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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, 1999
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
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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)
Registrant's telephone number, including area code: (215) 633-1900
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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
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(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. [ ]
The aggregate market value of the Registrant's Common Stock, par value
$.10 per share (the "Common Stock"), held by non-affiliates on March 20, 2000
was approximately $41,900,000, 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 20, 2000, the Registrant had outstanding 30,992,210 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 2000 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 INTERMAT, Inc.
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("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.
On March 2, 2000, the Company completed the sale of INTERMAT to Project
Software & Development, Inc. ("PSDI") for $55,000,000 in cash. The Company
realized a net gain of approximately $27,000,000 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.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
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.
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
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methods. The Company's In-Plant Store program, in which large industrial sites
outsource the procurement, handling and data 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 the
In-Plant Store program, 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 through the In-Plant Store program. The Company
operates the In-Plant Store program 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 of the
In-Plant Store program, the Company 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, 1999 to December 31, 1999, the number of In-Plant Store sites
operated by the Company increased from 134 to 170.
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,
the United Kingdom, South and Central America and South Africa.
4
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 identifies 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
5
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, 1999, the Company operated 170 In-Plant Store facilities
for 63 individual customers. During the year ended December 31, 1999, three
In-Plant Store customers comprised approximately 21% of the Company's
revenues, although no customer exceeded 10%. 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,
1999, 6.4% 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 - Replacement parts
- - Fasteners - Respiratory products
- - Fire protection equipment and clothing - Safety products
- 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 1999.
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.
6
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, internet 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. On March 2, 2000, the Company completed the sale
of INTERMAT to PSDI. 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.
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, 1999, the Company had approximately 1,210 employees, of
whom approximately 260 were employed in selling and
7
administrative capacities and approximately 950 were involved in operations.
None of the Company's employees were covered under 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
certain of its suppliers and, with respect to In-Plant Store facilities, so
names certain 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,
1999, 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. The
Company has received no payments under the earn-out, which covers periods ending
May 30, 2002. Under terms of the sale agreement, the Company expects to be
required to repurchase certain SSI inventory that remains unsold as of June 2,
2000.
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
consisted of $1,363,000 in cash, including $294,000 received in September 1999
in connection with an earn-out calculation.
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
8
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 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 or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
9
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 20, 2000, 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.
QUARTER ENDED HIGH SALES PRICE LOW SALES PRICE
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
March 31, 1999............ 2 7/8 1 3/4
June 30, 1999............. 2 7/8 1 7/8
September 30, 1999........ 3 1/4 1 15/16
December 31, 1999......... 3 1/4 1 1/8
The Company has paid no cash dividends on the Common Stock for the years
ended December 31, 1998 and 1999 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".
10
ITEM 6. SELECTED FINANCIAL DATA
(dollars in thousands, except for share data)
YEARS ENDED DECEMBER 31,
------------------------
1995 1996 1997(a) 1998(b) 1999(c)
Statement of Operations Data:
Revenues $ 52,915 $ 92,423 $ 170,780 $ 219,348 $ 292,656
Operating income (loss) 313 (3,956) (12,613) (1,522) (3,598)
Income (loss) before
income taxes 338 (2,589) (11,306) (937) (4,714)
Income tax (expense)
benefit (149) -- -- -- 8,641
Income (loss) from
continuing operations 189 (2,589) (11,306) (937) 3,927
Income (loss) from
discontinued
operations, net of tax 815 (6,519) (4,500) -- --
Net income (loss) 1,004 (9,108) (15,806) (937) 3,927
Per Share Data - Basic:
Income (loss) from
continuing operations $ 0.01 $ (0.10) $ (0.37) $ (0.03) $ 0.13
Income (loss) from
discontinued operations 0.04 (0.24) (0.15) -- --
Net income (loss) 0.05 (0.34) (0.52) (0.03) 0.13
Weighted Average Number of Shares of
Common Stock Outstanding 21,689,653 26,449,079 30,534,635 31,234,202 31,057,342
Other Data:
Number of In-Plant Store
facilities(d) 31 72 101 134 170
DECEMBER 31,
---------------------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital $ 12,252 $ 53,447 $ 46,076 $ 48,142 $ 70,000
Total assets 40,014 92,382 90,682 99,444 138,525
Long-term debt 5,054 587 1,469 8,948 29,926
Stockholders' equity 27,391 73,954 62,094 61,588 65,563
(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) An income tax benefit of $8,641,000 was recorded related primarily to the
Company's recognition of net operating loss carryforwards.
(d) As of the end of the year.
The Company has paid no cash dividends on the Common Stock for the years
ended December 31, 1995, 1996, 1997, 1998 and 1999. 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
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 its operations primarily
through a wholly-owned subsidiary, Industrial Systems Associates, Inc.
("ISA"). At December 31, 1999, the Company had 170 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. 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 acquired all of the outstanding capital
stock of INTERMAT International Materials Management Engineers, Inc. and
subsequently changed its name to INTERMAT, Inc. ("INTERMAT"). 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
12
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. 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
consisted of $1,363,000 in cash, including $294,000 received in September
1999 in connection with an earn-out calculation. In 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.
On March 2, 2000, the Company completed the sale of INTERMAT to Project
Software & Development, Inc. for $55,000,000 in cash. The Company realized a net
gain of approximately $27,000,000 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.
The balance of the net proceeds is available to pay federal and state taxes in
connection with the sale and to fund the anticipated 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. 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. Communications installations, establishment of a dedicated
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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 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. 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
December 31, 1999, the In-Site operating system deployment was approximately 45%
complete and is expected to be fully deployed by the third quarter of 2000.
RESULTS OF OPERATIONS
The following table of revenues and percentages sets forth selected items
of the results of operations.
YEARS ENDED DECEMBER 31,
---------------------------
1997 1998 1999
---- ---- ----
(dollars in thousands)
Revenues $170,780 $219,348 $292,656
========= ========= =========
100.0% 100.0% 100.0%
Cost of materials 78.5 77.5 79.1
Operating wages and benefits 8.9 8.5 8.2
Other operating expenses 3.9 3.3 3.1
Selling, general and administrative
expenses 11.4 11.4 10.8
Acquired in-process research and
development 4.7 -- --
Operating loss (7.4) (0.7) (1.2)
Interest income (expense), net 0.8 0.3 (0.4)
Loss from continuing
operations before taxes (6.6) (0.4) (1.6)
Income tax benefit -- -- 2.9
Income (loss) from continuing
operations (6.6) (0.4) 1.3
Loss on sale of discontinued
operations (2.7) -- --
Net income (loss) (9.3) (0.4) 1.3
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues for the year ended December 31, 1999 increased 33.4% to
$292,656,000 from $219,348,000 in 1998. This growth resulted primarily from the
implementation of new In-Plant Store facilities and
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growth of existing In-Plant Store facilities. The number of In-Plant Store
facilities increased from 134 at December 31, 1998 to 170 at December 31, 1999.
Cost of materials as a percentage of revenues increased to 79.1% for the
year ended December 31, 1999, as compared to 77.5% in 1998. The increase was
primarily due to growth in the Company's Mexican In-Plant Store facilities,
which had 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 year ended December 31, 1999 was comparable to 1998.
Operating wages and benefits as a percentage of revenues decreased to
8.2% for the year ended December 31, 1999 from 8.5% 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 and the decline
in data management service revenues. Operating wages and benefits associated
with data management services are higher as a percentage of revenues than
In-Plant Store operations. These factors offset increased expenses from
changes in employee benefits and overtime related to the implementation of
In-Site.
Other operating expenses as a percentage of revenues decreased to 3.1%
for the year ended December 31, 1999 from 3.3% 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 1999 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 from 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
decreased to 10.8% for the year ended December 31, 1999 from 11.4% 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 year
ended December 31, 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 $1,116,000 for the year ended December 31, 1999
versus interest income, net of $585,000 in 1998. In late 1998 the Company began
borrowing against its
15
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.
An income tax benefit of $8,641,000 was recorded for the year ended
December 31, 1999, related primarily to the Company's recognition of net
operating loss carryforwards. In consideration of the Company's appreciated
net asset value and expected future taxable income related to the sale of
INTERMAT, at December 31, 1999 the Company deemed it more likely than not
that its deferred tax assets would be realized and reversed the previously
established valuation allowance.
Net income for the year ended December 31, 1999 was $3,927,000 compared to
a net loss of $(937,000) in 1998, as a result of the items previously discussed.
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 no customer represented more 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 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.
16
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. 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. As of
December 31, 1998, the Company had spent approximately $390,000 on the IPR&D
projects, with an additional $150,000 spent in 1999 to complete expansion and
refinement of structured parts descriptions for the data redevelopment
project. The IPR&D projects 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.
17
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. Interest on the borrowings is variable at margins up
to 1.0% over the bank's reference rate (8.5% as of December 31, 1999) and/or a
Eurodollar rate, with a commitment fee during the term of the agreement which
ranges from 0.125% to 0.25% per annum on the unused portion of the credit
available. The credit facility expires on May 8, 2001. The amount that the
Company may borrow under the credit facility is based upon eligible accounts
receivable and inventories. The credit facility contains customary financial and
other covenants and is collateralized by substantially all of the assets, as
well as the pledge of the capital stock, of the Company's subsidiaries. As of
December 31, 1999, there was $29,900,000 of borrowings outstanding under the
credit facility with a weighted average interest rate of 8.1%. On March 2, 2000,
the Company used a portion of the net proceeds from the sale of INTERMAT to
repay all amounts outstanding under the credit facility. 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.
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. The Company has received no payments under the earn-out, which
covers periods ending May 30, 2002. Excluded from the sale were accounts
receivable of $5,669,000, which were substantially collected in 1997. Under
terms of the sale agreement, the Company expects to be required to repurchase
certain SSI inventory that remains unsold as of June 2, 2000.
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
consisted of $1,363,000 in cash, including $294,000 received in September 1999
in connection with an earn-out calculation.
The net cash used in continuing operations was $14,812,000 for the year
ended December 31, 1999, compared to $14,577,000 for the year ended December 31,
1998. 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. 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.
18
The change in net assets or liabilities of discontinued operations
reflected cash provided of $95,000 for the year ended December 31, 1999 compared
to cash provided of $687,000 for 1998. The changes in both years were primarily
related to the collection of accounts receivable, partially offset by expenses
incurred, in connection with the sale and wind down of the business operations
of ATSG.
The net cash used in investing activities decreased to $6,771,000 for the
year ended December 31, 1999 from $8,140,000 for the comparable period in 1998.
The net use in 1999 primarily reflects expenditures related to computer systems
and equipment. The net use in 1998 resulted primarily from expenditures related
to computer systems and equipment, partially offset by the sale of ATSG.
The net cash provided by financing activities was $21,674,000 for the year
ended December 31, 1999, compared to $7,411,000 for the year ended December 31,
1998. In both 1999 and 1998, cash was provided primarily from the Company's
credit facility.
During 1999, the Company expended $5,637,000 on capital additions for the
In-Site project. Recruiting, training, travel, data conversion and other
miscellaneous costs directly related to the project amounting to $1,170,000 were
expensed as incurred. At December 31, 1999, the total estimated additional
capital spending to complete this project was expected to be approximately
$2,000,000.
The Company believes that cash on hand, available funds from the INTERMAT
sale, cash generated from future operations, and cash from the Company's 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 arose 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.
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, referred to
as In-Site(TM), is using Year 2000 compliant software.
In addition to the systems replacement project, the Company evaluated Year
2000 compliance for its computer hardware, its non-technology systems and for
major third parties with which the Company conducts business. All testing was
completed by December 31, 1999 and the Company did not find any major
non-technology system under its control to be Year 2000 deficient. Costs
19
associated with the Company's Year 2000 compliance effort, which excluded its
planned systems replacement project, were not material. Salaries, benefits and
other costs of the Company's personnel evaluating its Year 2000 readiness were
not measured and were expensed as incurred.
The Company believes that its efforts to ensure Year 2000 readiness, in
conjunction with its systems replacement project, significantly reduced the risk
associated with Year 2000 systems failures. As of March 13, 2000, the Company
had not experienced any significant business disruption as a result of Year 2000
failures of its own systems or any systems controlled by its customers,
suppliers or service providers.
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.
20
STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Index to Financial Statements
PAGE NO.
--------
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December
31, 1998 and 1999 F-3
Consolidated Statements of Operations for
the Years Ended December 31, 1997, 1998
and 1999 F-4
Consolidated Statements of Stockholders'
Equity for the Years Ended December 31,
1997, 1998 and 1999 F-5
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1997, 1998
and 1999 F-6
Notes to Consolidated Financial Statements F-7
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
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, 1998 and 1999, 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, 1999.
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, 1998 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
KPMG LLP
Philadelphia, Pennsylvania
March 13, 2000
F-2
STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)
December 31,
----------------------
1998 1999
---------- ----------
Assets
Current assets:
Cash and cash equivalents $ 1,322 $ 1,508
Accounts receivable, net 41,819 53,137
Current portion of notes receivable 361 583
Inventories 31,060 46,458
Prepaid expenses and other current assets 401 675
Deferred income taxes 1,165 10,555
--------- ----------
Total current assets 76,128 112,916
Notes receivable 2,486 1,424
Property and equipment, net 12,854 17,273
Intangible assets, net 7,279 6,230
Other assets 697 682
--------- ----------
Total assets $ 99,444 $ 138,525
========= ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 27,966 $ 40,264
Current portion of long-term debt (related party $1,400 in 1999) 20 1,422
Net liabilities of discontinued operations -- 1,230
--------- ----------
Total current liabilities 27,986 42,916
Long-term debt 7,548 29,926
Subordinated debt to related party 1,400 --
Net liabilities of discontinued operations 797 --
Deferred income taxes 125 120
--------- ----------
Total liabilities 37,856 72,962
Stockholders' equity:
Preferred stock, par value $.10 per share. Authorized:
500,000 shares; issued and outstanding: none -- --
Common stock, par value $.10 per share.
Authorized: 50,000,000 shares; issued and
outstanding: 31,294,285 and 31,380,210 shares 3,129 3,138
Additional paid-in capital 94,255 95,184
Accumulated deficit (34,443) (30,516)
Notes receivable from related parties (1,303) (1,374)
Treasury stock, at cost (12,500 and 388,000 shares) (50) (869)
--------- ----------
Total stockholders' equity 61,588 65,563
--------- ----------
Total liabilities and stockholders' equity $ 99,444 $ 138,525
========= ==========
See accompanying notes to consolidated financial statements.
F-3
STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except share data)
Years Ended December 31,
--------------------------------------------
1997 1998 1999
------------ ------------ ------------
Revenues $ 170,780 $ 219,348 $ 292,656
Costs and expenses:
Cost of materials 134,061 170,003 231,664
Operating wages and benefits 15,150 18,564 23,915
Other operating expenses 6,728 7,299 9,142
Selling, general and administrative expenses 19,454 25,004 31,533
Acquired in-process research and development 8,000 -- --
------------ ------------ ------------
Total costs and expenses 183,393 220,870 296,254
------------ ------------ ------------
Operating loss (12,613) (1,522) (3,598)
Interest income (expense):
Interest expense (154) (154) (1,412)
Interest income 1,461 739 296
------------ ------------ ------------
Interest income (expense), net 1,307 585 (1,116)
------------ ------------ ------------
Loss before income taxes (11,306) (937) (4,714)
Income tax benefit -- -- 8,641
------------ ------------ ------------
Income (loss) from continuing operations (11,306) (937) 3,927
Loss on sale of discontinued operations (4,500) -- --
------------ ------------ ------------
Net income (loss) $ (15,806) $ (937) $ 3,927
============ ============ ============
Net income (loss) per common share - basic and diluted:
Income (loss) from continuing operations $ (0.37) $ (0.03) $ 0.13
Loss from discontinued operations (0.15) -- --
------------ ------------ ------------
Net income (loss) $ (0.52) $ (0.03) $ 0.13
============ ============ ============
Weighted average number of shares of common
stock outstanding:
Basic 30,534,635 31,234,202 31,057,342
============ ============ ============
Diluted 30,534,635 31,234,202 31,105,517
============ ============ ============
See accompanying notes to consolidated financial statements.
F-4
STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(in thousands, except share data)
Additional
Common Paid-In Accumulated Notes Treasury
Stock Capital Deficit Receivable Stock
--------- ---------- ----------- ----------- --------
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)
Net income 3,927
Exercise of stock options 1 6
Deferred tax benefit of stock
options exercised 754
Repurchase of 375,500 shares (819)
Issuance of 80,000 shares 8 169 (71)
-------- -------- -------- -------- -----
Balance at December 31, 1999 $ 3,138 $ 95,184 $(30,516) $ (1,374) $(869)
======== ======== ======== ======== =====
See accompanying notes to consolidated financial statements.
F-5
STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Years ended December 31,
--------------------------------
1997 1998 1999
--------- --------- --------
Cash flows from operating activities:
Income (loss) from continuing operations $(11,306) $ (937) $ 3,927
Adjustments to reconcile income (loss) from continuing
operations to net cash used in continuing operations:
Depreciation and amortization 2,016 2,805 3,960
Acquired in-process research and development 8,000 -- --
Deferred income taxes -- -- (8,641)
Changes in operating assets and liabilities, net of
effects of acquisition:
Short-term investments (2,997) 2,997 --
Accounts receivable (9,671) (13,047) (11,318)
Notes receivable 16 323 840
Inventories (7,992) (7,348) (15,398)
Prepaid expenses and other current assets 109 (167) (274)
Accounts payable and accrued expenses 7,921 1,467 12,298
Other, net (64) (670) (206)
-------- -------- --------
Net cash used in continuing operations (13,968) (14,577) (14,812)
Discontinued operations, net of effect of disposition:
Net loss (4,500) -- --
Change in net assets or liabilities 5,054 687 95
-------- -------- --------
Net cash used in operating activities (13,414) (13,890) (14,717)
-------- -------- --------
Cash flows from investing activities:
Acquisition of business, net of cash acquired (10,769) -- --
Proceeds from sale of discontinued operations 7,458 1,025 338
Additions of property and equipment (3,701) (9,165) (7,109)
-------- -------- --------
Net cash used in investing activities (7,012) (8,140) (6,771)
-------- -------- --------
Cash flows from financing activities:
Proceeds from sale of common stock, net 1,540 431 113
Repurchase of common stock -- -- (819)
Proceeds from (repayment of) notes payable (400) 7,500 22,400
Repayment of long-term obligations (271) (520) (20)
-------- -------- --------
Net cash provided by financing activities 869 7,411 21,674
-------- -------- --------
Increase (decrease) in cash and cash equivalents (19,557) (14,619) 186
Cash and cash equivalents, beginning of the year 35,498 15,941 1,322
-------- -------- --------
Cash and cash equivalents, end of the year $ 15,941 $ 1,322 $ 1,508
======== ======== ========
Supplemental cash flow information:
Taxes paid $ 11 $ 100 $ 146
Interest paid 164 135 1,039
See accompanying notes to consolidated financial statements.
F-6
STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) DESCRIPTION OF BUSINESS
Strategic Distribution, Inc. and subsidiaries ("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 a wholly-owned subsidiary, Industrial
Systems Associates, Inc. ("ISA"). At December 31, 1999, the Company had 170
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. 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
capital stock of INTERMAT International Materials Management Engineers, Inc.
and subsequently changed its name to INTERMAT, Inc. ("INTERMAT") (see Note
8). INTERMAT-Registered Trademark- provides data management services and
develops and supplies software for MRO inventory cataloging. On March 2,
2000, the Company completed the sale of all of the outstanding capital stock
of INTERMAT (see Note 19).
(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 in the financial statements and related notes. Actual results could
differ from these estimates.
F-7
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, 1998 and 1999, the Company had investments in cash
equivalents of approximately $1,000,000 and $400,000.
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:
Office equipment and software 3 to 8 years
Leasehold improvements 4 to 8 years
Transportation equipment 5 years
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 recovered, an impairment loss would be
recognized and the asset reduced to its estimated fair value.
F-8
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
post-delivery obligations remain, 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, 1997, 1998 and 1999, the Company's comprehensive
income (loss) equals the amounts of net income (loss) reported in the
Consolidated Statements of Operations.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current year presentation.
F-9
(3) ACCOUNTS RECEIVABLE
Accounts receivable is net of an allowance for doubtful accounts of
$460,000 and $900,000 at December 31, 1998 and 1999. For the years ended
December 31, 1997, 1998, and 1999, write-offs charged against the allowance
amounted to $16,000, $795,000 and $163,000.
(4) PROPERTY AND EQUIPMENT
DECEMBER 31,
-----------------
1998 1999
------- -------
(in thousands)
Office equipment and software $ 9,544 $10,937
Leasehold improvements 355 426
Transportation equipment 208 197
Systems development in process 6,074 11,711
------- -------
16,181 23,271
Less: Accumulated depreciation
and amortization 3,327 5,998
------- -------
$12,854 $17,273
======= =======
For the years ended December 31, 1997, 1998, and 1999, depreciation and
amortization expense amounted to $1,013,000, $1,602,000 and $2,690,000.
(5) INTANGIBLE ASSETS
DECEMBER 31,
---------------
1998 1999
------ ------
(in thousands)
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 2,387 3,436
------ ------
$7,279 $6,230
====== ======
For the years ended December 31, 1997, 1998, and 1999, amortization of
intangible assets amounted to $970,000, $1,048,000 and $1,049,000.
F-10
(6) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
DECEMBER 31,
-----------------
1998 1999
------- -------
(in thousands)
Accounts payable $22,050 $33,296
Cash overdraft 1,232 1,064
Payroll and related expenses 2,996 3,409
Other accrued expenses 1,688 2,495
------- -------
$27,966 $40,264
======= =======
(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. Interest on the borrowings is variable at margins up
to 1.0% over the bank's reference rate (8.5% as of December 31, 1999) and/or a
Eurodollar rate, with a commitment fee during the term of the agreement which
ranges from 0.125% to 0.25% per annum on the unused portion of the credit
available. The credit facility expires on May 8, 2001. The amount that the
Company may borrow under the credit facility is based upon eligible accounts
receivable and inventories. The credit facility contains customary financial and
other covenants and is collateralized by substantially all of the assets, as
well as the pledge of the capital stock, of the Company's subsidiaries. As of
December 31, 1999, there was $29,900,000 of borrowings outstanding under the
credit facility with a weighted average interest rate of 8.1%.
Long-term debt also includes a loan with an interest rate of 8.0% at
December 31, 1998 and 1999. Subordinated debt consists of a 9.0% note payable
in January 2000 to an officer of the Company (see Note 8).
Principal payments due on long-term borrowings during each of the next
three years are: 2000 - $1,422,000; 2001 - $29,924,000; and 2002 - $2,000.
(8) ACQUISITION
On January 28, 1997, the Company, through a newly formed subsidiary,
acquired all of the outstanding capital 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
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 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 as
of January 1, 1997.
YEAR ENDED
DECEMBER 31, 1997
-----------------
(in thousands)
Revenues $ 171,158
Loss from continuing operations $ (11,446)
Net loss per common share from
continuing operations $ (0.37)
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
period presented.
(9) DISCONTINUED OPERATIONS
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. 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. The
Company has received no payments under the earn-out, which covers periods ending
May 30, 2002. Under terms of the sale agreement, the Company expects to be
required to repurchase certain SSI inventory that remains unsold as of June 2,
2000. At December 31, 1998 and 1999, net liabilities of discontinued operations
includes a reserve for disposal of discontinued operations that relates
primarily to the estimated excess cost over fair value of SSI inventory subject
to repurchase in 2000.
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
consisted of $1,363,000 in cash, including $294,000 received in September 1999
in connection with an earn-out calculation. In the second quarter of 1997, the
Company recorded a $1,000,000 charge to loss on sale of discontinued operations,
which included estimated
F-12
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:
YEARS ENDED DECEMBER 31,
--------------------------
1997(a) 1998(b) 1999
--------- --------- --------
(in thousands)
Revenues $ 31,640 $ 5,011 $ --
======== ======== =====
Loss on sale of operations $ (4,500) $ -- $ --
======== ======== ======
(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. The loss from operations
includes an allocation of $527,000 for the Company's corporate and
interest expense.
(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.
The net liabilities of discontinued operations are summarized as follows:
DECEMBER 31,
1998 1999
-------- --------
(in thousands)
Current assets $ 562 $ 15
Reserve for disposal of
discontinued operations (1,359) (1,245)
------- -------
Net liabilities of
discontinued operations $ (797) $(1,230)
======= =======
(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 $71,000, $168,000 and $290,000 for the years
ended December 31, 1997, 1998 and 1999.
F-13
(11) INCOME TAXES
Income tax benefit from continuing operations is as follows:
YEARS ENDED DECEMBER 31,
------------------------
1997 1998 1999
------ ------ ------
(in thousands)
Deferred
Federal $ -- $ -- $8,051
State -- -- 590
----- ----- ------
$ -- $ -- $8,641
===== ===== ======
A reconciliation of the expected Federal income tax benefit from continuing
operations at the statutory rate to the Company's income tax benefit follows:
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------- -------- --------
(in thousands)
Expected tax benefit $ 3,844 $ 319 $ 1,602
Increase (decrease) in tax benefit
resulting from:
Valuation allowance (3,746) (198) 7,153
Goodwill (42) (46) (46)
Other (56) (75) (68)
------- ------- -------
$ -- $ -- $ 8,641
======= ======= =======
The components of the net deferred tax asset were as follows:
DECEMBER 31,
-------------------
1998 1999
-------- --------
(in thousands)
Deferred tax assets:
Net operating loss carryforwards
(available through periods ending
in 2014) $ 4,483 $ 5,713
Intangible assets 3,139 3,116
Accounts receivable allowance 184 322
Inventories 431 446
Accrued expenses 605 448
Reserve for disposal of
discontinued operations 539 456
Other 63 54
Valuation allowance (8,279) --
------- -------
Total deferred tax asset 1,165 10,555
------- -------
Deferred tax liabilities:
Property and equipment 125 120
------- -------
Net deferred tax asset $ 1,040 $10,435
======= =======
F-14
At December 31, 1998, a valuation allowance was established, when
necessary, to reduce deferred tax assets to amounts that were deemed more likely
than not to be realized. In consideration of the Company's appreciated net asset
value and expected future taxable income related to the sale of INTERMAT (see
Note 19), at December 31, 1999 the Company deemed it more likely than not that
its deferred tax assets would be realized and reversed the previously
established valuation allowance. The net change in the valuation allowance was a
decrease of $641,000 and $8,279,000 for the years ended December 31, 1998 and
1999.
(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 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 1, 2003.
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 could
repurchase up to 1,500,000 shares of common stock at prevailing market prices
within one year of the commencement of the Repurchase Program. During 1999,
the Company repurchased 375,500 shares under the Repurchase Program at a
weighted average price of $2.24 per share.
F-15
On June 5, 1999, the Company sold 80,000 shares of common stock to an
officer of a subsidiary of the Company at $2.22 per share. Pursuant to a Stock
Purchase Agreement between the officer and the Company, $71,000 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 June 5, 2004.
(13) NET INCOME (LOSS) PER SHARE
Net loss per common share - basic and diluted are equal for the years
ended December 31, 1997 and 1998, because the effect of the assumed issuance of
potential shares of common stock is antidilutive. For the year ended December
31, 1999, the weighted average number of shares used to calculate diluted net
income per common share includes the assumed exercise of stock options
equivalent to 48,175 shares under the treasury stock method. As of December 31,
1997, 1998 and 1999, there were stock options and warrants outstanding for
2,574,556, 3,250,466 and 4,004,631 shares of common stock.
(14) STOCK COMPENSATION PLANS
The Company has two Incentive Stock Option Plans (the "1990 Plan" and
the "1999 Plan", collectively referred to as the "ISO Plans") 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 under the 1990 Plan and up to 1,500,000 shares of common stock
under the 1999 Plan. The ISO Plans provide 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 ISO Plans, 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 ISO Plans 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.
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.
F-16
The following table summarizes the option information for options granted
under the ISO Plans:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICES
---------- ---------
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 granted during 1999 932,656 $ 2.64
Options canceled or expired (204,566) $ 3.84
Options exercised (5,925) $ 1.21
---------
Options outstanding, December 31, 1999 2,359,923 $ 3.86
=========
Options exercisable 707,730 $ 4.14
=========
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. Options granted under the Director Plan are
immediately exercisable and expire five years from the date of grant. The
following table summarizes the option information for options granted under the
Director Plan:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICES
--------- --------
Options outstanding, December 31, 1996 28,000 $ 8.00
Options granted during 1997 28,000 $ 4.50
Options granted during 1998 28,000 $ 2.50
Options granted during 1999 32,000 $ 1.44
--------
Options outstanding, December 31, 1999 116,000 $ 4.02
========
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
F-17
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, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- ---------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICES EXERCISABLE PRICES
- -------------- ----------- ------------ -------- ----------- --------
$0.97 - $2.00 202,595 3.4 $1.12 202,595 $1.12
$2.01 - $4.00 1,537,619 8.1 $2.99 264,726 $3.47
$4.01 - $6.00 1,014,460 7.1 $5.46 404,827 $5.41
$6.01 - $8.00 213,249 4.9 $7.07 151,582 $7.14
----------- ----------
2,967,923 7.2 $4.00 1,023,730 $4.32
=========== ==========
The weighted average fair value of options granted for the years ended
December 31, 1997, 1998 and 1999 was $3.43, $4.85 and $2.60.
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 income
(loss) and pro forma net income (loss) per share would have been the amounts
indicated below:
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1998 1999
---------- ---------- -------
(in thousands)
Net income (loss) - as reported $ (15,806) $ (937) $ 3,927
Net income (loss) - pro forma $ (16,766) $ (2,549) $ 3,011
Net income (loss) per share - as
reported $ (0.52) $ (0.03) $ 0.13
Net income (loss) per share - pro forma $ (0.55) $ (0.08) $ 0.10
F-18
The fair value of the options at date of grant was estimated using the
Black-Scholes model with the following weighted average assumptions:
YEARS ENDED DECEMBER 31,
------------------------
1997 1998 1999
---- ---- ----
Expected life (years) 6.92 7.06 6.82
Interest rate 6.77% 5.29% 5.43%
Volatility 60.89% 76.53% 76.85%
Dividend yield 0.00% 0.00% 0.00%
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, 1997, 1998 and 1999.
(15) COMMITMENTS AND CONTINGENCIES
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, 1999 are as follows (in thousands):
2000 $1,209
2001 $997
2002 $790
2003 $750
2004 $372
Rental expense for the years ended December 31, 1997, 1998 and 1999,
was approximately $809,000, $1,291,000, and $1,432,000.
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 or results
of operations.
(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
F-19
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, 1998
and 1999, revenues from data management services to customers other than
In-Plant Store customers amounted to $7,701,000, $9,302,000 and $7,214,000.
During the years ended December 31, 1997, 1998 and 1999, the Company
had revenues of $2,666,000, $5,000,000 and $18,711,000 from customers in foreign
countries, primarily Mexico and Canada. As of December 31, 1998 and 1999, less
than 1% of the Company's long-lived assets were located outside of the United
States.
During the years ended December 31, 1997, 1998 and 1999, three
In-Plant Store customers comprised approximately 31%, 21% and 21% of the
Company's revenues, although no customer exceeded 10% in 1998 and 1999. One
In-Plant Store customer represented approximately 15% of revenues for the
year ended December 31, 1997.
(17) QUARTERLY DATA (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) - UNAUDITED
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
--------- -------- -------- ------- --------
1998
Revenues $ 50,458 $ 52,404 $ 57,389 $ 59,097 $219,348
======== ======== ======== ======== ========
Operating income (loss)(a) $ (1,330) $ 12 $ 234 $ (438) $(1,522)
======== ======== ======== ======== ========
Net income (loss) $ (1,056) $ 193 $ 330 $ (404) $(937)
======== ======== ======== ======== ========
Net income (loss) per
common share(c) $(0.03) $ 0.01 $ 0.01 $(0.01) $(0.03)
======== ======== ======== ======== ========
F-20
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
-------- --------- -------- -------- -------
1999
Revenues $ 64,983 $ 73,292 $ 74,353 $ 80,028 $292,656
======== ======== ======== ======== ========
Operating income (loss) $148 $212 $(1,664) $(2,294) $(3,598)
======== ======== ======== ======== ========
Net income (loss)(b) $ 75 $ 14 $(1,957) $5,795 $3,927
======== ======== ======== ======== ========
Net income (loss) per
common share(c) $ 0.00 $ 0.00 $(0.06) $ 0.19 $ 0.13
======== ======== ======== ======== ========
(a) The fourth quarter of 1998 includes a charge of $1,000,000 related to the
bankruptcy of one In-Plant Store customer.
(b) The fourth quarter of 1999 includes an income tax benefit of $8,641,000
related primarily to the Company's recognition of net operating loss
carryforwards (see Note 11).
(c) Each period is computed separately.
(18) RELATED PARTY TRANSACTIONS
During 1997, 1998 and 1999, the Company entered into agreements with a
company of which the Company's Chairman of the Board was formerly 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 $200,000 in
1997 and $100,000 in 1999, 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, 1999, extends to May 31, 2001, and
requires monthly service fees of $12,500, which will be reduced by any
investment transaction fees paid.
(19) SUBSEQUENT EVENT
On March 2, 2000, the Company completed the sale of INTERMAT to Project
Software & Development, Inc. ("PSDI") for $55,000,000 in cash. The Company
realized a net gain of approximately $27,000,000 on the transaction. The
disposition was made pursuant to the terms of that certain 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.
F-21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information contained in the Company's Proxy Statement for the 2000
Annual Meeting of Shareholders, which will be filed not later than 120 days
after December 31, 1999 (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.
21
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. Information regarding Financial
Statement Schedules is included 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.)
Page No.
in Manually
Signed Copy
-----------
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).
22
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).
23
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).
24
10.17 Amendment to Executive Employment Agreement -
dated as of March 11, 1999, by and between
the Company and John M. Sergey (incorporated
by reference to the March 31, 1999 Form 10-Q).
10.18 Amended and Restated Loan and Pledge -
Agreement, dated as of March 11, 1999, by
and between the Company and John M. Sergey
(incorporated by reference to the March 31,
1999 Form 10-Q).
10.19 Amended and Restated Non-Recourse Promissory -
Note, dated as of March 11, 1999, made by
John M. Sergey in favor of the Company
(incorporated by reference to the March 31,
1999 Form 10-Q).
10.20 Form of Strategic Distribution, Inc. 1999 -
Incentive Stock Option Plan (incorporated by
reference to the June 30, 1999 Form 10-Q).
21. List of Subsidiaries of the Company 31*
23. Consent of KPMG LLP 32*
27. Financial Data Schedule *
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the fourth
quarter of 1999.
25
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, 2000.
Strategic Distribution, Inc.
----------------------------
By:/S/ JOHN M. SERGEY
----------------------------
John M. Sergey
President and Chief
Executive Officer
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.
/s/ John M. Sergey President and Chief Executive Officer and
- ------------------ Director
John M. Sergey March 29, 2000
Controller and
/s/ David L. Courtright Chief Accounting Officer
- ----------------------- (principal financial and accounting officer)
David L. Courtright March 29, 2000
/s/ William R. Berkley Chairman of the Board and
- ---------------------- Director
William R. Berkley March 29, 2000
/s/ Andrew M. Bursky
- -------------------- Director
Andrew M. Bursky March 29, 2000
/s/ Arnold W. Donald
- -------------------- Director
Arnold W. Donald March 29, 2000
/s/ Catherine B. James
- ---------------------- Director
Catherine B. James March 29, 2000
/s/ Robert D. Neary
- ------------------- Director
Robert D. Neary March 29, 2000
/s/ Jack H. Nusbaum
- ------------------- Director
Jack H. Nusbaum March 29, 2000
/s/ Joshua A. Polan
- ------------------- Director
Joshua A. Polan March 29, 2000
/S/ Mitchell I. Quain
- --------------------- Director
Mitchell I. Quain March 29, 2000
26
EXHIBIT INDEX
Page No.
in Manually
Signed Copy
-----------
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).
27
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")
28
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).
10.17 Amendment to Executive Employment Agreement -
dated as of March 11, 1999, by and between
the Company and John M. Sergey (incorporated
by reference to the March 31, 1999 Form 10-Q).
10.18 Amended and Restated Loan and Pledge -
Agreement, dated as of March 11, 1999, by
and between the Company and John M. Sergey
(incorporated by reference to the March 31,
1999 Form 10-Q).
10.19 Amended and Restated Non-Recourse Promissory -
Note, dated as of March 11, 1999, made by
John M. Sergey in favor of the Company
(incorporated by reference to the March 31,
1999 Form 10-Q).
10.20 Form of Strategic Distribution, Inc. 1999 -
Incentive Stock Option Plan (incorporated by
reference to the June 30, 1999 Form 10-Q).
21. List of Subsidiaries of the Company 33 31
23. Consent of KPMG LLP 32
27. Financial Data Schedule -
29