MRO Direct Files Chapter 11

MRO Direct, Inc., a Pittsburgh-based strategic sourcing and procurement services company, filed for Chapter 11 bankruptcy protection on Mar. 24, 2005. Pending court approval, the company expects to sell its assets to Avchem, Inc, St. Louis, MO, a similar service provider for the procurement and management of chemicals and MRO products at aerospace manufacturing/maintenance facilities. MRO Direct's bankruptcy was precipitated by the loss of its largest customer, TRW Automotive, Inc. Avchem, a spin-off of Boeing, has operations in seven cities, including St. Louis, Seattle, Wichita, Dallas/Ft. Worth, San Antonio, Los Angeles and Philadelphia.

According to court records, MRO Direct reported assets of $5.7 million and liabilities of $1.7 million. Included in its assets is an estimated $5.5 million damages claim against TRW Automotive for breach of contract, according to sources. MRO Direct established a legal fund on Mar. 1 to pursue that claim.

Under the terms of an asset purchase agreement, Avchem will pay $50,000 at the closing of the deal to purchase MRO Direct's assets, including software, databases, customer and supplier records. If the buyer sells $1 million of consumables within a year after the sale, it will pay an additional $50,000. There is also a four-year royalty payment structure, based on gross margin, to reach a minimum total $200,000 payment. If that total is not reached, there is contingency for MRO Direct to license the database commercially.

For 2005 year to date, MRO Direct reported no revenues up to the date of Ch. 11 filing. The company reported revenues of $1 million in 2003 and $2 million in 2004. MRO Direct closed a $2 million capital financing round a year ago. At that time, Don Belt, President, CEO, MRO Direct, told MDM the resources were to be used to fund working capital until an operating profit was generated (projected in the second half of 2004) and to invest in technology to enhance the current e-commerce platform.

MRO Direct provided sourcing and procurement processes designed to generate both hard cost savings (greater than 20%) and process savings to generate the lowest total procurement cost solution for purchasing MRO supplies. MRO Direct has a unique business model in the MRO distribution industry in that the emphasis is on taking hard costs out of the supply chain through disintermediation of local distributors, aggregating demand, and standardization of items.

Investors in MRO Direct include: C&L Venture Fund V; PA Growth Fund; Calumet, Ltd; Pribanic & Pribanic; iNetwork, LLC; Gefsky and Lehman Investment Partnership IV; MRO Direct, Inc. management; Socius Partners, LLC; and RainMaker Capital, among others.

Major MRO Direct customers include TRW Automotive (Detroit and Canada) and Valspar Corporation (Minneapolis). MRO Direct sought to change the structure of the MRO industry with a new business model and an old value proposition: Lower the price of indirect materials procurement with a focus on reducing invoice and order processing costs. The company targeted Fortune 500 manufacturers seeking to increase their earnings by lowering the costs associated with MRO procurement. The model was a combination of mark-up on sourced indirect materials as well as fees from its engineering services group to help improve procurement processes in large corporate environments.

The principals hoped to provide an enhancement to integrated supply offerings by providing a large breadth of product on a manufacturer direct basis. As a direct sourcing option, the company sought to reduce a company's indirect material spend by redirecting purchases through its exclusive Vendor Product Index, which aggregates more than three million SKUs. A differentiator for the company, Belt told MDM last year, is that it can be more flexible and efficient in its direct sourcing and inventory management at the plant level by leveraging

MRO Direct sourced through a range of distributors, master distributors, and cooperative buying groups using Prophet 21 as its technology base.

MRO Direct List of Creditors Holding 20 Largest Unsecured Claims

Name of Creditor                         Nature of Claim                      Amount

All-Pak ......................................Business supplies ....................$13K

American Express ......................Business credit ........................$30K

BDI ...........................................Business expense ....................$25K

Broner Glove & Safety Co. ..........Supplies ...................................$ 8K

Continental Paper/HP Prod. ........Business supplies .....................$25K

E&R Industrial Sales ..................Sales commissions ..................$12K

J F Good Co Kelly Services, Inc. .....................Employment services ...............$26K

Krystil Klear ...............................Employment services ..............$38K

Lagasse ....................................Supplies ..................................$22K

Labelmaster ...............................Supplies ..................................$ 8K

ORS Nasco ................................Supplies .................................$ 9K

PA Dept of Comm .......................Loan ....................................$100K

Pittsburgh ...................................Terminal Lease ......................$11K

Prophet 21 ..................................Services .................................$ 7K

Setech, Inc. ................................Supplies ................................$14K