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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1999
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-5228
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STRATEGIC DISTRIBUTION, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 22-1849240
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(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
3220 TILLMAN DRIVE, SUITE 200, BENSALEM, PA 19020
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(Address of principal executive offices) (Zip Code)
215-396-3088
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Number of Common Shares outstanding at November 5, 1999: 30,992,210
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TABLE OF CONTENTS
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PAGE NO.
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PART I - FINANCIAL INFORMATION
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ITEM 1
Consolidated Financial Statements:
- Consolidated Balance Sheets - 1
September 30, 1999 (unaudited)
and December 31, 1998
- Consolidated Statements of Operations 2
(unaudited) - Three Months and Nine
Months Ended September 30, 1999 and 1998
- Consolidated Statements of Cash Flows 3
(unaudited) - Nine Months Ended
September 30, 1999 and 1998
- Notes to Consolidated Financial Statements 4
(unaudited)
ITEM 2
Management's Discussion and Analysis of Financial 6
Condition and Results of Operations
ITEM 3
Quantitative and Qualitative Disclosures About
Market Risk 13
PART II - OTHER INFORMATION
ITEM 6
Exhibits and Reports on Form 8-K 14
Signatures 15
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STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
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(unaudited)
<S> <C> <C>
ASSETS
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Current assets:
Cash and cash equivalents $ 1,147 $ 1,322
Accounts receivable, net 52,806 41,819
Current portion of notes receivable - 361
Inventories 40,941 31,060
Prepaid expenses and other current assets 844 401
Deferred income taxes 1,165 1,165
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Total current assets 96,903 76,128
Notes receivable 2,050 2,486
Property and equipment, net 16,860 12,854
Intangible assets, net 6,492 7,279
Other assets 814 697
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Total assets $ 123,119 $ 99,444
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Current liabilities:
Accounts payable and accrued expenses $ 41,190 $ 27,966
Current portion of long-term debt 22 20
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Total current liabilities 41,212 27,986
Long-term debt 20,032 7,548
Subordinated debt to related party 1,400 1,400
Net liabilities of discontinued operations 1,336 797
Deferred income taxes 125 125
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Total liabilities 64,105 37,856
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Stockholders' equity:
Preferred stock, par value $.10 per share.
Authorized: 500,000 shares; issued and outstanding: none - -
Common stock, par value $.10 per share.
Authorized: 50,000,000 shares; issued and
outstanding: 31,380,210 and 31,294,285 shares 3,138 3,129
Additional paid-in capital 94,430 94,255
Accumulated deficit (36,311) (34,443)
Notes receivable from related parties (1,374) (1,303)
Treasury stock, at cost (388,000 and 12,500 shares) (869) (50)
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Total stockholders' equity 59,014 61,588
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Total liabilities and stockholders' equity $ 123,119 $ 99,444
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</TABLE>
See accompanying notes to consolidated financial statements.
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STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
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1999 1998 1999 1998
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Revenues $ 74,353 $ 57,389 $ 212,628 $ 160,251
Cost and expenses:
Cost of materials 59,059 44,204 167,868 124,693
Operating wages and benefits 6,007 4,859 16,989 13,487
Other operating expenses 2,634 1,849 6,550 5,395
Selling, general and administrative
expenses 8,317 6,243 22,525 17,760
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Total costs and expenses 76,017 57,155 213,932 161,335
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Operating income (loss) (1,664) 234 (1,304) (1,084)
Interest income (expense):
Interest expense (372) (33) (792) (99)
Interest income 79 129 228 649
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Interest income (expense), net (293) 96 (564) 550
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Income (loss) before income taxes (1,957) 330 (1,868) (534)
Income tax expense - - - -
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Net income (loss) $ (1,957) $ 330 $ (1,868) $ (534)
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Net income (loss) per common share - basic
and diluted $ (0.06) $ 0.01 $ (0.06) $ (0.02)
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Weighted average number of shares of
common stock outstanding:
Basic 30,989,441 31,283,891 31,079,290 31,214,224
=========== =========== ========== ===========
Diluted 30,989,441 31,425,868 31,079,290 31,214,224
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</TABLE>
See accompanying notes to consolidated financial statements.
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STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine months ended September 30,
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1999 1998
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Cash flows from operating activities:
Net loss $ (1,868) $ (534)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,797 1,972
Changes in operating assets and liabilities:
Short-term investments -- 2,997
Accounts receivable (10,987) (7,844)
Inventories (9,881) (5,072)
Prepaid expenses and other current assets (443) (300)
Accounts payable and accrued expenses 13,224 (1,052)
Other, net 516 (449)
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Net cash used in continuing operations (6,642) (10,282)
Increase in net liabilities of discontinued operations 201 526
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Net cash used in operating activities (6,441) (9,756)
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Cash flows from investing activities:
Proceeds from sale of discontinued operations 338 1,010
Additions of property and equipment (5,852) (5,238)
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Net cash used in investing activities (5,514) (4,228)
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Cash flows from financing activities:
Sale (repurchase) of common stock, net (706) 430
Proceeds from notes payable 12,500 --
Repayment of long-term obligations (14) (515)
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Net cash provided by (used in) financing activities 11,780 (85)
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Decrease in cash and cash equivalents (175) (14,069)
Cash and cash equivalents, beginning of the period 1,322 15,941
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Cash and cash equivalents, end of the period $ 1,147 $ 1,872
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Supplemental cash flow information:
Taxes paid $ 142 $ 47
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Interest paid $ 557 $ 67
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</TABLE>
See accompanying notes to consolidated financial statements.
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STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(unaudited)
1. The accompanying unaudited consolidated financial statements include the
accounts of Strategic Distribution, Inc. and subsidiaries (the "Company"). These
financial statements have been prepared in accordance with the instructions of
Form 10-Q. In the opinion of management, all adjustments (consisting of a normal
and recurring nature) considered necessary for a fair presentation of the
results of operations for the three months and nine months ended September 30,
1999 and 1998 have been included. The statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998. The
results for the three months and nine months ended September 30, 1999 are not
necessarily indicative of the results that may be expected for a full fiscal
year.
2. On November 11, 1996, the Company announced its intention to sell its
Strategic Supply, Inc. subsidiary ("SSI") (which was sold in 1997) and its
American Technical Services Group, Inc. subsidiary ("ATSG") in order to focus
more directly on the development of the Company's In-Plant Store-Registered
Trademark- business. The Company has reflected SSI and ATSG as discontinued
operations in the accompanying financial statements. On June 4, 1998, the
Company sold substantially all of the assets and certain liabilities of ATSG.
Consideration for the sale consisted of $1,363,000 in cash, including $294,000
received in September 1999, in connection with an earn-out.
3. Effective 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 (8.25% as of September 30, 1999) and/or a Eurodollar rate, with a
commitment fee during the term of the agreement which ranges from 0.125% to
0.25% per annum on the unused portion of the credit available. The credit
facility expires on May 8, 2001. The amount that the Company may borrow under
the credit facility is based upon eligible accounts receivable and
inventories. The credit facility contains customary financial and other
covenants and is collateralized by substantially all of the assets, as well
as the pledge of the capital stock, of the Company's subsidiaries. As of
September 30, 1999, there was $20,000,000 of borrowings outstanding under the
credit facility at a weighted average interest rate of 6.84%.
4. For the three months ended September 30, 1998, the weighted average number of
shares used to calculate diluted net income per common share includes the
assumed exercise of stock options equivalent to 141,977 shares under the
treasury stock method. Options to purchase approximately 2,900,000 shares at
prices ranging from $3.45 to $8.00 per share were outstanding during the three
months ended September 30, 1998, but were not included in the computation of
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diluted net income per common share because the market price of the common
shares did not exceed the options' exercise prices for substantially all of the
three consecutive months ending on September 30, 1998. Net loss per common share
- - basic and diluted are equal for the three months ended September 30, 1999 and
the nine months ended September 30, 1999 and 1998, because the effect of the
assumed issuance of common shares is antidilutive. As of September 30, 1999 and
1998, there were stock options outstanding for approximately 4,037,000 and
3,083,000 common shares.
5. The Company operates in one reportable segment and substantially all of its
revenues are derived from the procurement, handling and data management of MRO
supplies for large industrial customers. The Company provides inventory
management technology and services ("data management services") to In-Plant
Store customers and to industrial users other than In-Plant Store customers.
Total revenues derived from data management services is not determinable because
fees charged to In-Plant Store customers do not differentiate data management
services from other In-Plant Store services. During the three months ended
September 30, 1999 and 1998, revenues from data management services to customers
other than In-Plant Store customers amounted to $1,527,000 and $2,418,000.
During the nine months ended September 30, 1999 and 1998, revenues from data
management services to customers other than In-Plant Store customers amounted to
$5,304,000 and $6,290,000.
6. Effective March 11, 1999, the Company adopted an Incentive Stock Option Plan
(the "1999 Plan"). Under the 1999 Plan, the Board is authorized to grant certain
directors, executives and key employees options for the purchase of up to
1,500,000 shares of common stock.
On March 11, 1999, the Company granted to an officer of the Company,
nonqualified options under the 1999 Plan for 400,000 shares of common stock with
an exercise price of $2.81 per share. The options may be exercised in amounts
not to exceed 25.0% per year beginning on the first anniversary of the date of
grant, if the per share selling price of the Company's common stock exceeds
certain benchmarks. The options granted become exercisable in any case on
December 16, 2005.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Certain statements in this Form 10-Q constitute forward-looking
statements, which involve risks and uncertainties. The Company's actual results
in the future could differ significantly from the results discussed or implied
in such forward-looking statements. Factors that could cause or contribute to
such differences include, but are not limited to, those related to the Company's
ability to manage growth, termination of contracts by the Company's customers,
competition in the Company's business, the Company's dependence on key
personnel, the Company's ability to deal with problems associated with the Year
2000 issue and the effects of recession on the Company and its customers. In the
event of an economic downturn, the Company could experience reduced volume of
business from its existing customers, as well as lost volume due to plant
shutdowns or consolidations by the Company's customers.
The Company provides proprietary maintenance, repair and operating ("MRO")
supply procurement, handling and data management solutions to industrial sites,
primarily through its In-Plant Store-Registered Trademark- program. The Company
became a provider of the In-Plant Store program in 1994 and conducts its
operations primarily through its wholly-owned subsidiaries, Industrial Systems
Associates, Inc.-Registered Trademark- ("ISA-Registered Trademark-") and
INTERMAT, Inc. ("INTERMAT-Registered Trademark-"). At September 30, 1999, the
Company had 164 In-Plant Store facilities.
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
project is 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 was substantially completed in the second
quarter of 1999. Communications installations, establishment of a dedicated
telecommunications network with its data processing center, acquisition of
additional hardware, deployment of the operating systems to the Company's
In-Plant Store sites and integration with the financial systems commenced in the
second quarter. During the third quarter of 1999, the Company experienced
unanticipated difficulties with data conversion from existing systems and in the
flow and integration of information into the financial systems. This resulted in
increased overtime, temporary labor, travel and outside consultant expenses. The
Company also extended the deployment schedule into 2000 in order to allow
sufficient time and resources to successfully complete the project. As of
September 30, 1999, the In-Site operating system deployment was approximately
30% complete and is expected to be fully deployed by June 30, 2000.
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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>
Three Months Ended Nine Months Ended
September 30, September 30,
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1999 1998 1999 1998
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(dollars in thousands)
<S> <C> <C> <C> <C>
Revenues $74,353 $57,389 $212,628 $160,251
100.0% 100.0% 100.0% 100.0%
Cost of materials 79.4 77.0 79.0 77.8
Operating wages and benefits 8.1 8.5 8.0 8.4
Other operating expenses 3.5 3.2 3.1 3.4
Selling, general and administrative
expenses 11.2 10.9 10.6 11.1
Operating income (loss) (2.2) 0.4 (0.7) (0.7)
Interest income (expense), net (0.3) 0.1 (0.3) 0.3
Net income (loss) (2.5) 0.5 (1.0) (0.4)
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
Revenues for the three months ended September 30, 1999 increased 29.6%
to $74,353,000 from $57,389,000 for the three months ended September 30, 1998.
This growth resulted primarily from the maturation of In-Plant Store facilities
opened over the last six quarters in the United States and Mexico. In-Plant
Store facilities operated in Mexico increased to approximately 6% of revenues
for the three months ended September 30, 1999 from approximately 1% for the
three months ended September 30, 1998. The growth in the In-Plant Store business
more than offset a decline in revenues from data management services to
customers other than In-Plant Store customers. The number of In-Plant Store
facilities increased from 131 at September 30, 1998 to 164 at September 30,
1999.
Cost of materials as a percentage of revenues increased to 79.4% for
the three months ended September 30, 1999 from 77.0% in 1998. The increase was
primarily due to growth in the Company's Mexican In-Plant Store facilities,
which have a higher percentage of material costs than stores operated in the
United States, and the decline in data management service revenues. Direct
material costs associated with data management services are insignificant, so
the consolidated percentage may vary depending on the revenue mix. Cost of
materials as a percentage of revenues for the United States In-Plant Store
operations for the three months ended September 30, 1999 was comparable to 1998.
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Operating wages and benefits expenses as a percentage of revenues
decreased to 8.1% for the three months ended September 30, 1999 from 8.5% in
1998. The decrease reflects utilization of improved software technology at
INTERMAT to increase productivity and growth in the Mexican In-Plant Store
business, which has lower wages as a percentage of revenues than the United
States business. These factors offset increased expenses at ISA from changes in
employee benefits and overtime related to the implementation of In-Site.
Other operating expenses as a percentage of revenues increased to 3.5%
for the three months ended September 30, 1999 from 3.2% in 1998. The increase
reflects higher costs for the In-Site telecommunications network and higher
temporary labor costs in connection with the implementation of In-Site.
Selling, general and administrative expenses as a percentage of
revenues increased to 11.2% for the three months ended September 30, 1999 from
10.9% in 1998. The Company experienced increased costs as a percentage of
revenues primarily as a result of In-Site infrastructure costs, temporary labor
and travel in connection with the implementation of In-Site, changes in the
Company's employee benefits and new marketing initiatives.
Interest expense, net was $293,000 for the three months ended September
30, 1999 compared to interest income, net of $96,000 for the three months ended
September 30, 1998. In late 1998, the Company began borrowing against its credit
facility as funds available to earn interest income were depleted. Funds were
used to finance the working capital requirements of new In-Plant Store
facilities and for capital expenditures.
Profitability from growth in the Company's operations was negatively
impacted by difficulties experienced in the In-Site implementation and the
decline in higher margin data management services. This resulted in an operating
loss of $1,664,000 for the three months ended September 30, 1999 compared to
operating income of $234,000 in 1998. After interest coverage, net loss for the
three months ended September 30, 1999 was $1,957,000, compared to net income
of $330,000 in 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
Revenues for the nine months ended September 30, 1999 increased 32.7%
to $212,628,000 from $160,251,000 for the nine months ended September 30, 1998.
This growth resulted primarily from the maturation of In-Plant Store facilities
opened over the last six quarters in the United States and Mexico. In-Plant
Store facilities operated in Mexico increased to approximately 5% of revenues
for the nine months ended September 30, 1999 from less than 1% for the nine
months ended September 30, 1998. The growth in the In-Plant Store business more
than offset a decline in revenues from data management services to customers
other than In-Plant Store customers. The number
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of In-Plant Store facilities increased from 131 at September 30, 1998 to 164 at
September 30, 1999.
Cost of materials as a percentage of revenues increased to 79.0% for
the nine months ended September 30, 1999 from 77.8% in 1998. The increase was
primarily due to growth in the Company's Mexican In-Plant Store facilities,
which have a higher percentage of material costs than stores operated in the
United States, and the decline in data management service revenues. Direct
material costs associated with data management services are insignificant, so
the consolidated percentage may vary depending on the revenue mix. The increase
was partially offset by lower material costs sold to United States In-Plant
Store customers achieved by leveraging the Company's expanding purchasing power.
Operating wages and benefits expenses as a percentage of revenues
decreased to 8.0% for the nine months ended September 30, 1999 from 8.4% in
1998. The decrease reflects growth in the Mexican In-Plant Store business, which
has lower wages as a percentage of revenues than the United States business.
Also contributing was lower direct wages as a percentage of revenues at ISA,
partially offset by higher costs from changes in employee benefits and overtime
related to the implementation of In-Site. ISA's lower percentage reflects
its revenue mix, as wages at more mature In-Plant Store facilities are generally
lower as a percentage of revenues than stores in the start-up phase.
Other operating expenses as a percentage of revenues decreased to 3.1%
for the nine months ended September 30, 1999 from 3.4% in 1998. The decrease
reflects a smaller percentage of the Company's revenues generated from sales of
data management services by its INTERMAT subsidiary for the 1999 period as
compared to 1998. INTERMAT's results of operations have a much higher percentage
of these expenses than In-Plant Store operations. This decrease offset increased
expenses at ISA from changes in employee benefits and overtime related to the
implementation of In-Site.
Selling, general and administrative expenses as a percentage of
revenues decreased to 10.6% for the nine months ended September 30, 1999 from
11.1% in 1998. The decrease was primarily due to growth in the Company's Mexican
business, which has a lower percentage of these costs than the United States
business, and the decline in data management service revenues at INTERMAT, which
has a higher percentage of these costs than the United States business. ISA's
selling, general and administrative expenses as a percentage of revenues for the
nine months ended September 30, 1999 were comparable to 1998, despite growth in
the business, and reflected higher costs for In-Site infrastructure, temporary
labor and travel in connection with the implementation of In-Site, changes in
the Company's employee benefits and new marketing initiatives.
Interest expense, net was $564,000 for the nine months ended September
30, 1999 compared to interest income, net of $550,000 for the nine months ended
September 30, 1998. In late 1998 the Company
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began borrowing against its credit facility as funds available to earn interest
income were depleted. Funds were used to finance the working capital
requirements of new In-Plant Store facilities and for capital expenditures.
Growth in the Company's operations was negatively impacted by
difficulties experienced in the In-Site implementation and the decline in
higher margin data management services. This resulted in an operating loss of
$1,304,000 for the nine months ended September 30, 1999 compared to an
operating loss of $1,084,000 in 1998. After interest coverage, net loss for
the nine months ended September 30, 1999 was $1,868,000, compared to net
loss of $534,000 in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Effective May 8, 1998, the Company entered into the credit facility
providing maximum borrowings of $50,000,000. As of September 30, 1999, there
was $20,000,000 of borrowings outstanding under the credit facility bearing
interest at a weighted average rate of 6.84%. Borrowings under the facility
are expected to be used primarily to fund working capital requirements for
the expansion of the In-Plant Store program.
On June 4, 1998, the Company sold substantially all of the assets and
certain liabilities of ATSG. Consideration for the sale consisted of $1,363,000
in cash, including $294,000 received in September 1999, in connection with an
earn-out.
The net cash used in operating activities was $6,441,000 for the
nine months ended September 30, 1999 compared to net cash used of $9,756,000
in 1998. The decrease in cash used in operations resulted primarily from a
lower increase in net working capital requirements in 1999 as compared to
1998, for the Company's In-Plant Store program. In 1998, the Company also
used available funds to reduce accounts payable.
The net cash used in investing activities was $5,514,000 for the nine
months ended September 30, 1999 compared to $4,228,000 in 1998. The increase
reflects higher expenditures for computer systems and related equipment in 1999.
At September 30, 1999, the total additional capital spending necessary to
complete the In-Site project was estimated to be approximately $1,000,000. Also,
a significant portion of the proceeds from the sale of ATSG was received during
the nine months ended September 30, 1998.
The net cash provided by financing activities was $11,780,000 for the
nine months ended September 30, 1999 compared to net cash used of $85,000 in
1998. In 1999, cash was provided primarily from the Company's credit facility.
$819,000 of the cash was used to repurchase 375,500 shares of the Company's
common stock at prevailing market prices under a common stock repurchase program
initiated in 1998. The net cash used in 1998 included payment of a $500,000 note
to an officer of the Company.
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The Company believes that cash on hand, cash generated from future
operations, and cash from the credit facility will generate sufficient funds to
permit the Company to support the anticipated expansion of the In-Plant Store
program and completion of the In-Site project.
YEAR 2000 ISSUE
The Year 2000 issue arises from the fact that many existing computer
software programs use only two digits to identify the year in date fields and,
as such, could fail or create erroneous results by or at the Year 2000.
1. The Company's State of Readiness
In late 1997, the Company began a planned project (In-Site-TM-) 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.
Financial systems were operational effective January 1, 1999. Development of
the operating systems was substantially completed in the second quarter of 1999.
Communications installations, establishment of a dedicated telecommunications
network with its data processing center, acquisition of additional hardware,
deployment of the operating systems to the Company's In-Plant Store sites and
integration with the financial systems commenced during the second quarter and
is expected to be complete by June 30, 2000. The Company extended the deployment
schedule into 2000 in order to allow sufficient time and resources to
successfully complete the project. 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 for In-Plant store sites not converted to In-Site in 1999.
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. As of September 30, 1999, hardware requiring replacement or upgrade
was not significant and will be completed during the fourth quarter of 1999. 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 substantially
completed its evaluation and remediation, where necessary, as of June 30, 1999.
As of September 30, 1999, the Company had not found any major non-technology
system under its control to be Year 2000 deficient and the Company does not
believe that any of these systems create material risks for the Company.
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The Company's In-Plant Store facilities 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 contacted each of its customers and lessors to determine
their Year 2000 readiness. The Company completed this process as of June 30,
1999 and found no significant Year 2000 issues. 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 conducted a survey
of its remaining suppliers, with particular emphasis on existing "single source"
suppliers. As of September 30, 1999, the Company was substantially complete in
evaluating the results of the survey and has found no significant Year 2000
issues. The Company has contacted its telecommunications providers and has been
advised that their systems are Year 2000 compliant.
2. The Costs to Address the Company's Year 2000 Issues
Costs associated with the Company's Year 2000 compliance effort, which
exclude its planned systems replacement project, are not expected to be
material. Upgrade or replacement of Year 2000 deficient computers will be
completed during 1999. Salaries, benefits and other costs of the Company's
personnel evaluating its Year 2000 readiness have not been measured and have
been expensed as incurred.
3. The Risks of the Company's Year 2000 Issues
Failure to identify and correct Year 2000 problems could result in
interruptions in, or failures of, certain normal business activities. Factors
that could cause or contribute to such failures include, but are not limited to,
failure to complete the Company's systems replacement project as scheduled,
inability to procure 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 for
stores not converted in 1999. The Company has substantially completed the
process of identifying "single source" suppliers that may not be Year 2000
compliant and, where necessary, developing alternative supply sources as of
September 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
- 12 -
<PAGE>
segment of its telecommunications network, the Company has the ability to
transfer data using standard modem technology. The Company believes business
interruptions resulting from failures of its customers' systems are beyond its
control.
The Company believes that its efforts to ensure Year 2000 readiness, in
conjunction with its systems replacement project, will significantly reduce the
risk associated with Year 2000 systems failures. However, due primarily to
uncertainties surrounding the Year 2000 readiness of third parties, there can be
no assurance that Year 2000 systems failures will not occur.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any material exposure to market risk
associated with activities in derivative financial instruments, other financial
instruments and derivative commodity instruments.
- 13 -
<PAGE>
PART II
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). Exhibits:
3.1 Second Restated Certificate of
Incorporation of the Company filed June
21, 1996 with the Secretary of State of
the State of Delaware (incorporated by
reference to Exhibit 3.2 of the Company's
Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1996).
3.2 Amended and Restated Bylaws of the Company,
dated July 24, 1986, as amended
(incorporated by reference to Exhibits 3.2
and 3.2(a) of the Company's Annual Report
on Form 10-K for the fiscal year ended
December 31, 1995).
4.1 The instruments defining the rights of
holders of the long-term debt securities of
the Company are omitted pursuant to
Section (b)(4)(iii)(A) of Item 601 of
Regulation S-K. The Company agrees to
furnish supplementary copies of these
instruments to the Commission upon request.
27 Financial Data Schedule
(b). Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the third quarter
of 1999.
- 14 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Strategic Distribution, Inc.
Date: November 9, 1999 By: /S/ JOHN M. SERGEY
-------------------------
John M. Sergey
President and Chief
Executive Officer
Date: November 9, 1999 By: /S/ DAVID L. COURTRIGHT
---------------------------
David L. Courtright,
Controller and
Chief Accounting Officer
- 15 -
<PAGE>
EXHIBIT INDEX
3.1 Second Restated Certificate of
Incorporation of the Company filed June
21, 1996 with the Secretary of State of
the State of Delaware (incorporated by
reference to Exhibit 3.2 of the Company's
Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1996).
3.2 Amended and Restated Bylaws of the Company,
dated July 24, 1986, as amended
(incorporated by reference to Exhibits 3.2
and 3.2(a) of the Company's Annual Report
on Form 10-K for the fiscal year ended
December 31, 1995).
4.1 The instruments defining the rights of
holders of the long-term debt securities of
the Company are omitted pursuant to
Section (b)(4)(iii)(A) of Item 601 of
Regulation S-K. The Company agrees to
furnish supplementary copies of these
instruments to the Commission upon request.
27 Financial Data Schedule
- 16 -
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<NAME> STRATEGIC DISTRIBUTION INC.
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