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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1998
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] For the transition period from
___________
Commission file Number 0-5228
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STRATEGIC DISTRIBUTION, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 22-1849240
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3220 TILLMAN DRIVE, SUITE 200, BENSALEM, PA 19020
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 633-1900
---------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
NONE NONE
------------------- -------------------------
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.10 PER SHARE
--------------------------------------
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this 10-K or any amendment
to this Form 10-K. / /
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The aggregate market value of the Registrant's Common Stock, par value
$.10 per share (the "Common Stock"), held by non-affiliates on March 19, 1999
was approximately $46,500,000, based upon the last sale price of the Common
Stock on such date as reported on the Nasdaq National Market. For purposes of
this calculation, the Registrant has defined "affiliate" to include persons who
are directors or executive officers of the Registrant and persons who singly, or
as a group, beneficially own 10% or more of the issued and outstanding Common
Stock.
As of March 19, 1999, the Registrant had outstanding 31,111,285 shares
of Common Stock, which is registered pursuant to Section 12(g) of the Securities
Exchange Act of 1934 (the "1934 Act"). The Common Stock is sometimes referred to
herein as the "Voting Stock" of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's Proxy Statement for the 1999 Annual Meeting of
Shareholders is incorporated by reference in Part III of this Annual Report on
Form 10-K.
PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Strategic Distribution, Inc. (the "Company") is a Delaware corporation
which was organized in 1968.
On January 4, 1994, the Company acquired Industrial Systems Associates,
Inc. ("ISA"). ISA is a provider of In-Plant Store(R) programs for the
procurement, handling and data management of maintenance, repair and operating
("MRO") supplies for large industrial customers in North America.
In late 1996, the Company announced its intention to sell its Strategic
Supply, Inc. ("SSI") and American Technical Services Group, Inc. ("ATSG")
subsidiaries in order to focus more directly on the development of the In-Plant
Store business. SSI was formerly known as SafetyMaster Corporation
("SafetyMaster") and was the surviving corporation from a 1996 merger of two
wholly-owned subsidiaries, SafetyMaster and Lewis Supply (Delaware), Inc. See
"Discontinued Operations".
On January 28, 1997, the Company, through a newly formed subsidiary,
acquired all of the outstanding common stock of INTERMAT International Materials
Management Engineers, Inc. On February 6, 1997, the subsidiary changed its name
to INTERMAT International Materials Management, Inc. and on November 13, 1997,
to
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INTERMAT, Inc. ("INTERMAT"). INTERMAT(R) provides data management services and
develops and supplies software for MRO inventory cataloging.
On June 2, 1997, the Company sold substantially all of the assets and
business of SSI to DXP Acquisition, Inc., a wholly-owned subsidiary of DXP
Enterprises, Inc. (collectively referred to as "DXP")(excluding accounts
receivable of $5,669,000, which were retained by the Company and which were
substantially collected as of December 31, 1997). DXP also assumed certain
obligations and liabilities of SSI in connection with the sale.
On June 4, 1998, the Company sold substantially all of the assets and
certain liabilities of ATSG to SPEC/ATS, Inc.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
At December 31, 1998, the Company adopted Statement of Financial
Accounting Standards ("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. The
Company operates in one reportable segment and substantially all of its revenues
were from the procurement, handling and data management of MRO supplies for
large industrial customers. See Item 8, "Financial Statements and Supplementary
Data - Notes to Consolidated Financial Statements", Footnote No. 16.
(c) NARRATIVE DESCRIPTION OF BUSINESS
The Company's In-Plant Store program permits industrial sites to
outsource all aspects of their MRO procurement, storage and internal
distribution; the Company takes responsibility for purchasing, receiving,
stocking, issuing and delivering MRO supplies at the industrial site. The
Company also efficiently manages customers' MRO inventory using INTERMAT
technology. INTERMAT's proprietary software helps industrial users create
standardized descriptions of their MRO inventory, permitting users to eliminate
redundancies, identify obsolescence, better access MRO items, and locate
alternative sourcing for MRO items.
IN-PLANT STORE(R) PROGRAM
The Company provides proprietary MRO supply procurement, handling and
data management solutions to industrial sites, primarily through its In-Plant
Store program. The Company sells a broad range of MRO supplies, replacement
parts and selected classes of production materials, which are described
collectively as MRO supplies. MRO supplies are frequently low price but critical
items, which historically have been characterized by high procurement costs due
to inherent inefficiencies in traditional MRO supply distribution methods. The
Company's In-Plant Store program, in which large industrial sites outsource the
procurement, handling and data
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management of MRO supplies to the Company, substantially mitigates these
inefficiencies by reducing both the process and product costs associated with
MRO supply procurement and handling. The Company's In-Plant Store program also
helps customers achieve operational improvements, such as reduced plant
down-time resulting from unavailable parts and manufacturing process
improvements due to better tracking of critical parts. The Company believes that
its In-Plant Store program is superior to both traditional and alternative
methods of MRO supply distribution in that the In-Plant Store program allows
customers to get out of the MRO supply distribution and handling business and
concentrate on their core businesses.
The In-Plant Store program is a comprehensive outsourcing service
through which the Company manages all aspects of MRO supply procurement and
handling at a customer's industrial site. Prior to the implementation of an
In-Plant Store, the industrial site would typically obtain MRO supplies from as
many as 500 traditional industrial distributors. Through the In-Plant Store
program, the Company becomes responsible for servicing all of its customers' MRO
supply needs by establishing a dedicated, fully integrated store within the
customer's plant. The customer, in turn, generally purchases all of its MRO
supplies from the In-Plant Store. The Company staffs the In-Plant Store with its
own trained industrial procurement professionals, installs proprietary software
designed specifically for industrial procurement and identifies appropriate
inventory levels based on the supply needs of each site. Upon implementation,
the In-Plant Store purchases, receives, inventories and issues MRO supplies
directly to plant personnel, delivers ongoing technical support and provides the
customer with a comprehensive invoice twice per month, thereby reducing the
administrative burden of traditional MRO supply. In addition, with the In-Plant
Store program, the customer generally consumes MRO supplies before paying for
them, as opposed to traditional MRO supply that often requires the customer to
invest in substantial MRO supply inventories.
The Company believes that increased recognition of the inefficiencies
associated with the traditional MRO supply distribution process has rapidly
increased the demand for the Company's In-Plant Store program in recent years.
From January 1, 1998 to December 31, 1998, the number of In-Plant Store sites
operated by the Company increased from 101 to 134.
DATA MANAGEMENT SERVICES
The Company provides data management services and develops and supplies
software for MRO inventory data management using INTERMAT(R) technology. The
Company provides data management services to its In-Plant Store customers and
other customers, located primarily in North America, as well as the Middle East
(including Saudi Arabia and the United Arab Emirates), the United Kingdom, South
and Central America, and South Africa.
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STANDARD MODIFIER DICTIONARY(R)
INTERMAT's Standard Modifier Dictionary is an electronic dictionary
with over 2,000 formats for building standardized descriptions of MRO items.
INTERMAT has used these formats to describe over 6.0 million MRO items for its
users, enabling them to describe and maintain their MRO inventories in an
organized and consistent fashion. Users of the INTERMAT technology have
typically found that this systemization process turns up significant
redundancies in their MRO inventory. For example, the same MRO item may be used
in several different departments at a manufacturing site; each department
describes the part differently and, therefore, the different departments do not
realize that they are using the same part. Once all MRO parts are systematically
described and redundancies are identified, the user is able to consolidate and
reduce inventories, thereby reducing its capital investment. The user can also
reduce handling and other expenses related to MRO procurement and gain better
pricing by consolidating purchases.
INTERMAT has developed other proprietary software which scans a
customer's existing MRO database and efficiently converts as many items as
possible to the Standard Modifier Dictionary formats. This process saves users
substantial time and resources by reducing the number of items that need to be
manually converted to Standard Modifier Dictionary formats, and allows the
Company to implement its In-Plant Store program more efficiently.
STRUXURE(TM) MATERIALS DATA MANAGEMENT SOFTWARE
INTERMAT's Struxure software enables users to manipulate the Standard
Modifier Dictionary formats to create a customized MRO catalog. Initially, the
Company helps its new customers create a catalog of MRO items using the Standard
Modifier Dictionary formats, as well as item descriptions already developed for
and included in the Standard Modifier Dictionary. As MRO items are added or
deleted from a customer's inventory, the customer is able to add or delete items
from its MRO catalog. Struxure, an Oracle-based client-server system, has many
powerful data management features, including search tools, list making
capabilities, standard and custom reporting features, and network capabilities.
Through the In-Plant Store program, the Company creates and maintains the MRO
catalog for its customers.
BENEFITS OF DATA MANAGEMENT SERVICES
The initial and immediate benefit of the Company's data management
services is the identification and elimination of redundant and obsolete
inventory. In addition, over time, the Company can provide its customers
significant value by (i) more quickly and easily identifying and locating MRO
items needed by different departments at an industrial site, or by different
industrial sites operated by the same company, and (ii) helping locate
alternative sources for different MRO items. Once all MRO items are described
using Standard Modifier Dictionary formats, the user may realize that different
departments have been purchasing equivalent parts from different
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suppliers at different costs. This realization enables the user to choose the
best source and the best price. In addition, Standard Modifier Dictionary
formats enable the user to more easily locate new sources for a given product,
since Standard Modifier Dictionary formats give purchasing personnel the
information they need to obtain price quotes from new suppliers.
CUSTOMERS
At December 31, 1998, the Company operated 134 In-Plant Store
facilities for 57 individual customers. The Company provides its data management
services to its In-Plant Store customers, as well as other customers in the
United States and abroad. During the year ended December 31, 1998, 2.3% of the
Company's revenues were from customers in foreign countries, primarily Mexico.
PRODUCTS
The Company, through the In-Plant Store program, provides a broad range
of MRO supplies, replacement parts and selected classes of production materials,
including the following:
- - Abrasives - Hoses, pipe fittings and valves
- - Adhesives - HVAC and plumbing equipment
- - Coatings, lubricants and - Janitorial supplies
compounds - Material handling products
- - Cutting, hand, pneumatic and - Measuring instruments
power tools - Power transmission equipment
- - Electrical supplies - Respiratory products
- - Fasteners - Replacement parts
- - Fire protection equipment and - Safety products
clothing - Welding materials
Because of the broad range of products sold by the Company, no single
product or class of products accounted for more than 10% of the Company's
revenues in 1998.
SUPPLIERS
The Company purchases products for its In-Plant Store program from
numerous manufacturers and specialty distributors. The Company has distribution
agreements with numerous manufacturers and suppliers, all of which can be
canceled by the respective manufacturers and suppliers upon notice of one year
or less. Because no manufacturer or supplier provides products that account for
as much as 10% of the Company's revenues and because the Company believes that
it could quickly find alternative sources of supply if any distribution contract
were canceled, the Company does not believe that the loss of any one
distribution contract, or any small group of distribution contracts, would have
a material adverse impact on the Company's business.
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COMPETITION
The Company's business is highly competitive. The Company competes with
a wide variety of traditional MRO supply distributors. Most of such distributors
are small enterprises selling to customers in a limited geographic area. The
Company also competes with several integrated supply consortiums, direct mail
suppliers and large warehouse stores, some of which have significantly greater
financial resources than the Company. The primary areas of competition include
price, breadth and quality of product lines distributed, ability to fill orders
promptly, technical knowledge of sales personnel and, in certain product lines,
service and repair capability. The Company believes that its ability to compete
effectively is dependent upon its ability to deliver value-added procurement
solutions to its customers through its In-Plant Store program, to respond to the
needs of its customers through quality service and to be price-competitive. The
Company believes that certain of its competitors have developed and implemented
programs which offer services similar to, and which compete with, the Company's
In-Plant Store program.
The Company also competes to some extent with the manufacturers of MRO
supplies. The Company believes, however, that most of such manufacturers sell
their products through traditional industrial distributors, because the limited
range of products that a manufacturer offers cannot compete effectively with the
broad product lines and additional services offered by traditional industrial
distributors and MRO supply service providers such as the Company.
The Company's data management services are built upon proprietary
computer software developed by INTERMAT. The Company is aware of companies that
have developed competing software, and it is possible that one or more larger
software companies will create competing software at some point in the future.
GOVERNMENT REGULATION
In recent years, governmental and regulatory bodies have promulgated
numerous standards and regulations designed, among other things, to assure the
quality of certain classes of MRO items, to protect workers' well-being and to
make the work place safer. The Company reviews regulations governing its
customers in order to be able to distribute products that meet its customers'
needs, and some of the Company's past growth has been as a result of its
customers' compliance with this increasing level of regulation. The Company
cannot predict the level or direction of future regulation, but believes these
trends will continue to contribute to the Company's growth.
EMPLOYEES
As of December 31, 1998, the Company had approximately 1,030 employees,
of whom approximately 230 were employed in selling and administrative capacities
and approximately 800 were involved in operations. None of the Company's
employees were covered under
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collective bargaining agreements. The Company considers its employee relations
to be good.
INSURANCE
The Company maintains liability and other insurance that it believes to
be customary and generally consistent with industry practice. The Company is
also named as an additional insured under the products liability policies of
many of its suppliers and, with respect to In-Plant Store facilities, many of
its customers. The Company believes that such insurance is adequate to cover
potential claims relating to its existing business activities.
DISCONTINUED OPERATIONS
On November 11, 1996, the Company announced its intention to sell its
SSI and ATSG subsidiaries in order to focus more directly on the development of
the Company's In-Plant Store business. The results of operations of SSI and ATSG
have, therefore, been presented in the Company's consolidated financial
statements for each of the years in the three-year period ended December 31,
1998, to conform with discontinued operations treatment ("Discontinued
Operations"). See Item 8, "Financial Statements and Supplementary Data - Notes
to Consolidated Financial Statements", Footnote No. 9.
On June 2, 1997, the Company sold substantially all of the assets and
business of SSI to DXP Acquisition, Inc., a wholly-owned subsidiary of DXP
Enterprises, Inc. (collectively referred to as "DXP")(excluding accounts
receivable of $5,669,000, which were retained by the Company and which were
substantially collected as of December 31, 1997). DXP also assumed certain
obligations and liabilities of SSI in connection with the sale. Consideration
for the sale consisted of $4,269,000 in cash, promissory notes from DXP in the
aggregate amount of $3,189,000, as adjusted, and an earn-out (contingent
payment), which could result in additional compensation to the Company.
On June 4, 1998, the Company sold substantially all of the assets and
certain liabilities of ATSG to SPEC/ATS, Inc. Consideration for the sale
approximated the carrying value of the net assets sold, and consisted of
$1,025,000 in cash, with a final adjustment based on collected accounts
receivable to be determined. The sale agreement also provides for an earn-out
(contingent payment), which could result in additional compensation to the
Company.
ITEM 2. PROPERTIES
The Company leases its corporate headquarters located in Bensalem,
Pennsylvania, as well as additional office space in Feasterville, Pennsylvania,
Houston, Texas, El Paso, Texas, and several small warehouses and offices located
at or near In-Plant Store sites. The Company does not own or lease the space for
its other
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In-Plant Store facilities. The Company has the right to renew some of these
leases. The Company believes that the properties which are currently under
lease are adequate to serve the Company's business operations for the
foreseeable future. The Company believes that if it were unable to renew the
lease on any of these facilities, it could find other suitable facilities
with no adverse effect on the Company's business.
ITEM 3. LEGAL PROCEEDINGS
The Company is currently involved in certain legal proceedings
incidental to the normal conduct of its business. The Company does not believe
that any liabilities relating to such proceedings are likely to be, individually
or in the aggregate, material to its consolidated financial position and results
of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Common Stock is quoted on the Nasdaq National Market ("NNM") under
the symbol "STRD". As of March 19, 1999, there were approximately 1,500 holders
of record of the Common Stock. The following table sets forth the high and low
sale prices of the Common Stock on the NNM for the periods indicated.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH SALES PRICE LOW SALES PRICE
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<S> <C> <C>
March 31, 1997 ................. 7 3/4 3 3/16
June 30, 1997 .................. 5 1/4 3 3/8
September 30, 1997.............. 5 15/16 3 1/2
December 31, 1997............... 6 13/16 4 1/8
March 31, 1998 ................. 7 4 1/8
June 30, 1998 .................. 7 1/2 4 7/8
September 30, 1998.............. 5 5/8 3
December 31, 1998............... 3 3/4 1 13/16
</TABLE>
The Company has paid no cash dividends on the Common Stock for the
years ended December 31, 1997 and 1998 and does not intend to declare any cash
dividends in the foreseeable future. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources".
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ITEM 6. SELECTED FINANCIAL DATA
(dollars in thousands, except for share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
1994 1995 1996 1997(a) 1998(b)
---- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues $31,247 $52,915 $ 92,423 $170,780 $219,348
Operating income (loss) 573 313 (3,956) (12,613) (1,522)
Income (loss) before
income taxes 408 338 (2,589) (11,306) (937)
Income tax (expense)
benefit 850 (149) -- -- --
Income (loss) from
continuing operations 1,258 189 (2,589) (11,306) (937)
Income (loss) from
discontinued
operations, net of tax 977 815 (6,519) (4,500) --
Net income (loss) 2,235 1,004 (9,108) (15,806) (937)
Per Share Data - Basic:
Income (loss) from
continuing operations 0.07 0.01 (0.10) (0.37) (0.03)
Income (loss) from
discontinued operations 0.06 0.04 (0.24) (0.15) --
Net income (loss) 0.13 0.05 (0.34) (0.52) (0.03)
Weighted Average Number of Shares of
Common Stock Outstanding 16,993,971 21,689,653 26,449,079 30,534,635 31,234,202
Other Data:
Number of In-Plant Store
Facilities(c) 17 31 72 101 134
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
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1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $10,693 $12,252 $53,447 $46,076 $48,142
Total assets 29,992 40,014 92,382 90,682 99,444
Long-term debt 632 5,054 587 1,469 8,948
Stockholders' equity 24,721 27,391 73,954 62,094 61,588
</TABLE>
(a) Loss from continuing operations includes a non-cash charge of $8,000,000 as
a result of the write-off of acquired in-process research and development.
(b) Loss from continuing operations includes a charge of $1,000,000 related to
the bankruptcy of one In-Plant Store customer.
(c) As of the end of the year.
The Company has paid no cash dividends on the Common Stock for the
years ended December 31, 1994, 1995, 1996, 1997 and 1998. On December 6, 1995,
the Company declared a three percent stock dividend to the holders of record on
December 18, 1995. The payment date was December 29, 1995.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain statements in this Item 7 constitute forward-looking statements
which involve risks and uncertainties. The Company's actual results in the
future could differ significantly from the results discussed or implied in such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those related to the Company's
ability to manage growth, termination of contracts by the Company's customers,
competition in the Company's business, 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.
BACKGROUND
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 it operations
primarily through its wholly-owned subsidiary, Industrial Systems Associates,
Inc. ("ISA"). At December 31, 1998, the Company had 134 In-Plant Store
facilities.
The Company provides the In-Plant Store program in Mexico through two
subsidiaries (collectively "Mexico"). Mexico's operations are conducted
primarily in U.S. dollars, its functional currency, and therefore the Company is
not exposed to any significant foreign currency fluctuations and has no foreign
currency translation adjustments.
On November 11, 1996, the Company announced its intention to sell its
Strategic Supply, Inc. ("SSI") and American Technical Services Group, Inc.
("ATSG") subsidiaries in order to focus more directly on the development of the
Company's In-Plant Store business. SSI was formerly known as SafetyMaster
Corporation ("SafetyMaster") and was the surviving corporation from a 1996
merger of two wholly-owned subsidiaries, SafetyMaster and Lewis Supply
(Delaware), Inc. (the "Merger"). As a result of the Company's decision to sell
SSI and ATSG, the Company's consolidated financial statements reflect SSI and
ATSG as discontinued operations.
On January 28, 1997, the Company, through a newly formed subsidiary,
acquired all of the outstanding common stock of INTERMAT International Materials
Management Engineers, Inc. and subsequently changed its name to INTERMAT, Inc.
("INTERMAT").
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INTERMAT(R) provides data management services and develops and supplies software
for MRO inventory cataloging. The purchase price consisted of $10,800,000 in
cash, a $1,400,000 subordinated note, and 625,000 newly issued shares of the
Company's common stock with a fair market value of $2,406,000. In connection
with the acquisition, the Company recorded a charge of approximately $8,000,000
in the first quarter of 1997, as a result of the write-off of in-process
research and development.
On June 2, 1997, the Company sold substantially all of the assets and
business of SSI to DXP Acquisition, Inc., a wholly-owned subsidiary of DXP
Enterprises, Inc. (collectively referred to as "DXP")(excluding accounts
receivable of $5,669,000, which were retained by the Company and which were
substantially collected as of December 31, 1997). DXP also assumed certain
obligations and liabilities of SSI in connection with the sale. Consideration
for the sale consisted of $4,269,000 in cash, promissory notes from DXP in the
aggregate amount of $3,189,000, as adjusted, and an earn-out (contingent
payment), which could result in additional compensation to the Company. Total
consideration in the sale approximated the carrying value of the net assets
divested. However, due to the contingent nature of a portion of the
consideration, the Company recorded a charge of $3,500,000 to loss on sale of
discontinued operations in 1997.
On June 4, 1998, the Company sold substantially all of the assets and
certain liabilities of ATSG to SPEC/ATS, Inc. Consideration for the sale
approximated the carrying value of the net assets sold, and consisted of
$1,025,000 in cash, with a final adjustment based on collected accounts
receivable to be determined. 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. In the second quarter of 1997, the
Company recorded a $1,000,000 charge to loss on sale of discontinued operations,
which included estimated losses of ATSG through the date of sale and the
write-off of certain intangible assets in connection with the sale.
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RESULTS OF OPERATIONS
The following table of revenues and percentages sets forth selected
items of the results of operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1997 1998
---- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
Revenues $ 92,423 $ 170,780 $ 219,348
--------- ---------- ----------
--------- ---------- ----------
100.0% 100.0% 100.0%
Cost of materials 81.0 78.5 77.5
Operating wages and benefits 9.4 8.9 8.5
Other operating expenses 1.9 3.9 3.3
Selling, general and administrative
expenses 12.0 11.4 11.4
Acquired in-process research and
development -- 4.7 --
Operating loss (4.3) (7.4) (0.7)
Interest income, net 1.5 0.8 0.3
Loss from continuing
operations before taxes (2.8) (6.6) (0.4)
Income tax expense -- -- --
Loss from continuing
operations (2.8) (6.6) (0.4)
Loss from discontinued
operations (4.9) -- --
Loss on sale of discontinued
operations (2.2) (2.7) --
Net loss (9.9) (9.3) (0.4)
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues for the year ended December 31, 1998 increased 28.4% to
$219,348,000 from $170,780,000 in 1997. This growth resulted primarily from the
implementation of new In-Plant Store facilities and growth of existing In-Plant
Store facilities. The number of In-Plant Store facilities increased from 101 at
December 31, 1997 to 134 at December 31, 1998. One In-Plant Store customer
represented approximately 15% of revenues for the year ended December 31, 1997,
but less than 10% for the year ended December 31, 1998.
Cost of materials as a percentage of revenues decreased to 77.5% for
the year ended December 31, 1998, as compared to 78.5% in 1997. 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 as a percentage of revenues decreased to
8.5% for the year ended December 31, 1998 from 8.9% in 1997. This decrease is
primarily a result of the percentage of
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revenues from more mature In-Plant Store facilities as compared to the
percentage of revenues from new In-Plant Store facilities being greater for the
year ended December 31, 1998 than in 1997. As new In-Plant Store facilities are
added, operating wages and benefits will continue to increase. However these
expenses as a percentage of revenues will vary depending on the rate at which
the Company adds new In-Plant Store facilities. During the start-up phase of new
facilities, these expenses generally increase at a higher rate than revenues are
recognized.
Other operating expenses as a percentage of revenues decreased to 3.3%
for the year ended December 31, 1998 from 3.9% in 1997. The decrease reflects
utilization of improved software technology at INTERMAT to increase productivity
and lower temporary labor costs.
Selling, general and administrative expenses as a percentage of
revenues remained at 11.4% for the year ended December 31, 1998. Lower selling,
general and administrative expense spending as a percent of revenue was offset
by asset write-offs associated with the bankruptcy of one In-Plant Store
customer and an increase in allowance for doubtful accounts. As the In-Plant
Store program expands, this expense will continue to increase; however, as a
percentage of revenue, it should decrease as the ratio of more mature In-Plant
Store facilities to new facilities increases.
In 1997, the Company incurred a non-recurring charge of $8,000,000
for acquired in-process research and development ("IPR&D") in connection with
the acquisition of INTERMAT (see also Year Ended December 31, 1997 Compared
to Year Ended December 31, 1996). As of December 31, 1998, the Company had
spent approximately $390,000 on the IPR&D projects, with an additional
$160,000 expected to be spent in the first half 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 other operating expenses as
described above.
Interest income, net decreased by $722,000 to $585,000 for the year
ended December 31, 1998 when compared with interest income, net of $1,307,000 in
1997. The decrease resulted primarily from the use of cash and cash equivalents
to finance the working capital requirements of new In-Plant Store facilities and
for capital expenditures, thereby reducing the funds available to earn interest
income.
An income tax benefit was not recorded for the loss incurred in the
year ended December 31, 1998, as the Company did not believe there was a
sufficient basis for benefit recognition.
Net loss for the year ended December 31, 1998 was $(937,000) compared
to a net loss of $(15,806,000) in 1997, as a result of the items previously
discussed.
15
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues for the year ended December 31, 1997 increased 84.8% to
$170,780,000 from $92,423,000 in 1996. This growth resulted primarily from the
implementation of new In-Plant Store facilities, growth of existing In-Plant
Store facilities and the acquisition of INTERMAT. The number of In-Plant Store
facilities increased from 72 at December 31, 1996 to 101 at December 31, 1997.
One In-Plant Store customer (with which the Company operated under six separate
contracts) represented approximately 23% and 15% of the revenues for the years
ended December 31, 1996 and 1997.
Cost of materials as a percentage of revenues decreased to 78.5% for
the year ended December 31, 1997, as compared to 81.0% in 1996. This decrease is
a result of INTERMAT having a lower cost of materials, as a percentage of
revenues, than ISA. The decrease was partly offset by a higher cost of materials
for ISA because of a change in product mix to In-Plant Store facilities. This
percentage may vary depending on the relative sales of the two subsidiaries.
Operating wages and benefits as a percentage of revenues decreased to
8.9% for the year ended December 31, 1997 from 9.4% in 1996. This decrease is
primarily a result of the percentage of revenues from more mature In-Plant Store
facilities as compared to the percentage of revenues from new In-Plant Store
facilities being greater for the year ended December 31, 1997 than in 1996. As
new In-Plant Store facilities are added, operating wages and benefits will
continue to increase. However these expenses as a percentage of revenues will
vary depending on the rate at which the Company adds new In-Plant Store
facilities. During the start-up phase of new facilities, these expenses
generally increase at a higher rate than revenues are recognized. The inclusion
of INTERMAT's results of operations, which reflect a higher percentage of these
expenses than In-Plant Store operations, partly offset the overall percentage
decrease.
Other operating expenses as a percentage of revenues increased to 3.9%
for the year ended December 31, 1997 from 1.9% in 1996. This increase resulted
primarily from the inclusion of INTERMAT's results of operations, which reflect
a much higher percentage of these expenses than In-Plant Store operations.
Selling, general and administrative expenses as a percentage of
revenues decreased to 11.4% for the year ended December 31, 1997 from 12.0% in
1996. ISA's 1997 selling, general and administrative expenses as a percentage of
revenues decreased as compared to 1996, reflecting a higher mix of revenues in
1997 from more mature In-Plant Store facilities versus new In-Plant Store
facilities, than in 1996. As the In-Plant Store program expands, this expense
will continue to increase; however, as a percentage of revenue, it should
decrease as the ratio of more mature In-Plant Store facilities to new facilities
increases. The decrease in the percentage of selling, general and administrative
expenses was partly offset by the inclusion of
16
<PAGE>
INTERMAT's results of operations in 1997. INTERMAT has a much higher percentage
of these expenses than ISA.
In 1997, the Company incurred a non-recurring charge of $8,000,000 for
IPR&D in connection with the acquisition of INTERMAT. As of the acquisition date
(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 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 SMDII 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
17
<PAGE>
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.
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. Revenue and
profitability assumptions reflected the positive effects of the Year 2000
issue and corporations spending more on new compliant ERP systems and tools,
as well as the negative impact of future competition.
Interest income, net for the year ended December 31, 1997 was
$1,307,000 as compared to $1,367,000 in 1996. During 1996, the Company had more
funds available for investment, but for fewer months than in 1997, primarily
from the sale of 7,630,000 shares of common stock on May 23, 1996. During 1997,
a portion of the net proceeds from the stock sale were used to finance the
working capital requirements of new In-Plant Store facilities and the
acquisition of INTERMAT.
An income tax benefit was not recorded for the loss incurred in the
year ended December 31, 1997, as the Company did not believe there was a
sufficient basis for benefit recognition.
Results of discontinued operations relate to SSI and ATSG and are
discussed above.
Net loss for the year ended December 31, 1997 was $(15,806,000)
compared to a net loss of $(9,108,000) in 1996, as a result of the items
previously discussed.
LIQUIDITY AND CAPITAL RESOURCES
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 December 31, 1998) and/or a Eurodollar rate, with a commitment
18
<PAGE>
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 December 31, 1998, there was $7,500,000 of
borrowings outstanding under the credit facility. 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 May 23, 1996, the Company sold 7,630,000 shares of common stock in
an underwritten public offering. The net proceeds to the Company were
$55,332,000. A portion of the net proceeds was used to repay the Company's bank
indebtedness. The balance of the net proceeds at that time, was available for
working capital, including the opening of In-Plant Store facilities, for general
corporate purposes and for possible acquisitions.
On January 28, 1997, the Company completed the acquisition of INTERMAT
for a purchase price consisting of $10,800,000 in cash, a $1,400,000
subordinated note and 625,000 newly issued shares of common stock.
On June 2, 1997, the Company sold substantially all of the assets and
business of SSI. Consideration for the sale consisted 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. Excluded from the sale were accounts receivable of $5,669,000,
which were substantially collected in 1997.
On June 4, 1998, the Company sold substantially all of the assets and
certain liabilities of ATSG. Consideration for the sale consisted of $1,025,000
in cash, with a final adjustment based on collected accounts receivable to be
determined. The sale agreement also provides for an earn-out (contingent
payment), which could result in additional compensation to the Company.
The net cash used in continuing operations was $14,577,000 for the year
ended December 31, 1998, compared to $13,968,000 for the year ended December 31,
1997. The increase resulted primarily from an increase in accounts receivable
and inventories, which were partially offset by an increase in accounts payable
and accrued expenses and a decrease in short-term investments. Accounts
receivable and inventories increased primarily from the increase in the number
of In-Plant Store facilities. Accounts payable and accrued expenses increased
primarily from higher inventory levels.
The change in net assets of discontinued operations was a decrease of
$687,000 for the year ended December 31, 1998 compared to
19
<PAGE>
a decrease of $5,054,000 for 1997. The 1998 decrease was primarily related to
the collection of accounts receivable in connection with the sale and wind down
of the business operations of ATSG. The 1997 decrease was primarily related to
the collection of accounts receivable excluded from the sale of SSI.
The net cash used in investing activities increased to $8,140,000 for
the year ended December 31, 1998 from $7,012,000 for the comparable period in
1997. The net use in 1998 resulted primarily from expenditures related to
computer systems and equipment, partially offset by the sale of ATSG. The net
use in 1997 resulted primarily from the acquisition of INTERMAT and expenditures
related to computer systems and equipment, partially offset by the sale of SSI.
The net cash provided by financing activities was $7,411,000 for the
year ended December 31, 1998, compared to $869,000 for the year ended December
31, 1997. In 1998, cash was provided primarily from the Company's new credit
facility. In 1997, cash was provided primarily from the sale of stock to an
officer of the Company and the exercise of stock options.
The Company 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. During 1998, the Company
expended $6,008,000 on capital additions for the In-Site project. Recruiting,
training, data conversion and other miscellaneous costs directly related to the
project amounting to $206,000 were expensed as incurred. At December 31, 1998,
the total estimated additional capital spending to complete this project was
expected to be approximately $3,500,000.
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 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.
20
<PAGE>
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, 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 its 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 December 31, 1998, 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.
21
<PAGE>
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 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.
22
<PAGE>
INFLATION
The Company believes that any impact of general inflation has not had a
material effect on its results of operations. The Company's current policy is to
attempt to reduce any impact of inflation through price increases and cost
reductions.
SEASONALITY
The Company does not believe that its business is seasonal in nature.
ITEM 7A. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements of the Company are listed on the accompanying
Index to Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
23
<PAGE>
STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31,
1997 and 1998 F-3
Consolidated Statements of Operations for
the Years Ended December 31, 1996, 1997 and
1998 F-4
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1996, 1997
and 1998 F-5
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1996, 1997 and 1998 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
Schedules have been omitted because they are not applicable or they
are not required, because the required information has been included
elsewhere in the consolidated financial statements or notes thereto.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Strategic Distribution, Inc.:
We have audited the accompanying consolidated balance sheets of Strategic
Distribution, Inc. and subsidiaries as of December 31, 1997 and 1998, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Strategic
Distribution, Inc. and subsidiaries as of December 31, 1997 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
KPMG LLP
Philadelphia, Pennsylvania
February 24, 1999
F-2
<PAGE>
STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1997 1998
------------------ ------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $15,941 $ 1,322
Short-term investments 2,997 -
Accounts receivable, net 28,772 41,819
Current portion of notes receivable 230 361
Inventories 23,712 31,060
Prepaid expenses and other current assets 301 401
Deferred income taxes 1,141 1,165
------------------ ------------------
Total current assets 73,094 76,128
Notes receivable 2,941 2,486
Property and equipment, net 5,290 12,854
Net assets of discontinued operations 915 -
Intangible assets, net 8,327 7,279
Other assets 115 697
------------------ ------------------
Total assets $90,682 $99,444
------------------ ------------------
------------------ ------------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $26,499 $27,966
Current portion of long-term debt (related party $500 in 1997) 519 20
------------------ ------------------
Total current liabilities 27,018 27,986
Long-term debt 69 7,548
Subordinated debt to related party 1,400 1,400
Net liabilities of discontinued operations - 797
Deferred income taxes 101 125
------------------ ------------------
Total liabilities 28,588 37,856
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: 31,101,054 and 31,294,285 shares 3,110 3,129
Additional paid-in capital 93,540 94,255
Accumulated deficit (33,506) (34,443)
Notes receivable from related parties (1,000) (1,303)
Treasury stock, at cost (12,500 shares) (50) (50)
------------------ ------------------
Total stockholders' equity 62,094 61,588
------------------ ------------------
Total liabilities and stockholders' equity $90,682 $99,444
------------------ ------------------
------------------ ------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except share data)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------
1996 1997 1998
-------------------- ------------------- -------------------
<S> <C> <C> <C>
Revenues $ 92,423 $ 170,780 $ 219,348
Costs and expenses:
Cost of materials 74,842 134,061 170,003
Operating wages and benefits 8,644 15,150 18,564
Other operating expenses 1,809 6,728 7,299
Selling, general and administrative expenses 11,084 19,454 25,004
Acquired in-process research and development - 8,000 -
-------------------- ------------------- -------------------
Total costs and expenses 96,379 183,393 220,870
-------------------- ------------------- -------------------
Operating loss (3,956) (12,613) (1,522)
Interest income (expense):
Interest expense (98) (154) (154)
Interest income 1,465 1,461 739
-------------------- ------------------- -------------------
Interest income, net 1,367 1,307 585
-------------------- ------------------- -------------------
Loss before income taxes (2,589) (11,306) (937)
Income tax expense - - -
-------------------- ------------------- -------------------
Loss from continuing operations (2,589) (11,306) (937)
Discontinued operations:
Loss from discontinued operations (4,519) - -
Loss on sale of discontinued operations (2,000) (4,500) -
-------------------- ------------------- -------------------
Loss from discontinued operations (6,519) (4,500) -
-------------------- ------------------- -------------------
Net loss $ (9,108) $ (15,806) $ (937)
-------------------- ------------------- -------------------
-------------------- ------------------- -------------------
Net loss per common share - basic and diluted:
Loss from continuing operations $ (0.10) $ (0.37) $ (0.03)
Loss from discontinued operations (0.24) (0.15) -
-------------------- ------------------- -------------------
Net loss $ (0.34) $ (0.52) $ (0.03)
-------------------- ------------------- -------------------
-------------------- ------------------- -------------------
Weighted average number of shares of common
stock outstanding - basic and diluted 26,449,079 30,534,635 31,234,202
-------------------- ------------------- -------------------
-------------------- ------------------- -------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(in thousands, except share data)
<TABLE>
<CAPTION>
Additional
Common Paid-In Accumulated Notes Treasury
Stock Capital Deficit Receivable Stock
-------------- --------------- ------------------ ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 2,171 $ 33,861 $ (8,592) $ (50) $ -
Net loss (9,108)
Exercise of stock options 16 204
Issuance of 14,328 shares 2 118
Sale of 7,630,000 shares, net 763 54,569
-------------- --------------- ------------------ ---------------- ---------------
Balance at December 31, 1996 2,952 88,752 (17,700) (50) -
Net loss (15,806)
Exercise of stock options 55 785
Issuance of 625,000 shares
for acquisition 63 2,343
Issuance of 400,000 shares 40 1,660 (1,000)
Receipt of 12,500 shares in
settlement of note receivable 50 (50)
-------------- --------------- ------------------ ---------------- ---------------
Balance at December 31, 1997 3,110 93,540 (33,506) (1,000) (50)
Net loss (937)
Exercise of stock options
and warrants 8 120
Issuance of 115,000 shares 11 595 (303)
-------------- --------------- ------------------ ---------------- ---------------
-------------- --------------- ------------------ ---------------- ---------------
Balance at December 31, 1998 $ 3,129 $ 94,255 $ (34,443) $ (1,303) $ (50)
-------------- --------------- ------------------ ---------------- ---------------
-------------- --------------- ------------------ ---------------- ---------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------
1996 1997 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Loss from continuing operations $ (2,589) $ (11,306) $ (937)
Adjustments to reconcile loss from continuing
operations to net cash used in continuing operations:
Depreciation and amortization 691 2,016 2,805
Acquired in-process research and development - 8,000 -
Noncash directors compensation 120 - -
Changes in operating assets and liabilities, net of
effects of acquisition:
Short-term investments - (2,997) 2,997
Accounts receivable (8,066) (9,671) (13,047)
Inventories (8,175) (7,992) (7,348)
Prepaid expenses and other current assets (300) 109 (167)
Accounts payable and accrued expenses 10,277 7,921 1,467
Other, net (16) (48) (347)
----------------- ----------------- -----------------
Net cash used in continuing operations (8,058) (13,968) (14,577)
Discontinued operations, net of effect of disposition:
Net loss (6,519) (4,500) -
Decrease in net assets 475 5,054 687
----------------- ----------------- -----------------
Net cash used in operating activities (14,102) (13,414) (13,890)
----------------- ----------------- -----------------
Cash flows from investing activities:
Acquisition of business, net of cash acquired - (10,769) -
Proceeds from sale of discontinued operations - 7,458 1,025
Additions of property and equipment (1,848) (3,701) (9,165)
----------------- ----------------- -----------------
Net cash used in investing activities (1,848) (7,012) (8,140)
----------------- ----------------- -----------------
Cash flows from financing activities:
Proceeds from sale of common stock, net 55,552 1,540 431
Proceeds from (repayment of) notes payable (4,445) (400) 7,500
Repayment of long-term obligations (21) (271) (520)
----------------- ----------------- -----------------
Net cash provided by financing activities 51,086 869 7,411
----------------- ----------------- -----------------
Increase (decrease) in cash and cash equivalents 35,136 (19,557) (14,619)
Cash and cash equivalents, beginning of the year 362 35,498 15,941
----------------- ----------------- -----------------
Cash and cash equivalents, end of the year $ 35,498 $ 15,941 $ 1,322
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Supplemental cash flow information:
Taxes paid $ 67 $ 11 $ 100
Interest paid 160 164 135
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) DESCRIPTION OF BUSINESS
The Company provides proprietary maintenance, repair and operating
("MRO") supply procurement, 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 subsidiary, Industrial Systems Associates,
Inc. ("ISA"). At December 31, 1998, the Company had 134 In-Plant Store
facilities.
The Company provides the In-Plant Store program in Mexico through two
subsidiaries (collectively "Mexico"). Mexico's operations are conducted
primarily in U.S. dollars, its functional currency, and therefore the Company is
not exposed to any significant foreign currency fluctuations and has no foreign
currency translation adjustments.
On November 11, 1996, the Company announced its intention to sell its
Strategic Supply, Inc. ("SSI") and American Technical Services Group, Inc.
("ATSG") subsidiaries in order to focus more directly on the development of the
Company's In-Plant Store business. SSI was formerly known as SafetyMaster
Corporation ("SafetyMaster") and was the surviving corporation from a 1996
merger of two wholly-owned subsidiaries, SafetyMaster and Lewis Supply
(Delaware), Inc. (the "Merger"). As a result of the Company's decision to sell
SSI and ATSG, the Company has reflected SSI and ATSG as discontinued operations
in the accompanying financial statements. On June 2, 1997, the Company sold
substantially all of the assets and business of SSI (see Note 9). On June 4,
1998, the Company sold substantially all of the assets and business of ATSG (see
Note 9).
On January 28, 1997, the Company acquired all of the outstanding common
stock of INTERMAT International Materials Management Engineers, Inc. and
subsequently changed its name to INTERMAT, Inc. ("INTERMAT") (see Note 8).
INTERMAT(R) provides data management services and develops and supplies software
for MRO inventory cataloging.
(2) SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND USE OF ESTIMATES
The consolidated financial statements include the accounts of Strategic
Distribution, Inc. and subsidiaries. All significant intercompany accounts and
transactions have been eliminated. The preparation of the consolidated financial
statements requires estimates and assumptions that affect amounts reported and
disclosed
F-7
<PAGE>
in the financial statements and related notes. Actual results could differ from
these estimates.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
All highly liquid investments with a maturity of three months or less
when purchased are considered to be cash equivalents. Investments purchased
with an original maturity greater than three months are classified as short-term
investments. At December 31, 1997 and 1998, the Company had investments in cash
equivalents of approximately $15,000,000 and $1,000,000.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial instruments approximates
fair value.
INVENTORIES
Inventories, which consisted solely of finished goods, are stated at
the lower of cost (determined on the first-in, first-out basis) or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized on a straight-line basis over the shorter
of the remaining life of the asset or the lease term. Maintenance and repairs
are charged to expense. Major renewals and improvements are capitalized and
depreciated over the remaining useful lives of the assets. Effective January 1,
1998, the Company adopted Statement of Position ("SOP") 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use".
Estimated useful lives of depreciable assets are as follows:
<TABLE>
<S> <C>
Office equipment & software 3 to 8 years
Leasehold improvements 4 to 8 years
Transportation equipment 5 years
</TABLE>
INTANGIBLE ASSETS
Intangible assets include technology, customer list, trademarks,
assembled workforce and excess of costs over fair value of net assets of
businesses acquired. Technology, trademarks and assembled workforce are being
amortized over a 10 year period. Customer list is being amortized over a 4 year
period. Excess costs over fair value are being amortized over a 10 to 25 year
period. All intangible assets are amortized by the straight-line method. The
Company periodically reviews the value of its intangible assets to determine if
any impairment has occurred. The Company measures any potential impairment by
the projected undiscounted future operating cash flows. If the review indicates
the carrying value of an asset may not be
F-8
<PAGE>
recovered, an impairment loss would be recognized and the asset reduced to its
estimated fair value.
DEFERRED INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of assets and liabilities and their respective tax bases and
operating loss carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
REVENUE RECOGNITION
Revenue is recognized when products are delivered or services are
provided to customers. Revenue from software or product licensing is
generally recognized upon delivery of the software or product to the
customer, unless postcontract customer support remains, in which case those
costs are accrued or a pro rata portion of the revenue is deferred. Effective
January 1, 1998, the Company adopted SOP 97-2, "Software Revenue Recognition".
STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123 "Accounting for Stock-Based
Compensation". The Company measures compensation under its stock option plans
using the intrinsic value approach prescribed under Accounting Principles Board
Opinion No. 25.
SEGMENT INFORMATION
At December 31, 1998, the Company adopted 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 (see Note 16).
COMPREHENSIVE INCOME
At December 31, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in financial statements. For
the years ended December 31, 1996, 1997 and 1998, the Company's comprehensive
loss equals the amounts of net loss reported in the Consolidated Statements of
Operations.
F-9
<PAGE>
(3) ACCOUNTS RECEIVABLE
Accounts receivable is net of an allowance for doubtful accounts of
$238,000 and $460,000 at December 31, 1997 and 1998. For the years ended
December 31, 1996, 1997 and 1998, write-offs charged against the allowance
amounted to $17,000, $16,000 and $795,000.
(4) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1998
------- -------
(in thousands)
<S> <C> <C>
Office equipment & software $ 5,741 $ 9,544
Leasehold improvements 226 355
Transportation equipment 207 208
Systems development in process 1,020 6,074
------- -------
7,194 16,181
Less: Accumulated depreciation
and amortization 1,904 3,327
------- -------
$ 5,290 $12,854
------- -------
------- -------
</TABLE>
For the years ended December 31, 1996, 1997 and 1998, depreciation
expense amounted to $406,000, $1,013,000 and $1,602,000.
(5) INTANGIBLE ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1997 1998
------ ------
(in thousands)
<S> <C> <C>
Excess costs over fair value of
businesses acquired $3,166 $3,166
Technology 3,000 3,000
Customer list 1,700 1,700
Trademarks 1,000 1,000
Assembled workforce 800 800
------ ------
9,666 9,666
Less: Accumulated amortization 1,339 2,387
------ ------
$8,327 $7,279
------ ------
------ ------
</TABLE>
For the years ended December 31, 1996, 1997 and 1998, amortization of
intangible assets amounted to $123,000, $970,000 and $1,048,000.
F-10
<PAGE>
(6) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1998
------- -------
(in thousands)
<S> <C> <C>
Accounts payable $22,482 $22,050
Cash overdraft -- 1,232
Payroll and related expenses 2,293 2,996
Other accrued expenses 1,724 1,688
------- -------
$26,499 $27,966
------- -------
------- -------
</TABLE>
(7) LONG-TERM BORROWINGS
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 December 31, 1998) 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 December 31, 1998, there was $7,500,000 of
borrowings outstanding under the credit facility.
Long-term debt also includes several loans with weighted average
interest rates of 6.3% and 8.0% at December 31, 1997 and 1998. Subordinated debt
consists of a 9.0% note payable to an officer of the Company (see Note 8).
Principal payments due on long-term borrowings during each of the next
four years are: 1999 - $20,000; 2000 - $1,422,000; 2001 - $7,524,000; and 2002 -
$2,000.
(8) ACQUISITION
On January 28, 1997, the Company, through a newly formed subsidiary,
acquired all of the outstanding common stock of INTERMAT. The purchase price
consisted of $10,800,000 in cash, a $1,400,000 subordinated note, and 625,000
newly issued shares of the Company's common stock with a fair market value of
$2,406,000. The method of accounting for the acquisition was the purchase
method. The excess of purchase cost over the fair value of the underlying net
assets acquired was allocated to intangible assets, including in-process
research and development, technology, customer list, trademarks and assembled
workforce, based on their respective fair values as determined by an independent
appraisal. In connection with the
F-11
<PAGE>
acquisition, the Company recorded a charge of approximately $8,000,000 in the
first quarter of 1997, as a result of the write-off of in-process research and
development. The holder of the subordinated note is an officer and director of
the Company.
The results of operations of INTERMAT are included in the Company's
statements of operations from the date of acquisition. The following unaudited
pro forma consolidated results of operations assume the acquisition occurred at
the beginning of the respective years.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1997
---- ----
(in thousands)
<S> <C> <C>
Revenues $ 96,883 $ 171,158
Loss from continuing operations $ (5,050) $ (11,446)
Net loss per common share from
continuing operations $ (0.19) $ (0.37)
</TABLE>
The pro forma consolidated results do not purport to be indicative of
results that would have occurred had the acquisition been in effect for the
periods presented, nor do they purport to be indicative of results that will be
obtained in the future.
(9) DISCONTINUED OPERATIONS
On November 11, 1996, the Company announced its intention to sell SSI
and ATSG. As of December 31, 1996, the Company recorded a $2,000,000 charge to
estimated loss on sale of operations, which included the estimated financial
results of SSI and ATSG through June 30, 1997 (the original anticipated date of
sale of SSI and ATSG), and anticipated transaction costs related to the sales.
On June 2, 1997, the Company sold substantially all of the assets and
business of SSI to DXP Acquisition, Inc., a wholly-owned subsidiary of DXP
Enterprises, Inc. (collectively referred to as "DXP")(excluding accounts
receivable of $5,669,000, which were retained by the Company and which were
substantially collected as of December 31, 1997). DXP also assumed certain
obligations and liabilities of SSI in connection with the sale. Consideration
for the sale consisted of $4,269,000 in cash, promissory notes from DXP in the
aggregate amount of $3,189,000, as adjusted, and an earn-out (contingent
payment), which could result in additional compensation to the Company. Total
consideration in the sale approximated the carrying value of the net assets
divested. However, due to the contingent nature of a portion of the
consideration, the Company recorded a charge of $3,500,000 to loss on sale of
discontinued operations in 1997.
On June 4, 1998, the Company sold substantially all of the assets and
certain liabilities of ATSG to SPEC/ATS, Inc. Consideration for
F-12
<PAGE>
the sale approximated the carrying value of the net assets sold, and consisted
of $1,025,000 in cash, with a final adjustment based on collected accounts
receivable to be determined. 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. In the second quarter of 1997, the
Company recorded a $1,000,000 charge to loss on sale of discontinued operations,
which included estimated losses of ATSG through the date of sale and the
write-off of certain intangible assets in connection with the sale.
Discontinued operations are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1997(a) 1998(b)
---- ------- -------
(in thousands)
<S> <C> <C> <C>
Revenues $ 58,535 $ 31,640 $ 5,011
-------- --------- --------
-------- --------- --------
Loss from operations:
Loss before taxes $ (4,519) $ -- $ --
Income tax expense -- -- --
-------- --------- --------
Loss from operations $ (4,519) $ -- $ --
-------- --------- --------
-------- --------- --------
Loss on sale of operations $ (2,000) $ (4,500) $ --
-------- --------- --------
-------- --------- --------
</TABLE>
(a) Includes SSI through June 2, 1997, the date of sale. Loss from
operations, amounting to approximately $853,000, was charged against the
reserve for disposal of discontinued operations.
(b) Includes ATSG through June 4, 1998, the date of sale. Loss from
operations, amounting to approximately $471,000, was charged against the
reserve for disposal of discontinued operations.
F-13
<PAGE>
The net assets of discontinued operations are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1997 1998
---- ----
(in thousands)
<S> <C> <C>
Current assets $ 3,364 $ 562
Property and equipment, net 227 --
Excess costs over fair value of
businesses acquired, net 722 --
Other assets 49 --
------- -------
Total assets 4,362 562
------- -------
Current liabilities 1,271 --
Reserve for disposal of
discontinued operations 2,176 1,359
------- -------
Total liabilities 3,447 1,359
------- -------
Net assets (liabilities) of
discontinued operations $ 915 $ (797)
------- -------
------- -------
</TABLE>
The net loss from operations for the year ended December 31, 1996
includes a restructuring charge, one-time expenses associated with the Merger
and branch closing expenses totaling approximately $1,362,000. This amount
primarily consists of employee termination benefits, asset write-offs and lease
payments.
The historical results for the discontinued operations include an
allocation for the Company's corporate and interest expense. Interest expense
was allocated based upon the pro rata share of intercompany balances. Corporate
and interest expense allocated amounted to $573,000 and $527,000 for the years
ended December 31, 1996 and 1997. There was no allocation for the year ended
December 31, 1998.
(10) RETIREMENT PLAN
The Company has a qualified defined contribution plan (the "Retirement
Savings Plan") for employees who meet certain eligibility requirements.
Contributions to the Retirement Savings Plan are at the discretion of the Board
of Directors of the Company (the "Board") and are limited to the amount
deductible for Federal income tax purposes. The expense for the Retirement
Savings Plan was approximately $32,000, $71,000 and $168,000 for the years ended
December 31, 1996, 1997 and 1998.
F-14
<PAGE>
(11) INCOME TAXES
A reconciliation of the expected Federal income tax expense from
continuing operations at the statutory rate to the Company's income tax expense
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1996 1997 1998
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Expected tax benefit $ (880) $(3,844) $ (319)
Increase in tax expense
resulting from:
Valuation allowance 818 3,746 198
Goodwill 30 42 46
Other 32 56 75
------- ------- -------
$ -- $ -- $ --
------- ------- -------
------- ------- -------
</TABLE>
The components of the net deferred tax asset were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1998
------ ------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards
(available through periods ending
primarily in 2012) $ 5,464 $ 4,483
Intangible assets 3,179 3,139
Accounts receivable 275 184
Inventories 47 431
Accrued expenses 190 605
Reserve for disposal of
discontinued operations 841 539
Other 65 63
Valuation allowance (8,920) (8,279)
------- -------
Total deferred tax asset 1,141 1,165
Deferred tax liabilities:
Property and equipment 101 125
------- -------
Net deferred tax asset $ 1,040 $ 1,040
------- -------
------- -------
</TABLE>
At December 31, 1997 and 1998, valuation allowances were established,
when necessary, to reduce deferred tax assets to amounts that are more likely
than not to be realized. The net change in the valuation allowance was an
increase of $5,589,000 for the year ended December 31, 1997 and a decrease of
$641,000 for the year ended December 31, 1998.
F-15
<PAGE>
(12) STOCKHOLDERS' EQUITY
The Company has authorized 500,000 shares of preferred stock, par value
$0.10 per share. No shares of preferred stock are currently issued or
outstanding. The Board may at any time fix by resolution any of the powers,
preferences and rights, and the qualifications, limitations, and restrictions of
the preferred stock, which may be issued in series, the designation of each such
series to be fixed by the Board.
On May 23, 1996, the Company sold 7,630,000 shares of common stock in
an underwritten public offering. The net proceeds to the Company were
$55,332,000. A portion of the proceeds was used to repay the Company's bank
indebtedness. The balance of the net proceeds, at the time, was available for
working capital, for general corporate purposes and for possible acquisitions.
On January 28, 1997, the Company issued 625,000 shares of common stock
in connection with the acquisition of INTERMAT (see Note 8).
On May 20, 1997, the Company sold 400,000 shares of common stock to an
officer of the Company at $4.25 per share. Pursuant to a Stock Purchase
Agreement between the officer and the Company, $1,000,000 of the purchase price
was evidenced by a 7% promissory note issued by the officer to the Company. The
note, plus accrued interest thereon, is due May 20, 2002.
On January 10, 1998, the Company sold 40,000 shares of common stock to
an officer of a subsidiary of the Company at $5.06 per share. Pursuant to a
Stock Purchase Agreement between the officer and the Company, $101,000 of the
purchase price was evidenced by a 7% promissory note issued by the officer to
the Company. The note, plus accrued interest thereon, is due January 10, 2003.
On May 8, 1998, the Company sold 75,000 shares of common stock to an
officer of a subsidiary of the Company at $5.38 per share. Pursuant to a Stock
Purchase Agreement between the officer and the Company, $202,000 of the purchase
price was evidenced by a 7% promissory note issued by the officer to the
Company. The note, plus accrued interest thereon, is due May 8, 2003.
On November 16, 1998, the Company initiated a common stock repurchase
program (the "Repurchase Program") under which the Company may repurchase up to
1,500,000 shares of common stock at prevailing market prices within one year of
the commencement of the Repurchase Program. As of December 31, 1998, no shares
of common stock had been repurchased under the Repurchase Program.
(13) NET LOSS PER SHARE
Net loss per common share - basic and diluted are equal for the
years ended December 31, 1996, 1997 and 1998, because the effect of the
assumed issuance of potential shares of common stock is
F-16
<PAGE>
antidilutive. As of December 31, 1996, 1997 and 1998, there were stock options
and warrants outstanding for 2,423,155, 2,574,556 and 3,250,466 shares of common
stock.
(14) STOCK COMPENSATION PLANS
The Company has an Incentive Stock Option Plan (the "1990 Plan") under
which the Board is authorized to grant certain directors, executives, key
employees, consultants and advisers, options for the purchase of up to 3,000,000
shares of common stock. The 1990 Plan provides for the granting of both
incentive stock options and options that do not qualify as incentive stock
options ("nonqualified options"). In the case of each incentive stock option
granted under the 1990 Plan, the option price must not be less than the fair
market value of the common stock at the date of grant. To date, all options
granted under the 1990 Plan are exercisable at not less than the fair market
value of the common stock at the date of grant. A significant portion of the
options granted under the 1990 Plan are exercisable at various rates from 25.0%
to 33.3% per year beginning on the first anniversary of the date of grant, and a
significant portion of the options granted under the 1990 Plan are exercisable
at 33.3% per year beginning on the third anniversary of the date of grant. A
smaller portion of the options granted under the 1990 Plan were exercisable at
date of grant.
The following table summarizes the option information for options
granted under the 1990 Plan (as adjusted for the stock dividend):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICES
--------- ---------
<S> <C> <C>
Options outstanding, December 31, 1995 1,209,753 $1.87
Options granted during 1996 396,500 $6.88
Options canceled or expired (124,060) $4.01
Options exercised (162,371) $1.36
---------
Options outstanding, December 31, 1996 1,319,822 $3.24
Options granted during 1997 516,500 $4.07
Options canceled or expired (240,406) $5.52
Options exercised (552,693) $1.51
---------
Options outstanding, December 31, 1997 1,043,223 $3.99
Options granted during 1998 788,800 $5.17
Options canceled or expired (154,659) $4.79
Options exercised (39,606) $1.80
---------
Options outstanding, December 31, 1998 1,637,758 $4.54
---------
---------
Options exercisable 384,336 $3.10
---------
---------
</TABLE>
F-17
<PAGE>
The Company has a Non-Employee Director Stock Plan (the "Director
Plan") under which the Board is authorized to grant options to purchase up to
150,000 shares of common stock. On June 30, 1996, the Company issued 14,328
shares of common stock under the Director Plan. On December 31, 1996, the
Company granted options for 28,000 shares of common stock under the Director
Plan with an exercise price of $8.00 per share. On December 31, 1997, the
Company granted options for 28,000 shares of common stock under the Director
Plan with an exercise price of $4.50 per share. On December 31, 1998, the
Company granted options for 28,000 shares of common stock under the Director
Plan with an exercise price of $2.50 per share. Options granted under the
Director Plan are immediately exercisable and expire five years from the date of
grant. As of December 31, 1998, no options had been exercised under the Director
Plan.
The Company has an Executive Compensation Plan (the "Executive Plan")
under which the Board is authorized to grant up to 500,000 shares of common
stock. No shares of common stock have been issued under the Executive Plan.
On April 11, 1997, the Company granted, to an officer of the Company,
nonqualified options for 400,000 shares of common stock with an exercise price
of $5.12 per share. The options granted are exercisable at a rate of 25.0% per
year beginning on the first anniversary of the date of grant.
On December 16, 1998, the Company granted to two officers of a
subsidiary of the Company, nonqualified options for a total of 92,000 shares
of common stock with an exercise price of $2.81 per share. 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.
The following table summarizes information about stock options
outstanding under all plans at December 31, 1998.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- ---------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
-------- ------------ ------------ -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.97 - $2.00 177,670 4.3 $1.06 177,670 $1.06
$2.01 - $4.00 742,831 8.4 $3.41 156,140 $3.48
$4.01 - $6.00 1,072,508 8.5 $5.48 138,374 $5.01
$6.01 - $8.00 220,749 6.7 $7.05 96,152 $7.25
--------- -------
2,213,758 8.0 $4.59 568,336 $3.74
--------- -------
--------- -------
</TABLE>
The weighted average fair value of options granted for the years ended
December 31, 1996, 1997 and 1998 was $4.45, $3.43 and $4.85.
F-18
<PAGE>
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation expense has been recognized for the Company's stock
compensation plans. Had compensation expense for the plans been determined based
on the fair value prescribed by SFAS No. 123, the Company's pro forma net loss
and pro forma net loss per share would have been the amounts indicated below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1996 1997 1998
---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
Net loss - as reported $ (9,108) $(15,806) $ (937)
Net loss - pro forma $ (9,788) $(16,766) $(2,549)
Net loss per share - as
reported $ (0.34) $ (0.52) $ (0.03)
Net loss per share - pro forma $ (0.37) $ (0.55) $ (0.08)
</TABLE>
The fair value of the options at date of grant was estimated using the
Black-Scholes model with the following weighted average assumptions:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1997 1998
---- ----- -----
<S> <C> <C> <C>
Expected life (years) 6.00 6.92 7.06
Interest rate 6.61% 6.77% 5.29%
Volatility 72.31% 60.89% 76.53%
Dividend yield 0.00% 0.00% 0.00%
</TABLE>
Warrants to purchase 38,625 shares of common stock for $1.46 per share
were exercised during the year ended December 31, 1998.
Options to purchase an aggregate of 1,036,708 shares of common stock at
a price of $5.82 per share, issued in connection with the 1995 acquisition of
ATSG, were outstanding at December 31, 1996, 1997 and 1998.
(15) LEASE COMMITMENTS
The Company leases real estate, equipment and vehicles for initial
terms of three to eight years. The minimum future rental payments for operating
leases with initial noncancellable lease terms in excess of one year as of
December 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
1999 $1,182
2000 $947
2001 $806
2002 $688
2003 $377
</TABLE>
F-19
<PAGE>
Rental expense for the years ended December 31, 1996, 1997 and 1998,
was approximately $319,000, $809,000 and $1,291,000.
(16) SEGMENT INFORMATION
The Company operates in one reportable segment and substantially all of
its revenues were from the procurement, handling and data management of MRO
supplies for large industrial customers. In 1997, the Company acquired INTERMAT
and its MRO inventory management technology, which strengthened the Company's
MRO procurement and inventory management capabilities. INTERMAT 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 years ended December 31, 1997 and 1998, revenues from data management
services to customers other than In-Plant Store customers amounted to $7,701,000
and $9,302,000.
During the years ended December 31, 1997 and 1998, the Company had
revenues of $2,666,000 and $5,000,000 from customers in foreign countries,
primarily Mexico and Canada. As of December 31, 1997 and 1998, less than 1% of
the Company's long-lived assets were located outside of the United States.
One In-Plant Store customer represented approximately 23% and 15% of
revenues for the years ended December 31, 1996 and 1997, but less than 10% for
the year ended December 31, 1998.
(17) QUARTERLY DATA (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) - UNAUDITED
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
1997 ------- ------- ------- ------- ----
- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 34,506 $ 41,270 $ 45,280 $ 49,724 $ 170,780
--------- --------- --------- ---------- ---------
--------- --------- --------- ---------- ---------
Loss from continuing
operations (a) $ (8,818) $ (1,033) $ (419) $ (1,036) $ (11,306)
Loss on sale of
discontinued
operations -- (4,500) -- -- (4,500)
--------- --------- --------- ---------- ---------
Net loss $ (8,818) $ (5,533) $ (419) $ (1,036) $ (15,806)
--------- --------- --------- ---------- ---------
--------- --------- --------- ---------- ---------
Net loss per common
share(c):
Loss from continuing
operations $ (0.29) $ (0.03) $ (0.01) $ (0.03) $ (0.37)
Loss from
discontinued
operations -- (0.15) -- -- (0.15)
--------- --------- --------- ---------- ---------
Net loss $ (0.29) $ (0.18) $ (0.01) $ (0.03) $ (0.52)
--------- --------- --------- ---------- ---------
--------- --------- --------- ---------- ---------
</TABLE>
F-20
<PAGE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
--------- --------- --------- --------- ---------
1998
- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 50,458 $ 52,404 $ 57,389 $ 59,097 $ 219,348
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income (loss) from
continuing
operations (b) $ (1,056) $ 193 $ 330 $ (404) $ (937)
Loss from discontinued
operations -- -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss) $ (1,056) $ 193 $ 330 $ (404) $ (937)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income (loss) per
common share(c):
Income (loss) from
continuing
operations $ (0.03) $ 0.01 $ 0.01 $ (0.01) $ (0.03)
Loss from
discontinued
operations -- -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss) $ (0.03) $ 0.01 $ 0.01 $ (0.01) $ (0.03)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
(a) The first quarter of 1997 includes a charge of $8,000,000 related to the
write-off of acquired in-process research and development. The fourth
quarter of 1997 includes a charge of $440,000 related to closing one
In-Plant Store.
(b) The fourth quarter of 1998 includes a charge of $1,000,000 related to the
bankruptcy of one In-Plant Store customer.
(c) Each period is computed separately.
(18) RELATED PARTY TRANSACTIONS
During 1996, 1997 and 1998, the Company entered into agreements with a
company of which the Company's Chairman of the Board is an officer, one director
is the sole owner and another director is an officer. The agreements provided
for consulting and other services at fees of $400,000 in 1996 and $200,000 in
1997, and investment transaction services in connection with the sales of SSI
and ATSG, amounting to $265,000 in 1997 and $21,000 in 1998. The agreement in
effect at December 31, 1998, extends to May 31, 2000, and requires monthly
service fees of $12,500, which will be reduced by any investment transaction
fees paid.
(19) UNAUDITED SUBSEQUENT EVENTS
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.
F-21
<PAGE>
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.
F-22
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information contained in the Company's Proxy Statement for the 1999
Annual Meeting of Shareholders, which will be filed not later than 120 days
after December 31, 1998 (the "Proxy Statement"), under the captions "Election of
Directors", "Identification of Executive Officers" and "Section 16(a) Beneficial
Ownership Reporting Compliance" is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the Proxy Statement under the caption
"Executive Compensation" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information contained in the Proxy Statement under the caption
"Security Ownership of Certain Beneficial Owners and Management" is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the Proxy Statement under the captions
"Executive Compensation" and "Transactions with Affiliates" is incorporated
herein by reference.
24
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY. Consolidated
Financial Statements of Company filed with this Report are listed on the
accompanying Index to Financial Statements.
(a) 2. FINANCIAL STATEMENT SCHEDULES. Financial Statement Schedules of
the Company filed with this Report are listed on the accompanying Index to
Financial Statements.
(a) 3. EXHIBITS (References below to an exhibit being filed with a
previous filing made by the Company are included for the purpose of
incorporating such previously filed exhibit by reference to such filing.
Previously unfiled exhibits are those marked with an asterisk.)
<TABLE>
<CAPTION>
Page No.
in Manually
Signed Copy
-----------
<S> <C> <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).
10.1 Form of Strategic Distribution, Inc. --
Amended and Restated 1990 Incentive
Stock Option Plan (incorporated by
reference to Exhibit 10.1 of the Company's
Annual Report on Form 10-K for the fiscal
year ended December 31, 1995).
10.2 Form of Strategic Distribution, Inc. --
Executive Compensation Plan (incorporated by
reference to Exhibit 10.2 of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1996).
</TABLE>
25
<PAGE>
<TABLE>
<S> <C> <C>
10.3 Form of Amended and Restated Strategic Distribution, Inc. 1996 --
Non-Employee Director Stock Plan (incorporated by reference to
Exhibit 10.3 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996).
10.4 Stock Purchase Agreement, dated as of May 12, 1995, between the --
Company and the selling shareholders parties thereto
(incorporated by reference to the Company's May 12, 1995 Current
Report on Form 8-K).
10.5 Agreement and Plan of Merger, dated as of January 28, 1997, by --
and among Strategic Distribution, Inc., INTERMAT Acquisition
Corp., INTERMAT International Materials Management Engineers,
Inc., Jeffery O. Beauchamp, Toni R. Beauchamp, Gregory A. Enders,
Winston Gilpin, Gary Johnson and John Miday (incorporated by
reference to Exhibit 2 of the Company's January 28, 1997 Current
Report on Form 8-K).
10.6 Asset Purchase Agreement among Strategic Supply, Inc., Coulson --
Technologies, Inc. and Strategic Distribution, Inc., DXP
Acquisition, Inc. and DXP Enterprises, Inc. dated May 27, 1997
(incorporated by reference to Exhibit 2.1 of the Company's June
2, 1997 Current Report on Form 8-K).
10.7 Agreement for Sale and Purchase of Assets, dated April 22, 1998, --
by and among Strategic Distribution, Inc., American Technical
Services Group, Inc., ATS Phoenix, Inc. and SPEC/ATS, Inc.
(incorporated by reference to Exhibit 10.2 of the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended June
30, 1998).
10.8 Amendment to Agreement for Sale and Purchase of Assets, dated --
June 4, 1998, amending the Agreement for Sale and Purchase of
Assets described in Exhibit 10.7 (incorporated by reference to
Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended June 30, 1998).
</TABLE>
26
<PAGE>
<TABLE>
<S> <C> <C>
10.9 Loan and Security Agreement, dated as of May 8, 1998, among the --
financial institutions named therein as the lenders, BankAmerica
Business Credit, Inc. as the Agent, Industrial Systems
Associates, Inc. as a Borrower and INTERMAT, Inc. as a Borrower
(incorporated by reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended June
30, 1998).
10.10 Executive Employment Agreement, dated as of April 11, 1997, by --
and between Strategic Distribution, Inc. and John M. Sergey
(incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 1997 (the "June
30, 1997 Form 10-Q"))
10.11 Employment letter, dated as of April 11, 1997, by and between --
Strategic Distribution, Inc. and John M. Sergey (incorporated by
reference to the June 30, 1997 Form 10-Q).
10.12 Stock Purchase Agreement, dated as of April 11, 1997, by and --
between Strategic Distribution, Inc. and John M. Sergey
(incorporated by reference to the June 30, 1997 Form 10-Q).
10.13 Amendment to Stock Purchase Agreement, dated as of May 5, 1997, --
amending the Stock Purchase Agreement dated as of April 11, 1997,
by and between Strategic Distribution, Inc. and John M. Sergey
(incorporated by reference to the June 30, 1997 Form 10-Q).
10.14 Amended Loan and Pledge Agreement, dated as of May 5, 1997, by --
and between Strategic Distribution, Inc. and John M. Sergey
(incorporated by reference to the June 30, 1997 Form 10-Q).
10.15 Secured Non-Recourse Promissory Note, dated May 20, 1997, made --
by John M. Sergey in favor of Strategic Distribution, Inc.
(incorporated by reference to the June 30, 1997 Form 10-Q).
10.16 Non-Qualified Stock Option Agreement, dated as of April 11, --
1997, by and between Strategic Distribution, Inc. and John M.
Sergey (incorporated by reference to the June 30, 1997 Form
10-Q).
</TABLE>
27
<PAGE>
<TABLE>
<S> <C> <C>
21. List of Subsidiaries of the Company *
23. Consent of KPMG LLP *
27. Financial Data Schedule *
</TABLE>
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the last
quarter of 1998.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized,
this 29th day of March, 1999.
Strategic Distribution, Inc.
By: /s/ Andrew M. Bursky
--------------------
Andrew M. Bursky
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of
1934, this report on Form 10-K has been signed below by the following persons in
the capacities and on the date(s) indicated.
<TABLE>
<S> <C>
/s/ Andrew M. Bursky Chairman of the Board and
- ------------------------------- Director
Andrew M. Bursky March 29, 1999
/s/ John M. Sergey President and Chief Executive Officer and
- ------------------------------- Director
John M. Sergey March 29, 1999
/s/ Michael F. Devine III Chief Financial Officer, Secretary and
- ------------------------------- Treasurer
Michael F. Devine March 29, 1999
/s/ Jeffery O. Beauchamp Executive Vice President and
- ------------------------------- Director
Jeffery O. Beauchamp March 29, 1999
/s/ David L. Courtright Controller and
- ------------------------------- Chief Accounting Officer
David L. Courtright March 29, 1999
/s/ William R. Berkley
- ------------------------------- Director
William R. Berkley March 29, 1999
/s/ Arnold W. Donald
- ------------------------------- Director
Arnold W. Donald March 29, 1999
/s/ Catherine B. James
- ------------------------------- Director
Catherine B. James March 29, 1999
/s/ Robert D. Neary
- ------------------------------- Director
Robert D. Neary March 29, 1999
/s/ Jack H. Nusbaum
- ------------------------------- Director
Jack H. Nusbaum March 29, 1999
/s/ Joshua A. Polan
- ------------------------------- Director
Joshua A. Polan March 29, 1999
/s/ Mitchell I. Quain
- ------------------------------- Director
Mitchell I. Quain March 29, 1999
</TABLE>
29
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page No.
in Manually
Signed Copy
-----------
<S> <C> <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).
10.1 Form of Strategic Distribution, Inc. Amended and Restated 1990 --
Incentive Stock Option Plan (incorporated by reference to Exhibit
10.1 of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995).
10.2 Form of Strategic Distribution, Inc. Executive Compensation Plan --
(incorporated by reference to Exhibit 10.2 of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1996).
10.3 Form of Amended and Restated Strategic Distribution, Inc. 1996 --
Non-Employee Director Stock Plan (incorporated by reference to
Exhibit 10.3 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996).
10.4 Stock Purchase Agreement, dated as of May 12, 1995, between the --
Company and the selling shareholders parties thereto
(incorporated by reference to the Company's May 12, 1995 Current
Report on Form 8-K).
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.5 Agreement and Plan of Merger, dated as of January 28, 1997, by --
and among Strategic Distribution, Inc., INTERMAT Acquisition
Corp., INTERMAT International Materials Management Engineers,
Inc., Jeffery O. Beauchamp, Toni R. Beauchamp, Gregory A. Enders,
Winston Gilpin, Gary Johnson and John Miday (incorporated by
reference to Exhibit 2 of the Company's January 28, 1997 Current
Report on Form 8-K).
10.6 Asset Purchase Agreement among Strategic Supply, Inc., Coulson --
Technologies, Inc. and Strategic Distribution, Inc., DXP
Acquisition, Inc. and DXP Enterprises, Inc. dated May 27, 1997
(incorporated by reference to Exhibit 2.1 of the Company's June
2, 1997 Current Report on Form 8-K).
10.7 Agreement for Sale and Purchase of Assets, dated April 22, 1998, --
by and among Strategic Distribution, Inc., American Technical
Services Group, Inc., ATS Phoenix, Inc. and SPEC/ATS, Inc.
(incorporated by reference to Exhibit 10.2 of the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended June
30, 1998).
10.8 Amendment to Agreement for Sale and Purchase of Assets, dated --
June 4, 1998, amending the Agreement for Sale and Purchase of
Assets described in Exhibit 10.7 (incorporated by reference to
Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended June 30, 1998).
10.9 Loan and Security Agreement, dated as of May 8, 1998, among the --
financial institutions named therein as the lenders, BankAmerica
Business Credit, Inc. as the Agent, Industrial Systems
Associates, Inc. as a Borrower and INTERMAT, Inc. as a Borrower
(incorporated by reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended June
30, 1998).
10.10 Executive Employment Agreement, dated as of April 11, 1997, by --
and between Strategic Distribution, Inc. and John M. Sergey
(incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 1997 (the "June
30, 1997 Form 10-Q"))
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.11 Employment letter, dated as of April 11, 1997, by and between --
Strategic Distribution, Inc. and John M. Sergey (incorporated by
reference to the June 30, 1997 Form 10-Q).
10.12 Stock Purchase Agreement, dated as of April 11, 1997, by and --
between Strategic Distribution, Inc. and John M. Sergey
(incorporated by reference to the June 30, 1997 Form 10-Q).
10.13 Amendment to Stock Purchase Agreement, dated as of May 5, 1997, --
amending the Stock Purchase Agreement dated as of April 11, 1997,
by and between Strategic Distribution, Inc. and John M. Sergey
(incorporated by reference to the June 30, 1997 Form 10-Q).
10.14 Amended Loan and Pledge Agreement, dated as of May 5, 1997, by --
and between Strategic Distribution, Inc. and John M. Sergey
(incorporated by reference to the June 30, 1997 Form 10-Q).
10.15 Secured Non-Recourse Promissory Note, dated May 20, 1997, made by --
John M. Sergey in favor of Strategic Distribution, Inc.
(incorporated by reference to the June 30, 1997 Form 10-Q).
10.16 Non-Qualified Stock Option Agreement, dated as of April 11, 1997, --
by and between Strategic Distribution, Inc. and John M. Sergey
(incorporated by reference to the June 30, 1997 Form 10-Q).
21. List of Subsidiaries of the Company 33
23. Consent of KPMG LLP 34
27. Financial Data Schedule --
</TABLE>
32
<PAGE>
EXHIBIT 21
<TABLE>
<CAPTION>
WHOLLY-OWNED UNITED STATES STATE OF
SUBSIDIARIES OF THE COMPANY INCORPORATION
- --------------------------- -------------
<S> <C>
Industrial Systems Associates, Inc. Pennsylvania
Strategic Distribution Canada
Holdings, Inc.
(wholly-owned subsidiary of
Industrial Systems Associates, Inc.) Delaware
INTERMAT, INC. Delaware
American Technical Services Group, Inc. Delaware
National Technical Services Group, Inc.
(wholly-owned subsidiary of
American Technical Services
Group, Inc.) Delaware
Strategic Supply, Inc. Delaware
Coulson Technologies, Inc. Delaware
(wholly-owned subsidiary of
Strategic Supply, Inc.)
FastenMaster Corporation, Inc. Delaware
(wholly-owned subsidiary of
Strategic Supply, Inc.)
WHOLLY-OWNED FOREIGN SUBSIDIARIES COUNTRY
- --------------------------------- -------
Strategic Distribution Services De
Mexico, S. A. De C. V. Mexico
(subsidiary of the Company)
Strategic Distribution Marketing De
Mexico, S. A. De C. V. Mexico
(subsidiary of the Company)
Strategic Distribution (Canada) Company
(subsidiary of Strategic Distribution
Canada Holdings, Inc.) Canada
</TABLE>
33
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Stockholders
Strategic Distribution, Inc.:
We consent to incorporation by reference in the registration statements (No.
33-57578, No. 333-01715 and No. 333-06973) on Form S-8 of Strategic
Distribution, Inc. of our report dated February 24, 1999, relating to the
consolidated balance sheets of Strategic Distribution, Inc. and subsidiaries as
of December 31, 1997 and 1998 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1998, which report appears in the December
31, 1998 Annual Report on Form 10-K of Strategic Distribution, Inc.
KPMG LLP
Philadelphia, Pennsylvania
March 29, 1999
34
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (IDENTIFY
SPECIFIC FINANCIAL STATEMENTS HERE) ART. 5 FDS FOR YEAR 1998 10-K AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,322
<SECURITIES> 0
<RECEIVABLES> 41,819
<ALLOWANCES> 0
<INVENTORY> 31,060
<CURRENT-ASSETS> 76,128
<PP&E> 12,854
<DEPRECIATION> 0
<TOTAL-ASSETS> 99,444
<CURRENT-LIABILITIES> 27,986
<BONDS> 8,948
0
0
<COMMON> 3,129
<OTHER-SE> 94,255
<TOTAL-LIABILITY-AND-EQUITY> 99,444
<SALES> 219,348
<TOTAL-REVENUES> 219,348
<CGS> 170,003
<TOTAL-COSTS> 195,866
<OTHER-EXPENSES> 25,004
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (585)
<INCOME-PRETAX> (937)
<INCOME-TAX> 0
<INCOME-CONTINUING> (937)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (937)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
