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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, 2000
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________________ to _____________________
Commission file number 0-5228
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STRATEGIC DISTRIBUTION, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 22-1849240
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3220 TILLMAN DRIVE, SUITE 200, BENSALEM, PA 19020
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(Address of principal executive offices) (Zip Code)
215-633-1900
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ -----
Number of Common Shares outstanding at November 8, 2000: 30,912,210
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TABLE OF CONTENTS
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PAGE NO.
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PART I - FINANCIAL INFORMATION
<S> <C> <C>
ITEM 1
Consolidated Financial Statements:
- Consolidated Balance Sheets - 1
September 30, 2000 (unaudited)
and December 31, 1999
- Consolidated Statements of Operations 2
(unaudited) - Three Months and Nine
Months Ended September 30, 2000 and 1999
- Consolidated Statements of Cash Flows 3
(unaudited) - Nine Months Ended
September 30, 2000 and 1999
- Notes to Consolidated Financial Statements 4
(unaudited)
ITEM 2
Management's Discussion and Analysis of Financial 7
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
</TABLE>
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STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,365 $ 1,508
Accounts receivable, net 66,646 53,137
Current portion of notes receivable 1,333 583
Inventories 61,807 46,458
Prepaid expenses and other current assets 468 675
Deferred income taxes 2,866 10,555
--------- ---------
Total current assets 134,485 112,916
Notes receivable 674 1,424
Property and equipment, net 13,789 17,273
Intangible assets, net 2,084 6,230
Other assets 870 682
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Total assets $ 151,902 $ 138,525
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 49,031 $ 40,264
Current portion of long-term debt 23 1,422
Net liabilities of discontinued operations 2,249 1,230
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Total current liabilities 51,303 42,916
Long-term debt 15,608 29,926
Deferred income taxes 72 120
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Total liabilities 66,983 72,962
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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 31,380,210 shares 3,138 3,138
Additional paid-in capital 95,184 95,184
Accumulated deficit (11,052) (30,516)
Notes receivable from related parties (1,303) (1,374)
Treasury stock, at cost (468,000 and 388,000 shares) (1,048) (869)
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Total stockholders' equity 84,919 65,563
--------- ---------
Total liabilities and stockholders' equity $ 151,902 $ 138,525
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
-1-
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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,
----------------------------------- ---------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 85,895 $ 74,353 $ 264,021 $ 212,628
Cost and expenses:
Cost of materials 73,036 59,059 216,752 167,868
Operating wages and benefits 6,866 6,007 20,593 16,989
Other operating expenses 2,310 2,634 7,482 6,550
Selling, general and administrative expenses 8,470 8,317 24,962 22,525
Employment contract settlement and asset
impairment expenses 3,098 -- 3,098 --
------------ ------------ ------------ ------------
Total costs and expenses 93,780 76,017 272,887 213,932
------------ ------------ ------------ ------------
Operating loss (7,885) (1,664) (8,866) (1,304)
Gain on sale of subsidiary -- -- 43,185 --
Interest income (expense):
Interest expense (254) (372) (853) (792)
Interest income 35 79 277 228
------------ ------------ ------------ ------------
Interest expense, net (219) (293) (576) (564)
------------ ------------ ------------ ------------
Income (loss) before income taxes (8,104) (1,957) 33,743 (1,868)
Income tax benefit (expense) 2,535 -- (13,629) --
------------ ------------ ------------ ------------
Income (loss) from continuing operations (5,569) (1,957) 20,114 (1,868)
Loss on sale of discontinued operations, net of tax -- -- (650) --
============ ============ ============ ============
Net income (loss) $ (5,569) $ (1,957) $ 19,464 $ (1,868)
============ ============ ============ ============
Net income (loss) per common share - basic and diluted
Income (loss) from continuing operations $ (0.18) $ (0.06) $ 0.65 $ (0.06)
Loss from discontinued operations -- -- (0.02) --
------------ ------------ ------------ ------------
Net income (loss) $ (0.18) $ (0.06) $ 0.63 $ (0.06)
============ ============ ============ ============
Weighted average number of shares of common
stock outstanding:
Basic 30,912,210 30,989,441 30,937,611 31,079,290
============ ============ ============ ============
Diluted 30,912,210 30,989,441 30,967,808 31,079,290
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
- 2 -
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STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine months ended September 30,
--------------------------------
2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) from continuing operations $ 20,114 $ (1,868)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 3,291 2,797
Employment contract settlement and asset impairment 3,098 --
Gain on sale of subsidiary (43,185) --
Deferred income taxes 7,641 --
Changes in operating assets and liabilities:
Accounts receivable (15,577) (10,987)
Inventories (15,349) (9,881)
Prepaid expenses and other current assets 68 (443)
Accounts payable and accrued expenses 7,914 13,224
Other, net (352) 516
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Net cash used in continuing operations (32,337) (6,642)
Discontinued operations:
Net loss (650) --
Increase in net liabilities 1,019 201
-------- --------
Net cash used in operating activities (31,968) (6,441)
Cash flows from investing activities:
Proceeds from sale of business, net 50,356 338
Additions of property and equipment (2,707) (5,852)
-------- --------
Net cash provided by (used in) investing activities 47,649 (5,514)
-------- --------
Cash flows from financing activities:
Repurchase of common stock (108) (706)
Proceeds from (repayment of) notes payable (14,300) 12,500
Repayment of long-term obligations (1,416) (14)
-------- --------
Net cash provided by (used in) financing activities (15,824) 11,780
-------- --------
Decrease in cash and cash equivalents (143) (175)
Cash and cash equivalents, beginning of the period 1,508 1,322
-------- --------
Cash and cash equivalents, end of the period $ 1,365 $ 1,147
======== ========
Supplemental cash flow information:
Taxes paid $ 4,837 $ 142
======== ========
Interest paid $ 1,116 $ 557
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
- 3 -
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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 (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, 2000 and 1999 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, 1999. The results for the three months and nine months ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for a full fiscal year.
2. On March 2, 2000, the Company completed the sale of its INTERMAT, Inc.
subsidiary ("INTERMAT") to Project Software & Development, Inc. ("PSDI") for
$55,000,000 in cash. The Company realized a gain on sale of the subsidiary of
$43,185,000, or approximately $26,544,000 after tax. The disposition was made
pursuant to the terms of the Stock Purchase Agreement between the Company and
PSDI, dated as of January 11, 2000 and as amended by Amendment No. 1 to Stock
Purchase Agreement, dated as of February 29, 2000.
3. Under terms of a 1997 sale of a business, the Company is required to
repurchase certain inventory of the sold business that remained as of June 2,
2000. During June 2000, the Buyer notified the Company that the amount of such
inventory was approximately $2,200,000. Based on data provided by the Buyer, the
Company believes the value of such inventory to be less than the asserted amount
and is in the process of evaluating the claim. The Company believes that it has
adequately provided for its obligations under the contract and that any
liability resulting from the claim will not have a material impact to its
consolidated financial position or results of operations.
4. During the three months ended September 30, 2000, the Company's former Chief
Executive Officer resigned and the Company recorded a charge of $1,514,000
related to settlement of his employment contract. Under terms of the agreement,
the Company is obligated to pay salary continuation and benefits through May 1,
2003.
4
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5. During the three months ended September 30, 2000, the Company recorded a
charge of $1,584,000 related to the write-down of certain fixed assets. The
impaired assets were a document processing and imaging system, software
developed primarily for interfaces between the Company's legacy operating
systems and certain client systems, and electronic and print user reference
materials for the Company's In-Site-TM- ERP system. The Company has seen
rapid advances in technology related to its ERP system software. In order to
maintain a software environment scalable for future business expansion and
readily adaptable to software upgrades, the Company strategically evaluated
use of its development resources and determined that modification of the
document processing system and legacy interface software for use with the
current ERP system was not cost effective. The Company has also dedicated
resources to improve system speed and simplify certain processes for users.
In conjunction with software design and business process changes during the
three months ended September 30, 2000, the Company determined that its user
reference materials were outdated. Accordingly, the Company replaced and
reprinted the materials in a format that will allow for future changes to be
documented and incorporated more efficiently. The charge to operations during
the three months ended September 30, 2000 reflects the unamortized net book
value of the assets, which the Company no longer uses and which have no
future benefit to the Company.
6. The Company has a revolving Loan and Security Agreement (the "credit
facility") with its bank, providing maximum borrowings of $50,000,000.
Interest on the borrowings is variable at margins up to 1.0% over the bank's
reference rate (9.5% as of September 30, 2000) and/or a Eurodollar rate, with
a commitment fee of 0.25% per annum on the unused portion of the credit
available. Effective July 21, 2000, the credit facility was amended to extend
the term to May 8, 2002 and to reduce the effective interest rate on
borrowings up to $25,000,000. The credit facility is collateralized by
substantially all of the assets of the Company and is subject to certain
financial covenants when borrowings exceed $25,000,000. As of September 30,
2000, there was $15,600,000 of borrowings outstanding under the credit
facility at a weighted average interest rate of 8.5%.
7. Net loss per common share - basic and diluted are equal for the three months
ended September 30, 2000 and 1999, and the nine months ended September 30, 1999,
because the effect of the assumed issuance of potential shares of common stock
is antidilutive. For the nine months ended September 30, 2000, the weighted
average number of shares used to calculate diluted net income per common share
includes the assumed exercise of stock options equivalent to 30,197 shares under
the treasury stock method. Options to purchase approximately 2,722,000 shares at
prices ranging from $1.70 to $8.00 per share were outstanding during the nine
months ended September 30, 2000, but were not included in the computation of
diluted net income per common share because the market price of the common
shares did not exceed the options' exercise prices for substantially all of the
three consecutive months ending on September 30, 2000. As of September 30, 2000
and 1999, there were stock options outstanding for approximately 2,925,000 and
4,037,000 common shares.
5
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8. 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(R) customers and previously provided such services 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. Data management services to customers other
than In-Plant Store customers were provided primarily through INTERMAT.
During the three months ended September 30, 2000 and 1999, revenues from data
management services to customers other than In-Plant Store customers amounted
to $0 and $1,527,000. During the nine months ended September 30, 2000 and
1999, revenues from data management services to customers other than In-Plant
Store customers amounted to $1,463,000 and $5,304,000
6
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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, and the effects of recession on the Company and its customers. In the
event of an economic downturn, the Company could experience reduced volume of
business from its existing customers, as well as lost volume due to plant
shutdowns or consolidations by the Company's customers.
The Company provides proprietary maintenance, repair and operating
("MRO") supply procurement, handling and data management solutions to industrial
sites, primarily through its In-Plant Store(R) program.
SALE OF SUBSIDIARY
On March 2, 2000, the Company completed the sale of INTERMAT for
$55,000,000 in cash. The Company realized a gain on sale of subsidiary of
$43,185,000, or approximately $26,544,000 after tax, on the transaction. In
conjunction with the sale, the Company entered into a License and Services
Agreement with INTERMAT that allows the Company to continue to use both current
and future INTERMAT technology in the In-Plant Store operation. A portion of the
net proceeds from the INTERMAT sale transaction was used to repay all
outstanding bank borrowings as of March 2, 2000. The balance of the net proceeds
was used to pay federal tax deposits in connection with the sale and to fund the
expansion of the In-Plant Store program.
SYSTEMS IMPLEMENTATION
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. The new
systems are referred to as In-Site-TM- systems. 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. Communications installations, establishment of a dedicated
telecommunications network with the Company's data processing center,
acquisition of additional hardware, deployment of the operating
7
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systems to the Company's In-Plant Store sites and integration with the financial
systems commenced in the second quarter of 1999. During the second half 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. The Company also extended the deployment schedule in order to
allow sufficient time and resources to successfully complete the project. The
implementation problems and schedule changes have resulted in increased
overtime, temporary labor, travel and outside consultant expenses. As of
September 30, 2000, more than 90% of the Company's In-Plant Store locations
were utilizing the In-Site operating system. Conversion of the remaining sites
has been postponed until 2001, in order to improve the Company's operating
processes at existing In-Plant Store sites and to ensure that these sites are
technologically equipped for high service levels.
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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2000 1999 2000 1999
---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C>
Revenues $ 85,895 $ 74,353 $ 264,021 $ 212,628
100.0% 100.0% 100.0% 100.0%
Cost of materials 85.0 79.4 82.1 79.0
Operating wages and benefits 8.0 8.1 7.8 8.0
Other operating expenses 2.7 3.5 2.8 3.1
Selling, general and administrative
expenses 9.9 11.2 9.5 10.6
Employment contract settlement and
asset impairment expenses 3.6 -- 1.2 --
Operating loss (9.2) (2.2) (3.4) (0.7)
Gain on sale of subsidiary -- -- 16.4 --
Interest expense, net (0.2) (0.3) (0.2) (0.3)
Income (loss) before income taxes (9.4) (2.5) 12.8 (1.0)
Income tax benefit (expense) 2.9 -- (5.2) --
Income (loss) from continuing operations (6.5) (2.5) 7.6 (1.0)
Loss on sale of discontinued
operations, net of tax -- -- (0.3) --
Net income (loss) (6.5) (2.5) 7.3 (1.0)
</TABLE>
8
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THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Revenues for the three months ended September 30, 2000 increased
15.5% to $85,895,000 from $74,353,000 for the three months ended September
30, 1999. This growth resulted primarily from the maturation of In-Plant
Store facilities opened over the last six quarters. Revenues for the three
months ended September 30, 2000 decreased by 5.5% when compared to the three
months ended June 30, 2000. This decrease is principally attributable to the
termination of certain In-Plant Store site contracts. These terminations
reflect several client plant shut downs, performance difficulties related to
the installation and operation of In-Site, and a number of sites producing
less than acceptable levels of operating income. During the three months
ended September 30, 2000 and 1999, three In-Plant Store customers, in the
aggregate, comprised approximately 29.7% and 21.7% of the Company's revenues
although no customer exceeded 10% in 1999. One of the In-Plant Store
customers represented approximately 17.3% of revenues for the three months
ended September 30, 2000.
Cost of materials as a percentage of revenues increased to 85.0% for
the three months ended September 30, 2000 from 79.4% in 1999. Approximately 3.2%
of the increase relates to significant charges recorded during the period
related to the termination of certain unprofitable In-Plant Store sites. Cost of
materials as a percentage of revenues for the In-Plant Store business was
comparable to the three months ended June 30, 2000 before consideration of the
significant charges. The remainder of the increase was primarily due to lower
data management service revenues as a result of the first quarter 2000 sale of
INTERMAT. Direct material costs associated with data management services were
insignificant.
Operating wages and benefits expenses as a percentage of revenues
decreased to 8.0% for the three months ended September 30, 2000 from 8.1% in
1999. This decrease reflects the decline in data management service revenues.
Operating wages and benefits associated with data management services were
historically higher as a percentage of revenues than those associated with
In-Plant Store operations. The decrease was partially offset by increased
wages and benefits for the Mexico In-Plant Store operations necessary to
attract and retain qualified operating personnel to manage growth in the
business.
Other operating expenses as a percentage of revenues decreased to 2.7%
for the three months ended September 30, 2000 from 3.5% in 1999. The decrease
reflects the decline in data management service revenues. Other operating
expenses associated with data management services were historically higher as a
percentage of revenues than those associated with In-Plant Store operations. The
decrease was partially offset by higher costs for In-Site systems, including
amortization of capitalized costs and telecommunications network costs.
Selling, general and administrative expenses as a percentage of
revenues decreased to 9.9% for the three months ended September 30, 2000 from
11.2% in 1999. The decrease was primarily due to the
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decline in data management service revenues as a result of the first quarter
2000 sale of INTERMAT, which had a significantly higher percentage of these
costs than the In-Plant Store business. In-Plant Store selling, general and
administrative expenses for the three months ended September 30, 2000, as a
percentage of revenues, were slightly lower than 1999, as the Company reduced
temporary labor related to the implementation of In-Site systems.
During the three months ended September 30, 2000, the Company
recorded non-recurring charges of $3,098,000 or 3.6% of revenues. The
Company's former Chief Executive Officer resigned in this quarter and the
Company recorded a charge of $1,514,000 related to settlement of his
employment contract. The Company also recorded a charge of $1,584,000 related
to the write-down of certain impaired fixed assets. The impaired assets were
a document processing and imaging system, software developed primarily for
interfaces between the Company's legacy operating systems and certain client
systems, and electronic and print user reference materials for the Company's
In-Site-TM- ERP system. The Company has seen rapid advances in technology
related to its ERP system software. In order to maintain a software
environment scalable for future business expansion and readily adaptable to
software upgrades, the Company strategically evaluated use of its development
resources and determined that modification of the document processing system
and legacy interface software for use with the current ERP system was not
cost effective. The Company has also dedicated resources to improve system
speed and simplify certain processes for users. In conjunction with software
design and business process changes during the three months ended September
30, 2000, the Company determined that its user reference materials were
outdated. Accordingly, the Company replaced the content and reprinted the
materials in a format that will allow for future changes to be documented and
incorporated more efficiently. The charge to operations during the three
months ended September 30, 2000 reflects the unamortized net book value of
the assets, which the Company no longer uses and which have no future benefit
to the Company.
Interest expense, net was $219,000 for the three months ended September
30, 2000 compared to $293,000 for the three months ended September 30, 1999. The
decrease reflects lower average borrowings in 2000, although interest rates were
significantly higher. The bank's reference rate increased by 1.75% from June 30,
1999 to September 30, 2000.
Net loss for the three months ended September 30, 2000 was $5,569,000,
net of an income tax benefit of $2,535,000, compared to net loss of $1,957,000
in 1999, as a result of the operating results previously discussed.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Revenues for the nine months ended September 30, 2000 increased 24.2%
to $264,021,000 from $212,628,000 for the nine months ended September 30, 1999.
This growth resulted primarily from the
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maturation of In-Plant Store facilities opened over the last six quarters.
During the nine months ended September 30, 2000 and 1999, three In-Plant
Store customers, in the aggregate, comprised approximately 26.6% and 20.1% of
the Company's revenues although no customer exceeded 10% in 1999. One of the
In-Plant Store customers represented approximately 14.8% of revenues for the
nine months ended September 30, 2000.
Cost of materials as a percentage of revenues increased to 82.1% for
the nine months ended September 30, 2000 from 79.0% in 1999. Approximately
1.0% of the increase relates to significant charges recorded during the three
months ended September 30, 2000 primarily related to the termination of
certain unprofitable In-Plant Store sites. The consolidated percentage
increase also reflects a change in revenue mix and higher freight costs for
the In-Plant Store operations for the nine months ended September 30, 2000 as
compared to 1999. Lower data management service revenues as a result of the
first quarter 2000 sale of INTERMAT also affected the increase. Direct
material costs associated with data management services were insignificant.
Operating wages and benefits expenses as a percentage of revenues
decreased to 7.8% for the nine months ended September 30, 2000 from 8.0% in
1999. This decrease reflects the decline in data management service revenues.
Operating wages and benefits associated with data management services were
historically higher as a percentage of revenues than those associated with
In-Plant Store operations. The decrease was partially offset by increased
wages and benefits for the Mexico In-Plant Store operations necessary to
attract and retain qualified operating personnel to manage growth in the
business.
Other operating expenses as a percentage of revenues decreased to 2.8%
for the nine months ended September 30, 2000 from 3.1% in 1999. The decrease
reflects the decline in data management service revenues. Other operating
expenses associated with data management services were historically higher as a
percentage of revenues than those associated with In-Plant Store operations. The
decrease was partially offset by higher costs for In-Site systems, including
amortization of capitalized costs and telecommunications network costs.
Selling, general and administrative expenses as a percentage of
revenues decreased to 9.5% for the nine months ended September 30, 2000 from
10.6% in 1999. The decrease was primarily due to the decline in data management
service revenues as a result of the first quarter 2000 sale of INTERMAT, which
had a significantly higher percentage of these costs than the In-Plant Store
business. In-Plant Store selling, general and administrative expenses for the
nine months ended September 30, 2000, as a percentage of revenues, were
comparable to 1999.
Interest expense, net was $576,000 for the nine months ended
September 30, 2000 compared to $564,000 for the nine months ended September
30, 1999. The increase reflects lower average borrowings in 2000, but with
significantly higher interest rates. The bank's
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reference rate increased by 1.25% from September 30, 1999 to September 30, 2000.
Net income for the nine months ended September 30, 2000 was
$19,464,000, compared to net loss of $1,868,000 in 1999, as a result of the sale
of INTERMAT and the other operating results previously discussed.
LIQUIDITY AND CAPITAL RESOURCES
The Company's credit facility provides maximum borrowings of
$50,000,000. Effective July 21, 2000, the credit facility was amended to extend
the term to May 8, 2002 and to reduce the Company's borrowing rate. As of
September 30, 2000, there were $15,600,000 of borrowings outstanding under the
credit facility at a weighted average interest rate of 8.5%. Future borrowings
under the facility are expected to be used primarily to fund working capital
requirements for the expansion of the In-Plant Store program.
Income from continuing operations of $20,114,000 for the nine months
ended September 30, 2000, included a gain from the sale of INTERMAT, net of
taxes, of approximately $26,544,000. After adjusting for the noncash effect
of the INTERMAT sale, net cash used by operating activities was $31,968,000
for the nine months ended September 30, 2000 compared to net cash used of
$6,441,000 in 1999. The increase in cash used was primarily due to an
increase in accounts receivable and inventories, which were partially offset
by an increase in accounts payable and accrued expenses. Accounts receivable
and inventories increased due to the increase in the number of In-Plant Store
facilities, the maturation of facilities opened in the last year, and issues
related to the implementations of the In-Site systems. Accounts payable and
accrued expenses increased primarily due to higher inventory levels.
The net cash provided by investing activities was $47,649,000 for the
nine months ended September 30, 2000 compared to net cash used of $5,514,000 in
1999. Cash was provided from the sale of INTERMAT and was partially offset by
expenditures for computer systems and related equipment, which were lower in
2000 than in 1999.
The net cash used in financing activities was $15,824,000 for the nine
months ended September 30, 2000 compared to net cash provided of $11,780,000 in
1999. The net cash used in 2000 reflected payment of a $1,400,000 note to an
officer of the Company, the payment of all outstanding borrowings under the
credit facility with INTERMAT sale proceeds as of March 2, 2000, less subsequent
borrowings under the credit facility through September 30, 2000.
In 1999, cash was provided primarily from the Company's credit facility.
The Company believes that cash on hand, cash generated from future
operations, including improvements in working capital, 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.
12
<PAGE>
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 138, "Accounting for Derivative
Instruments and Certain Hedging Activities (an amendment of FASB Statement No.
133)". The statement is effective for fiscal years beginning after June 15,
2000.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). The implementation of SAB 101 has been delayed and will be effective for
the Company in the fourth quarter of fiscal 2000.
The Company believes adoption of these accounting standards will not
have a material effect on the Company's financial position or results of
operations.
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.
10.1 Amendment No. 1 to First Amended and Restated
Loan and Security Agreement, dated July 21, 2000,
by and among Bank of America, N.A., Mellon Bank,
N.A. and Industrial Systems Associates, Inc.,
amending the First Amended and Restated Loan and
Security Agreement, dated as of April 27, 2000,
among the financial institutions named therein as
the lenders, Bank of America, N.A. (formerly
known as Bank of America National Trust and
Savings Association, successor-in-interest to
BankAmerica Business Credit, Inc.) as the Agent
and Industrial Systems Associates, Inc. as the
Borrower (incorporated by reference to Exhibit
10.2 of the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 2000).
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 2000.
14
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Strategic Distribution, Inc.
Date: November 14, 2000 By: /s/ RONALD C. WHITAKER
-----------------------------
Ronald C. Whitaker,
President and Chief
Executive Officer
Date: November 14, 2000 By: /s/ MICHAEL F. BONNER
---------------------------
Michael F. Bonner,
Vice President and
Chief Financial Officer
Date: November 14, 2000 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.
10.1 Amendment No. 1 to First Amended and Restated
Loan and Security Agreement, dated July 21, 2000,
by and among Bank of America, N.A., Mellon Bank,
N.A. and Industrial Systems Associates, Inc.,
amending the First Amended and Restated Loan and
Security Agreement, dated as of April 27, 2000,
among the financial institutions named therein as
the lenders, Bank of America, N.A. (formerly
known as Bank of America National Trust and
Savings Association, successor-in-interest to
BankAmerica Business Credit, Inc.) as the Agent
and Industrial Systems Associates, Inc. as the
Borrower (incorporated by reference to Exhibit
10.2 of the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 2000).
27 Financial Data Schedule
