revenues
for the IPR&D valuation, however efficiencies derived from the projects produced
operating margins in line with the projections. There can be no guarantee that
future IPR&D revenues and margins will match the assumptions used in valuing the
IPR&D.
Selling, general and administrative expenses as a percentage of
revenues decreased to 10.3% for the three months ended March 31, 1999 from 11.9%
in 1998. Recruiting costs were higher in 1998, as the Company invested in
management talent to meet the needs of its clients and the expansion of the
In-Plant Store program. Payroll and travel expenses also decreased as a
percentage of revenues. As the In-Plant Store program expands, selling, general
and administrative expenses 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.
Interest expense, net was $73,000 for the three months ended March 31,
1999 compared to interest income, net of $274,000 for the three months ended
March 31, 1998. In late 1998 the Company began borrowing against its credit
facility as funds available to earn interest income were depleted. Funds were
used to finance the working capital requirements of new In-Plant Store
facilities and for capital expenditures.
Net income for the three months ended March 31, 1999 was $75,000,
compared to a net loss of $(1,056,000) in 1998, as a result of the items
previously discussed.
LIQUIDITY AND CAPITAL RESOURCES
Effective as of May 8, 1998, the Company entered into the credit
facility providing maximum borrowings of $50,000,000. As of March 31, 1999,
there was $9,300,000 of borrowings outstanding under the credit facility bearing
interest at the bank's reference rate of 7.75%. 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 June 4, 1998, the Company sold substantially all of the assets and
certain liabilities of ATSG. Consideration for the sale consisted of $1,069,000
in cash. The sale agreement also provides for an earn-out (contingent payment),
which could result in additional compensation to the Company.
The net cash provided by operating activities was $329,000 for the
three months ended March 31, 1999 compared to net cash used of
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$2,458,000 in 1998. The increase in cash provided by operations resulted
primarily from the increase in net income and lower increases in working capital
requirements in 1999 as compared to 1998, for the Company's In-Plant Store
program.
The net cash used in investing activities was $1,983,000 for the three
months ended March 31, 1999 compared to $1,167,000 in 1998. The increase
reflects higher expenditures for computer systems and related equipment in 1999.
The net cash provided by financing activities was $1,412,000 for the
three months ended March 31, 1999 compared to net cash used of $393,000 in 1998.
In 1999, cash was provided primarily from the Company's new credit facility. The
net cash used in 1998 reflected payment of a $500,000 note to an officer of the
Company.
The Company is in the process of implementing a resystemization of its
operating and financial data processing systems, referred to as In-Site(TM).
During 1998, central system hardware and software was acquired and development
of the operating and financial systems commenced. Financial systems were
operational effective January 1, 1999. Development of the operating systems is
expected to be complete early in the second quarter of 1999. Communications
installations, acquisition of additional hardware, deployment of the operating
systems to the Company's In-Plant Store sites and integration with the financial
systems is expected to be complete by the end of 1999. At March 31, 1999, the
total additional capital spending necessary to complete this project was
estimated to be approximately $2,500,000.
The Company believes that cash on hand, cash generated from future
operations, and cash from the credit facility will generate sufficient funds to
permit the Company to support the anticipated expansion of the In-Plant Store
program and completion of the In-Site project.
YEAR 2000 ISSUE
The Year 2000 issue arises from the fact that many existing computer
software programs use only two digits to identify the year in date fields and,
as such, could fail or create erroneous results by or at the Year 2000.
1. The Company's State of Readiness
In late 1997, the Company began a planned project to replace its
operating and financial data processing systems, in order to provide better
access to business information, to meet the service requirements of its
customers and to allow for the expansion of its In-Plant Store program. This
initiative is using Year 2000 compliant software. The system replacement project
is currently on schedule. Financial systems were operational effective January
1, 1999. Development of the operating systems is expected to be complete early
in the second quarter of 1999. Communications installations,
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acquisition of additional hardware, deployment of the operating systems to the
Company's In-Plant Store sites and integration with the financial systems is
expected to be complete by the end of 1999, primarily during the second and
third quarter.
In addition to the systems replacement project, the Company is in the
process of evaluating Year 2000 compliance for its computer hardware, its
non-technology systems and for major third parties with which the Company
conducts business. Computer hardware testing was substantially complete as of
September 30, 1998. The Company used the YMARK2000 test to assist in its
evaluation. Hardware requiring replacement or upgrade is expected to be
completed in a timeframe consistent with the deployment of the In-Site operating
systems. The Company has no buildings or other fixed plant with embedded
technology and is not highly dependent on its own non-technology systems. The
Company commenced identification and testing in the third quarter of 1998 and
expects to complete its evaluation and remediation, if necessary, by June 30,
1999. As of March 31, 1999, the Company had not found any major non-technology
system under its control to be Year 2000 deficient and the Company does not
believe that any of these systems create material risks for the Company.
The Company's In-Plant Stores are located at its customers' industrial
sites, the Company leases office space from third parties and the Company relies
on its suppliers and its telecommunications links to conduct business. The
Company is in the process of contacting each of its customers and lessors to
determine their Year 2000 readiness. The Company expects to complete this
process by June 30, 1999 and has found no significant Year 2000 issues to date.
The Company surveyed its top 100 suppliers (covering in excess of 30% of the
Company's 1998 purchases) in the fourth quarter of 1998 and believes they will
be able to continue to supply the Company with MRO parts into the Year 2000. The
Company expects to complete a survey of its remaining suppliers by June 30,
1999, with particular emphasis on existing "single source" suppliers. The
Company has contacted its telecommunications providers and has been advised that
their systems are Year 2000 compliant.
2. The Costs to Address the Company's Year 2000 Issues
Costs associated with the Company's Year 2000 compliance effort, which
exclude its planned systems replacement project, are not expected to be
material. Upgrade or replacement of Year 2000 deficient computers will be
completed during 1999. Salaries, benefits and other costs of the Company's
personnel evaluating its Year 2000 readiness have not been measured and have
been expensed as incurred.
3. The Risks of the Company's Year 2000 Issues
Failure to identify and correct Year 2000 problems could result in
interruptions in, or failures of, certain normal business activities. Factors
that could cause or contribute to such failures include, but are not limited to,
failure to complete the Company's systems replacement project as scheduled,
inability to procure
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critical parts from suppliers, telecommunications failures, and plant shutdowns
related to Year 2000 problems with customer systems. Such failures could have a
material adverse effect on the Company's results of operations and financial
condition.
4. The Company's Contingency Plans
The Company performed Year 2000 compliance testing on its existing
In-Plant Store operating system and believes the system to be Year 2000
compliant. Therefore, the Company expects to be able to use this system in the
event of a delay in the systems replacement project. The Company is in the
process of identifying "single source" suppliers that may not be Year 2000
compliant and, where necessary, developing alternative supply sources and
expects to have this plan completed by June 30, 1999. No manufacturer or
supplier provides products that account for as much as 10% of the Company's
revenues and the Company believes that it could quickly find alternative sources
of supply. With customer agreement, increases in inventory may also be
considered if no alternate source can be developed. The Company's
telecommunications network combines the use of dedicated lines and a data
exchange network provided by a national telecommunications company. In the event
of a failure in a segment of its telecommunications network, the Company has the
ability to transfer data using standard modem technology. The Company believes
business interruptions resulting from failures of its customers' systems are
beyond its control.
The Company believes that its efforts to ensure Year 2000 readiness, in
conjunction with its systems replacement project, will significantly reduce the
risk associated with Year 2000 systems failures. However, due primarily to
uncertainties surrounding the Year 2000 readiness of third parties, there can be
no assurance that Year 2000 systems failures will not occur.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any material exposure to market risk
associated with activities in derivative financial instruments, other financial
instruments and derivative commodity instruments.
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PART II
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). Exhibits:
<TABLE>
<S> <C>
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.
10.1 Amendment to Executive Employment Agreement
dated as of March 11, 1999, by and between
the Company and John M. Sergey.
10.2 Amended and Restated Loan and Pledge
Agreement, dated as of March 11, 1999, by
and between the Company and John M. Sergey.
10.3 Amended and Restated Non-Recourse Promissory
Note, dated as of March 11, 1999, made by
John M. Sergey in favor of the Company.
27 Financial Data Schedule
</TABLE>
(b). Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the first quarter
of 1999.
-13-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Strategic Distribution, Inc.
Date: May 3, 1999 By: /s/ John M. Sergey
-------------------------
John M. Sergey
President and Chief
Executive Officer
Date: May 3, 1999 By: /s/ David L. Courtright
---------------------------
David L. Courtright,
Controller and
Chief Accounting Officer
-14-
<PAGE>
EXHIBIT INDEX
<TABLE>
<S> <C>
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.
10.1 Amendment to Executive Employment Agreement
dated as of March 11, 1999, by and between
the Company and John M. Sergey.
10.2 Amended and Restated Loan and Pledge
Agreement, dated as of March 11, 1999, by
and between the Company and John M. Sergey.
10.3 Amended and Restated Non-Recourse Promissory
Note, dated as of March 11, 1999, made by
John M. Sergey in favor of the Company.
27 Financial Data Schedule
</TABLE>
-15-
<PAGE>
Exhibit 10.1
AMENDMENT
TO
EXECUTIVE EMPLOYMENT AGREEMENT
dated as of April 11, 1997
between
Strategic Distribution, Inc.
and
John M. Sergey
Dated as of March 11, 1999
<PAGE>
AMENDMENT
TO
EXECUTIVE EMPLOYMENT AGREEMENT
This Amendment to that certain Executive Employment Agreement, dated as
of April 11, 1997, is made as of the 11th day of March 1999, by and between
STRATEGIC DISTRIBUTION, INC., a Delaware corporation (the "COMPANY"), and JOHN
M. SERGEY (the "EXECUTIVE").
W I T N E S S E T H:
WHEREAS, the parties have entered into that certain Executive
Employment Agreement, dated as of April 11, 1997 (the "AGREEMENT"); and
WHEREAS, the parties desire to amend certain of the terms of the
Agreement;
NOW THEREFORE, in consideration of the foregoing premises, it is hereby
agreed by and between the parties as follows:
1.1. Section 2 of the Agreement is hereby amended by deleting
the word "third" on the fifth line thereof and replacing it with the word
"sixth" in its stead.
1.2. Section 3(a) of the Agreement is hereby amended by
deleting the first sentence thereof in its entirety and replacing it with the
following sentence in its place and stead.
"As compensation for the performance of the Executive's services
hereunder, the Company shall pay to the Executive a base salary (the
"SALARY") of (i) Three Hundred Sixty Thousand Dollars ($360,000) per
annum for the period from April 11, 1997 to and including December 31,
1998 and (ii) Four Hundred Thousand Dollars ($400,000) per annum
thereafter, with increases, if any, as may be approved in writing by
the Board of Directors."
1.3. Section 3 of the Agreement is hereby further amended by
adding the following new Sections 3(e) and 3(f) after Section 3(d) thereto:
"(e) ADDITIONAL BENEFITS APPROVED DECEMBER 16, 1998. The Executive
shall be entitled to the additional benefits described under the
heading "Additional Sergey Compensation Matters " set forth in the
excerpt from the Unanimous Written Consent of the board of directors of
the Company dated December 16, 1998, a copy of which excerpt is
attached hereto as Exhibit A.
<PAGE>
(f) ADDITIONAL BENEFITS APPROVED MARCH 11, 1999. The Executive shall be
entitled to the additional benefits described under the heading "Grant
of Sergey Stock Options" set forth in Resolutions adopted by the
Section 162(m) Committee of the board of directors of the Company on
March 11, 1999, a copy of which Resolutions is attached hereto as
Exhibit B."
1.4. Section 6(b) of the Agreement is hereby amended by
deleting the words "ninety (90) days" in the eighth and ninth lines thereof and
replacing them with the words "one hundred eighty (180) days" in their stead.
1.5. Section 6(d) of the Agreement is hereby amended by
deleting the fourth sentence thereof in its entirety and replacing it with the
following sentence in its place and stead:
"The term "SUBSTANTIAL BREACH" means any material breach by the Company
of its obligations hereunder consisting of: (i) the failure of the
Company to pay the Executive the Salary or Bonus, if any, in accordance
with Section 3(a) and (b) hereof; (ii) the failure by the Company to
substantially maintain and continue the Executive's participation in
benefit plans as provided in Section 3(c) hereof; (iii) the failure by
the Company to comply with Section 3(e) hereto within a reasonable time
after the date of the Unanimous Written Consent referred to in Section
3(e); (iv) any material diminishment in the duties or responsibilities
of the Executive described in Section 1 including without limitation a
change in the functions which report, directly or indirectly, to the
Executive; (v) any relocation of the Company's headquarters to a
location more than fifty (50) miles from the current headquarters of
the Company without the written consent of the Executive; (vi) a
merger, reorganization or other business combination involving the
Company if the Company is not the surviving corporation; (vii) a sale
of all or substantially all of the Company's assets; or (viii) the
acquisition by a person (as such term is used in Rule 13d-3 promulgated
under the Securities Exchange Act of 1934, as amended (the "ACT"))
other than a shareholder identified in the Company's most recent proxy
statement, of beneficial ownership (as such term is used in Rule 13d-3
promulgated under the Act) of twenty percent (20%) or more of the
issued and outstanding common stock of the Company (a "CONTROL
ACQUISITION") if, during the twelve month period following the Control
Acquisition (the "MEASUREMENT YEAR") one of the following shall occur:
(A) there is a change in the composition of the Board of Directors of
the Company which results, on any date during the Measurement Year, in
a majority of the members of the Board being comprised of individuals
who were not members of the Board prior to the date of the Control
Acquisition, or (B) there is a change in the composition of the
Executive
-2-
<PAGE>
Committee of the Board of Directors of the Company which results, on
any date during the Measurement Year, in a majority of the members of
the Executive Committee being comprised of individuals who were not
members of the Executive Committee prior to the date of the Control
Acquisition; PROVIDED, HOWEVER, that the term "SUBSTANTIAL BREACH"
shall not include a termination of the Executive's employment hereunder
pursuant to Section 6(b) or (c) hereof."
1.6. The Agreement is further amended by adding a new Exhibit
A and a new Exhibit B to the Agreement, which Exhibits A and B are attached to
this Amendment.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first above written.
STRATEGIC DISTRIBUTION, INC.
By:/s/ Andrew M. Bursky
------------------------------
Name: Andrew M. Bursky
Title: Chairman
EXECUTIVE
/s/ John M. Sergey
---------------------------------
John M. Sergey
125 Brownsburg Road East
New Hope, Pennsylvania 18938
fax: (215) 504-4427
-4-
<PAGE>
EXHIBIT A
ACTION BY
UNANIMOUS WRITTEN CONSENT OF
THE BOARD OF DIRECTORS OF
STRATEGIC DISTRIBUTION, INC.
The undersigned, being all of the directors of Strategic Distribution, Inc., a
corporation organized and existing under the laws of the State of Delaware (the
"Company"), do hereby consent, pursuant to Section 141(f) of the General
Corporation Law of the State of Delaware, to the adoption of the following
resolutions by the Board of Directors of the Corporation without a meeting and
to the actions authorized thereby:
AMENDMENTS TO SERGEY EMPLOYMENT AGREEMENT
WHEREAS, the Company wishes to amend certain of the terms of employment contract
of John M. Sergey, President and Chief Executive Officer of the Company.
NOW, THEREFORE, BE IT RESOLVED, that Section 2 of the Executive
Employment Agreement, dated as of April 11, 1997, by and between John
M. Sergey and the Company (the "Sergey Employment Agreement") be
amended to extend the termination date of the Agreement from May 1,
2000 to May 1, 2003; and be it further
RESOLVED, that Mr. Sergey's minimum Salary under Section 3(a) of the
Sergey Employment Agreement shall be increased from $360,000 per annum
to $400,000 per annum, effective January 1, 1999; and be it further
RESOLVED, that Section 6(b) of the Sergey Employment Agreement be
amended to provide that the Company shall not have the right to
terminate Mr. Sergey's employment as a result of Mr. Sergey's
disability until such time as Mr. Sergey shall have been unable, as a
result of injuries or illnesses that are substantially related to each
other, to perform the duties required of him under the Sergey
Employment Agreement for an aggregate of one hundred eighty (180) days
(whether or not consecutive) during any twelve (12) month period during
the term of the Sergey Employment Agreement; and be it further
<PAGE>
RESOLVED, that Clause (vii) of Section 6(d) of the Sergey Employment
Agreement be amended in its entirety to read as follows:
(vii) the acquisition by a person (as such term is used in
Rule 13d-3 promulgated under the Securities Exchange Act of
1934, as amended (the "Act")) other than a shareholder
identified in the Company's most recent proxy statement, of
beneficial ownership (as such term is used in Rule 13d-3
promulgated under the Act) of twenty percent (20%) or more of
the issued and outstanding common stock of the Company (a
"Control Acquisition") if, during the twelve month period
following the Control Acquisition (the "Measurement Year") one
of the following shall occur (A) there is a change in the
composition of the Board of Directors of the Company which
results, on any date during the Measurement Year, in a
majority of the members of the Board being comprised of
individuals who were not members of the Board prior to the
date of the Control Acquisition, or (B) a change in the
composition of the Executive Committee of the Board of
Directors of the Company which results, on any date during the
Measurement Year, in a majority of the members of the
Executive Committee being comprised of individuals who were
not members of the Executive Committee prior to the date of
the Control Acquisition;
and be it further
RESOLVED, that the Chairman of the Company, the Chief Financial Officer
of the Company, and any Vice President of the Company, each acting
singly, hereby is authorized and empowered to execute and deliver in
the name of the Company such agreements, certificates, instruments and
other documents and to take all such other actions as may be necessary,
desirable or appropriate in connection with the matters approved
herein.
ADDITIONAL SERGEY COMPENSATION MATTERS
WHEREAS, the Company wishes to address certain other compensation matters
related to the Company's employment of John M. Sergey.
NOW, THEREFORE, BE IT RESOLVED, that the bonus target for Mr. Sergey in
future years shall remain 100% of Mr. Sergey's base salary, the actual
amount of Mr. Sergey's bonus for services rendered in 1999 to be
determined by the Committee in early 2000, based upon Mr. Sergey's
achievement of performance criteria,; and be it further
<PAGE>
RESOLVED, that the Company eliminate the existing $2 million term life
insurance policy maintained for Mr. Sergey, and replace such policy
with a Company-funded $2.6 million "split-dollar" life insurance policy
(the "New Life Policy"), which New Life Policy will have the following
terms (i) annual cost to the Company of approximately $210,000, the
first $100,000 of which will be paid from bonus compensation that would
otherwise be paid to Mr. Sergey (i.e., for so long as the Company is
paying premiums under the New Life Policy, each annual bonus otherwise
payable to Mr. Sergey will be reduced by $100,000), (ii) at the end of
five years, the Company will receive a payment of $400,000 under the
policy, and the remainder of the policy, including future funding
obligations, will be assigned to Mr. Sergey, and (iii) the Company will
retain the right to a $400,000 death benefit under the New Life Policy
up until the time that the Company receives the $400,000 payment
described in clause (ii); and be it further
RESOLVED, that the benefit payable to Mr. Sergey under his long term
disability insurance be increased from $20,000 per month to $24,000 per
month effective January 1, 1999; and be it further
RESOLVED, that the Chairman of the Company, the Chief Financial Officer
of the Company, and any Vice President of the Company, each acting
singly, hereby is authorized and empowered to execute and deliver in
the name of the Company such agreements, certificates, instruments and
other documents and to take all such other actions as may be necessary,
desirable or appropriate in connection with the matters approved
herein.
<PAGE>
EXHIBIT B
GRANT OF SERGEY STOCK OPTIONS:
RESOLVED, that the Company shall grant non-qualified stock options for 400,000
shares of the Company's common stock to John M. Sergey (the "Sergey
Non-Qualified Options"). The Sergey Non-Qualified Options shall be granted as of
March 11, 1999 and shall be granted under the Company's 1999 Incentive Stock
Option Plan (the "1999 Plan"), subject to the approval of the 1999 Plan by the
shareholders of the Company. The exercise price of the Sergey Non-Qualified
Options shall be the greater of (A) $2.81 per share, and (B) the price per share
which was equal to the mean between the last quoted bid and asked prices of the
Company's Common Stock on March 10, 1999, as reported on the Nasdaq National
Market System. Vesting of the Sergey Non-Qualified Options shall be governed by
the following provisions:
(a) Subject to the provisions of paragraphs (b), (c) and (d) below,
the Sergey Non-Qualified Options will vest and become
exercisable in full on December 16, 2005.
(b) Notwithstanding the provisions of paragraph (a) above, and
subject to the provisions of paragraphs (c) and (d) below:
(i) The first 200,000 of the Sergey Non-Qualified Options
may be exercised prior to December 16, 2005 if, and
after such date as, the Company's common stock has
traded at or above $6.00 per share for thirty
consecutive trading days; and
(ii) The remaining 200,000 of the Sergey Non-Qualified
Options may be exercised prior to December 16, 2005 if,
and after such date as, the Company's common stock has
traded at or above $9.00 per share for thirty
consecutive trading days.
(c) Notwithstanding the provisions of paragraph (b) above, and
subject to the provisions of paragraph (d) below, (i) none of
the Sergey Non-Qualified Options may be exercised prior to
December 16, 1999, (ii) no more than 100,000 of the Sergey
Non-Qualified Options may be exercised prior to December 16,
2000, (iii) no more than a total of 200,000 of the Sergey
Non-Qualified Options may be exercised prior to December 16,
2001, and (iv) no more than a total of 300,000 of the Sergey
Non-Qualified Options may be exercised prior to December 16,
2002.
<PAGE>
GRANT OF SERGEY STOCK OPTIONS: (cont'd)
(d) Notwithstanding the provisions of paragraphs (a), (b) and (c)
above, all of the Sergey Non-Qualified Options will become
immediately exercisable upon a Change in Control of the
Company.
(e) For the purposes of paragraph (d) above, a "Change in Control
of the Company" means (i) a merger, reorganization or other
business combination involving the Company if the Company is
not the surviving corporation, (ii) a sale of all or
substantially all of the Company's assets; or (iii) the
acquisition by a person other than a shareholder identified in
the Company's most recent proxy statement of beneficial
ownership of twenty percent (20%) or more of the issued and
outstanding common stock of the Company (a "Control
Acquisition") if, at any time during the twelve month period
following the Control Acquisition (the "Measurement Year") one
of the following shall occur (A) there is a change in the
composition of the Board of Directors of the Company which
results, on any date during the Measurement Year, in a
majority of the members of the Board being comprised of
individuals who were not members of the Board prior to the
date of the Control Acquisition, or (B) a change in the
composition of the Executive Committee of the Board of
Directors of the Company which results, on any date during the
Measurement Year, in a majority of the members of the
Executive Committee being comprised of individuals who were
not members of the Executive Committee prior to the date of
the Control Acquisition.
<PAGE>
Exhibit 10.2
AMENDED AND RESTATED LOAN AND PLEDGE AGREEMENT
This Amended and Restated Loan and Pledge Agreement, dated as
of March 11, 1999, by and between Strategic Distribution, Inc., a Delaware
corporation (the "Company"), and John M. Sergey ("Sergey"), further amends and
restates the Amended Loan and Pledge Agreement, dated as of May 5, 1997, by and
between the Company and Sergey.
1. The Company hereby agrees to loan to Sergey an amount equal
to $1,000,000, which is equal to (a) the purchase price of shares of common
stock, par value $0.10 per share, of the Company ("Common Stock") purchased by
Sergey pursuant to the Stock Purchase Agreement, dated as of April 11, 1997, as
amended, between Sergey and the Company (collectively, the "Shares") less (b)
$700,000.
2. The loan shall be evidenced by an amended and restated
non-recourse promissory note in the form of Annex A attached hereto, dated the
date hereof (the "Amended Note), such Amended Note amending, restating and
replacing the non-recourse promissory note dated May 20, 1997 (the "Old Note"),
which Old Note will thereby be cancelled. The Amended Note shall be secured
solely by a pledge of the Shares as set forth below and the Company shall have
no recourse to any other property or assets of Sergey.
3. The entire unpaid principal amount of the Amended Note
shall be due, together with all interest accrued but unpaid thereon, on May 1,
2003. Sergey may prepay the Amended Note in whole or from time to time, in part,
without premium or penalty.
4. In the event Sergey sells any Shares or otherwise realizes
any cash or other consideration in respect of such Shares prior to repayment in
full of the Amended Note, whether pursuant to a dividend, private sale, public
offering, merger, recapitalization, liquidation or dissolution of the Company
(each, a "Realization Event"), Sergey shall within ten days of the Realization
Event, make a mandatory prepayment of the Amended Note in an amount equal to the
lesser of (i) 100% of the net after tax proceeds received by or for the account
of Sergey in respect of the Realization Event and (ii) the aggregate amount then
outstanding under the Amended Note, such amount to be applied pro rata to
accrued interest and principal on the Amended Note.
<PAGE>
5. Sergey hereby grants to the Company a first priority
security interest in the Shares, as collateral security for the due and punctual
payment of the Amended Note in accordance with its terms and the performance by
Sergey of his obligations under the Amended Note (which Shares shall include any
other securities or property receivable or distributable with respect thereto
after the date hereof). The certificates representing the Shares, together with
a stock power attached thereto in blank, shall be delivered to the Company and
shall be retained by the Company until all obligations under the Amended Note
have been paid in full. At such time, the Company shall return to Sergey the
certificates representing the Shares, together with the stock power attached
thereto.
6. Upon the occurrence of an Event of Default, the Company
shall have and may exercise all rights and remedies afforded to a secured party
under the New York Uniform Commercial Code applicable thereto, including,
without limitation, the right to sell the Shares at a public or private sale
(provided that the Company shall give Sergey at least 15 days prior written
notice of the date in which any public sale is to be held or the date after
which any private sale may be made), at which sale the Company may purchase such
Shares (free from any right of redemption by Sergey, which right is hereby
waived and released) and have the right to retain the Shares in partial or full
satisfaction of Sergey's obligations under the Amended Note in accordance with
the provisions of the New York Uniform Commercial Code. The Company's recovery
upon an Event of Default shall be limited to the Shares, and no judgment, order
or execution entered in any suit, action or proceeding, whether legal or
equitable, on this Agreement or the Amended Note shall be obtained or enforced
against Sergey or any other property or asset of Sergey. If there is a
foreclosure of the Company's lien on the Shares, by power of sale or otherwise,
no judgment for any deficiency shall be brought or obtained by the Company
against Sergey or any other property or asset of Sergey.
7. Each of Sergey and the Company has all power and authority
necessary to enter into and consummate the transactions contemplated by this
Agreement and this Agreement is valid and enforceable against each of the
Company and Sergey in accordance with its terms. Sergey has not created or
permitted any lien or encumbrance to attach to the Shares, other than the pledge
set forth in this Agreement.
8. If any of the following events ("Events of Default") shall
occur:
-2-
<PAGE>
(a) Sergey shall default in the payment of interest
or principal on the Amended Note when the same shall become due and
payable, whether at maturity, by acceleration or otherwise and such
default continues for more than ten days after receipt of written
notice from the Company;
(b) Sergey shall default in the performance or
compliance with any other term or provision contained in this Agreement
and such default continues for more than 30 days after receipt of
written notice from the Company; or
(c) If any of the Shares shall be encumbered,
pledged, attached or levied upon or seized at any legal proceeding,
except as contemplated by this Agreement, and such encumbrance, pledge,
attachment or levy remains uncured for more than 15 days;
then the holder of the Amended Note may at any time by written notice to Sergey
(or without such notice with respect to subsection (c) above), declare the
entire unpaid principal of and the interest then accrued on the Amended Note to
be forthwith due and payable, without other notices or demands of any kind, all
of which are hereby waived by Sergey.
9. (a) In the event that a Change in Control (as
hereinafter defined) occurs prior to May 1, 2001 and the fair market value of
the Common Stock on the date of such Change in Control is $6.00 per share or
less, then the amount of principal and interest due and payable under the
Amended Note shall be reduced to $0.0.
(b) In the event that a Change in Control occurs
prior to May 1, 2001 and the fair market value of the Common Stock on the
date of such Change in Control is greater than $6.00 per share, then the
amount of principal and interest due and payable under the Amended Note shall
be reduced by 50%.
(c) In the event that a Change in Control occurs on
or after May 1, 2001 but prior to May 1, 2003, and the fair market value of the
Common Stock on the date of such Change in Control is $9.00 per share or less,
then the amount of principal and interest due and payable under the Amended Note
shall be reduced by 50%.
(d) For purposes of this Section 9, the term "Change
in Control" means (i) a merger, reorganization or other business combination
involving the Company if the Company is not
-3-
<PAGE>
the surviving corporation, (ii) a sale of all or substantially all of the
Company's assets; or (iii) the acquisition by a person other than a shareholder
identified in the Company's most recent proxy statement of beneficial ownership
of twenty percent (20%) or more of the issued and outstanding Common Stock (a
"Control Acquisition") if, at any time during the twelve month period following
the Control Acquisition (the "Measurement Year") one of the following shall
occur: (A) there is a change in the composition of the Board of Directors of the
Company which results, on any date during the Measurement Year, in a majority of
the members of the Board being comprised of individuals who were not members of
the Board prior to the date of the Control Acquisition, or (B) there is a change
in the composition of the Executive Committee of the Board of Directors of the
Company which results, on any date during the Measurement Year, in a majority of
the members of the Executive Committee being comprised of individuals who were
not members of the Executive Committee prior to the date of the Control
Acquisition.
10. Sergey will do, execute, acknowledge, deliver, file and
record all such further acts, conveyances, transfers and assurances as the
Company may deem necessary or advisable to perform, preserve, protect and
continue the pledge granted by this Agreement.
11. All notices and communications provided for herein shall
be delivered or mailed by registered or certified mail, postage prepaid, or
telegraphed, addressed as follows:
If to the Company:
475 Steamboat Road
Greenwich, CT 06830
Facsimile No.: (203) 629-8554
Attention: William L. Mahone
If to Sergey:
John M. Sergey
125 Brownsburg Road East
New Hope, Pennsylvania 18938
Facsimile No.: (215) 504-4427
or such other address or to the attention of such other person as the recipient
party has specified by prior written notice to the sending party.
-4-
<PAGE>
12. All representations and warranties made by Sergey and the
Company herein shall survive the making of the loan and the delivery of the
Amended Note hereunder.
13. No delay on the part of the Company in exercising any
right, power or privilege hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise of any right, power or privilege hereunder
preclude other or further exercise thereof, or the exercise of any other right,
power or privilege.
14. This Agreement and the Amended Note shall be governed by
and interpreted and enforced in accordance with the laws of the State of
Delaware without giving effect to the choice-of-law provisions thereof.
15. This Agreement shall be binding upon the successors and
assigns of the parties hereto.
16. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which
together shall be considered on and the same agreement.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date and year first above written.
STRATEGIC DISTRIBUTION, INC.
By: /s/ Andrew M. Bursky
---------------------------------
Name: Andrew M. Bursky
Title: Chairman
/s/ John M. Sergey
------------------------------------
John M. Sergey
-5-
<PAGE>
Exhibit 10.3
AMENDED AND RESTATED SECURED NON-RECOURSE PROMISSORY NOTE
$1,000,000 March 11, 1999
Original Issue Date: May 20, 1997
FOR VALUE RECEIVED, John M. Sergey ("Maker" or "Sergey")
hereby promises to pay to the order of Strategic Distribution, Inc., a Delaware
corporation ("the Company"), at 475 Steamboat Road, Greenwich, Connecticut, or
such address as the Company or the holder of this Amended Note shall have given
to the Maker, the principal sum of One Million Dollars ($1,000,000) on May 1,
2003, with interest (computed on a 360-day year of twelve 30-day months) from
the Original Issue Date on the unpaid balance thereof at the rate of 7.00% per
annum, until the principal hereof shall have been paid. Interest shall accrue
from the date hereof and shall be payable on May 1, 2003.
Any payments of principal and/or interest shall be made in
such currency of the United States at the time of payment shall be legal tender
for the payment of public and private debts.
This Amended Note evidences a non-recourse loan made by the
Company under the Amended and Restated Loan and Pledge Agreement, dated as of
March 11, 1999, which further amends and restates the Amended Loan and Pledge
Agreement, dated as of May 5, 1997, between the Company and Sergey (the
"Agreement") which provides, among other things, for the securing of the Amended
Note by a pledge of the Shares, as defined in the Agreement, for the mandatory
prepayment of this Amended Note under certain circumstances and for the
acceleration of the maturity of this Amended Note following an Event of Default,
all on the terms set forth in the Agreement.
This Amended Note may be prepaid in whole or in part at any
time and from time to time without penalty or premium. Any voluntary or
mandatory prepayment of this Amended Note shall be applied pro rata to accrued
interest and principal on this Amended Note.
Upon the occurrence of an Event of Default (as defined in the
Agreement), this Amended Note shall become due and payable as set forth in the
Agreement. The Company's recovery upon an Event of Default shall be limited to
the Shares, and no judgment, order or execution entered in any suit, action or
proceeding, whether legal or equitable, on this Amended Note shall be obtained
or enforced against the Maker or any other property or asset of the Maker. If
there is a foreclosure of the Company's
<PAGE>
lien on the Shares, by power of sale or otherwise, no judgment for any
deficiency shall be brought or obtained by the Company against the Maker or any
other property or asset of the Maker.
In the event that a Change in Control (as hereinafter defined)
occurs prior to May 1, 2001 and the fair market value of the Common Stock of the
Company on the date of such Change in Control is $6.00 per share or less, then
the amount of principal and interest due and payable under the Amended Note
shall be reduced to $0.0. In the event that a Change in Control occurs prior to
May 1, 2001 and the fair market value of the Common Stock on the date of such
Change in Control is greater than $6.00 per share, then the amount of principal
and interest due and payable under the Amended Note shall be reduced by 50%. In
the event that a Change in Control occurs on or after May 1, 2001 but prior to
May 1, 2003, and the fair market value of the Common Stock on the date of such
Change in Control is $9.00 per share or less, then the amount of principal and
interest due and payable under the Amended Note shall be reduced by 50%.
For purposes of the preceding paragraph, the term "Change in
Control" means (i) a merger, reorganization or other business combination
involving the Company if the Company is not the surviving corporation, (ii) a
sale of all or substantially all of the Company's assets; or (iii) the
acquisition by a person other than a shareholder identified in the Company's
most recent proxy statement of beneficial ownership of twenty percent (20%) or
more of the issued and outstanding Common Stock (a "Control Acquisition") if, at
any time during the twelve month period following the Control Acquisition (the
"Measurement Year") one of the following shall occur: (A) there is a change in
the composition of the Board of Directors of the Company which results, on any
date during the Measurement Year, in a majority of the members of the Board
being comprised of individuals who were not members of the Board prior to the
date of the Control Acquisition, or (B) there is a change in the composition of
the Executive Committee of the Board of Directors of the Company which results,
on any date during the Measurement Year, in a majority of the members of the
Executive Committee being comprised of individuals who were not members of the
Executive Committee prior to the date of the Control Acquisition.
The Maker hereby forever waives presentment, demand,
presentment for payment, protest, notice of protest, notice of dishonor of this
Amended Note and all other demands and notices in connection with the delivery,
acceptance, performance and enforcement of this Amended Note.
-2-
<PAGE>
This Amended Note shall be governed and construed in
accordance with the laws of the State of Delaware applicable to agreements made
and to be performed entirely in such State and shall be binding upon the heirs
or legal representatives of the Maker and shall inure to the benefit of the
successors and assigns of the Company.
This Amended and Restated Secured Non-Recourse Promissory Note
amends, restates and replaces the Secured Non-Recourse Promissory Note issued by
Maker to the Company on May 20, 1997, and such Secured Non-Recourse Promissory
Note is hereby cancelled.
/s/ John M. Sergey
--------------------------
John M. Sergey
-3-
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<PAGE>
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<NAME> STRATEGIC DISTRIBUTION, INC.
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