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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Commission file Number 0-5228

Strategic Distribution, Inc.
(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code: (215) 633-1900

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, Par Value $.10 Per Share
(Title of class)

        Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    YES ý    NO o

        Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
YES o    NO ý

        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. ý

        The aggregate market value of the Registrant's Common Stock, par value $.10 per share (the "Common Stock"), held by non-affiliates on June 30, 2002, the last day of the registrant's most recently completed second fiscal quarter, was approximately $29,800,000, 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, 2003, the Registrant had outstanding 3,036,358 shares of Common Stock, which were 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 2003 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. In 1994, the Company acquired Industrial Systems Associates, Inc. ("ISA"). ISA is a provider of In-Plant Store® programs for the procurement, handling and data management of maintenance, repair and operating ("MRO") supplies for industrial and institutional customers in North America.

        (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 industrial and institutional customers. See Item 8, "Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements", Footnote No. 18.

        (c)    Narrative Description of Business.    

        The Company's In-Plant Store program permits an organization 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 customer site. The Company also efficiently manages customers' MRO inventory using its proprietary information system.

In-Plant Store® Program

        The Company provides proprietary MRO supply procurement, handling and data management solutions to organizations, 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 inexpensive but critical items, with high associated procurement costs due to inherent inefficiencies in traditional MRO supply distribution methods. The Company's In-Plant Store program, in which organizations 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 outsource MRO supply distribution and handling activities 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 site. Prior to the implementation of the In-Plant Store program, a customer would typically obtain MRO supplies from as many as 500 traditional industrial distributors. Through the In-Plant Store program, the Company services all of its customers' MRO supply needs by establishing a dedicated, fully integrated store at the customer's site. 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 MRO procurement professionals, installs its proprietary information system 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.

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        A benefit of the Company's In-Plant Store program is the identification and reduction of redundant and obsolete inventory in the customer's legacy inventory of MRO supplies. 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. The Company uses its software to systematically describe all MRO parts. Redundancies are identified and the Company is able to consolidate and reduce inventories, thereby reducing its own and the customer's capital investment. The Company can also reduce handling and other expenses related to MRO procurement and gain better pricing by consolidating purchases. In addition, over time, the Company can provide its customers value by (i) more quickly and easily identifying and locating MRO items needed by different departments at a site, or by different sites operated by the same company, and (ii) helping locate alternative sources for different MRO items.

        The Company believes that increased recognition of the inefficiencies associated with the traditional MRO supply distribution process has increased the demand for integrated supply solutions such as the Company's In-Plant Store program.

Customers

        During the year ended December 31, 2002, three customers comprised approximately 51.9% of the Company's revenues. The Company operated 34 In-Plant Store sites for one such customer, Kraft Foods North America, Inc. ("Kraft"), which comprised 30.4% of the Company's revenues for the year ended December 31, 2002. The Company operated 20 In-Plant Store sites for another customer, El Paso Corporation ("EPC"), which comprised 13.7% of the Company's revenues for the year ended December 31, 2002.

        During 2001 and early 2002, the Company and Kraft discussed certain changes to the In-Plant Store services agreement that would have made the Kraft agreement profitable and reduced the Company's working capital commitment. As a result of the inability of the parties to reach a revised agreement, on March 27, 2002 the Company and Kraft agreed to terminate the relationship prior to the contract expiration of August 2003. During the second quarter of 2002, the Company sold its Kraft inventory to Kraft at normal selling prices. The value of the sale was $26.2 million and the related gross margin was $1.7 million. During the second and third quarters of 2002, the Company substantially completed the transition of all storerooms to Kraft and reduced its operating costs. The Company provided inventory procurement and management services to Kraft during the transition. The Company's Kraft revenues for the years ended December 31, 2002, 2001 and 2000 were $77.0 million ($50.8 million excluding the Kraft inventory sale), $86.1 million and $56.0 million. Accounts receivable related to the Kraft services agreement were collected at December 31, 2002.

        The Company periodically reviews the financial condition of its customers and seeks to reduce asset exposure and program costs when appropriate. The Company is monitoring the financial condition of EPC, which had its debt ratings downgraded in November 2002. EPC has undertaken a plan to improve its liquidity through asset sales and debt refinancing. Accounts receivable related to the EPC services agreements were approximately $2.2 million at December 31, 2002.

        The Company provides its services to its In-Plant Store customers in the United States and Mexico. During the year ended December 31, 2002, 9.9% of the Company's revenues were from customers in Mexico.

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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:

        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 2002.

Suppliers

        The Company purchases products for its In-Plant Store program from manufacturers and specialty distributors. The Company has distribution agreements with 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 more than 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.

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 providers, 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 be price-competitive, to deliver value-added procurement solutions to its customers through its In-Plant Store program and to respond to the needs of its customers with high quality of service. 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.

Government Regulation

        In recent years, governmental and regulatory bodies have promulgated numerous standards and regulations designed, among other things, to ensure the quality of certain classes of MRO items, to

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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, 2002, the Company had approximately 550 employees, of whom approximately 120 were employed in selling and administrative capacities and approximately 430 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.

Item 2. Properties

        The Company leases its corporate headquarters located in Bensalem, Pennsylvania, as well as additional office space in Feasterville, Pennsylvania; El Paso, Texas; and several small warehouses and offices located at or near In-Plant Store sites. The Company has the right to renew some of these leases. The Company believes the properties that 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 its lease at any of these facilities, it could find other suitable facilities with no adverse effect on the Company's business. The Company does not own or lease the space occupied by its In-Plant Store facilities.

Item 3. Legal Proceedings

        The Company is currently involved in certain legal proceedings incidental to the conduct of its business, including collection matters with several terminated accounts. The Company does not believe that the outcomes of such proceedings are likely to have a material adverse effect, individually or in the aggregate, on its consolidated financial position or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

        Not applicable.

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PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters

        The Common Stock is quoted on the Nasdaq National Market ("NNM") under the symbol "STRD". As of March 20, 2003, there were approximately 1,400 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.

        Effective May 17, 2001, the Company's shareholders approved a one-for-ten reverse split of its common stock (the "Reverse Split"). The shareholders also approved a decrease in the number of authorized shares of common stock from 50,000,000 shares to 20,000,000 shares. All references in the Company's current filing on Form 10-K to number of shares issued and per share amounts have been restated to reflect the effect of the Reverse Split for the periods presented.

        The Company paid no cash dividends on the Common Stock for the years ended December 31, 2002 and 2001 and does not intend to declare any cash dividends in the foreseeable future. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources".

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Item 6. Selected Financial Data

(a)

Operating results include revenues of $26,200,000, gross margin of $1,700,000, a charge of $3,800,000 for the write-down of certain fixed assets and severance expense of $700,000, all related to termination of the Kraft contract and inventory sale to Kraft.

(b)

Operating loss is net of operating income of $900,000 related to an increase in the estimated recoverable value of accounts receivable and inventories in connection with the termination of services agreements and $300,000 from an insurance recovery.

(c)

Operating loss includes charges amounting to $5,800,000 related to the bankruptcies of two large In-Plant Store customers.

(d)

Operating loss includes a charge of $1,514,000 for settlement of an employment contract and a charge of $1,584,000 related to the write-off of certain impaired assets.

(e)

Income before income taxes includes a pretax gain of $43,185,000 from the sale of the Company's INTERMAT, Inc. subsidiary ("INTERMAT").

(f)

An income tax benefit of $8,641,000 was recorded related primarily to the Company's recognition of net operating loss carryforwards.

(g)

Operating loss includes a charge of $1,000,000 related to the bankruptcy of one In-Plant Store customer.

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

General

        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 obtain new customers and manage growth, the Company's ability to enforce provisions of its contracts, 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 continued economic downturn, the Company could experience additional customer bankruptcies, reduced volume of business from its existing customers and lost volume due to plant shutdowns or consolidations by the Company's customers.

        The Company provides proprietary maintenance, repair and operating ("MRO") supply procurement, handling and data management solutions to its customers, primarily through its In-Plant Store® program.

        Many of the Company's customers continue to experience business downturns in the current economic environment. Six such customers filed petitions for relief under Chapter 11 of the U.S. Bankruptcy Code; two during the year ended December 31, 2002 and four during the year ended December 31, 2001. The Company is monitoring the financial condition of EPC, which had its debt ratings downgraded in November 2002. EPC has undertaken a plan to improve its liquidity through asset sales and debt refinancing. Accounts receivable related to the EPC services agreements were approximately $2.2 million at December 31, 2002. An economic downturn affecting the Company's customers, negatively impacts the Company's revenues and earnings, and its ability to effectively implement improvements in the In-Plant Store program. The Company periodically reviews the financial condition of its customers and seeks to reduce asset exposure and program costs when appropriate. There can be no assurance, however, that the Company will not experience further reductions in business or asset losses due to the economic downturn or business failures affecting its customers.

Contract Termination

        During 2001 and early 2002, the Company and Kraft discussed certain changes to the In-Plant Store services agreement that would have made the Kraft agreement profitable and reduced the Company's working capital commitment. As a result of the inability of the parties to reach a revised agreement, on March 27, 2002 the Company and Kraft agreed to terminate the relationship prior to the contract expiration of August 2003. During the second quarter of 2002, the Company sold its Kraft inventory to Kraft at normal selling prices. The value of the sale was $26.2 million and the related gross margin was $1.7 million. During the second and third quarters of 2002, the Company substantially completed the transition of all storerooms to Kraft and reduced its operating costs. The Company provided inventory procurement and management services to Kraft during the transition. During the second quarter of 2002, the Company and Kraft finalized a transition plan, provided the affected workforce with information concerning employment opportunities with either the Company or Kraft and provided severance benefits to those employees whose positions were being eliminated in the workforce reduction. In connection therewith, the Company recorded severance expense of $700,000 during the second quarter of 2002, which was paid prior to December 31, 2002. The Company's Kraft revenues for the years ended December 31, 2002, 2001 and 2000 were $77.0 million ($50.8 million excluding the Kraft inventory sale), $86.1 million and $56.0 million. Accounts receivable related to the Kraft supply agreement were collected at December 31, 2002. There are no significant additional Kraft revenues, expenses or cash flows expected in the future.

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        During the second quarter of 2002, the Company recorded a charge of $3,800,000 related to the write-down of certain fixed assets in accordance with the provisions of Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"). The Company provides its MRO procurement, handling and data management services through the In-Plant Store® program utilizing the In-Site® operating system, the Company's proprietary information system. The Company's primary investment in long-lived assets is in its In-Site technology, including supporting equipment or systems such as personal computers and network communications. As a result of the termination of the Kraft services agreement, the Company evaluated, in accordance with SFAS 144, the recoverability of its computer technology and determined that the value was impaired from the expected underutilization. The Company measured the fair value of the long-lived assets in accordance with SFAS 144 and determined the amount of impairment to be $3,800,000, including $200,000 related to personal computers removed from use and sold or disposed.

Critical Accounting Policies

        The Securities and Exchange Commission ("SEC") has issued cautionary advice regarding disclosure about critical accounting policies. The SEC defines critical accounting policies as those that are both most important to the portrayal of a company's financial condition and results and that require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about matters that are inherently uncertain and may change materially in subsequent periods. The preparation of the Company's consolidated financial statements requires estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes. Significant estimates made by the Company include evaluation of the recoverability of assets, such as accounts receivable, inventories, long-lived assets and income tax assets, and the assessment of litigation and other contingencies. The Company's ability to collect accounts receivable and recover the value of its inventories depends on a number of factors, including the financial condition of its customers, the effect of changes in economic conditions and its ability to enforce provisions of its contracts in the event of disputes, through litigation if necessary. The recoverability of long-lived assets is highly dependant on the Company's business volume and application of the applicable accounting standards requires significant judgments and estimates. The Company provides reserves or accrues liabilities in accordance with generally accepted accounting principles for events such as site closures, to record assets at estimated net realizable values and to record probable contingent liabilities. The amounts of such reserves and liabilities are based on information and assumptions that the Company deems reasonable and probable at the time. The matters that give rise to such provisions are inherently uncertain and may require complex and subjective judgments. Although the Company believes the estimates and assumptions used in determining the recorded amounts of net assets and liabilities at December 31, 2002 are reasonable, actual results could differ materially from the estimated amounts recorded in the Company's financial statements.

Sale of Subsidiary

        On March 2, 2000, the Company completed the sale of INTERMAT for $55,000,000 in cash. The Company realized a gain on sale of subsidiary of $43,185,000, or approximately $26,544,000 after tax, on the transaction. A portion of the net proceeds from the INTERMAT sale transaction was used to repay all outstanding bank borrowings as of March 2, 2000. The balance of the net proceeds was used to pay federal tax deposits in connection with the sale and to fund the expansion of the In-Plant Store program.

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Results of Operations

        The following table of revenues and percentages sets forth selected items of the results of operations.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

        Revenues for the year ended December 31, 2002 decreased 20.7% to $253,583,000 from $319,619,000 for the year ended December 31, 2001. Revenues for the year ended December 31, 2002 include $26.2 million related to the sale of Kraft inventory in connection with the termination of the Kraft services agreement. Excluding the one-time sale of Kraft inventory, revenues for the year ended December 31, 2002 declined 28.9% from the comparable period in 2001. Termination of the Kraft services agreement accounted for $35.3 million (11.0%) of the revenue decline for the year ended December 31, 2002 as compared to the respective period in 2001. The weakened U.S. economy reduced mature store revenues by approximately $10.0 million (3.1%) for the year ended December 31, 2002 as compared to 2001. Revenue declines related to other site closings, including unprofitable contracts, partially offset by increased revenues from maturing sites during the year ended December 31, 2002, accounted for the remaining 14.8% of the net decline for the year.

        As a result of the termination of the In-Plant Store services agreement with Kraft, the slowdown of the introduction of new sites and the closing of unprofitable sites, the Company did not achieve historic levels of revenue during 2002. The Company closed a large Mexican In-Plant Store site in January 2003, which will favorably impact the Company's operating results for the first quarter of 2003. Future growth in the Company's business is highly dependant on its ability to attract new customers. Continued weakness in the U.S. economy has delayed prospective customers' decisions to implement the In-Plant Store program. Future growth is also dependant on a reversal of revenue declines that are related to the effect of the weak economy on the Company's customers. The Company has reduced and may continue to reduce its operating costs as a result of the revenue declines. Such cost reductions will likely be lower than the relative sales declines because of the fixed nature of certain costs and determinations by the Company that certain costs are necessary to improve the Company's technology and service offerings and to obtain new business. Kraft comprised approximately 30.4% (20.0%

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excluding the Kraft inventory sale) and 26.9% of the Company's revenues during the years ended December 31, 2002 and 2001. The Company's second largest customer, El Paso Corporation, comprised approximately 13.7% and 11.4% of the Company's revenues during the years ended December 31, 2002 and 2001.

        Cost of materials as a percentage of revenues decreased to 80.9% for the year ended December 31, 2002 from 82.0% in 2001. During the year ended December 31, 2002, the high dollar/low margin sale of Kraft inventory produced $1.7 million of gross margin, which accounted for 1.4% of higher cost of material percentage for the period. Excluding the aforementioned sale, the Company's overall gross margins improved 2.5% for the year ended December 31, 2002 as compared to 2001. Approximately 1.3% of this improvement reflects the Company's efforts to close unprofitable sites and improve profit margins at both new and existing sites, partially offset by the slowdown in implementation of new In-Plant Store sites and the associated decline in implementation revenues, which have no material costs. Approximately 0.4% of the improvement relates to an increase in revenues, with no associated direct material costs, in connection with the termination of services agreements and an insurance recovery. The remaining 0.8% reflects a greater proportion of management service fees in the revenue mix. Management service fees have no direct material costs.

        Operating wages and benefits expense as a percentage of revenues decreased to 7.3% for the year ended December 31, 2002 from 8.2% in 2001. When revenue from the Kraft inventory sale is excluded, the percentage for the year ended December 31, 2002 was 8.1%. The Company's operating wages and benefits were reduced significantly during 2002 in conjunction with contract terminations. The comparable year over year percentage reflects the Company's effort to reduce costs commensurate with declines in the Company's revenue base. Continued declines in business volume from existing customers due to the weak economy may result in lower productivity and negatively impact the Company's ability to maintain staff at optimum levels.

        Other operating expenses as a percentage of revenues decreased to 2.6% for the year ended December 31, 2002 from 3.0% in 2001. When revenue from the Kraft inventory sale is excluded, the percentage for the year ended December 31, 2002 was 2.9%. The Company's operating expenses were reduced significantly during 2002 in conjunction with contract terminations. The slightly lower adjusted percentage for the year ended December 31, 2002 reflects lower temporary labor and travel costs related to efficiency improvement projects initiated during 2001, partially offset by a higher percentage of fixed systems costs due to the lower revenue base.

        Selling, general and administrative expenses as a percentage of revenues decreased to 8.1% for the year ended December 31, 2002 from 10.8% in 2001. When revenue from the Kraft inventory sale is excluded, the percentage for the year ended December 31, 2002 was 9.0%. The Company's selling, general and administrative expenses were reduced significantly during 2002 in conjunction with contract terminations. The decreased percentage for the year ended December 31, 2002 reflects a 1.6% period over period reduction of charges for certain uncollectible accounts, including the 2001 write-off of uncollectible accounts in connection with the bankruptcies of two In-Plant Store customers. The remaining percentage decline resulted primarily from lower wages and travel costs, reflecting the Company's efforts to improve efficiency and reduce headcount in its administrative operations.

        During the year ended December 31, 2002, the Company recorded charges of $4,500,000, or 1.8% of revenues, in connection with the termination of the Kraft services agreement. The charges include $700,000 of severance expense and $3,800,000 of long-lived asset impairment expense. See "Contract Termination", above.

        Interest income, net was $437,000 for the year ended December 31, 2002 compared to interest expense, net of $348,000 for the comparable period in 2001. The Company had no borrowings against its credit facility during 2002, and invested its available cash, including cash received from the sale of Kraft inventory.

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        Income tax expense of $164,000 was recorded on income earned from the Company's Mexican operations during the year ended December 31, 2002. There was no tax benefit recorded for cumulative pretax losses of the Company's U.S. operations for the year ended December 31, 2002. The realization of income tax benefits from such losses is dependent on future events that cannot currently be deemed more likely than not to occur. The Company's aggregate net loss for 2002 includes the write-off of $1.9 million of goodwill that is not deductible for federal income tax purposes.

        During the first quarter of 2002, the Company adopted SFAS 142 and recorded a one-time, non-cash charge of $1.9 million to write-off the carrying value of its goodwill. Such charge is non-recurring in nature and is reflected as cumulative effect of accounting change in the accompanying consolidated statement of operations.

        Net loss for the year ended December 31, 2002 was $3,418,000, compared to net loss of $13,125,000 in 2001, as a result of the operating results previously discussed and the cumulative effect of the accounting change to write-off the Company's goodwill.

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

        Revenues for the year ended December 31, 2001 decreased 10.1% to $319,619,000 from $355,503,000 for the year ended December 31, 2000. The Company terminated unprofitable contracts throughout 2001 and the second half of 2000 and experienced other additional terminations initiated by certain customers. Revenue declines from site closings, including terminated contracts, were partially offset by increased revenues from the maturation of sites opened over the six quarters ended December 31, 2001, resulting in the net decline of 6.9%. Final sales of inventories at closed sites were higher in 2000, resulting in a revenue decrease of 2.5% for the year ended December 31, 2001, as compared to December 31, 2000. The Company's planned slowdown of the introduction of new sites also resulted in lower revenue from new site implementations, which in turn accounted for 0.2% of the revenue decline. The slowdown of the introduction of new sites and the closing of terminated sites impacted the Company's ability to achieve historic levels of revenue and growth during 2002. Additionally, 0.4% of the decrease is attributable to lower data management service revenues as a result of the first quarter 2000 sale of INTERMAT. During the years ended December 31, 2001 and 2000, three In-Plant Store customers, in the aggregate, comprised approximately 43.8% and 28.1% of the Company's revenues. Kraft represented approximately 26.9% and 15.5% of revenues for the years ended December 31, 2001 and 2000. El Paso Corporation represented approximately 11.4% of revenues for the year ended December 31, 2001, but less than 10% for the year ended December 31, 2000.

        Cost of materials as a percentage of revenues increased slightly to 82.0% for the year ended December 31, 2001 from 81.9% in 2000. Lower data management service revenues as a result of the first quarter 2000 sale of INTERMAT accounted for an increase of approximately 0.4% of revenues because there are no material costs associated with data management services. Approximately 0.2% of the increase related to the slowdown in implementation of new In-Plant Store sites and the associated decline in implementation revenues, which have no material costs. Higher costs in the Company's Mexico In-Plant Store sites, resulted in an increase of approximately 0.3% of revenues. The higher Mexico costs include a charge of 0.1% for a site closing in connection with the bankruptcy of a customer's U.S. parent company. A decrease of approximately 0.6% was due to significant charges recorded during the year ended December 31, 2000, primarily related to the termination of certain In-Plant Store sites. The remaining consolidated percentage decrease reflects improvements in the Company's overall profit margins for the year ended December 31, 2001 as compared to 2000, through certain site closings and less high volume/low margin sales of inventory at terminated sites. During 2001, the Company was also able to reduce certain liabilities to amounts more favorable than originally recorded, however the favorable impact on cost of materials was offset by increased taxes on its materials and other costs related to performance under its contracts.

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        Operating wages and benefits expenses as a percentage of revenues increased to 8.2% for the year ended December 31, 2001 from 7.8% in 2000. This increase reflects higher wages and employee benefit costs for the Company's In-Plant Store workforce. The increase also reflects additional staffing in connection with In-Site training and service improvements since December 31, 2000. The increase was partially offset by the decline in data management service revenues. Operating wages and benefits associated with data management services were historically higher as a percentage of revenues than those associated with In-Plant Store operations.

        Other operating expenses as a percentage of revenues increased to 3.0% for the year ended December 31, 2001 from 2.9% in 2000. The increase reflects higher temporary labor and travel costs related to site closures and service improvement projects and higher costs for the In-Site system, including amortization of capitalized costs and telecommunications network costs. The increase was partially offset by the decline in data management service revenues. Other operating expenses associated with data management services were historically higher as a percentage of revenues than those associated with In-Plant Store operations.

        Selling, general and administrative expenses as a percentage of revenues increased to 10.8% for the year ended December 31, 2001 from 9.6% in 2000. The year ended December 31, 2001 includes charges of 1.8% of revenues related to site closings, including the write-off of uncollectible accounts in connection with the bankruptcies of two In-Plant Store customers. Offsetting the increase described above was a decrease of approximately 0.2% of revenues due to the decline in data management service revenues as a result of the first quarter 2000 sale of INTERMAT, which historically had a significantly higher selling, general and administrative cost component than the In-Plant Store business. The remaining net decrease of 0.4% resulted from lower wages and travel costs, reflecting the Company's efforts to improve the efficiency of its operations.

        During the third quarter 2000, the Company recorded non-recurring charges of $3,098,000 or 0.9% of revenues. The Company's former Chief Executive Officer resigned and the Company recorded a charge of $1,514,000 related to settlement of his employment contract. The Company also recorded a charge of $1,584,000 related to the write-off of certain impaired assets. The charge to operations reflected the write-off of the net book value of these assets, which were no longer used and which provided no future benefit to the Company.

        Interest expense, net was $348,000 or 0.1% of revenues for the year ended December 31, 2001 compared to $859,000 or 0.2% of revenues for the year ended December 31, 2000. The Company had lower average borrowings and interest rates during the year ended December 31, 2001 as compared to 2000, which were partially offset by higher interest income in 2000 during the period the Company invested available proceeds from the INTERMAT sale.

        In accordance with applicable accounting standards, no income tax benefit was recorded for the year ended December 31, 2001, as a result of the valuation allowance provided on the deferred tax assets generated by the Company's pretax losses. The valuation allowance was established to reduce deferred tax assets to amounts deemed more likely than not to be realizable in the future. Income tax expense of $12,789,000 was recorded for the year ended December 31, 2000 on the Company's pretax income from continuing operations, which included the gain from the sale of INTERMAT.

        Loss from discontinued operations was $650,000, net of income tax benefit of $350,000 for the year ended December 31, 2000 reflecting a charge for estimated contractual obligations from a prior sale of a business.

        Net loss for the year ended December 31, 2001 was $13,125,000, compared to net income of $17,902,000 in 2000, as a result of the operating results previously discussed and the first quarter 2000 sale of INTERMAT.

13

Liquidity and Capital Resources

        The Company's revolving Loan and Security Agreement (the "credit facility"), which provided maximum borrowings of $50,000,000, expired on May 8, 2002. After completing the sale of Kraft inventory during the second quarter of 2002, the Company determined that it had sufficient cash and cash equivalents to support its operations and elected not to enter into a new credit facility at that time. Although there can be no assurance, in the event a credit facility is required in the future, the Company expects to be able to obtain a financing commitment, with terms and conditions appropriate for the Company's needs.

        Net cash provided by operating activities was $40,643,000 for the year ended December 31, 2002 compared to net cash provided of $17,102,000 in 2001. During 2002, the Company received $26.2 million from the one-time sale of inventory to Kraft in connection with the termination of the Kraft services agreement. The Company completed the transition of all storerooms to Kraft during 2002 and reduced Kraft accounts receivable by $12.2 million during the year. Also during 2002, the Company received federal income tax refunds of $4.1 million related to the filing of its year end 2000 and 2001 income tax returns. The remaining change in cash provided was primarily due to increased cash generated from the Company's operations and accounts receivable collections offset by reduction of amounts due to suppliers. As of December 31, 2002, accounts receivable, net on the consolidated balance sheet included outstanding balances of approximately $3,000,000 with several terminated accounts with which the Company is involved in litigation. Although there can be no assurance, the Company does not believe, based upon its evaluation of information currently available, that the outcomes of such proceedings are likely to have a material adverse effect, individually or in the aggregate, on its consolidated financial position or results of operations.

        Net cash used in investing activities was $145,000 for the year ended December 31, 2002 compared to net cash used of $2,056,000 in 2001. Expenditures for computer systems and related equipment were significantly lower in 2002 than in 2001.

        Net cash used in financing activities was $490,000 for the year ended December 31, 2002 compared to net cash used of $13,301,000 in 2001. During the year ended December 31, 2002, the Company repurchased 42,400 shares of its common stock under a stock repurchase program. During the year ended December 31, 2001, the Company used cash provided by operating activities to repay borrowings under the credit facility. There were no borrowings under the credit facility during 2002.

        At December 31, 2002, the Company had $43.6 million of cash and cash equivalents. The Company is currently evaluating strategic alternatives for the use of its cash balances. The Company believes that cash on hand, cash generated from future operations and the ability to enter into a new credit facility, if deemed appropriate, will generate sufficient funds to permit the Company to support its operations.

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.

14

Recently Issued Accounting Standards

        In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"). FIN 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The provisions of FIN 46 are effective for variable interest entities created after January 31, 2003. At December 31, 2002, the Company had no investments in variable interest entities.

        In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure ("SFAS 148"). SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends SFAS 123, Accounting for Stock-Based Compensation, by requiring prominent disclosures in both annual and interim financial statements, about the method of accounting for stock-based employee compensation and the effect of the method on reported results. The provisions of SFAS 148 are effective for fiscal years ending after December 15, 2002. Since the Company intends to continue using the intrinsic value approach, prescribed under Accounting Principles Board Opinion No. 25, for measuring stock-based employee compensation, it has adopted the required disclosure provisions of SFAS 148 for the year ended December 31, 2002.

        In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's Accounting and Disclosure for Guarantees, Including Indirect Guarantees and Indebtedness of Others ("FIN 45"). FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees it has issued. FIN 45 also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The provisions of FIN 45 are effective on a prospective basis for guarantees issued or modified after December 31, 2002 and immediately for the related disclosure requirements. At December 31, 2002, the Company had not issued any guarantees in respect of the performance of third parties.

        In July 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities ("SFAS 146"). SFAS 146 will spread out the reporting of expenses related to restructurings initiated after 2002 because a commitment to a plan to exit an activity or dispose of long-lived assets will no longer be enough to record a liability for the anticipated costs. Instead, companies will record exit and disposal costs when they are incurred and can be measured at fair value, and they will subsequently adjust the recorded liability for changes in estimated cash flows. SFAS 146 is effective for fiscal years beginning after December 31, 2002. The Company believes that adoption of SFAS 146 will have no material effect on the Company's financial position or results of operations.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

        The Company's exposure to market risk is generally limited to changes in interest rates related to funds available for investment, which are tied to variable market rates. 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. If market interest rates were to increase by 10% from rates as of December 31, 2002, the effect would not be material to the Company.

        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.

15

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.

16

STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES

Index to Financial Statements

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, 2002 and 2001, 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, 2002. In connection with our audits of the consolidated financial statements, we also have audited the accompanying financial statement schedule. These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits.

        We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

        As discussed in Notes 2 and 5 of the Notes to Consolidated Financial Statements, in 2002 the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.

Philadelphia, Pennsylvania
February 28, 2003

F-2

STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands, except share data)

See accompanying notes to consolidated financial statements.

F-3

STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(in thousands, except share data)

See accompanying notes to consolidated financial statements.

F-4

STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity

(in thousands, except share data)

See accompanying notes to consolidated financial statements.

F-5

STRATEGIC DISTRIBUTION, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(in thousands)

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 and institutional customers, primarily through its In-Plant Store® program. The Company became a provider of the In-Plant Store program in 1994 and conducts its U.S. operations primarily through a wholly-owned subsidiary, Industrial Systems Associates, Inc. ("ISA").

        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 March 2, 2000, the Company completed the sale of all of the outstanding capital stock of its INTERMAT, Inc. subsidiary ("INTERMAT") (see Note 9). INTERMAT provided data management services and developed and supplied software for MRO inventory cataloging.

        Effective May 17, 2001, the Company's shareholders approved a one-for-ten reverse split of its common stock (the "Reverse Split"). The shareholders also approved a decrease in the number of authorized shares of common stock from 50,000,000 shares to 20,000,000 shares. The effect of the Reverse Split has been retroactively reflected as of January 1, 2000 in the consolidated financial statements. All references to number of shares issued, per share amounts and stock option data have been restated to reflect the effect of the Reverse Split for the periods presented.

(2) Significant Accounting Policies

Principles of Consolidation

        The consolidated financial statements include the accounts of Strategic Distribution, Inc. and subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Use of Estimates

        The preparation of the consolidated financial statements requires estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes. Significant estimates made by the Company include evaluation of the recoverability of assets, such as accounts receivable, inventories and income tax assets, and the assessment of litigation and other contingencies. The Company's ability to collect accounts receivable and recover the value of its inventories depends on a number of factors, including the financial condition of its customers, the effect of changes in economic conditions and its ability to enforce provisions of its contracts in the event of disputes. The Company provides reserves or accrues liabilities in accordance with generally accepted accounting principles, to record assets at estimated net realizable values and to record probable contingent liabilities. The matters that give rise to such provisions are inherently uncertain and may require complex and subjective judgments. Although the Company believes the estimates and assumptions used in determining the recorded amounts of net assets and liabilities at December 31, 2002, are reasonable, actual results could differ materially from the estimated amounts recorded in the Company's financial statements.

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. At December 31, 2002 and 2001, the Company had investments in cash equivalents of approximately $43,200,000 and $2,600,000.

Fair Value of Financial Instruments

        The carrying amounts of the Company's financial instruments, principally accounts receivable and accounts payable, approximate fair value.

Inventories

        Inventories, which consisted solely of goods purchased for resale, are stated at the lower of cost (determined on the first-in, first-out basis) or market.

Office Fixtures and Equipment

        Office fixtures 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. Estimated useful lives of depreciable assets are as follows:

Intangible Assets

        Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142") requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. Under SFAS 142, goodwill impairment is deemed to exist if the net book value of the Company's goodwill exceeds its estimated fair value. (See Note 5, Intangible Assets).

Impairment of Long-Lived Assets

        Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144") requires that long-lived assets, such as office fixtures and equipment and purchased intangibles subject to amortization, be tested for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. (See Note 8, Contract Termination).

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. A valuation allowance may be established to reduce deferred tax assets to amounts deemed more likely than not to be realized.

Revenue Recognition

        Revenue is recognized when products are delivered or services are provided to customers, selling prices are fixed or determinable and collection is reasonably assured.

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" and SFAS 148 "Accounting for Stock-Based Compensation—Transition and Disclosure". The Company measures compensation under its stock option plans using the intrinsic value approach prescribed under Accounting Principles Board Opinion No. 25.

        The following table illustrates the effect on net income (loss) of each period if the fair value based method of determining stock-based employee compensation under SFAS 123 had been applied to all outstanding awards.

Comprehensive Income

        For the years ended December 31, 2002, 2001 and 2000, the Company's comprehensive income (loss) equals the amounts of net income (loss) reported in the Consolidated Statements of Operations.

F-9

(3) Accounts Receivable

        Accounts receivable is stated net of an allowance for doubtful accounts of $3,750,000 and $9,300,000 at December 31, 2002 and 2001. For the years ended December 31, 2002, 2001 and 2000, charge-offs against the allowance amounted to $7,297,000, $1,482,000 and $1,175,000. As of December 31, 2002, accounts receivable included outstanding balances of approximately $3,000,000 with several terminated accounts with which the Company is involved in litigation.

(4) Office Fixtures and Equipment

        For the years ended December 31, 2002, 2001 and 2000, depreciation and amortization expense amounted to $2,797,000, $4,029,000 and $3,771,000.

        During the year ended December 31, 2002, the Company recorded a charge of $3,800,000 related to the write-down of certain fixed assets in accordance with the provisions of SFAS 144 (see Note 8, Contract Termination).

        During the year ended December 31, 2000, in order to maintain a computer software environment scalable for future business operations, the Company strategically evaluated use of its information technology resources. As a result of this evaluation the Company identified certain capitalized software and reference materials that were no longer required or that would require significant modification, deemed not to be cost effective, to be used within the Company's current information technology environment. A charge to operations of $1,584,000 was taken during the year ended December 31, 2000 to reflect the write-off of the net book value of the assets, which were no longer used and which provided no future benefit to the Company.

(5) Intangible Assets

        During the year ended December 31, 2002, the Company adopted SFAS 142 and recorded a one-time, noncash charge of $1,939,000 to write-off the carrying value of its goodwill as of January 1, 2002. The fair value used in determining the amount of impairment was estimated based on quoted market prices for the Company's common stock. This charge is non-recurring in nature and is reflected

F-10

as "cumulative effect of accounting change" in the accompanying consolidated statements of operations. For the years ended December 31, 2001 and 2000, amortization of intangible assets amounted to $116,000 ($0.04 per share—basic and diluted) and $271,000 ($0.08 per share—basic and diluted).

(6) Accounts Payable and Accrued Expenses

(7) Long-Term Debt

        The Company's revolving Loan and Security Agreement (the "credit facility"), which provided maximum borrowings of $50,000,000, expired on May 8, 2002. At December 31, 2002, the Company had $43.6 million of cash and cash equivalents to support its operations and had no long-term debt outstanding.

(8) Contract Termination

        During 2001 and early 2002, the Company and its largest customer, Kraft Foods North America, Inc. ("Kraft") discussed certain changes to the In-Plant Store services agreement that would have made the Kraft agreement profitable and reduced the Company's working capital commitment. As a result of the inability of the parties to reach a revised agreement, on March 27, 2002 the Company and Kraft agreed to terminate the relationship prior to the contract expiration of August 2003. During the second quarter of 2002, the Company sold its Kraft inventory to Kraft at normal selling prices. The value of the sale was $26.2 million and the related gross margin was $1.7 million. During the second and third quarters of 2002, the Company substantially completed the transition of all storerooms to Kraft and reduced its operating costs. The Company provided inventory procurement and management services to Kraft during the transition. The Company's Kraft revenues for the years ended December 31, 2002, 2001 and 2000 were $77.0 million ($50.8 million excluding the Kraft inventory sale), $86.1 million and $56.0 million. Accounts receivable related to the Kraft supply agreement were collected at December 31, 2002.

        During the second quarter of 2002, the Company and Kraft finalized a transition plan, provided the affected workforce with information concerning employment opportunities with either the Company or Kraft and provided severance benefits to those employees whose positions were being eliminated in the workforce reduction. In connection therewith, the Company recorded severance expense of $700,000 during the second quarter of 2002, which was paid prior to December 31, 2002.

F-11

        During the second quarter of 2002, the Company recorded a charge of $3,800,000 related to the write-down of certain fixed assets in accordance with the provisions of SFAS 144. The Company provides its MRO procurement, handling and data management services through the In-Plant Store® program utilizing the In-Site® operating system, the Company's proprietary information system. The Company's primary investment in long-lived assets is in the In-Site technology, including supporting equipment or systems such as personal computers and network communications. As a result of the termination of the Kraft services agreement, the Company evaluated, in accordance with SFAS 144, the recoverability of its computer technology over its expected useful life and determined that the value was impaired from the expected underutilization. The Company measured the fair value of the long-lived assets in accordance with SFAS 144 and determined the amount of impairment to be $3,800,000, including $200,000 related to personal computers removed from use and sold or disposed. The Company used an expected present value method with multiple cash flow scenarios and a risk free interest rate as the basis for measuring the fair value of the assets.

(9) Sale of Subsidiary

        On March 2, 2000, the Company completed the sale of INTERMAT for $55,000,000 in cash. The Company realized a gain on sale of subsidiary of $43,185,000, or approximately $26,544,000 after tax, on the transaction.

(10) Discontinued Operations

        During the year ended December 31, 2002, the Company received $100,000 in settlement of issues related to a requirement, arising from a 1997 sale of a business, to repurchase certain inventory and the collection of a defaulted promissory note due from the buyer. No net gain or loss was realized in the transaction.

(11) 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 $260,000, $400,000 and $240,000 for the years ended December 31, 2002, 2001 and 2000.

F-12

(12) Income Taxes

        Income tax benefit (expense) from continuing operations is as follows:

        A reconciliation of the expected Federal income tax benefit (expense) from continuing operations at the statutory rate (34% in 2002 and 2001 and 35% in 2000) to the Company's income tax expense follows:

F-13

        The components of the net deferred tax asset were as follows:

        At December 31, 2002 and 2001, a valuation allowance was established to reduce deferred tax assets to amounts deemed more likely than not to be realizable. The net change in the valuation allowance was an increase of $512,000 and $4,356,000 for the years ended December 31, 2002 and 2001.

(13) 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.

        At December 31, 2002, the Company had 7% promissory notes receivable amounting to $1,303,000, related to the sale of 51,500 shares of common stock pursuant to Stock Purchase Agreements with three former executives. The non-recourse notes, plus accrued interest thereon, are due in 2003 and are collateralized by the common stock sold. Notes receivable amounting to $71,000, plus accrued interest, were repaid during 2000 in connection with the repurchase of 8,000 shares of common stock from a former executive.

        During 2001, the Company repurchased 2,700 shares of common stock at a weighted average price of $9.46 per share under a one year repurchase program that expired in February 2002.

        During 2002, the Company repurchased 42,400 shares of common stock at a weighted average price of $11.55 per share under a one year repurchase program that expires in June 2003.

F-14

(14) Net Income (Loss) Per Share

        Net loss per common share—basic and diluted are equal for the years ended December 31, 2002 and 2001, because the effect of the assumed issuance of potential shares of common stock is antidilutive. For the year ended December 31, 2000, the weighted average number of shares used to calculate diluted net income per common share includes the assumed exercise of stock options equivalent to 3,019 shares under the treasury stock method. As of December 31, 2002, 2001 and 2000, there were stock options outstanding for 93,101, 130,516 and 170,959 shares of common stock.

(15) Employment Contract Settlement

        During the year ended December 31, 2000, the Company's former Chief Executive Officer resigned and the Company recorded a charge of $1,514,000 related to settlement of his employment contract. The charge reflects the terms of an agreement, under which the Company is obligated to pay salary continuation and benefits through May 1, 2003.

(16) 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 300,000 shares of common stock under the 1990 Plan and up to 150,000 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 ISO Plans are exercisable at various rates from 25.0% to 33.3% per year beginning on the first anniversary of the date of grant. In addition, 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.

F-15

        The following table summarizes the option information for options granted under the ISO Plans:

        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 27,500 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:

        The Company has an Executive Compensation Plan (the "Executive Plan") under which the Board is authorized to grant up to 50,000 shares of common stock. No shares of common stock have been issued under the Executive Plan.

        Nonqualified options for a total of 9,200 shares granted to two former officers of a subsidiary of the Company expired in 2001. Options for a total of 100,000 shares granted to the Company's former Chief Executive Officer under the ISO Plans and a 1997 nonqualified option grant expired in December 2000.

F-16

        The following table summarizes information about stock options outstanding under all plans at December 31, 2002:

        The weighted average fair value of options granted for the years ended December 31, 2002, 2001 and 2000 was $12.70, $10.44 and $23.46.

        The fair value based employee compensation of the options at date of grant was estimated using the Black-Scholes model with the following weighted average assumptions: