-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Gd8PzNZzbSyFsVaWhTr7OK6568BEbJ1wC8Mnl5teOfvF/F0NNt9+uVP1WW7GSd7j hiJPkClc6oEaRWbHF0hYAw== 0000912057-00-014449.txt : 20000411 0000912057-00-014449.hdr.sgml : 20000411 ACCESSION NUMBER: 0000912057-00-014449 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STRATEGIC DISTRIBUTION INC CENTRAL INDEX KEY: 0000073822 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MACHINERY, EQUIPMENT & SUPPLIES [5080] IRS NUMBER: 221849240 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-05228 FILM NUMBER: 583293 BUSINESS ADDRESS: STREET 1: 3220 TILLMAN DRIVE STREET 2: SUITE 200 CITY: BENSALEM STATE: PA ZIP: 19020 BUSINESS PHONE: 2156331900 MAIL ADDRESS: STREET 1: 3220 TILLMAN DRIVE STREET 2: SUITE 200 CITY: BENSALEM STATE: PA ZIP: 19020 FORMER COMPANY: FORMER CONFORMED NAME: STRATEGIC INFORMATION INC DATE OF NAME CHANGE: 19901113 FORMER COMPANY: FORMER CONFORMED NAME: INFORMEDIA CORP DATE OF NAME CHANGE: 19890221 FORMER COMPANY: FORMER CONFORMED NAME: OCTO LTD DATE OF NAME CHANGE: 19870921 10-K 1 FORM 10-K 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 -------------- Commission file Number 0-5228 ----------------------------------- STRATEGIC DISTRIBUTION, INC. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 22-1849240 - --------------------------------- --------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3220 TILLMAN DRIVE, SUITE 200, BENSALEM, PA 19020 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (215) 633-1900 ---------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered NONE NONE - -------------------------- ---------------------------- Securities registered pursuant to Section 12(g)of the Act: COMMON STOCK, PAR VALUE $.10 PER SHARE ---------------------------------------------- (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this 10-K or any amendment to this Form 10-K. [ ] 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. 2 ("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 3 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. 11 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 13 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 14 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 EX-21 2 EXHITBIT 21 EXHIBIT 21 Wholly-Owned United States State of Subsidiaries of the Company Incorporation - --------------------------- ------------- Industrial Systems Associates, Inc. Pennsylvania Strategic Distribution Canada Holdings, Inc. (wholly-owned subsidiary of Industrial Systems Associates, Inc.) Delaware INTERMAT, Inc. Delaware American Technical Services Group, Inc. Delaware National Technical Services Group, Inc. (wholly-owned subsidiary of American Technical Services Group, Inc.) Delaware Strategic Supply, Inc. Delaware Coulson Technologies, Inc. Delaware (wholly-owned subsidiary of Strategic Supply, Inc.) FastenMaster Corporation, Inc. Delaware (wholly-owned subsidiary of Strategic Supply, Inc.) Wholly-Owned Foreign Subsidiaries Country - --------------------------------- ------- Strategic Distribution Services De Mexico, S. A. De C. V. Mexico (subsidiary of the Company) Strategic Distribution Marketing De Mexico, S. A. De C. V. Mexico (subsidiary of the Company) Strategic Distribution (Canada) Company (subsidiary of Strategic Distribution Canada Holdings, Inc.) Canada EX-23 3 EXHBIT 23 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT The Board of Directors and Stockholders Strategic Distribution, Inc.: We consent to incorporation by reference in the registration statements (No. 33-57578, No. 333-01715 and No. 333-06973) on Form S-8 of Strategic Distribution, Inc. of our report dated March 13, 2000, relating to the 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, which report appears in the December 31, 1999 Annual Report on Form 10-K of Strategic Distribution, Inc. KPMG LLP Philadelphia, Pennsylvania March 29, 2000 EX-27 4 EXHIBTI 27
5 0000073822 STRATGIC DISTRIBUTION,INC. 1,000 YEAR DEC-31-1999 DEC-31-1999 1,508 0 53,137 0 46,458 112,916 17,273 0 138,525 42,916 29,926 3,138 0 0 95,184 138,525 292,656 292,656 231,664 264,721 31,533 0 1,116 (4,714) (8,641) 3,927 0 0 0 3,927 0.13 0.13
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