<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 18, 1997
REGISTRATION NO. 333-31539
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
INDUSTRIAL DISTRIBUTION GROUP, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 5085 58-2299339
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
2500 Royal Place
Tucker, Georgia 30084
(770) 243-9000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Martin S. Pinson
Chairman and Chief Executive Officer
2500 Royal Place
Tucker, Georgia 30084
(770) 243-9000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------
Copies to:
<TABLE>
<C> <C>
W. Randy Eaddy, Esq. William R. Kunkel, Esq.
Kilpatrick Stockton LLP Skadden, Arps, Slate, Meagher & Flom (Illinois)
1100 Peachtree Street 333 West Wacker Drive
Atlanta, Georgia 30309 Chicago, Illinois 60606
(404) 815-6500 (312) 407-0820
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities on this Form are being offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the
following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED SEPTEMBER 18, 1997
PROSPECTUS
- -----------------
3,000,000 SHARES
[LOGO INDUSTRIAL DISTRIBUTION GROUP, INC.]
Common Stock
---------------------
All of the shares of Common Stock, $.01 par value per share (the "Common
Stock"), offered hereby (the "Offering") are being offered by Industrial
Distribution Group, Inc. (the "Company" or "IDG").
Prior to the Offering, there has been no public market for the Common
Stock. It is currently estimated that the initial public offering price will be
between $14.00 and $16.00 per share. See "Underwriting" for information relating
to the factors to be considered in determining the initial public offering
price. Shares of Common Stock are being reserved for sale to certain employees,
directors, and business associates of, and certain other persons designated by,
the Company, at the initial public offering price. Such employees, directors,
and other persons are expected to purchase, in the aggregate, not more than 5%
of the Common Stock offered in the Offering. See "Underwriting".
Application will be made for listing of the Common Stock on the New York
Stock Exchange under the symbol "IDG"; however, there is no assurance that such
listing will be approved.
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN MATTERS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED
HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
==================================================================================================================
PRICE TO PUBLIC UNDERWRITING DISCOUNT(1) PROCEEDS TO COMPANY(2)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.............................. $ $ $
- ------------------------------------------------------------------------------------------------------------------
Total(3)............................... $ $ $
==================================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting".
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the several Underwriters an option, exercisable
within 30 days after the date hereof, to purchase up to 450,000 additional
shares of Common Stock solely to cover over-allotments, if any. If such
option is exercised in full, the total Price to Public, Underwriting
Discount, and Proceeds to Company will be $ , $ , and
$ , respectively. See "Underwriting".
---------------------
The shares of Common Stock offered hereby are offered by the several
Underwriters, subject to prior sale, when, as and if issued to and accepted by
the Underwriters against payment therefor and subject to approval of certain
legal matters by counsel for the Underwriters and certain other conditions. The
Underwriters reserve the right to withdraw, cancel, or modify such offer and to
reject orders in whole or in part. It is expected that delivery of share
certificates representing the Common Stock will be made in New York, New York on
or about , 1997.
---------------------
<TABLE>
<S> <C>
MERRILL LYNCH & CO. THE ROBINSON-HUMPHREY
COMPANY, INC.
</TABLE>
---------------------
The date of this Prospectus is , 1997.
<PAGE> 3
[INDUSTRIAL DISTRIBUTION GROUP AND LOGO
PICTURES OF DRILL, GRINDING WHEEL,
SAFETY EQUIPMENT, AND TOOLS]
[NON EXCLUSIVE LIST OF PRODUCT CATEGORIES]
ABRASIVES
CUTTING TOOLS
HAND TOOLS & POWER TOOLS
COOLANTS, LUBRICANTS & ADHESIVES
MATERIAL HANDLING EQUIPMENT
MAINTENANCE EQUIPMENT & SUPPLIES
SAFETY PRODUCTS
CONTRACTOR SUPPLIES
MACHINE TOOLS & ACCESSORIES
FASTENERS
INDUSTRIAL HOSE
QUALITY CONTROL PRODUCTS
TOOL & DIE SUPPLIES
BRUSHES
TAPES
Certain persons participating in the Offering may engage in transactions
that stabilize, maintain, or otherwise affect the price of the Common Stock.
Such transactions may include stabilizing, the purchase of Common Stock to cover
syndicate short positions, and the imposition of penalty bids. For a description
of these activities, see "Underwriting".
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in this Prospectus.
Simultaneously with, and as a condition to, the Offering, the Company acquired
nine distributors of industrial products (collectively, the "Founding
Companies") in exchange for shares of Common Stock (the "Combination"). Unless
the context otherwise requires, all references herein to the "Company" or "IDG"
shall mean Industrial Distribution Group, Inc., a corporation formed in February
1997, and all the Founding Companies, taken as a whole, and assume that the
Combination has been consummated. Unless otherwise indicated, the information in
this Prospectus (i) does not give effect to the Underwriters' over-allotment
option, (ii) gives effect to a 115.333 for 1 stock split effective as of
September , 1997, (iii) assumes an initial offering price of $15.00 per share,
and (iv) assumes that consideration of 3,330,224 shares of Common Stock is paid
by the Company pursuant to the Combination. See "The Combination".
THE COMPANY
Industrial Distribution Group, Inc. (the "Company" or "IDG") was formed in
February 1997 to create a leading, nationwide supplier of cost-effective,
flexible procurement solutions for manufacturers and other users of maintenance,
repair, operating, and production ("MROP") products. The Company distributes a
full line of industrial MROP products, emphasizing its specialized expertise in
product applications. The Company's principal product categories include
abrasives, cutting tools, hand and power tools, and coolants, lubricants, and
adhesives. Utilizing its proprietary computerized Supply Management System, the
Company's application and product specialists are able to analyze a customer's
acquisition, possession, and application processes for MROP supplies and design
programs to streamline the processes and reduce associated costs. Such programs
may include improving a customer's production and procurement processes,
standardizing MROP products, reducing the number of suppliers, or developing
integrated supply arrangements that outsource to the Company some or all of a
customer's MROP procurement and management functions.
The Company intends to establish a nationwide presence, with MROP product
and service capabilities in all or most of the major U.S. industrial markets.
Currently, the Company has 41 operating locations in 37 cities, along with four
small facilities abroad. The Company's more than 20,000 customers include a
diverse group of major national and international corporations, including
AlliedSignal, Black & Decker, Boeing, Chrysler, General Motors, Hoechst
Celanese, PPG Industries, and Shell Oil, as well as small and large local and
regional businesses. On a pro forma combined basis, the Company had net sales of
approximately $251 million for the year ended December 31, 1996, and net sales
of approximately $137 million for the six months ended June 30, 1997.
The Company estimates that the size of the market for industrial MROP
products in which it participates primarily is approximately $70 billion
annually. However, the entire United States MROP market is estimated to be in
excess of $175 billion annually, and includes electrical, PVF (pipes, valves,
and fittings), power transmission, and other product categories in which the
Company participates to a lesser extent. This larger market is highly
fragmented, with the 50 largest distributors (all of which have annual sales
over $90 million) accounting for less than 15% of the market.
Manufacturers and other users of MROP products are seeking ways to enhance
efficiencies and reduce MROP process and procurement costs in order to compete
more effectively in the global economy. As a result, the industrial supply
industry is experiencing consolidation, as customers focus on the convenience,
cost savings, and economies of scale associated with a reduced number of
suppliers capable of providing superior service and product selection. Further,
as manufacturers focus on their core manufacturing or other production
competencies, they are increasingly outsourcing their MROP procurement,
management, and application processes in search of comprehensive MROP solutions,
such as integrated supply. The Company believes that it will benefit from these
industry trends.
As a result of the Combination and the Offering, the Company believes that
it has the size, scale of operations, and resources necessary to compete
effectively in the evolving industrial MROP supply industry.
3
<PAGE> 5
The Company's size and scale of operations allow it to benefit from high volume
purchasing, attract the highly skilled personnel required to deliver enhanced
levels of service, and realize internal operating efficiencies. The Company's
resources enable it to offer a comprehensive product line and invest in
sophisticated inventory management and control systems needed to support its
enhanced levels of customer service. Finally, the Company's position enhances
its ability to implement its acquisition strategy in the consolidating and
fragmented MROP industry.
OPERATING STRATEGY
Superior Product Expertise and Comprehensive Product Line. One of the
Company's core competencies is its extensive product expertise. With its
understanding of the most appropriate product for specific customer
applications, the Company can identify the MROP product best suited for a
customer's specific need. This expertise benefits the customer in two ways, each
of which lowers the customer's total MROP costs. First, the customer increases
the efficiency of its manufacturing processes by minimizing downtime and other
indirect costs. Second, by providing only that level of quality required by the
application, the Company can lower the customer's MROP product costs. The
Company's comprehensive product line supports its commitment to deliver the most
appropriate product to its customers. In addition to maintaining over 100,000
stock keeping units ("SKUs"), as well as special items in stock for regular
customers, the Company can provide virtually any MROP item, including
special-order items.
Flexible Procurement Solutions; Integrated Supply. The Company believes
the key to serving customers in the changing MROP market is the ability to
design and implement customized flexible procurement solutions for acquiring,
possessing, and applying MROP products to satisfy each customer's particular
needs and achieve its cost reduction objectives. The spectrum of services
necessary to deliver such solutions is broad. For customers who are not yet
prepared to outsource their entire MROP procurement and management functions,
the Company provides a range of options from which customers may select the
appropriate types and level of service. For customers who desire total
procurement solutions designed and implemented through a single distributor, the
Company offers its "fully integrated supply" programs, which permit customers to
outsource to the Company the entire MROP procurement and management function,
including ownership by the Company of inventory in the customer's on-site MROP
supply room (or "tool crib").
Centralized Corporate Functions and Decentralized Operating Management. At
the corporate level, on the one hand, the Company will consolidate functions
such as financial, accounting, management information systems, employee
benefits, and certain purchasing arrangements to eliminate duplicative
administrative and other costs that otherwise would be incurred at each of its
operating locations. The resulting operating efficiencies, along with the
enhanced leverage from higher volume purchasing, should provide the Company an
advantage over smaller regional and local competitors. At the operating
subsidiary level, on the other hand, the Company will employ a decentralized
management structure that focuses management at each operating subsidiary on
day-to-day operating matters, profitability, and growth, as well as identifying
potential acquisition candidates. The Company believes that its decentralized
management philosophy will result in better customer service by allowing local
management the flexibility to implement policies and make decisions based on
first-hand assessments of the needs and desires of individual customers.
Superior Customer Service. Providing superior quality and a comprehensive
range of MROP services to customers is the IDG hallmark in that, among other
things, the Company can procure virtually any MROP product and can provide the
full range of flexible procurement solutions for its customers. As part of its
commitment to customer service, the Company also emphasizes quality assurance in
all phases of its operations. The Company's sales and service personnel receive
ongoing periodic training in TQM ("total quality management") and other team
management skills to assure such quality performance. IDG will also seek
certification under the International Standards Organization ("ISO") 9002
standards for distribution with respect to its principal locations and expects
to make such certification a Company-wide objective for all future principal
locations.
GROWTH STRATEGY
Internal Growth. Management believes that significant opportunities exist
to increase revenues and earnings through internal expansion, particularly due
to the Company's enhanced competitive position resulting from the
4
<PAGE> 6
Combination. Through focused marketing both inside and outside the United
States, the Company will seek to add revenue by offering additional products and
services to new and existing customers and identifying any unserved facilities
of its larger existing customers. Where necessary to increase its market share,
the Company will open or expand facilities in the vicinity of existing
operations. The Company will also consider the desirability of internal
expansion into new geographic markets.
Acquisitions in Select Geographic Markets. The Company intends to launch
an aggressive acquisition program to take advantage of consolidation
opportunities that management believes exist within the highly fragmented
industrial MROP market. The Company will seek to acquire successful MROP
distribution and related businesses that are large enough to establish a
significant initial presence and to provide for future Company expansion in the
particular market. The Company will seek to retain the management of acquired
businesses.
Expansion into International Markets. The Company believes that the
consolidation and outsourcing trends that provide growth opportunities in the
United States offer comparable opportunities in international markets. The
Company plans initially to extend its offering of flexible procurement solutions
to foreign manufacturing facilities of its domestic customers to develop a base
for potentially expanded international operations. The Company has been active
in the Peoples Republic of China since 1988, establishing sales offices in
Beijing (1994) and Shanghai (1996), and in Mexico since 1997.
THE COMBINATION
The decision to form IDG through the combination of the Founding Companies
emerged from the principals of those nine companies, who had developed
significant professional and personal relationships over the past 10 years.
These principals, who have had an average of over 20 years of experience in the
industrial distribution industry, have shared ideas for "best practices" with
respect to such matters as marketing, management, and operating systems, and
concluded that the formation of the Company would enhance their individual and
collective ability to compete successfully in the changing industrial MROP
market. In addition, the entire consideration payable by IDG for the Founding
Companies (other than a cash payment to a dissenting shareholder and payments in
lieu of fractional shares) consists of shares of Common Stock, all of which the
Founding Companies' stockholders have agreed contractually to hold for at least
two years. As a result, management believes that IDG's ability to integrate
successfully the operations of the Founding Companies will be greatly
facilitated.
---------------------
The Company's principal executive offices are located at 2500 Royal Place,
Tucker, Georgia, where its telephone number is (770) 243-9000.
THE OFFERING
Common Stock offered................ 3,000,000 shares
Common Stock to be outstanding after
the Offering(1)..................... 6,459,973 shares
Use of proceeds..................... To repay certain indebtedness of the
Founding Companies, to finance the
acquisition of additional MROP
distribution and related businesses,
for general corporate purposes, and to
make a cash payment under applicable
corporate law to a dissenting
shareholder of Predecessor-IDG. See
"Use of Proceeds".
Proposed New York Stock
Exchange symbol................... IDG
- ---------------
(1) Does not include 392,157 shares of Common Stock issuable upon the exercise
of stock options granted under the Company's Stock Incentive Plan. See
"Management -- Stock Incentive Plan" and "Underwriting". As a result of the
Combination, the former stockholders of the Founding Companies will own
3,330,224 shares of Common Stock, or 51.6% of the Common Stock to be
outstanding after the Offering.
5
<PAGE> 7
SUMMARY PRO FORMA COMBINED FINANCIAL DATA
IDG will acquire the Founding Companies simultaneously with the closing of
this Offering. Pursuant to the requirements of the Securities and Exchange
Commission's Staff Accounting Bulletin No. 97 ("SAB 97"), however, Industrial
Distribution Group, Inc., a Georgia corporation formed in 1981 and one of the
nine Founding Companies (referred to herein as "Predecessor-IDG"), is deemed to
be the acquiror, for financial reporting purposes, of the other eight Founding
Companies (the "Other Founding Companies"), and the following pro forma combined
data is presented on that basis. The acquisition of the Other Founding Companies
will be accounted for under the purchase method of accounting, whereby their
assets and liabilities are recorded at fair market value. Prior to the
Combination, each of the Founding Companies operated independently and was not
under common control or management; accordingly, the pro forma data presented
may not be comparable to or indicative of post-Combination results. For a
discussion of the pro forma combined operating results, see the Unaudited Pro
Forma Combined Financial Statements of the Company and related notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C>
STATEMENT OF INCOME DATA:(1)
Net sales................................................... $ 251,058 $ 137,590
Gross profit................................................ 60,275 32,750
Selling, general, and administrative expenses(2)(3)......... 53,777 28,042
Operating income............................................ 6,498 4,708
Net income(4)............................................... 3,487 2,728
Net income per share........................................ 1.01 .79
Weighted average shares outstanding(5)...................... 3,459,973 3,459,973
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
---------------------------------------------
PRO FORMA COMBINED(1)(6) AS ADJUSTED(1)(7)
------------------------ ------------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital....................................... $32,297 $ 56,908
Property and equipment, net........................... 6,923 6,923
Total assets.......................................... 91,662 101,119
Long-term debt, including current portion............. 31,488 5,995
Stockholders' equity.................................. 33,059 72,209
</TABLE>
- ---------------
(1) See the Unaudited Pro Forma Combined Financial Statements of the Company
for pro forma financial information relating to the year ended December 31,
1996 and the six months ended June 30, 1997.
(2) Adjusted to reflect the acquisition of the Other Founding Companies and
reductions in salaries and benefits to certain owners of the Founding
Companies that have been agreed to in connection with the Combination (the
"Compensation Differential").
(3) Includes amortization of goodwill to be recorded as a result of the
Combination.
(4) Gives effect to certain tax adjustments related to the taxation of
Predecessor-IDG as an S Corporation prior to consummation of the
Combination, the tax impact of the Compensation Differential in each
period, and assumes all income is subject to a corporate tax rate of 40%.
(5) Includes (i) 129,749 shares issued by the Company prior to the Combination
and the Offering and (ii) 3,330,224 shares to be issued to the stockholders
of the Founding Companies in connection with the Combination; but excludes
3,000,000 shares to be issued in the Offering and 392,157 shares of Common
Stock issuable pursuant to outstanding options granted under the Company's
Stock Incentive Plan.
(6) Gives effect to: (i) the acquisition of the Other Founding Companies at
fair market value in accordance with SAB 97; and (ii) the combination of
the Other Founding Companies with Predecessor-IDG as if such combination
had occurred as of June 30, 1997.
(7) Adjusted to reflect the sale of 3,000,000 shares of Common Stock offered
hereby and the application of the estimated net proceeds therefrom. See
"Use of Proceeds".
6
<PAGE> 8
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. In addition to the other information in this Prospectus, the
following risk factors should be considered carefully in evaluating an
investment in the Common Stock.
This Prospectus contains certain forward-looking statements (as such term
is defined in the Securities Act) concerning the Company's operations,
performance, and financial condition, including, in particular, the likelihood
of the Company's success in developing and expanding its business. These
statements are based upon a number of assumptions and estimates which are
inherently subject to significant uncertainties and contingencies, many of which
are beyond the control of the Company. Actual results may differ materially from
those expressed or implied by such forward-looking statements. Factors that
could cause actual results to differ materially include those set forth below.
ABSENCE OF COMBINED OPERATING HISTORY
Although each of the Founding Companies has operated for over 20 years, the
businesses of the Founding Companies will not be operated as a combined entity
until the Combination is consummated. There can be no assurance that the Company
will be able to integrate successfully the businesses of the Founding Companies
or to operate profitably. There can be no assurance that the Company's
management group, certain of whom, including the Chief Executive Officer, have
not previously worked in the MROP industry, will be able to manage effectively
the combined entity. Failure to integrate successfully the Founding Companies
could have a material adverse effect on the Company's results of operations and
financial condition.
ABSENCE OF INTEGRATED SYSTEMS
Until the Company implements its centralized management systems, the
Company will utilize and be dependent upon the information and operating systems
of the Founding Companies for ordering products, recording and analyzing
financial results, controlling inventory, and other important functions.
Although the Company has put in place certain control mechanisms, it may
nonetheless experience delays, disruptions, and unanticipated expenses in
implementing, integrating, and operating its centralized systems, any of which
could have a material adverse effect on the Company's results of operations and
financial condition. The Company will not be able to fully achieve certain
contemplated operating efficiencies and competitive advantages until it has
implemented fully its centralized management information and operating systems.
RISKS ASSOCIATED WITH EXPANSION THROUGH ACQUISITIONS
The Company's growth strategy contemplates acquisitions of MROP
distribution and related businesses. As a result, the Company's future success
is dependent, in part, upon its ability to identify, finance, and acquire
suitable businesses on favorable terms and then to integrate and manage the
acquired businesses successfully. The Company does not have a history of
completing and integrating acquisitions. Acquisitions involve special risks,
including risks associated with unanticipated liabilities, diversion of
management attention, and possible adverse effects on earnings resulting from
increased goodwill amortization, potential increased interest costs, the
issuance of additional securities, the dependence on retention, hiring, and
training of key personnel, and difficulties relating to the integration of the
acquired businesses. Although the Company believes that it can implement
successfully its acquisition program and establish a nationwide presence, there
can be no assurance that the Company will be able to do so. Further, there can
be no assurance that future acquisitions will not have an adverse effect upon
the Company's results of operations, particularly during periods in which the
operations of acquired businesses are being integrated into the Company's
operations. See "Business -- Business Strategies -- Growth Strategy".
NEED FOR ADDITIONAL FINANCING
The Company intends to use a combination of shares of Common Stock and
other types of consideration in making future acquisitions. The extent to which
the Company will be able or willing to use Common Stock for this purpose will
depend on the market value of the Common Stock from time to time and the
willingness
7
<PAGE> 9
of potential sellers to accept it as full or partial payment. If the Company is
unable to use its Common Stock for acquisitions, the Company's ability to make
acquisitions may depend upon its ability to raise additional capital, including
through borrowings. Such borrowings could create other risks for the Company and
its stockholders. No assurance can be given that the Company will be able to
obtain the capital it will need to finance its acquisition program. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Combined" and
"Business -- Business Strategies -- Growth Strategy".
DEPENDENCE ON SUPPLIER RELATIONSHIPS
Each of the Founding Companies has distribution rights for certain product
lines in its respective geographic market. The Company depends upon these
distribution rights for a substantial portion of its business. A significant
percentage of the Company's distribution arrangements with its suppliers are
oral, and many of its distribution rights may be terminated by the supplier
immediately or upon short notice. The termination or limitation by any key
supplier of its relationship with the Company could have a material adverse
effect on the Company's results of operations and financial condition.
COMPETITION
The industrial MROP supplies industry is highly competitive and features
numerous distribution channels, including: national, regional, and local
distributors; direct mail suppliers; large warehouse chains; hardware stores;
and manufacturers' own sales forces. Many of the Company's competitors are small
enterprises who sell to customers in a limited geographic area, but the Company
also competes against several large MROP distributors that have significantly
greater resources than the Company. As customers increasingly seek low-cost
alternatives to traditional methods of purchasing and sources of supply, they
are, among other things, reducing the number of their MROP suppliers. Also, MROP
distributors are consolidating to achieve economies of scale and increase
efficiencies, which consolidation trend could cause the industry to become more
competitive. In addition, new competitors may emerge. Certain of the Company's
competitors sell identical products for prices lower than those offered by the
Company. Moreover, the Company also competes on the basis of responsiveness to
the needs of customers for quality service, product diversity, and availability.
There can be no assurance that the Company will be able to compete successfully
under such conditions.
DEPENDENCE ON KEY PERSONNEL
The Company's operations depend on the continuing efforts of its executive
officers and the senior management of the Founding Companies, and the Company
likely will depend on the senior management of any significant businesses it
acquires in the future, especially as the Company enters into new geographic
markets. The business and prospects of the Company could be adversely affected
if these persons, in significant numbers, do not continue their key roles, and
the Company is unable to attract and retain qualified replacements. See
"-- Absence of Combined Operating History".
LABOR AVAILABILITY
The timely provision of high-quality service by the Company requires an
adequate supply of skilled sales and customer service personnel, including the
application and product specialists whose expertise is an essential element of
the Company's customer-oriented, flexible procurement solutions approach.
Accordingly, the Company's ability to implement its strategies depends to a
degree on its ability to employ the skilled personnel necessary to meet the
Company's marketing and services requirements. From time to time, the Company
has experienced difficulty in attracting or retaining sufficient numbers of
qualified personnel. In addition, the operating costs of the Company may be
adversely affected by turnover in such positions. There can be no assurance that
the Company will be able to maintain an adequately skilled sales and customer
service force or that the Company's labor expenses will not increase as a result
of a shortage in the supply of such skilled personnel.
8
<PAGE> 10
INDUSTRY CYCLICALITY
Some of the primary markets for the products sold by the Company are
subject to cyclical fluctuations that generally affect demand for industrial and
consumer durable goods produced by the users of MROP products. Consequently, the
demand for MROP products has been and may continue to be influenced by many of
those same national or regional factors. Changes in economic conditions
resulting in a change in the current business cycle could have a material
adverse effect on the Company's results of operations and financial condition.
CONTROL BY MANAGEMENT AND FORMER OWNERS OF FOUNDING COMPANIES
Following the Offering, directors and officers of the Company, and former
stockholders of the Founding Companies, will own beneficially an aggregate of
approximately 54% of the outstanding Common Stock (50% if the Underwriters'
over-allotment option is exercised in full). See "Principal Stockholders".
Accordingly, these persons, if they were to act in concert, would have
substantial influence over the affairs of the Company, including the ability
potentially to control the election of directors and other matters requiring
stockholder approval by simple majority vote.
LEGAL PROCEEDING
On November 18, 1996, Milliken & Company ("Milliken"), a textile
manufacturer and customer of Predecessor-IDG, filed suit against a manufacturer
of an industrial product and Predecessor-IDG in the Superior Court of Troup
County, Georgia, Civil Action No. 96-CV-964. Milliken claims that a product sold
to it by Predecessor-IDG as a distributor of the defendant-manufacturer was
defective and caused a fire, severely damaging Milliken's textile manufacturing
plant in LaGrange, Georgia. Milliken alleges damages of $500 million against the
defendants. Predecessor-IDG has denied any liability, and its insurance carrier
is vigorously defending the lawsuit on its behalf. While the damages alleged by
Milliken are exceptional in amount, the inclusion of the distributor of a
product, along with its manufacturer, as a defendant in an action for alleged
product defectiveness is unexceptional. The litigation is in the early stages of
discovery, and while it is not possible to predict with accuracy the outcome of
any such litigation matter, the Company believes that its insurance, which
provides for $12 million of coverage, will be adequate to cover any loss to
Predecessor-IDG that might result from the lawsuit.
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and Bylaws
and Delaware law may make a change in control of the Company more difficult to
effect, even if a change in control were in the stockholders' interests.
Provisions in the Company's Certificate of Incorporation allow the Board to
determine the terms of preferred stock that may be issued by the Company without
approval of the holders of the Common Stock. The ability of the Company to issue
preferred stock in such manner could enable the Board to prevent changes in
management and control of the Company. See "Description of Capital Stock --
Preferred Stock".
ABSENCE OF PRIOR PUBLIC MARKET; VOLATILITY OF MARKET PRICE
Prior to the Offering, there has been no public market for the Common
Stock. There can be no assurance that an active trading market will develop or
continue after the Offering or that the market price of the Common Stock will
not decline below the initial public offering price. The initial public offering
price of the Common Stock has been determined by negotiation between the Company
and the Underwriters, and may not be indicative of the market price of shares of
Common Stock after the Offering. See "Underwriting".
From time to time after the Offering, there may be significant volatility
in the market price of the Common Stock. Quarterly operating results of the
Company, changes in earnings estimated by analysts, changes in general
conditions in the economy or the financial markets, or other developments
affecting the Company could cause the market price of the Common Stock to
fluctuate substantially. In addition, in recent years the stock market has
experienced extreme price and volume fluctuations. This volatility has had a
9
<PAGE> 11
significant effect on the market prices of securities issued by many companies
for reasons unrelated to their operating performance. Therefore, the Company
cannot predict the market price for the Common Stock subsequent to the Offering.
DILUTION
The purchasers of the Common Stock offered hereby will experience immediate
and substantial dilution of $5.60 per share, the amount by which the purchase
price of the Common Stock offered hereby will exceed the net tangible book value
of the Common Stock immediately following the Offering. See "Dilution". If the
Company issues additional Common Stock in the future, including shares that may
be issued in connection with future acquisitions, purchasers of Common Stock in
the Offering may experience further dilution in net tangible book value per
share of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public
market following the Offering could adversely affect the market price for the
Common Stock. The number of outstanding shares of Common Stock available for
sale in the public market will be limited by (i) contractual agreements between
the Company and the stockholders of the Founding Companies not to sell for two
years the shares of Common Stock received by them in the Combination; (ii) the
lock-up agreements under which the Company, its officers and directors, and the
former Founding Company stockholders have agreed not to sell or otherwise
dispose of any of their shares for a period of 180 days after the date of this
Prospectus without the prior written consent of Merrill Lynch & Co., on behalf
of the Underwriters; and (iii) applicable restrictions under the Securities Act.
As a result of those agreements and restrictions, upon the closing of the
Offering, no shares other than the 3,000,000 shares offered hereby will be
eligible for sale. A total of 3,459,973 shares are subject to the above two-year
limitation and lock-up agreements, but otherwise would be eligible for sale
subject to the volume and holding period limitations of Rule 144 beginning one
year after the date of this Prospectus. In addition, the Company plans to file a
shelf registration statement to register shares of Common Stock for use in
connection with future acquisitions, which shares, if any were to be issued
within 180 days after the date of the Prospectus, would be subject to the
Company's lock-up agreement with Merrill Lynch & Co. as described above. See
"Shares Eligible for Future Sale".
POLICY TO PAY NO DIVIDENDS
The Company presently intends to retain its earnings to finance its growth
and expansion and for general corporate purposes. Consequently, it does not
anticipate paying any cash dividends in the foreseeable future. In addition, the
Company's future financing agreements may contain limitations on the payment of
cash dividends and other distributions of assets. See "Dividend Policy".
10
<PAGE> 12
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby (assuming an initial public offering price of $15.00 per share
and after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company) are estimated to be approximately
$39.2 million (approximately $45.4 million if the Underwriters' over-allotment
option is exercised in full).
In connection with the Combination, the Company plans to use approximately
$25.5 million to repay certain preexisting indebtedness of the Founding
Companies as follows: (i) $14,539,000 of debt, $5,039,000 of which bears
interest at the prime rate plus .75% and $9,500,000 of which bears interest at
LIBOR plus 3.25%, and all of which matures in March 1999; (ii) $3,300,000 of
debt which bears interest at the prime rate plus .25% and matures in February
1998; (iii) $2,457,000 of debt which bears interest at the prime rate plus .50%
and matures in July 1998; (iv) $2,311,000 of debt which bears interest at the
prime rate and matures on May 31, 1998; (v) $1,307,000 of debt which bears
interest at the prime rate plus 2% and matures on November 1, 1999; (vi)
$980,000 of debt which bears interest at the prime rate and matures on October
1, 1997; and (vii) $599,000 of debt which bears interest at the prime rate plus
1.5% and matures on December 31, 1997. The prime rate and the LIBOR rate were
8.5% and 5.7%, respectively, at June 30, 1997. The Company expects to use
approximately $4.2 million to make a cash payment under applicable corporate law
to a dissenting shareholder of Predecessor-IDG.
The remaining $9.5 million of the net proceeds is expected to be used,
together with internally generated funds and proposed borrowings, to fund the
acquisition and development of additional MROP distribution and related
businesses and for general corporate purposes, including as working capital. A
more specific allocation between these two general categories cannot be made,
because the portion of the net proceeds to be used for acquisitions will depend
primarily upon the amount and type of consideration the Company is ultimately
required to pay to make such acquisitions. While the Company is continuously
considering possible acquisition prospects as part of its growth strategy, the
Company is not presently engaged in active negotiations with respect to any
particular acquisition.
Pending application of the net proceeds as described above, the Company
intends to invest the net proceeds in short-term, interest-bearing investment
grade or government securities.
DIVIDEND POLICY
The Company currently intends to retain its future earnings, if any, to
finance the growth, development, and expansion of the Company's business and,
accordingly, does not currently intend to declare or pay any dividends on the
Common Stock for the foreseeable future. The declaration, payment, and amount of
future dividends, if any, will be subject to the discretion of the Company's
Board of Directors and will depend upon the future earnings, results of
operations, financial condition, and capital requirements of the Company, among
other factors. Under Delaware law, the Company is prohibited from paying any
dividends unless it has capital surplus or net profits available for this
purpose.
11
<PAGE> 13
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1997 (i) for Predecessor-IDG as the deemed acquiror under SAB 97, (ii) on a
pro forma basis to reflect the Combination, and (iii) on a pro forma as adjusted
basis to reflect the Combination and to give effect to the sale of the 3,000,000
shares of Common Stock offered by the Company in the Offering at an assumed
offering price of $15.00 per share and the application of the net proceeds
therefrom, which are estimated to be approximately $39.2 million (after
deducting underwriting discounts and commissions and estimated Offering
expenses). The following table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and the Unaudited Pro Forma
Financial Statements of the Company and the related Notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
-----------------------------------------
PRO FORMA
PREDECESSOR- AS ADJUSTED
IDG PRO FORMA(1) (1)(2)(3)
------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term borrowings and current portion of long-term
debt..................................................... $ 54 $11,735 $ 781
======= ======= =======
Long-term debt, excluding current portion.................. 16,113 19,753 5,214
------- ------- -------
Stockholders' equity:
Preferred Stock, par value $.10 per share, 10,000,000
shares authorized; no shares issued and outstanding
(historical, pro forma, and pro forma as adjusted).... -- -- --
Common Stock, par value $.01 per share, 50,000,000 shares
authorized; 110,665 shares issued and outstanding
(Predecessor-IDG historical); 3,459,973 shares issued
and outstanding (pro forma); 6,459,973 shares issued
and outstanding (pro forma as adjusted)............... 1 35 65
Additional paid-in capital............................... 307 33,024 72,144
Retained earnings........................................ 4,278 0 0
------- ------- -------
Total stockholders' equity....................... 4,586 33,059 72,209
------- ------- -------
Total capitalization............................. $20,699 $52,812 $77,423
======= ======= =======
</TABLE>
- ---------------
(1) Gives effect to: (i) the acquisition of the Founding Companies in accordance
with SAB 97; (ii) the combination of the other Founding Companies with
Predecessor-IDG as if such combination had occurred as of June 30, 1997; and
(iii) an estimated liability that is payable in cash to a former shareholder
of Predecessor-IDG who elected to exercise dissenter's rights with respect
to the acquisition of that company.
(2) Adjusted to reflect the sale of 3,000,000 shares of Common Stock offered
hereby and the application of the estimated net proceeds therefrom. See "Use
of Proceeds".
(3) Excludes 392,157 shares of Common Stock issuable pursuant to outstanding
options granted under the Company's Stock Incentive Plan. See
"Management -- Stock Incentive Plan".
12
<PAGE> 14
DILUTION
At June 30, 1997, after giving effect to the Combination as if it had
occurred at such date, the pro forma combined net tangible book value of the
Company would have been $21.6 million, or $6.24 per share. Such pro forma
combined net tangible book value is equal to the aggregate net tangible book
value (tangible assets less total liabilities) of the Founding Companies prior
to the Combination. The number of shares used for the per share calculation
includes the 129,749 shares outstanding prior to the Offering. After giving
effect to the Combination and the sale by the Company of the 3,000,000 shares of
Common Stock offered hereby (assuming an initial public offering price of $15.00
per share and after deducting underwriting discounts and commissions and
estimated Offering expenses payable by the Company), the pro forma combined net
tangible book value of the Company would have been $60.8 million, or $9.40 per
share. This represents an immediate increase in pro forma net tangible book
value of $3.16 per share to existing stockholders and an immediate dilution in
net tangible book value of $5.60 per share to new investors purchasing the
shares of Common Stock in the Offering. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $ 15.00
Pro forma net tangible book value prior to the Offering... $ 6.24
Increase attributable to new investors.................... 3.16
-------
Pro forma net tangible book value after the Offering........ 9.40
-------
Dilution in net tangible book value to new investors........ $ 5.60
=======
</TABLE>
The following table sets forth on a pro forma basis, after giving effect to
the Combination as of June 30, 1997, the number of shares of Common Stock
purchased from the Company, the total consideration to the Company, and the
average price per share paid to the Company by existing stockholders, including
both management stockholders and the stockholders of the Founding Companies, and
the new investors purchasing Common Stock from the Company in this Offering at
the initial public offering price of $15.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)............ 129,749 2.0% $ 1,125 0.0% $ .09
Stockholders of Founding
Companies(1)(2)................... 3,330,224 51.6 37,465,312 45.4 11.25
New investors....................... 3,000,000 46.4 45,000,000 54.6 15.00
--------- ----- ----------- -----
Total..................... 6,459,973 100.0% $82,466,437 100.0%
========= ===== =========== =====
</TABLE>
- ---------------
(1) See "Certain Transactions" for a discussion of certain issuances of Common
Stock.
(2) Total consideration paid by the stockholders of the Founding Companies
represents the stockholders' equity of the Founding Companies before the
Offering, adjusted to reflect S Corporation distributions and excludes cash
consideration to be paid to the dissenting shareholder of Predecessor-IDG.
13
<PAGE> 15
SELECTED PRO FORMA COMBINED FINANCIAL DATA
The Company will acquire the Founding Companies simultaneously with the
closing of this Offering. Pursuant to SAB 97, Predecessor-IDG is deemed to be
the acquiror, for financial reporting purposes, of the Other Founding Companies,
and the following pro forma combined data is presented on that basis. The
Selected Pro Forma Combined Financial Data of the Company should be read in
conjunction with the audited financial statements of Predecessor-IDG and the
related notes thereto, the Unaudited Pro Forma Combined Financial Statements of
the Company and related notes thereto, and "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
STATEMENT OF INCOME DATA:(1)
Net sales................................................. $251,058 $ 137,590
Gross profit.............................................. 60,275 32,750
Selling, general, and administrative expenses(2)(3)....... 53,777 28,042
Operating income.......................................... 6,498 4,708
Net income(4)............................................. 3,487 2,728
Net income per share...................................... 1.01 .79
Weighted average shares outstanding(5).................... 3,459,973 3,459,973
<CAPTION>
AS OF JUNE 30, 1997
---------------------------------------
PRO FORMA
COMBINED(1)(6) AS ADJUSTED(1)(7)
----------------- ------------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital........................................... $ 32,297 $ 56,908
Property and equipment, net............................... 6,923 6,923
Total assets.............................................. 91,662 101,119
Long-term debt, including current portion................. 31,488 5,995
Stockholders' equity...................................... 33,059 72,209
</TABLE>
- ---------------
(1) See the Unaudited Pro Forma Combined Financial Statements of the Company for
pro forma financial information relating to the year ended December 31, 1996
and the six months ended June 30, 1997.
(2) Adjusted to reflect the acquisition of the Other Founding Companies and
reductions in salaries and benefits to certain owners of the Founding
Companies that have been agreed to in connection with the Combination (the
"Compensation Differential").
(3) Includes amortization of goodwill to be recorded as a result of the
Combination.
(4) Gives effect to certain tax adjustments related to the taxation of
Predecessor-IDG as an S Corporation prior to consummation of the Combination
and the tax impact of the Compensation Differential in each period, and
assumes all income is subject to a corporate tax rate of 40%.
(5) Includes (i) 129,749 shares issued by the Company prior to the Combination
and the Offering and (ii) 3,330,224 shares to be issued to the stockholders
of the Founding Companies in connection with the Combination; but excludes
3,000,000 shares to be issued in the Offering and 392,157 shares of Common
Stock issuable pursuant to outstanding options granted under the Company's
Stock Incentive Plan.
(6) Gives effect to: (i) the acquisition of the Other Founding Companies at fair
market value in accordance with SAB 97; and (ii) the combination of the
Other Founding Companies with Predecessor-IDG as if such combination had
occurred as of June 30, 1997.
(7) Adjusted to reflect the sale of 3,000,000 shares of Common Stock offered
hereby and the application of the estimated net proceeds therefrom. See "Use
of Proceeds".
14
<PAGE> 16
PREDECESSOR-IDG SELECTED FINANCIAL DATA
Pursuant to the requirements of SAB 97, Predecessor-IDG is deemed to be the
acquiror, for financial reporting purposes, of the Other Founding Companies. The
following selected financial data of Predecessor-IDG are qualified by reference
to, and should be read in conjunction with, the financial statements of
Predecessor-IDG and notes thereto and other financial data included elsewhere in
this Prospectus. The financial data set forth below as of and for each of the
periods ended December 31, 1994, 1995, and 1996 have been derived from the
audited financial statements of Predecessor-IDG included elsewhere in this
Prospectus. The financial data as of and for the periods ended June 30, 1996 and
1997 have been derived from the unaudited financial statements of
Predecessor-IDG included elsewhere in this Prospectus. The financial data as of
and for the periods ended December 31, 1992 and 1993 have been derived from
audited financial statements of Predecessor-IDG not included in this Prospectus.
These historical results are not indicative of the results that may be expected
in the future. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Prospectus Summary -- Summary Pro Forma Combined
Financial Data".
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales................................. $59,067 $66,675 $75,624 $83,526 $90,786 $45,184 $49,960
------- ------- ------- ------- ------- ------- -------
Gross profit.............................. 15,929 17,887 19,676 21,165 23,456 10,876 12,398
Selling, general, and administrative
expenses................................ 15,255 16,048 17,447 18,803 21,160 9,785 10,747
------- ------- ------- ------- ------- ------- -------
Operating income.......................... 674 1,839 2,229 2,362 2,296 1,091 1,651
Net income................................ 14 805 1,255 1,202 693 483 833
BALANCE SHEET DATA:
Working capital........................... 637 1,365 10,604 11,765 17,161 14,625 17,683
Property and equipment, net............... 2,267 2,184 2,202 2,142 2,166 2,191 1,961
Total assets.............................. 17,253 18,511 20,297 22,352 26,428 24,750 28,166
Long-term debt, including current
portion................................. 9,706 10,442 10,365 11,060 16,706 13,486 16,167
Shareholders' equity...................... 1,603 2,408 3,146 3,798 4,050 3,951 4,586
</TABLE>
15
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company provides flexible procurement solutions for manufacturers and
other users of industrial MROP products, distributing a full line of such
industrial MROP products and providing specialized services to a diverse group
of more than 20,000 customers. The Company has 41 operating locations in 37
cities, along with four small facilities abroad. The Company had net sales of
$251 million for the 12 months ended December 31, 1996, and $137 million for the
six months ended June 30, 1997.
The Company sells MROP supplies directly from stock using catalogs or
similar methods (stock sales); such sales were $157.6 million and $151.3 million
in 1996 and 1995, respectively. The Company also sells products and services
pursuant to supply contracts (normally for a duration of at least one year) for
fixed prices or fixed margins on certain products or product lines; such supply
contracts generated sales of $81.6 million and $73.3 million in 1996 and 1995,
respectively. Pursuant to integrated supply contracts, the Company manages tool
cribs and provides a level of enhanced service to certain customers, often with
a guaranteed minimum reduction in the customer's total MROP costs. The Company
began offering integrated supply contracts in 1995, and revenues from such
contracts have grown to $12.1 million in 1996 from $6.3 million in 1995.
Management expects the upward trend in its integrated supply business and
its specialized services supply business to continue for the foreseeable future,
driven by increasing demand from customers to outsource their MROP procurement
and management functions and for customized MROP procurement solutions.
Integrated supply arrangements are still in the early stages of development, but
management believes such arrangements are becoming increasingly attractive to
customers. IDG has selected integrated supply as a major focus of its operating
strategy. Because start-up costs necessary to design and implement an integrated
supply arrangement are currently expensed as incurred, such contracts typically
have a lower operating margin, in their implementation phase, than the Company's
other principal categories of revenue. Management believes, however, that
margins on these arrangements generally increase over the term of a contract (as
the Company's costs are reduced and savings to the customer increase), and that
integrated supply contracts will become a significant component of the Company's
operating results.
Management believes that the success of the Company's integrated supply and
other specialized services supply contract business will depend in major part on
the Company's utilization of technology to design and implement the MROP
procurement solutions that customers desire. The Company, on a combined basis,
invested over $800,000 in 1996 to develop and upgrade its proprietary Supply
Management System and its internal management information systems in order to
expand its capabilities to successfully and profitably deliver such specialized
services to customers. The Company will continue to commit resources to its
technological capabilities in order to provide superior customer service and
achieve internal operating efficiencies.
Under SAB 97, Predecessor-IDG has been designated as the acquiror for the
Combination, and the Company must include in this Prospectus management's
discussion and analysis of historical financial information of Predecessor-IDG.
Management has also included its discussion and analysis of certain combined
historical information of the Founding Companies, in order to provide other
important information with respect to the Company in light of certain effects of
the Combination. The following discussions have been organized on that basis.
In these discussions, most percentages and dollar amounts have been rounded
to aid presentation; as a result, all such figures are approximations.
References to such approximations have generally been omitted.
16
<PAGE> 18
RESULTS OF OPERATIONS -- COMBINED
The following table sets forth certain combined operating results of the
Founding Companies on a historical basis and shows such results as a percentage
of net sales.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------------------ -----------------------------------
1994 1995 1996 1996 1997
---------------- ---------------- ---------------- ---------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales..................... $206,608 100.0% $230,877 100.0% $251,303 100.0% $123,583 100.0% $137,314 100.0%
Cost of sales................. 157,307 76.1 176,696 76.5 191,221 76.1 94,964 76.8 105,106 76.5
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Gross profit.................. 49,301 23.9 54,181 23.5 60,082 24.0 28,619 23.2 32,208 23.5
Selling, general, and
administrative.............. 44,594 21.6 48,307 20.9 53,306 21.2 25,458 20.6 27,395 20.0
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Operating income.............. $ 4,707 2.3% $ 5,874 2.6% $ 6,776 2.7% $ 3,161 2.6% $ 4,813 3.5%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
The combined operating results may not be indicative of the Company's
post-Combination results of operations for several reasons. The Founding
Companies have operated throughout the periods presented as separate
privately-owned entities. Their results of operations reflect varying tax
structures, which in turn have influenced other matters such as owners'
compensation. Accordingly, selling, general, and administrative expenses may not
be comparable among the individual Founding Companies. In addition, the Company
will have new senior management going forward, will incur implementation costs
of the Combination, and will incur amortization expenses from the goodwill
associated with the Combination. Moreover, these combined operating results do
not represent combined results of operations presented in accordance with
generally accepted accounting principles, but are only summations of the
respective line items from historical information of the individual Founding
Companies.
The Company will record goodwill in the Combination equal to the excess of
the fair value of the consideration paid for the Other Founding Companies over
the fair value of the net assets acquired from such companies. The amortization
of goodwill is a non-cash charge to operating income. Generally accepted
accounting principles require the amortization of goodwill over its useful life,
which in the Company's case will be the maximum of 40 years. The pro forma
impact of the Company's amortization expense, which is non-deductible for tax
purposes, is expected to be approximately $300,000 per year. The owners of the
Founding Companies have contractually agreed to certain adjustments in
compensation and benefits in connection with the Combination. The aggregate
result of these adjustments -- a reduction of $282,000 and $70,000 for the year
ended December 31, 1996 and the six months ended June 30, 1997, respectively
(the "Compensation Differential") -- has been reflected in the Unaudited Pro
Forma Combined Statements of Income of the Company presented elsewhere in this
Prospectus. However, the combined operating results presented above do not
reflect the effect of the Compensation Differential, goodwill amortization, or
any other pro forma adjustments.
The Company anticipates that, following the Combination, it will realize
savings from several sources, including (i) increased volume discounts and
rebates from vendors, (ii) consolidation of certain administrative functions,
and (iii) lower borrowing rates. These savings will be offset, to some extent,
by costs related to the Company's new senior management and costs associated
with being a public company. No such savings are reflected in the above combined
information or the following discussion.
Six Months Ended June 30, 1997 Compared to June 30, 1996
Net Sales. Net sales increased $13.7 million, or 11.1%, from $123.6
million for the six months ended June 30, 1996 to $137.3 million for the six
months ended June 30, 1997. The increase was attributable to several factors,
including an increase in the number of new, and increased revenue under
existing, integrated supply contracts. Of the $13.7 million increase, $5.6
million resulted from increased orders from existing customers, $6.5 million
from an increase in integrated supply contracts, and $1.6 million in business
from new customers.
Cost of Sales. Cost of sales increased $10.1 million, or 10.6%, from $95.0
million for the six months ended June 30, 1996, to $105.1 million for the six
months ended June 30, 1997, primarily as a result of the
17
<PAGE> 19
increased amount of sales in the latter period. As a percentage of net sales,
however, cost of sales remained relatively constant between periods.
SG&A Expenses. Selling, general, and administrative expenses increased
$1.9 million, or 7.5%, from $25.5 million for the six months ended June 30,
1996, to $27.4 million for the six months ended June 30, 1997. The increase is
attributable in part to the higher volume of business, but it also reflects
certain increases in start up costs associated with new integrated supply
contracts, employee health care and retirement costs, and professional fees
incurred. As a percentage of net sales, however, selling, general, and
administrative expenses remained relatively consistent between periods.
Operating Income. Operating income increased to $4.8 million for the six
months ended June 30, 1997, from $3.2 million for the six months ended June 30,
1996. As a percentage of net sales, operating income increased from 2.6% for the
six months ended June 30, 1996 to 3.5% for the six months ended June 30, 1997.
Year Ended 1996 Compared to 1995
Net Sales. Net sales increased $20.4 million, or 8.8%, from $230.9 million
in 1995 to $251.3 million in 1996. The increase primarily reflects substantial
growth in revenue from all categories of revenue. An acquisition at the end of
1995 contributed approximately $6.0 million in net sales in 1996. Price
increases ranged between 1% and 3%. These factors more than offset a $2.5
million decrease in gross sales to one large customer as a result of a vendor
agreeing to bill the customer directly (a "direct bill arrangement") and the
Company receiving a commission on the sale rather than recording the gross
amount of the sale as revenue.
Cost of Sales. Cost of sales increased $14.5 million, or 8.2%, from $176.7
million in 1995 to $191.2 million in 1996, primarily as a result of the increase
in sales in 1996. As a percentage of net sales, however, cost of sales decreased
from 76.5% in 1995 to 76.1% in 1996. The decrease was primarily due to a higher
margin product mix, increased margin as a result of the change to the direct
bill arrangement with the customer discussed above, and increased vendor
rebates.
SG&A Expenses. Selling, general, and administrative expenses increased
$5.0 million, or 10.4%, from $48.3 million in 1995 to $53.3 million in 1996. As
a percentage of net sales, these expenses increased from 20.9% in 1995 to 21.2%
in 1996. The increase was primarily due to higher start-up costs associated with
new specialized services and integrated supply contracts (approximately $1.4
million) and an increase in infrastructure needed to support increased volume.
Approximately $800,000 reflects the Company's expenditures for technology
upgrades and enhancements.
Operating Income. Operating income increased $900,000 or 15.3%, from $5.9
million in 1995 to $6.8 million in 1996. As a percentage of net sales, operating
income increased from 2.6% in 1995 to 2.7% in 1996.
Year Ended 1995 Compared to 1994
Net Sales. Net sales increased $24.3 million, or 11.8%, from $206.6
million in 1994 to $230.9 million in 1995. The increase is attributable
primarily to new customers within the stock sales category, although integrated
supply increased $1.5 million. Prices increased an average of 1% to 3%.
Cost of Sales. Cost of sales increased $19.4 million, or 12.3%, from
$157.3 million in 1994 to $176.7 million in 1995, primarily as a result of the
increase in sales in 1995. As a percentage of net sales, cost of sales increased
from 76.1% in 1994 to 76.5% in 1995. The increase was due to narrowing margins,
specifically in the abrasives product category, and some inventory write downs.
SG&A Expenses. Selling, general, and administrative expenses increased
$3.7 million, or 8.3%, from $44.6 million in 1994 to $48.3 million in 1995. As a
percentage of net sales, these expenses decreased from 21.6% in 1994 to 20.9% in
1995. The dollar increase in SG&A was primarily the result of increases in
integrated supply charges, sales commissions, and compensation expense. However,
the decrease as a percent of sales is a result of using existing Company
overhead to support the higher sales level.
Operating Income. Operating income increased $1.2 million, or 25.5%, from
$4.7 million in 1994 to $5.9 million in 1995. As a percentage of net sales,
operating income increased from 2.3% in 1994 to 2.6% in 1995.
18
<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES -- COMBINED
At June 30, 1997, combined working capital was $36.3 million. Upon
consummation of the Combination and after applying the estimated net proceeds of
the Offering as discussed under "Use of Proceeds", the Company will have $14.0
million of cash and cash equivalents, $56.9 million of working capital, and no
outstanding indebtedness under its operating lines of credit. The $25.5 million
of operating indebtedness of the Founding Companies is anticipated to be repaid
from Offering proceeds in connection with the Combination. The Company is
currently negotiating the terms of a credit facility with a bank that is
expected to include both an operating line of credit and a facility for use in
connection with future acquisitions by the Company (the "Credit Facility").
The principal operating capital requirements of the Company are for
increases in inventory and accounts receivable and purchasing and upgrading
property and equipment. Whether or not the Credit Facility is established,
management believes that the Company's available cash and working capital,
together with cash flow generated from operations, will be adequate to enable
the Company to fund its current operations on a combined basis and to fund
anticipated internal expansion for at least the next year. Management also
believes the Company could make some acquisitions and fund its capital
requirements to integrate those new businesses, without establishing the Credit
Facility, if it is able to use its Common Stock as the acquisition
consideration. However, in order to fully implement its contemplated acquisition
program, management believes the Company will need to establish the Credit
Facility or obtain comparable borrowing arrangements from other sources, such as
different banks or financial institutions from the one with whom the Company is
currently negotiating. The Company had discussions with (and received proposals
from) several such other institutions before deciding to proceed with the
current negotiations. While there can be no assurance that the Company will be
able to do so, management believes that the Company's size and other resources
will enable it to obtain adequate credit arrangements, on acceptable terms, to
meet its anticipated operating and growth objectives for the foreseeable future.
Net cash (used in) provided by operating activities in 1996 and 1995 was
$(3.0 million) and $400,000, respectively. These changes were principally due to
the funding of working capital requirements for inventory and accounts
receivable for 1996.
Net cash used for investing activities, primarily attributable to capital
expenditures, in 1996 and 1995 was $900,000 and $2.6 million, respectively.
Net cash provided by financing activities in 1996 and 1995 was $4.0 million
and $2.5 million, respectively. Cash was primarily provided by the various lines
of credit arrangements that the Founding Companies have established.
RESULTS OF OPERATIONS -- PREDECESSOR-IDG
This discussion of the historical results of operations of Predecessor-IDG,
and the following discussion of "Liquidity and Capital Resources" of
Predecessor-IDG, are included herein as prescribed disclosures as a result of
SAB 97. They should be read in conjunction with the audited financial statements
of Predecessor-IDG included elsewhere in this Prospectus.
Predecessor-IDG operates three divisions that sell industrial supply
products to different industries. The largest division (64% of fiscal 1996
sales) sells to pulp, chemical, textile, and furniture manufacturers. Other
divisions sell to the recreational vehicle and manufactured housing market (26%
of fiscal 1996 sales) and to the residential and commercial construction
industry (10% of fiscal 1996 sales).
Six Months Ended June 30, 1997 Compared to June 30, 1996
Net sales increased $4.8 million, or 10.6%, from $45.2 million in 1996 to
$50.0 million in 1997. This increase was primarily due to an increase in the
number of integrated supply contracts between periods and the strengthening of
Predecessor-IDG's sales force.
19
<PAGE> 21
Cost of sales increased $3.3 million or 9.6%, from $34.3 million in 1996 to
$37.6 million in 1997. As a percentage of net sales, cost of sales decreased
from 75.9% in 1996 to 75.2% in 1997. The decrease was primarily due to an
increase in sales of products with a higher profit margin.
Selling, general, and administrative expenses increased $900,000 or 9.2%,
from $9.8 million in 1996 to $10.7 million in 1997. As a percentage of net
sales, selling, general, and administrative expenses decreased from 21.7% in
1996 to 21.5% in 1997.
Other expense remained flat between periods and operating income increased
to $1.7 million in 1997 from $1.1 million in 1996.
Year Ended 1996 Compared to 1995
Net sales increased $7.3 million, or 8.7%, from $83.5 million in 1995 to
$90.8 million in 1996. This increase was primarily due to the implementation
throughout the year of more integrated supply contracts and the strengthening of
Predecessor-IDG's sales force.
Cost of sales increased $4.9 million, or 7.9%, from $62.4 million in 1995
to $67.3 million in 1996. As a percentage of net sales, cost of sales decreased
from 74.7% in 1995 to 74.2% in 1996. The decrease was primarily due to
cooperative purchasing arrangements and efficiencies realized in
Predecessor-IDG's inventory tracking systems.
Selling, general, and administrative expenses increased $2.4 million, or
12.8%, from $18.8 million in 1995 to $21.2 million in 1996. As a percentage of
net sales, selling, general, and administrative expenses increased from 22.5% in
1995 to 23.3% in 1996. The increase was primarily due to start-up costs
associated with the integrated supply contracts discussed above and costs
associated with its inventory tracking system implementation.
Other expenses increased $500,000, or 45.5%, from $1.1 million in 1995 to
$1.6 million in 1996. The increase was due to higher interest expense and the
settlement and related costs in 1996 of shareholder litigation.
Operating income decreased from 2.8% of sales in 1995 to 2.5% in 1996.
Year Ended 1995 compared to 1994
Net sales increased $7.9 million, or 10.4%, from $75.6 million in 1994 to
$83.5 million in 1995. This increase was primarily due to increased penetration
of sales to existing customers.
Cost of sales increased $6.4 million, or 11.4%, from $56.0 million in 1994
to $62.4 million in 1995. As a percentage of net sales, cost of sales increased
from 74.1% in 1994 to 74.7% in 1995. The increase was primarily due to
writedowns of obsolete and discontinued inventory.
Selling, general, and administrative expenses increased $1.4 million, or
8.0%, from $17.4 million in 1994 to $18.8 million in 1995. As a percentage of
net sales, selling, general, and administrative expenses decreased from 23.0% in
1994 to 22.5% in 1995. The decrease was primarily due to the ability to use the
existing corporate overhead level to increase net sales.
Other expense increased $100,000, or 10.0%, from $1.0 million in 1994 to
$1.1 million in 1995. The increase was due to higher interest expense in 1995.
Operating income remained relatively flat from 1994 to 1995. As a
percentage of net sales, operating income decreased from 2.9% in 1994 to 2.8% in
1995.
LIQUIDITY AND CAPITAL RESOURCES -- PREDECESSOR-IDG
At June 30, 1997, Predecessor-IDG's working capital was $17.7 million.
Predecessor-IDG's principal capital requirements have been to fund inventory and
accounts receivable and purchase and upgrade property
20
<PAGE> 22
and equipment. Historically, these requirements have been met by cash flows from
operating activities and borrowings under bank lines of credit.
Predecessor-IDG has a bank line of credit for up to $20 million based upon
a contractually defined formula of outstanding trade accounts receivable and
merchandise inventory. The line is secured by accounts receivable, inventory,
and other assets, and expires in March 1999. The line, which is expected to be
adequate for Predecessor-IDG's growth through 1998, is anticipated to be repaid
upon consummation of the Combination and the Offering.
Net cash provided by (used in) operating activities for 1996, 1995, and
1994 was ($4.8 million), ($100,000), and $700,000 respectively. These changes
were principally due to the funding of working capital requirements for
inventory and accounts receivable for all three years and decreased net income
and reduction in payables for 1996.
Net cash used for investing activities was primarily attributable to
capital expenditures and for 1996, 1995, and 1994 was $400,000, $200,000, and
$300,000, respectively.
Net cash (used in) provided by financing activities for 1996, 1995, and
1994 was $5.2 million, $100,000, and ($600,000), respectively. Predecessor-IDG,
which is an "S Corporation", made distributions to its shareholders of $400,000,
$600,000 and $500,000 for 1996, 1995, and 1994, respectively. Predecessor-IDG
also repaid a shareholder note of $150,000 in 1995. Its net borrowings
(repayments) for 1996, 1995 and 1994 were $5.7 million, $800,000, and
($100,000,) respectively.
21
<PAGE> 23
THE COMBINATION
The Company was formed in February 1997 to create a leading, nationwide
supplier of cost-effective, flexible procurement solutions for manufacturers and
other users of maintenance, repair, operating, and production ("MROP") products.
The Company will commence operations by combining the existing businesses of
nine MROP distributors (the "Founding Companies") that collectively are engaged
in business across a broad spectrum of MROP products and services in different
geographic locations around the United States. The Company has entered into a
definitive acquisition agreement with each Founding Company. When the
acquisitions are consummated, simultaneously with the closing of the Offering,
each Founding Company will become an operating subsidiary of the Company. As
combined, the Company will have 41 operating locations in 37 cities, along with
four small facilities abroad, serving over 20,000 customers. The Founding
Companies, on a pro forma combined basis, had net sales of approximately $251
million for the 12 months ended December 31, 1996, and net sales of
approximately $137 million for the six months ended June 30, 1997.
Over the last 10 years, the presidents of the Founding Companies have
developed significant professional and personal relationships, through meetings
at industry conventions, participating on supplier advisory boards and in trade
associations, and periodic informal exchanges. These principals, who have had an
average of over 20 years of experience in the industrial distribution industry,
have shared ideas for "best practices" with respect to such matters as
marketing, management, and operating systems. The decision to form the Company
emerged from these relationships, mutual respect developed over time, and a
belief by each principal that the Combination would enhance their individual and
collective ability to compete successfully in the changing MROP market. As a
result, management believes that IDG's ability to integrate successfully the
operations of the Founding Companies after the Combination will be greatly
facilitated.
FOUNDING COMPANIES
Predecessor-IDG, or the business to which it succeeded, has been in
operation since 1972. Predecessor-IDG operates principally throughout the
southeastern United States, with major facilities in Georgia, North Carolina,
and South Carolina. Douglass C. Smith, the President of Predecessor-IDG, who has
been in the MROP business for 25 years, is President and Chief Operating Officer
and a director of the Company. Charles A. Lingenfelter, who has been in the MROP
business for approximately 25 years and has been Executive Vice President of
Predecessor-IDG, will become its president. Predecessor-IDG's net sales for the
twelve months ended December 31, 1996 were approximately $91 million.
Shearer Industrial Supply Co. ("Shearer") has been in operation since 1947.
Shearer operates principally in Delaware, Maryland, North Carolina, and
Pennsylvania. Andrew B. Shearer, the President of Shearer, who has been in the
MROP business for approximately 12 years, is a director of the Company and will
continue as the president of Shearer. Shearer's net sales for the twelve months
ended December 31, 1996 were approximately $44 million.
B & J Industrial Supply Company ("B&J") has been in operation since 1936.
B&J operates principally in Alaska, Washington, and Idaho, and has small sales
offices in Beijing and Shanghai in the People's Republic of China. Martin C.
Burkland, the President of B&J, who has been in the MROP business for 22 years,
will continue as the president of B&J. William J. Burkland, the Vice President
of Finance of B&J, is a director of the Company. B&J's net sales for the twelve
months ended December 31, 1996 were approximately $29 million.
Tri-Star Industrial Supply, Inc. ("Tri-Star") has been in operation since
1956. Tri-Star operates principally in Arkansas, Illinois, and Missouri. George
L. Sachs, Jr., the President of Tri-Star, who has been in the MROP business for
19 years, is a director of the Company and will continue as the president of
Tri-Star. Tri-Star's net sales for the twelve months ended December 31, 1996
were approximately $24 million.
Associated Suppliers, Inc. ("Associated") has been in operation since 1936.
Associated operates principally in Arizona, Oregon, and Washington, and has a
small operation in Sonora, Mexico. William J. Janner, Jr., the President of
Associated, who has been in the MROP business for 19 years, will continue as the
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<PAGE> 24
president of Associated. Associated's net sales for the twelve months ended
December 31, 1996 were approximately $24 million.
J.J. Stangel Co. ("J.J. Stangel") has been in operation since 1917. J.J.
Stangel operates principally in Wisconsin. John J. Zimmer, the President of J.J.
Stangel, who has been in the MROP business for 34 years, will continue as the
president of J.J. Stangel. J.J. Stangel's net sales for the twelve months ended
December 31, 1996 were approximately $12 million.
Cramer Industrial Supplies, Inc. ("Cramer") has been in operation since
1900. Cramer operates principally in New York. Thomas W. Stewart, the President
of Cramer, who has been in the MROP business for 11 years, will continue as the
president of Cramer. Cramer's net sales for the twelve months ended December 31,
1996 were approximately $11 million.
Grinding Supplies Company ("Grinding") has been in operation since 1933.
Grinding operates principally in Michigan. Roy R. Woleben, the President of
Grinding, who has been in the MROP business for 27 years, will continue as the
president of Grinding. Grinding's net sales for the twelve months ended December
31, 1996 were approximately $8 million.
Slater Industrial Supply, Inc. ("Slater") has been in operation since 1946.
Slater operates principally in California. Robert C. Skidmore, the President of
Slater, who has been in the MROP business for 25 years, will continue as the
president of Slater. Slater's net sales for the twelve months ended December 31,
1996 were approximately $7 million.
SELECTED FINANCIAL DATA OF THE FOUNDING COMPANIES
The following table presents selected financial data for each of the
Founding Companies for the three most recent calendar years, as well as the most
recent interim period and comparable period of the prior year. Each Founding
Company has a fiscal year ending December 31, or has been converted to a
December 31 year end for purposes of the following table, and has an interim
period comprising six months.
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------------- -----------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
PREDECESSOR-IDG
Net sales...................................... $75,624 $83,526 $90,786 $45,184 $49,960
------- ------- ------- ------- -------
Gross profit................................... 19,676 21,165 23,456 10,876 12,398
Selling, general, and administrative
expenses(1)................................. 17,447 18,803 21,160 9,785 10,747
------- ------- ------- ------- -------
Operating income............................... 2,229 2,362 2,296 1,091 1,651
SHEARER INDUSTRIAL SUPPLY CO.
Net sales...................................... $32,689 $35,946 $44,184 $21,246 $23,110
------- ------- ------- ------- -------
Gross profit................................... 7,304 7,724 10,019 4,477 4,819
Selling, general, and administrative
expenses(1)................................. 6,852 7,250 9,085 4,104 4,213
------- ------- ------- ------- -------
Operating income............................... 452 474 934 373 606
B & J INDUSTRIAL SUPPLY COMPANY
Net sales...................................... $22,108 $25,377 $29,083 $13,336 $16,767
------- ------- ------- ------- -------
Gross profit................................... 5,922 6,646 7,458 3,449 4,331
Selling, general, and administrative
expenses(1)................................. 5,175 5,631 6,058 2,891 3,294
------- ------- ------- ------- -------
Operating income............................... 747 1,015 1,400 558 1,037
</TABLE>
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<PAGE> 25
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------------- -----------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
TRI-STAR INDUSTRIAL SUPPLY, INC.
Net sales...................................... $19,562 $24,474 $24,010 12,014 14,630
------- ------- ------- ------- -------
Gross profit................................... 3,789 5,027 5,319 2,687 3,149
Selling, general, and administrative
expenses(1)................................. 3,240 4,152 4,431 2,243 2,687
------- ------- ------- ------- -------
Operating income............................... 549 875 888 444 462
ASSOCIATED SUPPLIERS, INC.
Net sales...................................... $21,636 $24,471 $24,481 $12,265 $12,654
------- ------- ------- ------- -------
Gross profit................................... 4,425 4,917 4,907 2,542 2,700
Selling, general, and administrative
expenses(1)................................. 4,068 4,226 4,156 2,372 2,250
------- ------- ------- ------- -------
Operating income............................... 357 691 751 170 450
J.J. STANGEL CO.
Net sales...................................... $12,607 $12,188 $11,610 $ 5,982 $ 6,206
------- ------- ------- ------- -------
Gross profit................................... 2,978 2,948 2,765 1,438 1,525
Selling, general, and administrative
expenses(1)................................. 2,705 2,636 2,517 1,195 1,247
------- ------- ------- ------- -------
Operating income............................... 273 312 248 243 278
CRAMER INDUSTRIAL SUPPLIES, INC.
Net sales...................................... $ 8,870 $10,159 $11,467 $ 5,927 $ 5,903
------- ------- ------- ------- -------
Gross profit................................... 2,052 2,152 2,173 1,228 1,270
Selling, general, and administrative
expenses(1)................................. 1,894 1,931 2,159 1,145 1,143
------- ------- ------- ------- -------
Operating income (loss)........................ 158 221 14 83 127
GRINDING SUPPLIES COMPANY
Net sales...................................... $ 7,938 $ 8,371 $ 8,424 $ 4,061 $ 4,289
------- ------- ------- ------- -------
Gross profit................................... 1,850 2,089 2,213 1,073 1,137
Selling, general, and administrative
expenses(1)................................. 1,978 2,284 2,151 927 950
------- ------- ------- ------- -------
Operating income (loss)........................ (128) (195) 62 146 187
SLATER INDUSTRIAL SUPPLY, INC.
Net sales...................................... $ 5,574 $ 6,365 $ 7,258 $ 3,568 $ 3,795
------- ------- ------- ------- -------
Gross profit................................... 1,305 1,513 1,772 849 879
Selling, general, and administrative
expenses(1)................................. 1,235 1,394 1,589 796 810
------- ------- ------- ------- -------
Operating income............................... 70 119 183 53 69
</TABLE>
- ---------------
(1) Does not reflect the effects of certain reductions in salaries and benefits
to the owners of the Founding Companies (see "Summary Pro Forma Combined
Financial Data").
TERMS OF THE COMBINATION
To effect the Combination, the Company will acquire each of the Founding
Companies in a merger or stock purchase. The aggregate consideration payable to
the stockholders of the Founding Companies in the Combination (the "Combination
Consideration") consists of 3,330,224 shares of Common Stock and incidental cash
amounts in lieu of fractional shares. A dissenting shareholder of
Predecessor-IDG will receive the fair value of his interest in that company in
accordance with applicable law.
Twenty-five percent of the shares of Common Stock received as Combination
Consideration by each Founding Company stockholder will be deposited in an
escrow account (the "Escrow Account") for the purpose of securing (i) the
guarantee by each stockholder of any receivables on the books and records of its
Founding Company as of March 31, 1997, and (ii) the indemnification obligations
of each stockholder to the Company under the acquisition agreement with the
subject Founding Company, subject to setoff of any
24
<PAGE> 26
indemnification obligations that the Company may have thereunder. A portion of
the escrowed shares will be distributed from the Escrow Account one year after
the closing of the Combination, and the balance after two years, unless required
to be distributed earlier to the Company in respect of its establishment of
indemnification claims prior to such times. Only stockholders who are also part
of the management of a Founding Company ("Management Stockholders") are subject
to indemnification obligations with respect to representations, warranties, and
similar business matters concerning the Founding Company ("Business Matters").
Each stockholder's indemnification obligation is several, not joint, and is
limited in amount to the product of the number of shares received in the
Combination times the price per share in the Offering, except that Management
Stockholders are jointly and severally liable for indemnification claims based
on Business Matters in an amount equal to the aggregate of the individual limits
for all the Management Stockholders. All indemnification obligations, except
with respect to taxes and environmental Business Matters, expire at the end of
two years after the closing of the Combination.
The President of each Other Founding Company and the Executive Vice
President of Predecessor-IDG will enter into an employment agreement with the
Company, effective as of the consummation of the Combination, to serve as the
president of that company as an operating subsidiary of the Company. The term of
such employment agreement is three years, and provides for termination by the
Company for cause (as defined in the respective employment agreements). If such
an employee is terminated without cause, he is entitled to a severance payment
equal to his salary for the greater of twelve months or the remainder of the
three-year term.
The closing of the Combination is subject to customary conditions. No
assurance can be given that the conditions to the closing set forth in all of
the acquisition agreements will be satisfied or waived, or that each component
of the Combination will close. However, the closing of the Company's acquisition
of each Founding Company is a condition to the closing of the acquisition of
each other Founding Company and to the consummation of the Offering.
One shareholder of Predecessor-IDG, who owned approximately 45% of its
stock, has dissented from Predecessor-IDG's participation in the Combination.
Pursuant to Georgia's dissenter's rights statute, he will be paid cash instead
of Common Stock for the fair value of his interest in Predecessor-IDG.
Predecessor-IDG expects to offer to pay that shareholder approximately $4.2
million for his interest, which amount the Company believes represents the fair
value of his interest in Predecessor-IDG as calculated under the dissenter's
rights statute (that is, without regard to the effect of the Combination). There
can be no assurance, however, that the shareholder will accept the offer or that
the ultimate amount paid to the shareholder will not be higher. If he rejects
the offer within the prescribed period and the parties do not otherwise agree on
the amount of the payment, the Company will institute an action under the
statute for a judicial determination of the fair value of his interest. The
approximately $4.2 million amount expected to be offered by the Company is
reflected in the pro forma financial information of the Company included
elsewhere in this Prospectus.
25
<PAGE> 27
BUSINESS
GENERAL
Industrial Distribution Group, Inc. (the "Company" or "IDG") was formed in
February 1997 to create a leading, nationwide supplier of cost-effective,
flexible procurement solutions for manufacturers and other users of maintenance,
repair, operating, and production ("MROP") products. The Company distributes a
full line of industrial MROP products, emphasizing its specialized expertise in
product applications. The Company's principal product categories include
abrasives, cutting tools, hand and power tools, and coolants, lubricants, and
adhesives. Utilizing its proprietary computerized Supply Management System, the
Company's application and product specialists are able to analyze a customer's
acquisition, possession, and application processes for MROP supplies in order to
design programs to streamline the processes and reduce associated costs. Such
programs may include improving a customer's production and procurement
processes, standardizing MROP products, reducing the number of suppliers, or
developing integrated supply arrangements that outsource to the Company some or
all of a customer's MROP procurement and management functions.
The Company intends to establish a nationwide presence, with MROP product
and service capability in all or most of the major U.S. industrial markets.
Currently, the Company has 41 operating locations in 37 cities, along with four
small facilities abroad. The Company's more than 20,000 customers include a
diverse group of major national and international corporations, including
AlliedSignal, Black & Decker, Boeing, Chrysler, General Motors, Hoechst
Celanese, PPG Industries, and Shell Oil, as well as small and large local and
regional businesses. On a pro forma combined basis, the Company had net sales of
approximately $251 million for the year ended December 31, 1996, and net
revenues of approximately $137 million for the six months ended June 30, 1997.
INDUSTRY OVERVIEW
Manufacturers, processors, and other producers of industrial, commercial,
or consumer products have a continual need for a broad range of industrial MROP
products. Many of these products -- such as drill bits, sandpaper, and saw
blades -- are consumed in production processes and are essential to maintain at
the point of production to avoid unnecessary downtime. Other MROP
products -- such as power tools, scales, hoists, and lathes -- have relatively
longer operational lives and are therefore purchased less frequently, but still
must be available "on time" in order to achieve production efficiencies.
The Company estimates that the size of the market for industrial MROP
products in which it participates primarily is approximately $70 billion
annually. However, the entire United States MROP market is estimated to be in
excess of $175 billion annually, and includes electrical, PVF (pipes, valves,
and fittings), power transmission, and other product categories in which the
Company participates to a lesser extent. This larger market is highly
fragmented, with the 50 largest distributors (all of which have annual sales
over $90 million) accounting for less than 15% of the market.
Manufacturers and other users of MROP products are seeking ways to enhance
efficiencies and reduce MROP process and procurement costs in order to compete
more effectively in the global economy. As a result, the industrial supply
industry is experiencing consolidation, as customers focus on the convenience,
cost savings, and economies of scale associated with a reduced number of
suppliers capable of providing superior service and product selection. Further,
as manufacturers focus on their core manufacturing or other production
competencies, they are increasingly outsourcing their MROP procurement,
management, and application processes in search of comprehensive MROP solutions,
such as integrated supply. The Company believes that it will benefit from these
industry trends.
BUSINESS STRATEGIES
As a result of the Combination and the Offering, the Company believes that
it has the size, scale of operations, and resources necessary to compete
effectively in the evolving industrial MROP supply industry. The Company's size
and scale of operations allow it to benefit from high volume purchasing, attract
the highly skilled personnel required to deliver enhanced levels of service, and
realize internal operating efficiencies. The Company's resources enable it to
offer a comprehensive product line and invest in sophisticated inventory
26
<PAGE> 28
management and control systems needed to support its enhanced levels of customer
service. Finally, the Company's position enhances its ability to implement its
acquisition strategy in the consolidating and fragmented MROP industry.
Operating Strategy
Superior Product Expertise and Comprehensive Product Line. One of the
Company's core competencies is its extensive product expertise. With its
understanding of the most appropriate product for specific customer
applications, the Company can identify the MROP product best suited for a
customer's specific need. This expertise benefits the customer in two ways, each
of which lowers the customer's total MROP costs. First, the customer increases
the efficiency of its manufacturing processes by minimizing downtime and other
indirect costs. Second, by providing only that level of quality required by the
application, the Company can lower the customer's MROP product costs. The
Company's comprehensive product line supports its commitment to deliver the most
appropriate product to its customers. In addition to maintaining over 100,000
stock keeping units ("SKUs"), as well as special items in stock for regular
customers, the Company can provide virtually any MROP item, including
special-order items.
Flexible Procurement Solutions; Integrated Supply. The Company believes
the key to serving customers in the changing MROP market is the ability to
design and implement customized flexible procurement solutions for acquiring,
possessing, and applying MROP products to satisfy each customer's particular
needs and achieve its cost reduction objectives. The spectrum of services
necessary to deliver such solutions is broad. For customers who are not yet
prepared to outsource their entire MROP procurement and management functions,
the Company provides a range of options from which customers may select the
appropriate types and level of service. For customers who desire total
procurement solutions designed and implemented through a single distributor, the
Company offers its "fully integrated supply" programs, which permit customers to
outsource to the Company the entire MROP procurement and management function,
including ownership by the Company of inventory in the customer's on-site MROP
supply room (or "tool crib"). The Company's services include, as needed by the
customer: assessing a customer's total procurement costs for its MROP
requirements (comprised of product ordering, carrying, management,
administrative, and other overhead costs); re-engineering procurement and
production processes; standardizing products; reducing the number of
distributors, with a corresponding reduction in purchase orders and invoices
processed by customers; reducing the numbers of products used by the customer;
acquiring supplies on an "on-time" basis; managing and supplying MROP items
using the Supply Management System; managing and staffing customers' tool cribs;
bar coding products in tool cribs to facilitate ordering and to track and
control consumption by employee, product, or cost center; and generating a
variety of customer-designed management reports.
Centralized Corporate Functions and Decentralized Operating Management. At
the corporate level, on the one hand, the Company will consolidate functions
such as financial, accounting, management information systems, employee
benefits, and certain purchasing arrangements to eliminate duplicative
administrative and other costs that otherwise would be incurred at each of its
operating locations. The resulting operating efficiencies, along with the
enhanced leverage from higher volume purchasing, should provide the Company an
advantage over smaller regional and local competitors. At the operating
subsidiary level, on the other hand, the Company will employ a decentralized
management structure that focuses management at each operating subsidiary on
day-to-day operating matters, profitability, and growth, as well as identifying
potential acquisition candidates. The Company believes that its decentralized
management philosophy will result in better customer service by allowing local
management the flexibility to implement policies and make decisions based on
first-hand assessments of the needs and desires of individual customers.
Superior Customer Service. Providing superior quality and a comprehensive
range of MROP services to customers is the IDG hallmark. As part of its
commitment to customer service, the Company emphasizes quality assurance in all
phases of its operations. The Company's sales and service personnel receive
ongoing periodic training in TQM ("total quality management") and other team
management skills to assure such quality performance. IDG also will seek
certification under the International Standards Organization ("ISO") 9002
standards for distribution with respect to its principal locations and expects
to make such certification a Company-wide objective for all future principal
locations.
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<PAGE> 29
Commitment to Technology. The Company's proprietary computerized Supply
Management System and its internal management and information systems will be
instrumental in delivering high quality customer service and in reducing the
Company's operating costs. The Supply Management System is designed to allow a
customer to order products directly from the Company, set internal purchase
control limits for its personnel, coordinate the management of MROP items within
its tool cribs, run customized reports, and perform numerous other functions
that facilitate the procurement process or reduce its costs. When fully
implemented, the Company's internal management and information systems will
track all of its products nationwide and will enable a customer and the
Company's sales personnel anywhere to determine the availability of products in
stock on a real time basis and to evaluate alternative products and pricing. The
Company is committed to continually assessing and implementing technological
innovations that will enhance its ability to serve customers and improve its
operating results. The Company will seek to use technology to reduce its order
processing and receiving costs, by means such as product bar coding, electronic
funds transfer ("EFT"), electronic data interchange ("EDI"), and vendor managed
inventory ("VMI") modules to facilitate on-time procurement of products, without
the administrative expense and inconveniences of the traditional exchange of
purchase orders and invoices.
Growth Strategy
Internal Growth. Management believes that significant opportunities exist
to increase revenues and earnings through internal expansion, particularly due
to the Company's enhanced competitive position resulting from the Combination.
Through focused marketing both inside and outside the United States, the Company
will seek to add revenue by offering additional products and services to new and
existing customers and identifying any unserved facilities of its larger
existing customers. Where necessary to increase its market share, the Company
will open or expand facilities in the vicinity of existing operations. The
Company will also consider the desirability of internal expansion into new
geographic markets.
Acquisitions in Select Geographic Markets. The Company intends to launch
an aggressive acquisitions program to take advantage of consolidation
opportunities that management believes exist within the highly fragmented
industrial MROP market. The Company will focus primarily on industrial MROP
markets in the United States, and initially on those major markets where the
Company does not presently operate. The Company will seek to acquire successful
MROP distribution and related businesses that are large enough to establish a
significant initial presence and to provide for future Company expansion in the
particular market. The Company will seek to retain the management of acquired
businesses.
"Hub and Spoke" Expansion Strategy. The Company will utilize a "hub and
spoke" approach both for acquisitions and internal expansion. In establishing a
"hub" location, the Company generally will assess both the volume of MROP
utilization in the geographic area and the ready availability of transportation
and warehouse facilities to permit the Company to develop and support smaller
operations in surrounding regions through centralization of some functions at
the hub location. Upon establishing a hub, the Company will seek to acquire or
open additional smaller operations, or "spokes", in the surrounding geographic
area to increase market penetration or capitalize on operating efficiencies
available through the hub.
Expansion into International Markets. The Company believes that the
consolidation and outsourcing trends that provide growth opportunities in the
United States offer comparable opportunities in international markets. The
Company plans initially to extend its offering of flexible procurement solutions
to foreign manufacturing facilities of its domestic customers to develop a base
for potentially expanded international operations. The Company has been active
in the People's Republic of China since 1988, establishing sales offices in
Beijing (1994) and Shanghai (1996), and in Mexico since 1997.
FLEXIBLE PROCUREMENT SOLUTIONS; INTEGRATED SUPPLY
The ability to deliver customized flexible procurement solutions that are
specially designed to reduce a particular customer's MROP costs is one of the
fundamental strengths of the Company. The spectrum of services necessary to
design and implement such solutions for customers in the changing industrial
MROP market is broad and must encompass all three phases of a customer's MROP
cycle -- acquisition, possession,
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<PAGE> 30
and application. The Company offers the entire spectrum of services in order to
assure its ability to design and implement procurement solutions that meet each
particular customer's MROP requirements.
Some customers may require nearly the entire spectrum of services -- a
so-called "fully integrated supply" relationship, where the Company essentially
forms a strategic alliance with the customer to procure, manage, and apply MROP
products at the customer's site and to share the benefits of the cost reductions
achieved. The Company's fully integrated supply relationships, which are not
standardized and vary from customer to customer, usually include licensing IDG's
proprietary Supply Management System to the customer; gaining access to plant
floors to re-engineer procurement and production processes and standardize MROP
products; coordinating the purchase of multiple MROP product lines; providing
consolidated invoices and customized management reports via a direct network
link to customers; and managing and staffing tool cribs. In addition, in a fully
integrated supply relationship, the Company, rather than the customer, generally
owns the inventory in the tool crib. The Company believes that the nature of
integrated supply relationships will continue to evolve, and it will seek to
maintain the capability to provide whatever level of integration its customers
may require over time.
In a fully integrated supply relationship, the Company often guarantees a
minimum annual reduction in the customer's total MROP costs. The Company
believes it can achieve such guaranteed cost reductions through its focused and
ongoing analysis and re-engineering of a customer's production processes to
reduce the variety and number of MROP products used by the customer. In addition
to the contractually guaranteed cost reductions, the Company often achieves
additional costs savings for the customer through the reduction of certain tool
crib staffing expenses; the reduction in shrinkage and obsolete stock due to
better inventory controls; and the elimination of certain inventory holding
costs. Where the Company saves additional costs for a customer through process
improvements, the customer usually shares the additional savings with the
Company. The Company believes that, for appropriate customers, a fully
integrated supply arrangement also has other benefits. For example, through the
use of the Company's proprietary Supply Management System, the customer
experiences a better fill rate for MROP products; reduces production downtime
due to the unavailability of key products; and obtains more useful information
about inventory needs and consumption by cost center than previously collected.
Other customers require less comprehensive solutions, and the Company has
the flexibility to design and implement only those services needed by the
customer. In addition to selections from the services described for fully
integrated supply arrangements, these specialized services may include any one
or more of the following: providing consolidated billing for MROP products and
computerized management reports to customers regarding purchases and inventory
levels; installing computer software and hardware to implement an EDI system to
enable the customer to order products from its own location electronically
without contacting the Company by telephone or facsimile; and bar coding
products in a customer's tool crib to control inventory and track consumption by
product, employee, or cost center. Other services, as needed to respond to a
particular customer's MROP requirements, can be designed and implemented to
achieve the desired solution.
At June 30, 1997, the Company had in place 19 fully integrated supply
arrangements with 17 customers covering 20 sites, and supply contracts for
specialized services with over 300 customers.
PRODUCTS
The Company offers a full line of industrial MROP products, stocks specific
items for regular customers, and can satisfy virtually any requirement a
customer may have for an MROP application or service. The Company's principal
categories of products include abrasives, cutting tools, hand and power tools,
coolants, lubricants, and adhesives, among others. The Company will be able to
offer significant depth and breadth in its core product lines to customers
throughout its nationwide operations, which will distinguish it from most of its
present competitors. The Company's products may be ordered electronically, by
telephone, by mail, or by facsimile. The Company will at all times seek to
provide its customers with the most convenient method of selecting and ordering
products, which in the future may include paper and electronic catalogs,
Internet commerce, and other publications.
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<PAGE> 31
The Company's offering of specific products from multiple manufacturers at
different prices and quality levels permits the Company to offer the product
that provides the best value for the customer. For example, if a customer
requires a drill bit to drill 100 holes, it would be inefficient and more costly
to purchase the top-of-the line product that is designed for a requirement of
drilling 10,000 holes. The Company's application and product specialists are
trained specifically to assist customers in making such intelligent cost-saving
purchases, with the goal of lowering the customer's total MROP product costs.
The Company believes these factors will significantly enhance its volume of
repeat business, and they are an integral part of the Company's overall customer
costs reduction and total procurement solution.
The following table sets forth the MROP products offered by the Company,
based on the Industrial Distribution Association product categories, describes
typical products in each category, and presents the percentage of the Company's
aggregate revenues from sales of the product category for 1996:
<TABLE>
<CAPTION>
% OF
AGGREGATE
PRODUCT CATEGORY TYPICAL PRODUCTS REVENUE
- ---------------- ---------------- ---------
<S> <C> <C>
Abrasives............................ Grinding Wheels, Sanding Belts, Discs, Sheets 17.3%
or Rolls
Cutting Tools........................ Drills, Taps, Carbide Tools, End Mills 15.3
Hand Tools........................... Wrenches, Socket Sets, Screwdrivers, Hammers 11.2
Power Tools.......................... Air and Electric Drills, Air Compressors, 10.5
Impact Wrenches, Screwdrivers
Coolants, Lubricants, and 6.5
Adhesives.......................... Metal Cutting Coolants, Aerosols, Industrial
Adhesives
Material Handling Equipment.......... Hoists, Slings, Chain, Shelving, Casters 5.2
Maintenance Equipment & Supplies..... Hydraulic Tools, Paint, Lubrication Equipment 4.3
Safety Products...................... Gloves, Signs, Absorbents, Glasses 4.0
Contractor Supplies.................. Powder-Actuated Tools, Ladders, Shovels 2.6
Machine Tools & Accessories.......... Milling Machines, Work Holding Vises, Tool 2.1
Holders
Fasteners............................ Socket Screws, Hex Screws, Anchors 1.7
Industrial Hose...................... Air Hose, Water Hose 1.7
Quality Control Products............. Electronic Calipers, Micrometers 1.6
Saw Blades........................... Band, Hack, Hole, Jig Saw Blades 1.5
Fluid Power.......................... Hydraulic and Pneumatic Valves, Cylinders 1.4
Tool & Die Supplies.................. Ground Stock, Drill Rod, Die Sets 1.4
Power Transmission Equipment......... Belts, Drives, Bearings, Gears, Pulleys 1.3
Brushes.............................. Wire Wheel, Floor Brooms 1.2
Tapes................................ Masking, Filament and Duct Tape 1.1
Industrial Pipe, Valves & Fittings... Pipes, Valves, Fittings 0.6
Welding Equipment & Supplies......... Welders, Weld Rod 0.3
Electrical........................... Fuses, Electrical Switches, Controls 0.2
Metal Goods.......................... Angle Iron, Conduit 0.1
Other Products....................... Not otherwise classified 6.9
-----
Total...................... 100.0%
=====
</TABLE>
In addition to maintaining over 100,000 SKUs in stock, the Company often
maintains supplies of special items for regular customers. Moreover, the Company
is able to supply virtually any special order MROP item. In order to achieve
costs savings for the Company and its customers, the Company periodically
reviews its special order activities to identify items ordered with sufficient
frequency to warrant inclusion in the Company's stock.
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The Company obtains its products from approximately 3,200 vendors. During
the 12 months ended December 31, 1996, only one vendor provided as much as 10%
of the products sold by the Company, and no other vendor provided more than 4%.
The Company believes it is not materially dependent on any one vendor or small
group of vendors.
The Company ships products anywhere in the world in the time frame required
by the customer. To facilitate such "on time" delivery of the Company's
products, the Company stores its stock MROP products primarily in warehouses at
various locations across the United States. See "-- Properties".
CUSTOMERS
The Company's customers, who number over 20,000, include a broad range of
industrial, commercial, and institutional users of MROP products, from
one-person machine shops to national and multinational corporations such as
AlliedSignal, Black & Decker, Boeing, Chrysler, General Motors, Hoechst
Celanese, PPG Industries, and Shell Oil. For the 12 months ended December 31,
1996, the Company sold products to over 700 customers who purchased at least
$50,000 of products, and no single customer accounted for as much as 5% of the
Company's net sales.
The Company will continue to serve a large number and wide variety of
customers, as part of its planned growth and nationwide expansion strategy.
Management does expect, however, that the Company will place special emphasis on
marketing and sales of core product categories to mid- to large-sized users of
MROP products who require the value-added benefits of the Company's flexible
procurement solutions.
SALES AND MARKETING
The Company has approximately 180 outside sales representatives, 170 inside
sales/customer service representatives, and 50 application and product
specialists. Most of the inside sales/customer service representatives support
the outside sales representatives and are responsible for certain types of
customer service contacts and order entry. The application and product
specialists call on designated customers and are responsible for designing and
presenting the Company's flexible procurement solutions to those customers and
providing technical support with respect to certain products. These specialists
are highly trained individuals who build relationships with customers and assist
them in reducing total procurement costs and improve production processes. Once
the Company's internal operating systems are integrated, its entire sales force
will have access to customers' historic product preferences, order values, and
inventory levels for all of the products stocked by the Company. The sales force
will also be able to access billing information and plant and industry
information, and to input product orders. The Company has invested significant
resources in developing these sales force automation systems and databases. The
databases will be a key component of the Company's marketing strategy and can
offer the Company an ongoing competitive advantage in increasing sales to
existing customers and attracting new customers.
The Company will centralize the administration of Company-wide training
programs and will provide intensive ongoing TQM training programs for all
Company personnel. In addition, each Founding Company has developed, and will
continue to provide as operating subsidiaries of the Company, regular training
programs for its sales personnel and special training programs for any products
distributed only in its market area. Each operating subsidiary will also
maintain a technical support group, as part of its overall sales and marketing
function, dedicated to answering specific customer inquiries, assisting
customers with the operation of products, and finding low cost solutions to
manufacturing problems.
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<PAGE> 33
PROPERTIES
The Company's current warehouses, sales, and administrative offices are as
follows, although it expects to consolidate certain facilities to achieve
operating efficiencies:
<TABLE>
<CAPTION>
LOCATION LEASE/OWN SQUARE FT.
- -------- --------- ---------- TYPE
<S> <C> <C> <C>
Tucson, AZ Lease 14,335 Warehouse/Offices
Little Rock, AR Lease 5,000 Warehouse/Sales
Cerritos, CA Lease 16,500 Warehouse/Sales/Office
Van Nuys, CA Lease 2,750 Warehouse/Sales
Tucker, GA Own 58,180 Warehouse/Sales/Headquarters
West Point, GA Own 33,346 Warehouse/Sales
Elkhart, IN Lease 8,700 Warehouse/Sales
Decatur, IL Lease 10,000 Warehouse/Sales
Baltimore, MD Lease 7,500 Warehouse/Sales
Hermosillo, Sonora, MX Lease 2,400 Warehouse/Offices
Ferndale, MI Own 30,000 Warehouse/Offices
Springfield, MO Lease 10,000 Warehouse/Sales
St. Louis, MO Lease 40,000 Warehouse/Sales
Jamestown, NY Own 4,000 Warehouse/Sales
Tonawanda, NY Own 16,700 Warehouse/Sales
Arden, NC Lease 5,500 Warehouse/Sales
Charlotte, NC Lease 6,900 Warehouse/Sales
Greensboro, NC Lease 52,000 Warehouse/Sales
Greenville, NC Lease 6,750 Warehouse/Sales
Hudson, NC Lease 11,200 Warehouse/Sales
Raleigh, NC Lease 8,800 Warehouse/Sales
Shelby, NC Lease 68,064 Warehouse/Sales
Statesville, NC Lease 550 Sales
Lincoln City, OR Lease 1,800 Sales
Portland, OR Lease 44,800 Warehouse/Offices
Portland, OR Lease 11,450 Warehouse/Offices
Portland, OR Lease 10,500 Warehouse/Sales
Hazleton, PA Lease 3,500 Sales
Reading, PA Lease 15,750 Warehouse/Sales
Southampton, PA Lease 16,000 Warehouse/Sales
Whitehall, PA Lease 24,000 Warehouse/Sales
Williamsport, PA Lease 4,000 Warehouse/Sales
York, PA Lease 22,000 Warehouse/Sales
York, PA Lease 5,000 Warehouse/Offices
Beijing, PRC Lease 500 Sales
Shanghai, PRC Lease 300 Sales
Tianjin, PRC Lease 500 Warehouse
Greenville, SC Lease 15,000 Warehouse/Sales
Knoxville, TN Lease 19,060 Warehouse/Sales
Redmond, WA Lease 2,266 Warehouse/Offices
Seattle, WA Lease 45,000 Warehouse/Sales
Spokane, WA Lease 31,440 Warehouse/Sales
Spokane, WA Lease 1,838 Warehouse/Offices
Tacoma, WA Own 26,150 Warehouse/Sales
Manitowoc, WI Lease 40,000 Warehouse/Sales
</TABLE>
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The Company's corporate offices are contained within Predecessor-IDG's
principal operating location at 2500 Royal Place, Tucker, Georgia, where the
Company is expanding a portion of that space to accommodate its executive
offices.
MANAGEMENT INFORMATION SYSTEMS
The Company will develop, maintain, and utilize computerized management and
information systems, including its internal management and information systems
and its proprietary PC-based Supply Management System for customer product
procurement and management. Both of these systems are important elements of the
Company's ability to meet customers' requirements for increasing levels of
individualized total MROP procurement solutions and also to achieve the
Company's desired level of operating efficiencies. The Company utilizes its
proprietary Supply Management System in providing flexible procurement solutions
for customers. In addition, certain other Founding Companies have internal
information systems that allow centralized management of key functions,
including communication links between warehouse and sales offices, inventory and
accounts receivable management, purchasing, pricing, sales and distribution, and
the preparation of periodic operating control reports that provide concise and
timely information regarding key aspects of its business.
In connection with developing its internal Company-wide systems following
the Combination, the Company expects to draw upon the best features of the
existing systems that have been utilized by the Founding Companies. Once the
systems of the Founding Companies are integrated, certain of the information
systems will operate over a wide area network, and the real-time information
system will allow each warehouse and sales center to share information and
monitor daily progress relating to sales activities, credit approval, inventory
levels, stock balancing, vendor returns, order fulfillment, and other measures
of performance. In addition, the Company's systems will enable it to
automatically purchase inventory from certain vendors based on projected
customer ordering models.
COMPETITION
The industrial MROP products industry is highly competitive and features
numerous distribution channels, including: national, regional, and local
distributors; direct mail suppliers; large warehouse chains; hardware stores;
and manufacturers' own sales forces. Many of the Company's competitors are small
enterprises who sell to such customers in a limited geographic area, but the
Company also competes against several large MROP distributors that have
significantly greater resources than the Company. Certain of the Company's
competitors sell identical products for lower prices than those offered by the
Company. Management believes, however, that the Company's ability to compete
effectively is dependent primarily upon its ability to respond to the needs of
its customers through quality service and product diversity and availability. As
a result of the Combination, the Company will be the 21st largest industrial
MROP distributor, based on the 1997 survey of the top 100 industrial
distributors published in the June 1997 issue of Industrial Distribution
magazine. Management believes the Company's operating and growth strategies will
yield operating efficiencies that enhance its ability to compete successfully
for the types of customers it desires.
PERSONNEL
Immediately after the Combination, the Company expects to have
approximately 850 full-time and 30 part-time associates. Twelve of the Company's
associates will be employed pursuant to a collective bargaining agreement with
local unions affiliated with the International Brotherhood of Teamsters.
Management believes that the Founding Company that has been employing these
persons pursuant to that contract enjoys good relations with these associates,
and has not experienced work stoppages. Management believes the Company's
relations with all of its associates is good.
LEGAL MATTERS
On November 18, 1996, Milliken & Company ("Milliken"), a textile
manufacturer and customer of Predecessor-IDG, filed suit against a manufacturer
of an industrial product and Predecessor-IDG in the
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<PAGE> 35
Superior Court of Troup County, Georgia, Civil Action No. 96-CV-964. Milliken
claims that a product sold to it by Predecessor-IDG as a distributor of the
defendant-manufacturer was defective and caused a fire, severely damaging
Milliken's textile manufacturing plant in LaGrange, Georgia. Milliken alleges
damages of $500 million against the defendants. Predecessor-IDG has denied any
liability, and its insurance carrier is vigorously defending the lawsuit on its
behalf. While the damages alleged by Milliken are exceptional in amount, the
inclusion of the distributor of a product, along with its manufacturer, as a
defendant in an action for alleged product defectiveness is unexceptional. The
litigation is in the early stages of discovery, and while it is not possible to
predict with accuracy the outcome of any such litigation matter, the Company
believes that its insurance, which provides for $12 million of coverage, will be
adequate to cover any loss to Predecessor-IDG that might result from the
lawsuit.
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<PAGE> 36
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Certain information regarding the directors and executive officers of the
Company is set forth in the following table and paragraphs.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Martin S. Pinson (1)(3)............... 51 Chairman of the Board and Chief Executive Officer
Douglass C. Smith (1)................. 56 President and Chief Operating Officer and Director
Jack P. Healey........................ 38 Vice President, Chief Financial Officer, and Secretary
David K. Barth........................ 53 Director
William J. Burkland................... 35 Director; Vice President of B&J
William R. Fenoglio(1)(2)............. 58 Director
William T. Parr(2)(3)................. 60 Director
George L. Sachs, Jr. (1).............. 55 Director; President of Tri-Star
Richard M. Seigel (2)(3).............. 51 Director
Andrew B. Shearer..................... 34 Director; President of Shearer
</TABLE>
- ---------------
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
Mr. Pinson joined the Company in June 1997 as its Chairman and Chief
Executive Officer. Prior to joining the Company, Mr. Pinson was a co-founder in
1994, and served as Executive Vice President (from inception) and Chief
Financial Officer (from inception to 1995) of U.S. Office Products Company, an
international office products supplier to corporate, commercial, and industrial
customers, which engaged in a consolidation of office products suppliers. From
1991 to 1995, Mr. Pinson served as President of Pinson and Associates, a
Washington, D.C.-based investment, legal, and consulting services firm primarily
serving development stage companies. From 1973 to 1990, Mr. Pinson was Senior
Vice President and Secretary of Greater Washington Investors, Inc., a
publicly-owned venture capital investment company, where he specialized in
developing investment strategy and locating new investment opportunities. He
received his undergraduate degree from Union College and his law degree from
Georgetown University.
Mr. Smith is a co-founder of the Company and has served as its President
and Chief Operating Officer since its inception. Mr. Smith was a co-founder in
1981 of Predecessor-IDG and has served as its President and Chief Executive
Officer since that time. Mr. Smith was also a co-founder in 1972 of Boring &
Smith Industries, Inc., a predecessor of Predecessor-IDG, and had served as its
President until the formation of the Company. Mr. Smith received his
undergraduate degree from the University of Maryland and his Masters in Business
Administration from Emory University.
Mr. Healey joined the Company in June 1997 as Vice President, Chief
Financial Officer, and Secretary. Prior to joining the Company, Mr. Healey was
the partner in charge of assurance services (since 1983) for Miller Ray Healey &
Houser, a regional accounting firm and member of the SEC practice section of
AICPA, during which time he served as auditor for Predecessor-IDG. Prior to
joining that firm, Mr. Healey was a senior auditor with the international
accounting firm of Ernst & Young. Mr. Healey is a certified public accountant
and a certified fraud examiner. He received his undergraduate degree in
accounting from Syracuse University.
Mr. Barth is the President of Barth Smith Company, an investment and
management consulting firm specializing in strategy, marketing, operating and
executive staffing issues associated with various distribution channels, which
he founded in 1991, which assisted the Company with the Combination. Prior to
that time, he served as Vice President, Planning and Development, from 1985 to
1990, and Treasurer, from 1979 to 1984, of W.W. Grainger, Inc., a national
distributor of maintenance, repair, and operating supplies and related
information to commercial, industrial, contractor, and institutional customers.
Mr. Barth also served as Treasurer, Financial Services Group, from 1975 to 1979,
and Manager, Treasury Operations, from 1972 to
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<PAGE> 37
1975, of Borg-Warner Corporation, a multinational diversified manufacturing,
finance, and services company. Mr. Barth received his undergraduate degree from
Knox College in Galesburg, Illinois, and his Masters in Business Administration
from the University of California at Berkeley.
Mr. Burkland is a co-founder of the Company. Mr. Burkland has served since
1994 as the Vice President of Finance and Controller of B & J Industrial Supply
Company. From 1992 to 1994, Mr. Burkland served as B & J's Director of
International Sales, during which he initiated, managed, and expanded B & J's
international business. Mr. Burkland received his undergraduate degree in
business administration from the University of Washington.
Mr. Fenoglio served as the President and Chief Executive Officer of Augat,
Inc., a manufacturer of connector products, from 1994 to 1996. Prior to that
time, Mr. Fenoglio served as President and Chief Executive Officer (1991 to
1994) and Chief Operating Officer (1985 to 1991) of Barnes Group, Inc., a
diversified manufacturer and distributor which owns Bowman Distribution Company.
From 1961 to 1984, Mr. Fenoglio was employed by General Electric Corporation and
served as the Vice President and General Manager of the Component Motor Division
from 1981 to 1984. Mr. Fenoglio is currently a director of the Southern New
England Telecommunications Corporation and Southern New England Telephone
Company, and he has served as Chairman of the Board of Connecticut Business &
Industry Association. Mr. Fenoglio received his undergraduate engineering degree
from Rose Hulman Institute of Technology and completed the Advanced Executive
Program at Northwestern University's J.L. Kellogg Graduate School of Management.
Mr. Parr has served as Vice Chairman and a director of J. Smith Lanier &
Co., an insurance placement company, since 1980. He currently serves as a
director of ITC Holding and several of its subsidiaries, including ITC Services
Co., Inc. (a management services company), Valley Telephone, InterCall, Inc. (a
conference calling service provider), and Globe Telecommunications, Inc. (a
non-regulated telecommunications provider). He also serves as a director of
AvData Systems, Inc. and ITC DeltaCom. Mr. Parr received his undergraduate
degree in mathematics from Georgia State University.
Mr. Sachs is a co-founder of the Company. Mr. Sachs has served since 1985
as the President of Tri-Star Industrial Supply, Inc., one of the Founding
Companies, and from 1978 to 1985, he served as Tri-Star's Vice
President -- Finance. Prior to joining Tri-Star, Mr. Sachs served as an Audit
Manager for Arthur Andersen & Co. from 1968 to 1978. Mr. Sachs received his
undergraduate degree in accounting from California State Polytechnic University,
and is a certified public accountant.
Mr. Seigel is the Chairman and Chief Executive Officer (since 1990) of
SYSCO Food Services of Los Angeles, a subsidiary of SYSCO Corporation that
distributes a broad range of products and services to restaurants, hotels,
hospitals, schools, the military, and other institutions. Prior to that time,
Mr. Seigel had been Senior Vice President of SYSCO Corporation (1988 to 1990),
which he joined in 1988 following the acquisition by SYSCO Corporation of a
subsidiary of Staley-Continental, Inc. for which Mr. Seigel served as President
from 1984 to 1988. Mr. Seigel received his undergraduate degree from Knox
College and his Masters in Business Administration from The Amos Tuck School of
Business at Dartmouth College.
Mr. Shearer is a co-founder of the Company. Mr. Shearer has served since
1991 as the President of Shearer Industrial Supply Co., one of the Founding
Companies. Prior to becoming President, Mr. Shearer was employed by Shearer
Industrial Supply Co. in various positions from 1985. Mr. Shearer received his
undergraduate degree in business management from New Hampshire College.
EXECUTIVE COMPENSATION AND EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs. Pinson and
Healey, and effective as of the consummation of the Combination, will enter into
an employment agreement with Mr. Smith. The agreements provide for a base salary
of $250,000, $250,000, and $150,000 per year for Messrs. Pinson, Smith, and
Healey, respectively; an annual bonus as determined by the Company's Board of
Directors; and Company benefits of the type generally provided to key
executives. While the Company may terminate an employment agreement at any time
during the term, if the Company terminates the agreement other than for cause,
death, or disability, the Company must pay severance based on the officer's base
salary under the agreement for the
36
<PAGE> 38
greater of 12 months or the unexpired portion of the term and any performance
bonus to which the officer would otherwise be entitled for the fiscal year in
which such termination occurs. Messrs. Pinson's and Healey's employment
agreements each have a three-year term from June 1, 1997, and Mr. Smith's
employment agreement has a three-year term from the date of the Combination. All
of the agreements contain customary proscriptions against misuse of Company
information, competition with the Company, and solicitation of employees of the
Company.
Prior to June 1, 1997, the Company paid no compensation.
DIRECTORS' COMPENSATION
The Company pays its outside directors an annual fee of $10,000, payable
quarterly. The Company reimburses all directors for their travel and other
expenses incurred in connection with attending Board or Committee meetings, and
also reimburses its outside directors for actual expenses otherwise incurred in
performing their duties. As of the date of this Prospectus, the Company had
granted each outside director options to purchase 15,000 shares of Common Stock
at the Offering Price. Such options will vest in three equal installments on the
first three anniversaries of the date of grant.
STOCK INCENTIVE PLAN
In July 1997, the Company adopted its Stock Incentive Plan to provide key
employees, officers, and directors an opportunity to own Common Stock of the
Company and to provide incentives for such persons to promote the financial
success of the Company. Awards under the Stock Incentive Plan may be structured
in a variety of ways, including "incentive stock options", as defined in Section
422 of the Internal Revenue Code, as amended ("IRC"), "nonqualified stock
options", shares of Common Stock subject to terms and conditions set by the
Board of Directors ("restricted stock awards"), and stock appreciation rights
("SARs"). Incentive stock options may be granted only to full-time employees
(including officers) of the Company, including its subsidiaries. Non-qualified
options, restricted stock awards, SARs, and other permitted forms of awards may
be granted to any person employed by or performing services for the Company,
including directors. The Stock Incentive Plan provides for the issuance of an
aggregate number of shares of Common Stock equal to 15% of the Company's fully
diluted shares of Common Stock outstanding from time to time, subject to the
issuance of a maximum of 1,000,000 shares pursuant to incentive stock options.
Incentive stock options are also subject to certain limitations prescribed
by the IRC, including the requirement that such options may not be granted to
employees who own more than 10% of the combined voting power of all classes of
voting stock of the Company, unless the option price is at least 110% of the
fair market value of the Common Stock subject to the option. In addition, such
incentive stock options may not be exercised for more than 5 years from the
stated grant. The Board of Directors of the Company (or a committee designated
by the Board) otherwise generally has discretion to set the terms and conditions
of options and other awards, including the term, exercise price, and vesting
conditions, if any; to select the persons who receive such grants and awards;
and to interpret and administer the Incentive Plan.
As of the date of this Prospectus, options to purchase an aggregate of
392,157 shares of Common Stock have been granted under the Stock Incentive Plan
and were outstanding, including options for 103,799 and 20,760 shares of Common
Stock issued to Mr. Pinson and Mr. Healey, respectively.
EMPLOYEE STOCK PURCHASE PLAN
The Company has adopted an Employee Stock Purchase Plan (the "Stock
Purchase Plan") under which qualified employees of the Company and its
subsidiaries have the right to purchase shares of Common Stock on a quarterly
basis through payroll deductions by the employee. The Stock Purchase Plan will
be administered by the Compensation Committee of the Company's Board of
Directors. The price to be paid for a share of Common Stock under the plan is
85% of the fair market value (as defined in the Stock Purchase Plan) of a share
of Common Stock at the beginning or the end of each quarterly purchase period,
whichever is lower. The amount of any participant's payroll deductions or cash
contributions made pursuant to the Stock Purchase Plan may not exceed 10% of
such participant's total annual compensation and may not exceed
37
<PAGE> 39
$25,000 per year. A maximum of 500,000 shares of Common Stock may be issued
under the Stock Purchase Plan. The Stock Purchase Plan may be terminated or
amended by the Company's Board of Directors; provided, however, that no such
amendment shall (i) disqualify the Stock Purchase Plan under Section 423 of the
IRC or (ii) without the consent of a participant, materially impair the rights
of such participant with respect to any shares of Common Stock previously
purchased for him or her under the Stock Purchase Plan.
The Stock Purchase Plan is intended to qualify under Sections 421 and 423
of the IRC. In accordance therewith, no income will be recognized by a
participant when shares are acquired pursuant to the Stock Purchase Plan. With
certain exceptions, when a participant disposes of such shares, he or she will
recognize a capital gain equal to the difference between the acquisition price
and the amount realized on such disposition. The Company will not be allowed a
deduction with respect to any shares transferred to a participant pursuant to
the Stock Purchase Plan.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Pursuant to the Company's Certificate of Incorporation and Bylaws, the
Company is obligated to indemnify each of its directors and officers to the
fullest extent permitted by law with respect to all liability and losses
suffered and reasonable expenses incurred by such person in any action, suit, or
proceeding in which such person was (or is made or threatened to be made) a
party or is otherwise involved by reason of the fact that such person is or was
a director or officer of the Company. The Company will enter into
indemnification agreements with its directors and certain executive officers. It
will be obligated to pay the reasonable expenses of the directors or officers
incurred in defending such proceedings if the indemnified party agrees to repay
all amounts advanced by the Company if it is ultimately determined that such
indemnified party is not entitled to indemnification. See "Description of
Capital Stock -- Indemnification and Limitations on Liability of Officers and
Directors".
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<PAGE> 40
PRINCIPAL STOCKHOLDERS
The table below sets forth information regarding the beneficial ownership
of the Common Stock, as of the date hereof and giving effect to the Combination
and the Offering, by (i) each person known to the Company to be the beneficial
owner of more than 5% of the outstanding shares of Common Stock, including those
persons who are known to be such holders after the closing of the Combination,
(ii) each director and executive officer of the Company, and (iii) all directors
and executive officers of the Company as a group. Unless otherwise indicated,
each of the stockholders listed below has sole voting and investment power with
respect to the shares beneficially owned.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENT PRIOR PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) TO OFFERING(2) AFTER OFFERING(2)
- ------------------------------------ ------------ -------------- -----------------
<S> <C> <C> <C>
Martin S. Pinson........................................ 69,200 2.0% 1.1%
Douglass C. Smith(3).................................... 123,774 3.6 1.9
Jack P. Healey.......................................... 25,950 * *
David K. Barth(4)....................................... 23,066 * *
William J. Burkland(5).................................. 143,282 4.1 2.2
William R. Fenoglio..................................... 0 * *
William T. Parr......................................... 0 * *
George L. Sachs, Jr..................................... 53,989 1.6 *
Richard M. Seigel....................................... 0 * *
Andrew B. Shearer....................................... 514,889 14.9 8.0
All directors and executive officers as a group (10
persons).............................................. 954,150 27.6 14.8
</TABLE>
- ---------------
* Denotes less than 1%
(1) Includes shares to be received as Combination Consideration by any
stockholder of a Founding Company simultaneously with the closing of the
Offering.
(2) The percentages shown prior to the Offering include all shares to be issued
as Combination Consideration simultaneously with the closing of the
Offering. The percentages shown after the Offering are based on the
assumptions that: (i) there will be 6,459,973 shares of Common Stock
outstanding immediately after the closing of the Offering, and (ii) no such
person or entity will purchase any shares in the Offering.
(3) Does not include an aggregate of 371,331 shares owned by Mr. Smith's wife
and his two adult daughters, with respect to which Mr. Smith disclaims
beneficial ownership.
(4) Does not include an aggregate of 11,533 shares owned by Mr. Barth's business
associate, with respect to which Mr. Barth disclaims beneficial ownership.
(5) Does not include an aggregate of 28,291 shares owned by Mr. Burkland's wife,
with respect to which Mr. Burkland disclaims beneficial ownership.
CERTAIN TRANSACTIONS
In February 1997 the Company entered into agreements with the Founding
Companies to (i) confirm their respective intentions (without effecting a
binding commitment to consummate the Combination) to assist the Company's
pursuit of the Combination and the Offering and (ii) commit to pay their pro
rata share of the expenses thereof, whether or not the transactions are
consummated. As of June 30, 1997, the Founding Companies have advanced $705,000
to IDG pursuant to those agreements, none of which is repayable by IDG.
In 1996 and 1997, each of the Founding Companies paid $7,500 ($67,500 in
the aggregate) to Barth Smith Company, a consulting firm in which David K.
Barth, a director of the Company, has a 75% ownership interest. The Company will
pay Barth Smith Company an amount equal to 1% of the cash payment ultimately
paid to the dissenting shareholder of Predecessor-IDG. After consummation of the
Offering, it is expected that Barth Smith Company will assist IDG in
implementing its acquisition strategy with respect to future acquisitions.
39
<PAGE> 41
In February 1997, Mr. Barth purchased 11,533 shares at an aggregate
purchase price of $100. In June 1997, Messrs. Pinson, Healey, and Barth
purchased 69,200, 25,950, and 11,533 shares, respectively, at aggregate purchase
prices of $600, $225, and $100, respectively. The Company has recorded
compensation expense of $1.1 million in connection with the issuance of these
shares.
Between January 1996 and May 1997, Predecessor-IDG paid approximately
$130,000 in fees to Miller Ray Healey & Houser, certified public accountants, in
connection with accounting services performed on behalf of Predecessor-IDG. Jack
P. Healey was a partner in Miller Ray Healey & Houser during that time.
Since January 1996, Predecessor-IDG has paid approximately $518,000 in
insurance premiums to J. Smith Lanier & Co., an independent insurance agency, in
connection with business and health insurance purchased by Predecessor-IDG.
William T. Parr is the Vice Chairman of, and has a 12% ownership interest in, J.
Smith Lanier & Co.
The following table sets forth the consideration being paid for each
Founding Company other than the cash payment being paid to the dissenting
shareholder of Predecessor-IDG. The consideration for each Founding Company was
based on a uniform formula, applied to each of the Founding Companies in the
same manner, and reflected primarily their respective book values and operating
incomes, as adjusted for the fair market value of certain assets including
independent appraisals of real estate, to eliminate the effects of unusual or
discontinued operations, to reflect contractually agreed upon compensation
adjustments, to convert accounting for inventory to a FIFO basis, and to reflect
certain other agreed upon matters.
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------------------------
VALUE OF SHARES VALUE OF SHARES
WITH DISCOUNT BASED ON
WHOLE FOR RESALE PUBLIC OFFERING
COMPANY SHARES RESTRICTIONS(1) PRICE(2)
- ------- --------- --------------- ---------------
<S> <C> <C> <C>
Predecessor-IDG......................................... 600,705 $ 6,758,000 $ 9,010,575
Associated.............................................. 315,706 3,552,000 4,735,590
B&J..................................................... 866,992 9,754,000 13,004,880
Cramer.................................................. 114,889 1,292,000 1,723,335
Grinding................................................ 299,421 3,368,000 4,491,315
Shearer................................................. 514,889 5,792,000 7,723,335
Slater.................................................. 59,910 674,000 898,650
J.J. Stangel............................................ 203,877 2,294,000 3,058,155
Tri-Star................................................ 353,835 3,981,000 5,307,525
--------- ----------- -----------
Total......................................... 3,330,224 $37,465,000 $49,953,360
========= =========== ===========
</TABLE>
(1) Based on an estimated fair value of $11.25 per share, which represents a
discount of 25% from the assumed initial public offering price of $15.00 due
to restrictions on the sale and transferability of the shares issued.
(2) Based on the public offering price per share for the Offering without
recognizing a discount, due to restrictions on the sale and transferability
of the shares issued.
In connection with the Combination, and as consideration for their
respective interests in the Founding Companies, certain officers, directors, and
principal stockholders of the Company, and certain family members and related
parties of such individuals, will receive shares of Common Stock of the Company
as follows: Douglass C. Smith -- 495,106 shares (including 371,332 shares that
are not beneficially owned by Mr. Smith); William J. Burkland -- 684,467 shares
(including 541,185 shares that are not beneficially owned by Mr. Burkland);
Andrew B. Shearer -- 514,889 shares; and George L. Sachs, Jr. -- 53,989 shares.
See "The Combination".
Upon consummation of the Combination, the Company will succeed to certain
real property leases as lessee with respect to which shareholders of the Company
(former shareholders of certain of the Founding Companies), or their affiliates,
are the lessors. The Company believes that the monthly rent and other terms of
each of these leases are not less favorable to the Company than could be
obtained from unaffiliated parties for comparable properties in the respective
geographic areas. Specifically, following consummation of the Combination, the
Company will lease property in (i) Spokane, Washington from a company in which
the
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<PAGE> 42
father of William J. Burkland has a 25% ownership interest; (ii) Whitehall,
Pennsylvania from Andrew B. Shearer; (iii) York, Pennsylvania from a company in
which Andrew B. Shearer has a 40% ownership interest; (iv) Reading,
Williamsport, and York, Pennsylvania from a trust of which Andrew B. Shearer's
mother is the trustee and he and his father, brother, and sisters are the
beneficiaries; (v) Hazelton and Lancaster, Pennsylvania from a trust of which
Andrew B. Shearer and his father, brother, and sisters are the beneficiaries;
(vi) Manitowoc, Wisconsin from a trust of which John Zimmer is a beneficiary;
and (vii) St. Louis and Springfield, Missouri from a company in which George L.
Sachs, Jr. has a 15% ownership interest. Messrs. Burkland, Shearer, and Sachs
are each directors and principal stockholders of the Company, and Mr. Zimmer is
a founding stockholder of the Company.
The Company has agreed to cause the release of certain personal guarantees
of indebtedness of the Founding Companies granted by certain former stockholders
of those Founding Companies who are now officers, directors, and holders of 5%
or more of the outstanding shares of the Company within 60 days after
consummation of the Offering. The aggregate amount of such guarantees for each
of these individuals is as follows: Douglass C. Smith -- $31,000; Robert C.
Skidmore -- $598,720; George L. Sachs, Jr. -- $1,929,670; and Thomas W.
Stewart -- $100,000.
Prior to the Combination, B&J had agreed to pay Charles T. Burkland, a
former president and currently a significant stockholder of B&J, a
non-qualified, unfunded pension in the amount of $10,000 per month during his
lifetime and thereafter to his spouse, if she survived him, for her lifetime. As
a condition to B&J's participation in the Combination, B&J made a lump sum
payment of $1.11 million to Charles T. Burkland in exchange for relief from its
obligation to make such monthly pension payments through 2012. As part of that
arrangement, the Company agreed to make such $10,000 monthly payments beginning
in January 2013, if either Mr. Burkland or his spouse is then surviving, and
continuing thereafter until both of them are deceased. In addition, the Company
has agreed to pay 75% of the health and dental insurance costs of Mr. Burkland
and his spouse until their deaths. Mr. Burkland is 71 years old, and his spouse
is 67 years old.
Predecessor-IDG has been treated for federal and certain state income tax
purposes as an S Corporation under the IRC. As a result, earnings of the
corporation have been subject to taxation at the stockholder rather than the
corporate level for federal and certain state income tax purposes. Prior to the
Combination, Predecessor-IDG will make distributions to its stockholders of
previously earned and undistributed earnings through June 30, 1997. The Company
will make another distribution as promptly as practicable after the closing of
the Combination to each of the stockholders of Predecessor-IDG equal to such
corporation's earned but undistributed earnings in accordance with
Predecessor-IDG's final tax return.
On July 10, 1997, the Board of Directors adopted a policy that any
transactions between the Company and any of its officers, directors, or
principal stockholders or affiliates must be on terms no less favorable than
those that could be obtained from unaffiliated parties in comparable situations
and must be approved by a majority of the disinterested members of the Board of
Directors. The Audit Committee of the Board of Directors will be responsible for
reviewing all related party transactions on a continuing basis and potential
conflict of interest situations where appropriate.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no market for the Common Stock and no
predictions can be made as to the effect, if any, that sales of such shares or
the availability of such shares for sale in the public market will have on the
market prices prevailing from time to time. Nevertheless, sales of substantial
amounts of Common Stock in the public market could adversely affect prevailing
market prices and impair the Company's ability to raise capital through the sale
of equity securities.
Upon completion of the Offering, the Company will have outstanding
6,459,973 shares of Common Stock, of which only the 3,000,000 shares sold in the
Offering (3,450,000 shares if the Underwriters' over-allotment option is
exercised in full) will be freely tradable without restrictions or further
registration under the Securities Act, unless purchased by "affiliates" of the
Company, as that term is defined in Rule 144 under the Securities Act ("Rule
144").
Shares of Common Stock not sold in the Offering were issued and sold by the
Company in private transactions in reliance upon the exemption from registration
contained in Section 4(2) of the Securities Act and are restricted securities
under Rule 144. These shares may not be sold unless they are registered under
the
41
<PAGE> 43
Securities Act or are sold pursuant to an applicable exemption from
registration, pursuant to Rule 144. In general, under Rule 144 as currently in
effect, beginning 90 days after the Offering, a person who has beneficially
owned any such shares for at least one year, including "affiliates" of the
Company, would be entitled to sell in broker's transactions or to market makers
within any three-month period a number of shares that does not exceed the
greater of 1% of the then outstanding shares of Common Stock or the average
weekly trading volume of the Common Stock on the New York Stock Exchange during
the four calendar weeks preceding the date on which notice of the sale is filed
with the Commission. Sales under Rule 144 are also subject to certain manner of
sale restrictions and notice requirements and to the availability of current
public information concerning the Company. A person (or persons whose shares are
aggregated) who is not an "affiliate" of the Company at any time during the 90
days preceding a sale, and who has beneficially owned such shares for at least
two years, would be entitled to sell such shares under Rule 144(k) without
regard to the availability of current public information, volume limitations,
manner of sale provisions, or notice requirements. The above is a summary of
Rule 144 and is not intended to be a complete description thereof.
Notwithstanding the eligibility of certain shares to be sold after the
expiration of the 90 day period, such shares are subject to certain lockup
agreements described below.
As a condition to the Combination, the stockholders of the Founding
Companies have agreed that they will not, directly or indirectly, sell or
otherwise dispose of the shares of Common Stock issued to them as Combination
Consideration for a period of two years after the Combination. In addition, the
Company, its officers and directors, and stockholders of the Founding Companies
have agreed that they will not, directly or indirectly, offer, pledge, sell,
contract to sell, or otherwise dispose of any shares of Common Stock for a
period of 180 days after the date of this Prospectus, without the prior written
consent of the Merrill Lynch & Co. on behalf of Underwriters. See
"Underwriting".
The Company plans to file a shelf registration statement to register shares
of Common Stock under the Securities Act for its use in connection with future
acquisitions. When and if any such registration statement is filed, the shares
issued pursuant to it (after the above 180-day period established by the lock-up
agreements with Merrill Lynch & Co.) generally will be freely tradable by
persons not affiliated with the Company, unless the Company contractually
restricts their sale.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock, $.01 par value per share, and 10,000,000 shares of Preferred
Stock, $.10 par value per share, having such rights and privileges as the Board
of Directors may from time to time determine. Giving effect to the Combination,
3,459,973 shares of Common Stock, and no shares of Preferred Stock, will be
issued and outstanding immediately prior to the Offering.
The following summary of the Company's capital stock does not purport to be
complete and is qualified in its entirety by reference to the Certificate of
Incorporation, as amended, and Bylaws of the Company that are included as
exhibits to the Registration Statement of which this Prospectus forms a part,
and the applicable provisions of the Delaware General Corporation Law.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on any issue
submitted to a vote of the stockholders and do not have cumulative voting rights
in the election of directors. Accordingly, the holders of a majority of the
outstanding shares of Common Stock voting in an election of directors can elect
all of the directors then standing for election, if they choose to do so. All
shares of Common Stock are entitled to share equally in such dividends as the
Board of Directors of the Company may, in its discretion, declare out of sources
legally available therefor. See "Dividend Policy". Upon dissolution,
liquidation, or winding up of the Company, holders of Common Stock are entitled
to receive on a ratable basis, after payment or provision for payment of all
debts and liabilities of the Company and any preferential amount due with
respect to outstanding shares of Preferred stock, all assets of the Company
available for distribution, in cash or in kind. Holders of shares of Common
Stock do not have preemptive or other subscription rights, conversion or
redemption rights, or any rights to share in any sinking fund. All currently
outstanding shares of Common
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<PAGE> 44
Stock are, and the shares offered hereby (when sold in the manner contemplated
by this Prospectus) will be, fully paid and nonassessable.
The Bylaws provide that, subject to any rights of holders of Preferred
Stock to elect additional directors under specified circumstances, the Company's
Board of Directors will consist of not less than three but no more than 15
directors. Currently, there are nine directors, four of whom are independent
directors.
The Bylaws provide that, subject to any rights of the Preferred Stock, and
unless the Board of Directors otherwise determines, any vacancies may be filled
by the affirmative vote of a majority of the remaining directors. A vacancy
resulting from an increase in the number of directors also may be filled by
action of the Board of Directors.
PREFERRED STOCK
Pursuant to the Company's Certificate of Incorporation, the Board of
Directors, from time to time, may authorize the issuance of shares of Preferred
Stock in one or more series, may establish the number of shares to be included
in any such series, and may fix the designations, powers, preferences, and
rights (including voting rights) of the shares of each such series and any
qualifications, limitations, or restrictions thereon. No stockholder
authorization is required for the issuance of shares of Preferred Stock unless
imposed by then applicable law. Shares of Preferred Stock may be issued for any
general corporate purposes, including acquisitions. The Board of Directors may
issue one or more series of Preferred Stock with rights more favorable with
regard to dividends and liquidation than the rights of holders of Common Stock.
Any such series of Preferred Stock also could be used for the purpose of
preventing a hostile takeover of the Company that is considered to be desirable
by the holders of the Common Stock, could otherwise adversely affect the voting
power of the holders of Common Stock, and could serve to perpetuate the
directors' control of the Company under certain circumstances. No transaction is
now contemplated that would result in the issuance of any such shares of
Preferred Stock.
INDEMNIFICATION AND LIMITATIONS ON LIABILITY OF OFFICERS AND DIRECTORS
The Company's Certificate of Incorporation provides for indemnification of
directors to the full extent permitted by Delaware law and, to the extent
permitted by such law, eliminate or limit the personal liability of directors to
the Company and its stockholders for monetary damages for certain breaches of
fiduciary duty and the duty of care. Such indemnification may be available for
liabilities arising in connection with this Offering. Insofar as indemnification
for liabilities under the Securities Act may be permitted to directors, officers
or persons controlling the Company pursuant to the foregoing provisions, the
Company has been informed that, in the opinion of the Commission, such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable. Pursuant to its Certificate of Incorporation, the
Company may indemnify its officers, employees, agents and other persons to the
fullest extent permitted by Delaware law. The Company's Bylaws obligate the
Company, under certain circumstances, to advance expenses to its directors and
officers in defending an action, suit or proceeding for which indemnification
may be sought. In addition, the Company has entered into indemnification
agreements with its directors and executive officers pursuant to which the
Company has agreed to indemnify such persons in certain circumstances.
The Company's Bylaws also provide that the Company shall have the power to
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the Company, or who, while a director,
officer, employee or agent, is or was serving as a director, officer, trustee,
general partner, employee or agent of one of the Company's subsidiaries or, at
the request of the Company, of any other organization, against any liability
asserted against such person or incurred by such person in any such capacity,
whether the Company would have the power to indemnify such person against such
liability under Delaware law. The Company intends to purchase and maintain
insurance on behalf of all of its directors and executive officers.
OTHER MATTERS
Application will be made for listing of the Common Stock on the New York
Stock Exchange under the proposed symbol "IDG"; however, there is no assurance
that such listing will be approved.
The transfer agent and registrar for the Company's Common Stock is American
Stock Transfer & Trust Company.
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<PAGE> 45
UNDERWRITING
Subject to the terms and conditions set forth in the Purchase Agreement
(the "Purchase Agreement") among the Company and each of the underwriters named
below (the "Underwriters"), the Company has agreed to sell to each of the
Underwriters, and each of the Underwriters severally has agreed to purchase from
the Company, the aggregate number of shares of Common Stock set forth opposite
its name below. The Purchase Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all of the shares of Common Stock
offered hereby if any of such shares are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
The Robinson-Humphrey Company, Inc. ........................
---------
Total.......................................... 3,000,000
=========
</TABLE>
The Underwriters have advised the Company that they propose initially to
offer the shares of Common Stock to the public at the initial public offering
price set forth on the cover page of this Prospectus, and to certain dealers at
such price less a concession not in excess of $. per share. The Underwriters
may allow, and such dealers may reallow, a discount not in excess of $. per
share to certain other dealers. After the Offering, the initial public offering
price, concession, and discount may be changed.
The Company has granted the Underwriters an option, exercisable for 30 days
after the date of this Prospectus, to purchase up to an aggregate of 450,000
additional shares of Common Stock at the initial public offering price set forth
on the cover page hereof, less the underwriting discount. The Underwriters may
exercise this option only to cover overallotments, if any, made on the sale of
the shares of Common Stock offered hereby. If the Underwriters exercise this
option, each Underwriter will have a firm commitment, subject to certain
conditions, to purchase approximately the same percentage thereof which the
number of shares of Common Stock to be purchased by it shown in the foregoing
table bears to the 3,000,000 shares of Common Stock initially offered hereby.
The Company has agreed not to (i) directly or indirectly, offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant for the sale of,
or dispose of or transfer any shares of Common Stock or any securities
convertible into or exchangeable or exercisable for Common Stock or file any
registration statement under the Securities Act with respect to any of the
foregoing or (ii) enter into any swap or any other agreement or any transaction
that transfers, in whole or in part, directly or indirectly, the economic
consequence of ownership of the Common Stock or any securities convertible into
or exercisable or exchangeable for Common Stock whether any such swap or
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise, for a period of
180 days from the date of this Prospectus without the prior written consent of
Merrill Lynch, Pierce, Fenner & Smith Incorporated on behalf of the
Underwriters, except for any shares of Common Stock issued or options to
purchase Common Stock granted pursuant to the Company's benefit plans described
herein.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments the Underwriters may be required to make in respect thereof.
Until the distribution of the Common Stock is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase the Common Stock. As an exception to these
rules, the Underwriters are permitted to engage in certain transactions that
stabilize the price of the Common Stock. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock.
44
<PAGE> 46
If the Underwriters create a short position in the Common Stock in
connection with the Offering (i.e., if they sell more shares of Common Stock
than are set forth on the cover page of the Prospectus), the Underwriters may
reduce that short position by purchasing Common Stock in the open market. The
Underwriters may also elect to reduce any short position by exercising all or
part of the over-allotment option described above.
The Underwriters may also impose a penalty bid on certain Underwriters and
selling group members. This means that if the Underwriters purchase shares of
Common Stock in the open market to reduce the Underwriters' short position or to
stabilize the price of the Common Stock, they may reclaim the amount of the
selling concession from the Underwriters and selling group members who sold
those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
Certain of the Underwriters have provided from time to time, and may
provide in the future, investment banking services to the Company and its
affiliates, for which such Underwriters have received and will receive customary
fees and commissions.
The Company will apply for listing of Common Stock on the New York Stock
Exchange under the trading symbol "IDG".
The Underwriters have reserved for sale, at the initial public offering
price, up to 150,000 shares of Common Stock for certain employees, directors,
and business associates of, and certain other persons designated by, the Company
who have expressed an interest in purchasing such shares of Common Stock. The
number of shares available for sale to the general public in the Offering will
be reduced to the extent such persons purchase such reserved shares. Any
reserved shares not so purchased will be offered to the general public on the
same basis as other shares offered hereby.
Prior to the Offering, there has been no established trading market for the
shares of Common Stock. The initial public offering price for the Common Stock
offered hereby has been determined by negotiations between the Company and the
Underwriters. Among the factors considered in making such determination were the
history of and the prospects for the industry in which the Company competes, an
assessment of the Company's management, the past and present operations of the
Founding Companies and the Company, the historical results of operations of the
Founding Companies and the Company and the trend of its revenues and earnings,
the prospects for future earnings of the Company, the general condition of
prices of similar securities of generally comparable companies and other
relevant factors. There can be no assurance that an active trading market will
develop for the Common Stock or that the Common Stock will trade in the public
market subsequent to the Offering at or above the initial public offering price.
The Underwriters have informed the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of Common
Stock offered hereby will be passed upon for the Company by Kilpatrick Stockton
LLP, counsel to the Company. Certain legal matters in connection with this
Offering will be passed upon for the Underwriters by Skadden, Arps, Slate,
Meagher & Flom (Illinois).
45
<PAGE> 47
EXPERTS
The audited financial statements of the Company, Predecessor-IDG, B&J
Industrial Supply Company, Cramer Industrial Supply Company, and Associated
Suppliers, Inc. in this Prospectus and elsewhere in the Registration Statement
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
The audited financial statements of Shearer Industrial Supply Co. in this
Prospectus and elsewhere in the Registration Statement have been audited by
Miller & Co. LLP, independent public accountants, as indicated in their reports
with respect thereto, and are included herein in reliance upon the authority of
said firm as experts in giving said reports.
The audited financial statements of J. J. Stangel Co. in this Prospectus
and elsewhere in the Registration Statement have been audited by Schenck &
Associates, SC, independent public accountants, as indicated in their reports
with respect thereto, and are included herein in reliance upon the authority of
said firm as experts in giving said reports.
The audited financial statements of Tri-Star Industrial Supply, Inc. in
this Prospectus and elsewhere in the Registration Statement have been audited by
Baird, Kurtz & Dobson, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus, which is a part of the Registration Statement, does not contain
all of the information set forth in the Registration Statement and the exhibits
and schedules thereto. For further information with respect to the Company and
the Common Stock, reference is hereby made to the Registration Statement and the
exhibits and schedules filed as a part thereof. Statements contained in this
Prospectus concerning the provisions or contents of any contract, agreement, or
any other document referred to herein are not necessarily complete. With respect
to each such contract, agreement, or document filed as an exhibit to the
Registration Statement, reference is made to such exhibit for a more complete
description of the matters involved, and each statement shall be deemed
qualified in its entirety by such reference to the copy of the applicable
document filed with the Commission. A copy of the Registration Statement,
including the exhibits and schedules thereto, may be inspected without charge at
the Public Reference section of the commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the following regional
offices of the Commission: New York Regional Office, 7 World Trade Center, 13th
Floor, New York, New York 10048; and Chicago Regional Office, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of the Registration
Statement and the exhibits and schedules thereto can be obtained from the Public
Reference Section of the Commission upon payment of prescribed fees. The
Commission maintains an Internet web site that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the Commission. The address of that site is
http://www.sec.gov.
Prior to filing the Registration Statement of which this Prospectus is a
part, the Company was not subject to the reporting requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Upon effectiveness of the Registration Statement, the Company will become
subject to the informational and periodic reporting requirements of the Exchange
Act, and in accordance therewith, will file periodic reports, proxy statements,
and other information with the Commission. Such periodic reports, proxy
statements, and other information will be available for inspection and copying
at the public reference facilities and other regional offices referred to above.
The Company intends to register the securities offered by the Registration
Statement under the Exchange Act simultaneously with the effectiveness of the
Registration Statement and to furnish its stockholders with annual reports
containing audited financial statements and such other reports as may be
required from time to time by law or the New York Stock Exchange.
46
<PAGE> 48
INDEX TO FINANCIAL INFORMATION
PRO FORMA FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Industrial Distribution Group, Inc.
Introduction to Unaudited Pro forma Combined Financial
Statements............................................. F-3
Pro Forma Combined Balance Sheet as of June 30, 1997
(Unaudited)............................................ F-4
Pro Forma Combined Statements of Income for the Year Ended
December 31, 1996 and the Six Months Ended June 30,
1997 (Unaudited)....................................... F-6
Notes to Unaudited Pro Forma Combined Financial
Statements............................................. F-8
HISTORICAL FINANCIAL STATEMENTS
Industrial Distribution Group, Inc. ("Predecessor-IDG")
Report of Independent Public Accountants.................. F-11
Balance Sheets............................................ F-12
Statements of Income...................................... F-13
Statements of Shareholders' Equity........................ F-14
Statements of Cash Flows.................................. F-15
Notes to Financial Statements............................. F-16
Associated Suppliers, Inc.
Report of Independent Public Accountants.................. F-22
Consolidated Balance Sheets............................... F-23
Consolidated Statements of Income......................... F-24
Consolidated Statements of Shareholders' Equity........... F-25
Consolidated Statements of Cash Flows..................... F-26
Notes to Consolidated Financial Statements................ F-27
B & J Industrial Supply Company
Report of Independent Public Accountants.................. F-33
Consolidated Balance Sheets............................... F-34
Consolidated Statements of Income......................... F-35
Consolidated Statements of Shareholders' Equity........... F-36
Consolidated Statements of Cash Flows..................... F-37
Notes to Consolidated Financial Statements................ F-38
Cramer Industrial Supplies, Inc.
Report of Independent Public Accountants.................. F-44
Consolidated Balance Sheets............................... F-45
Consolidated Statements of Operations..................... F-46
Consolidated Statements of Shareholders' Equity........... F-47
Consolidated Statements of Cash Flows..................... F-48
Notes to Consolidated Financial Statements................ F-49
Shearer Industrial Supply Co.
Report of Independent Certified Public Accountants........ F-53
Consolidated Balance Sheets............................... F-54
Consolidated Statements of Earnings....................... F-56
Consolidated Statements of Stockholders' Equity........... F-57
Consolidated Statements of Cash Flows..................... F-58
Notes to Consolidated Financial Statements................ F-60
</TABLE>
F-1
<PAGE> 49
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
J. J. Stangel Co.
Report of Independent Public Accountants.................. F-69
Balance Sheets............................................ F-70
Statements of Income and Retained Earnings................ F-72
Statements of Cash Flows.................................. F-73
Notes to Financial Statements............................. F-74
Tri-Star Industrial Supply, Inc.
Independent Accountants' Report........................... F-79
Balance Sheets............................................ F-80
Statements of Income...................................... F-81
Statements of Retained Earnings........................... F-82
Statements of Cash Flows.................................. F-83
Notes to Financial Statements............................. F-84
Industrial Distribution Group, Inc. ("IDG" or the "Company")
Report of Independent Public Accountants.................. F-88
Balance Sheet............................................. F-89
Statement of Income....................................... F-90
Statement of Stockholders' Deficit........................ F-91
Statement of Cash Flows................................... F-92
Notes to Financial Statements............................. F-93
</TABLE>
F-2
<PAGE> 50
INDUSTRIAL DISTRIBUTION GROUP, INC.
INTRODUCTION TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
The Company will acquire the Founding Companies simultaneously with the
closing of this Offering. Pursuant to the requirements of SAB 97,
Predecessor-IDG has been designated as the acquiror of the Other Founding
Companies for financial reporting purposes. Based upon the provisions of SAB 97,
these acquisitions will be accounted for as purchases at estimated fair value.
However, since the Founding Companies were not under common control or
management, pro forma results may not be comparable to, or indicative of, future
performance.
The unaudited pro forma combined balance sheet gives effect to the
Combination as if it had occurred on June 30, 1997. The unaudited pro forma
combined statements of income give effect to these transactions as if they had
occurred on January 1, 1996.
The following unaudited pro forma financial statements present
Predecessor-IDG and the Other Founding Companies and give effect to the
following pro forma adjustments: (i) the acquisition of the Other Founding
Companies in accordance with the applicable provisions of SAB 97; (ii) the
adjustment to compensation expense for specified Founding Company owners
pursuant to the acquisition agreement applicable to such Founding Company
("Compensation Differential"); (iii) the incremental provision for income taxes
attributable to the income of Predecessor-IDG (an S Corporation), net of the
income tax benefits related to the Compensation Differential and other; (iv) the
liability for the cash consideration to be paid to the dissenting shareholder in
the Combination; (v) the issuance of 3,330,224 shares of Common Stock to
shareholders of the Founding Companies in connection with the Combination; (vi)
the adjustments to record the net deferred income tax liability attributable to
the temporary differences between the financial reporting and income tax bases
of assets and liabilities currently held in Predecessor-IDG (an S Corporation);
and (vii) the adjustment for goodwill recorded in connection with the
Combination.
The Company has performed a preliminary analysis of the savings that it
expects to realize as a result of (i) consolidating certain general and
administrative functions; (ii) the reduction in interest payments related to the
repayment of certain outstanding Founding Company debt; (iii) its ability to
borrow at lower interest rates than the Founding Companies; (iv) the interest
earned on the net proceeds of the Offering remaining after payment of the
expenses of the Offering, the cash portion of the consideration paid for the
Founding Companies, and the repayment of certain outstanding Founding Company
debt; and (v) efficiencies in other general and administrative areas. The
Company has not and cannot quantify these savings until after completion of the
Combination. It is anticipated that these savings will be partially offset by
the costs of the Company's new senior management and expenses associated with
being a public company. These costs cannot be quantified accurately.
Accordingly, only those anticipated savings and costs that are factually
supportable have been included in the accompanying pro forma financial
information of the Company.
The pro forma financial data do not purport to represent what the Company's
financial position or results of operations would actually have been if such
transactions and events in fact had occurred on those dates or to project the
Company's financial position or results of operations for any future period. See
"Risk Factors" included elsewhere herein.
These pro forma financial statements should be read in conjunction with
other information contained elsewhere in this Prospectus under the heading
"Selected Pro Forma Combined Financial Data", "Management's Discussion and
Analysis of Financial Condition and Results of Operations", and the historical
financial statements of Predecessor-IDG and the Other Founding Companies. See
"Index to Financial Statements".
F-3
<PAGE> 51
INDUSTRIAL DISTRIBUTION GROUP, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR-
IDG ASSOCIATED B&J CRAMER GRINDING SHEARER SLATER J.J. STANGEL TRI-STAR
------------ ---------- ------- ------- -------- ------- ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents.............. $ 13 $ 41 $ 2,979 $ 77 $ 620 $ 0 $ 5 $ 379 $ 176
Accounts receivable, net... 9,924 2,706 3,606 1,261 1,175 4,979 914 784 3,424
Inventories, net........... 14,649 3,192 4,669 1,505 683 3,136 918 988 4,437
Prepaid expenses and other
current assets........... 564 200 488 43 85 301 93 140 304
------- ------ ------- ------ ------ ------ ------ ------ ------
Total current
assets........... 25,150 6,139 11,742 2,886 2,563 8,416 1,930 2,291 8,341
------- ------ ------- ------ ------ ------ ------ ------ ------
PROPERTY AND EQUIPMENT,
net...................... 1,961 358 1,085 484 313 557 85 570 482
OTHER ASSETS............... 1,055 156 647 82 0 301 43 209 20
GOODWILL................... 0 0 0 0 0 78 0 0 0
------- ------ ------- ------ ------ ------ ------ ------ ------
Total assets....... $28,166 $6,653 $13,474 $3,452 $2,876 $9,352 $2,058 $3,070 $8,843
======= ====== ======= ====== ====== ====== ====== ====== ======
<CAPTION>
POST ADJUSTED
PRO FORMA PRO FORMA COMBINATION POST
IDG ADJUSTMENTS COMBINED ADJUSTMENTS COMBINATION
------ ------------- --------- ------------- -----------
(SEE NOTE 4) (SEE NOTE 5)
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents.............. $ 94 $ 1,250a $ 4,520 $ 9,457t $ 13,977
(1,114)p
Accounts receivable, net... 0 28,773 28,773
Inventories, net........... 0 1,936b 36,113 36,113
Prepaid expenses and other
current assets........... 180 (774)b 1,339 1,339
(492)q
207c
------ ------- --------
Total current
assets........... 274 70,745 80,202
------ ------- --------
PROPERTY AND EQUIPMENT,
net...................... 0 1,028d 6,923 6,923
OTHER ASSETS............... 1,309 (1,250)a 3,107 3,107
570f
(35)q
GOODWILL................... 0 (78)e 10,887 10,887
10,887f
------ ------- --------
Total assets....... $1,583 $91,662 $101,119
====== ======= ========
</TABLE>
F-4
<PAGE> 52
INDUSTRIAL DISTRIBUTION GROUP, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1997 -- (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR-
IDG ASSOCIATED B&J CRAMER GRINDING SHEARER SLATER J.J. STANGEL
------------ ---------- ------- ------- -------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
expenses.................... $ 7,413 $1,573 $ 3,075 $1,445 $ 614 $3,856 $ 773 $ 902
Current maturities of
long-term debt.............. 54 209 129 40 0 147 17 42
Line of credit................ 0 2,457 980 1,307 0 2,311 599 0
Pro forma cash consideration
due to dissenting
shareholder of
Predecessor-IDG............. 0 0 0 0 0 0 0 0
Other liabilities............. 0 0 0 0 0 0 0 0
------- ------ ------- ------ ------ ------ ------ ------
Total current
liabilities......... 7,467 4,239 4,184 2,792 614 6,314 1,389 944
------- ------ ------- ------ ------ ------ ------ ------
LONG-TERM DEBT, net of current
maturities.................. 16,113 422 376 134 0 680 738 716
------- ------ ------- ------ ------ ------ ------ ------
OTHER LIABILITIES............. 0 0 1,075 50 0 33 0 0
------- ------ ------- ------ ------ ------ ------ ------
DEFERRED INCOME TAXES......... 0 0 4 0 0 52 0 0
------- ------ ------- ------ ------ ------ ------ ------
STOCKHOLDERS' EQUITY:
Preferred stock............... 0 0 0 0 0 62 0 0
Common stock.................. 1 0 9 3 207 33 40 17
Additional paid-in capital &
other....................... 307 329 0 1,298 0 87 141 14
Retained earnings (deficit)... 4,278 1,663 8,005 (825) 2,055 2,686 (250) 1,680
Treasury stock................ 0 0 (179) 0 0 (595) 0 (301)
------- ------ ------- ------ ------ ------ ------ ------
Total stockholders'
equity (deficit).... 4,586 1,992 7,835 476 2,262 2,273 (69) 1,410
------- ------ ------- ------ ------ ------ ------ ------
Total liabilities and
stockholders' equity
(deficit)........... $28,166 $6,653 $13,474 $3,452 $2,876 $9,352 $2,058 $3,070
======= ====== ======= ====== ====== ====== ====== ======
<CAPTION>
POST ADJUSTED
PRO FORMA PRO FORMA COMBINATION POST
TRI-STAR IDG ADJUSTMENTS COMBINED ADJUSTMENTS COMBINATION
-------- ------ ------------ --------- ------------- -----------
(SEE NOTE 4) (SEE NOTE 5)
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
expenses.................... $1,778 $ 776 $ 0 $22,205 $ 0 $ 22,205
Current maturities of
long-term debt.............. 182 0 (39)p 781 781
Line of credit................ 3,300 0 10,954 (10,954)t 0
Pro forma cash consideration
due to dissenting
shareholder of
Predecessor-IDG............. 0 0 4,200r 4,200 (4,200)t 0
Other liabilities............. 0 835 (527)q 308 308
------ ------ ------- --------
Total current
liabilities......... 5,260 1,611 38,448 23,294
------ ------ ------- --------
LONG-TERM DEBT, net of current
maturities.................. 1,277 0 (703)l 19,753 (14,539)t 5,214
------ ------ ------- --------
OTHER LIABILITIES............. 0 0 (1,075)p 83 83
------ ------ ------- --------
DEFERRED INCOME TAXES......... 263 0 319 319
------ ------ ------- --------
STOCKHOLDERS' EQUITY:
Preferred stock............... 0 0 (62)h 0 0
Common stock.................. 5 0 (315)h 35 30t 65
35f
Additional paid-in capital &
other....................... 0 1,160 1,162b 33,024 39,120t 72,144
1,028d
(78)e
11,457f
703l
(4,200)r
19,651h
(35)f
Retained earnings (deficit)... 2,053 (1,188) 207c 0 0
(20,364)h
Treasury stock................ (15) 0 1,090h 0 0
------ ------ ------- --------
Total stockholders'
equity (deficit).... 2,043 (28) 33,059 72,209
------ ------ ------- --------
Total liabilities and
stockholders' equity
(deficit)........... $8,843 $1,583 $91,662 $101,119
====== ====== ======= ========
</TABLE>
The accompanying notes are an integral part of this unaudited pro forma combined
financial statement.
F-5
<PAGE> 53
INDUSTRIAL DISTRIBUTION GROUP, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREDECESSOR-
IDG ASSOCIATED B&J CRAMER GRINDING SHEARER SLATER J.J. STANGEL
------------ ---------- ------- ------- -------- ------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET SALES........................ $90,786 $24,481 $29,083 $11,467 $8,424 $44,184 $7,258 $11,610
COST OF SALES.................... 67,330 19,574 21,625 9,294 6,211 34,165 5,486 8,845
------- ------- ------- ------- ------ ------- ------ -------
Gross profit............. 23,456 4,907 7,458 2,173 2,213 10,019 1,772 2,765
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES........ 21,160 4,156 6,058 2,159 2,151 9,063 1,589 2,517
AMORTIZATION EXPENSE............. 0 0 0 0 0 22 0 0
------- ------- ------- ------- ------ ------- ------ -------
INCOME FROM OPERATIONS........... 2,296 751 1,400 14 62 934 183 248
OTHER INCOME (EXPENSE):
Interest expense............... (1,016) (278) (213) (173) 0 (437) (131) (82)
Other.......................... (562) (89) 244 0 83 235 12 10
------- ------- ------- ------- ------ ------- ------ -------
INCOME (LOSS) BEFORE INCOME
TAXES.......................... 718 384 1,431 (159) 145 732 64 176
PROVISION FOR INCOME TAXES....... 25 158 440 0 45 319 0 69
------- ------- ------- ------- ------ ------- ------ -------
NET INCOME (LOSS)................ $ 693 $ 226 $ 991 $ (159) $ 100 $ 413 $ 64 $ 107
======= ======= ======= ======= ====== ======= ====== =======
PRO FORMA NET INCOME PER SHARE...
SHARES USED IN COMPUTING PRO
FORMA NET INCOME PER SHARE.....
<CAPTION>
PRO FORMA PRO FORMA
TRI-STAR IDG ADJUSTMENTS COMBINED
-------- --- ------------ ---------
(SEE NOTE 4)
<S> <C> <C> <C> <C>
NET SALES........................ $24,010 $0 $(245)i $ 251,058
COST OF SALES.................... 18,691 0 (485)i 190,783
47b
------- --- ---------
Gross profit............. 5,319 0 60,275
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES........ 4,431 0 (282)j 53,461
400k
33i
26d
AMORTIZATION EXPENSE............. 0 0 (22)e 316
316g
------- --- ---------
INCOME FROM OPERATIONS........... 888 0 6,498
OTHER INCOME (EXPENSE):
Interest expense............... (191) 0 2,084m (437)
Other.......................... (8) 0 (207)i (250)
32o
------- --- ---------
INCOME (LOSS) BEFORE INCOME
TAXES.......................... 689 0 5,811
PROVISION FOR INCOME TAXES....... 271 0 997n 2,324
------- --- ---------
NET INCOME (LOSS)................ $ 418 $0 $ 3,487
======= === =========
PRO FORMA NET INCOME PER SHARE... $ 1.01
=========
SHARES USED IN COMPUTING PRO
FORMA NET INCOME PER SHARE..... 3,459,973
=========
</TABLE>
The accompanying notes are an integral part of this unaudited pro forma combined
financial statement.
F-6
<PAGE> 54
INDUSTRIAL DISTRIBUTION GROUP, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREDECESSOR-
IDG ASSOCIATED B&J CRAMER GRINDING SHEARER SLATER J.J. STANGEL
------------ ---------- ------- ------ -------- ------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET SALES........................... $49,960 $12,654 $16,767 $5,903 $4,289 $23,110 $3,795 $6,206
COST OF SALES....................... 37,562 9,954 12,436 4,633 3,152 18,291 2,916 4,681
------- ------- ------- ------ ------ ------- ------ ------
Gross profit................... 12,398 2,700 4,331 1,270 1,137 4,819 879 1,525
SELLING, GENERAL, AND ADMINISTRATIVE
EXPENSES.......................... 10,747 2,250 3,294 1,143 950 4,202 810 1,247
AMORTIZATION EXPENSE................ 0 0 0 0 0 11 0 0
------- ------- ------- ------ ------ ------- ------ ------
INCOME (LOSS) FROM OPERATIONS....... 1,651 450 1,037 127 187 606 69 278
OTHER INCOME (EXPENSE):
Interest expense.................. (778) (128) (156) (81) 0 (182) (66) (39)
Other............................. 1 (1) 142 (11) 10 141 0 (8)
------- ------- ------- ------ ------ ------- ------ ------
INCOME (LOSS) BEFORE INCOME TAXES... 874 321 1,023 35 197 565 3 231
PROVISION FOR INCOME TAXES.......... 41 94 357 0 0 226 1 98
------- ------- ------- ------ ------ ------- ------ ------
NET INCOME (LOSS)................... $ 833 $ 227 $ 666 $ 35 $ 197 $ 339 $ 2 $ 133
======= ======= ======= ====== ====== ======= ====== ======
PRO FORMA NET INCOME PER SHARE......
SHARES USED IN COMPUTING PRO FORMA
NET INCOME PER SHARE..............
<CAPTION>
PRO FORMA PRO FORMA
TRI-STAR IDG ADJUSTMENTS COMBINED
-------- ------- ------------ ---------
(SEE NOTE 4)
<S> <C> <C> <C> <C>
NET SALES........................... $14,630 $ 0 $ 276i $ 137,590
COST OF SALES....................... 11,481 0 (223)i 104,840
(43)b
------- ------- ---------
Gross profit................... 3,149 0 32,750
SELLING, GENERAL, AND ADMINISTRATIVE
EXPENSES.......................... 2,687 1,188 373i 27,884
200k
(70)j
13d
(1,150)s
AMORTIZATION EXPENSE................ 0 0 (11)e 158
158g
------- ------- ---------
INCOME (LOSS) FROM OPERATIONS....... 462 (1,188) 4,708
OTHER INCOME (EXPENSE):
Interest expense.................. (80) 0 1,183m (327)
Other............................. 17 0 126i 165
------- ------- ---------
INCOME (LOSS) BEFORE INCOME TAXES... 399 (1,188) 4,546
PROVISION FOR INCOME TAXES.......... 149 0 852n 1,818
------- ------- ---------
NET INCOME (LOSS)................... $ 250 $(1,188) $ 2,728
======= ======= =========
PRO FORMA NET INCOME PER SHARE...... $ 0.79
=========
SHARES USED IN COMPUTING PRO FORMA
NET INCOME PER SHARE.............. 3,459,973
=========
</TABLE>
The accompanying notes are an integral part of this unaudited pro forma combined
financial statement.
F-7
<PAGE> 55
INDUSTRIAL DISTRIBUTION GROUP, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
JUNE 30, 1997 AND DECEMBER 31, 1996
1. BACKGROUND
Industrial Distribution Group, Inc., a Delaware corporation (the
"Company"), was formed to create a nationwide supplier of cost-effective,
flexible procurement solutions for manufacturers and other users of maintenance,
repair, operating, and production ("MROP") products. The Company will commence
operations by combining the existing operations of nine MROP distributors that
collectively are engaged in business across a broad spectrum of MROP products
and services in different geographic locations around the United States.
2. HISTORICAL FINANCIAL STATEMENTS
The historical financial statements represent the financial position and
results of operations of the Founding Companies and were derived from the
respective financial statements where indicated. All Founding Companies have a
December 31 year-end, or their financial results have been recast to a December
31 year-end. Quarterly statements of income have been included in the pro forma
statements of income for the six months ended June 30, 1997. The audited
historical financial statements included elsewhere in this Prospectus have been
included in accordance with Securities and Exchange Commission ("SEC") Staff
Accounting Bulletin No. 80. The Company will have a December 31 year-end.
3. ACQUISITION OF FOUNDING COMPANIES
Concurrent with the closing of the Offering, the Company will acquire
substantially all of the net assets of the Founding Companies. The acquisitions
will be accounted for using the purchase method of accounting, with
Predecessor-IDG being treated as the acquiror.
The following table sets forth for each Founding Company the shares of
Common Stock to be paid to its stockholders.
<TABLE>
<CAPTION>
SHARES
------
<S> <C>
Predecessor-IDG............................................. 600,705
Associated.................................................. 315,706
B&J......................................................... 866,992
Cramer...................................................... 114,889
Grinding.................................................... 299,421
Shearer..................................................... 514,889
Slater...................................................... 59,910
J.J. Stangel................................................ 203,877
Tri-Star.................................................... 353,835
---------
Total............................................. 3,330,224
=========
</TABLE>
The estimated purchase price for the acquisitions is subject to certain
purchase price adjustments following closing. See "Certain Transactions".
The holders of all of the shares of Common Stock issued as consideration in
the Combination have contractually agreed with the Company not to offer, sell,
or otherwise dispose of any of those shares for a minimum period of two years
after the Offering. The fair value of these shares reflects this restriction.
F-8
<PAGE> 56
INDUSTRIAL DISTRIBUTION GROUP, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The estimated total purchase price (based on the fair value of the shares
to be issued) of the acquisitions is allocated as follows (in thousands):
<TABLE>
<S> <C>
Net assets of the Other Founding Companies acquired, at book
value..................................................... $18,222
Adjustment of property and equipment to fair market value... 1,028
Net liabilities of IDG...................................... (28)
Goodwill.................................................... 10,887
Other intangible assets..................................... 570
-------
Total purchase price.............................. $30,679
=======
</TABLE>
Based on management's preliminary analysis, it is anticipated that the
historical carrying value of the Founding Companies' assets and liabilities
except for certain property will approximate fair value. The amounts allocated
to property, goodwill and other intangible assets is approximately $12.5
million. Management of the Company has not identified any other material
tangible or identifiable intangible assets of the Founding Companies to which a
portion of the purchase price could reasonably be allocated.
4. PRO FORMA BALANCE SHEET AND INCOME STATEMENT ADJUSTMENTS
a. Records the buyout of the cash surrender value of life insurance
policies in the amount of $1,250,000 by shareholders of the Founding
Companies.
b. Records the elimination of LIFO inventory reserves, net of deferred
income taxes.
c. Records the adjustment for deferred income tax balances attributable to
the temporary differences between the financial reporting and income tax
bases of assets and liabilities of Predecessor-IDG (an S Corporation).
d. Adjusts the carrying value of property and equipment purchased from the
Other Founding Companies to fair market value and records the related
pro forma depreciation.
e. Eliminates existing goodwill of Shearer and the related amortization
expense.
f. Records an estimate of the intangible assets to be recorded in
connection with the Combination and the issuance of 3,459,973 shares to
be issued to the stockholders of the Founding Companies and senior
management and other advisors to the Company. The total purchase price
of the acquisitions is based upon an estimated fair value of $11.25 per
share which represents a discount of 25% from the assumed initial
public offering price of $15.00 due to restrictions on the sale and
transferability of the shares issued.
g. Records the pro forma amortization expense using a 40-year estimated
life for goodwill and a 13-year estimated life for other intangible
assets.
h. Records the elimination of stockholders' equity of the Founding
Companies and IDG.
i. Reclassifies vendor and customer discounts consistently between the
Founding Companies.
j. Adjusts compensation to the level that the presidents of the Founding
Companies have contractually agreed to receive subsequent to the
Combination. The employment agreements have a term of three years and
include certain severance provisions in the event of termination without
cause.
k. Records compensation for the chief executive officer and chief financial
officer of the Company.
l. Reclassifies notes payable to stockholders.
F-9
<PAGE> 57
INDUSTRIAL DISTRIBUTION GROUP, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
m.Records change in interest expense for pro forma adjustments to debt
based on the interest rate applicable to each instrument as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- ----------------
<S> <C> <C>
Predecessor-IDG.................. $1,099 $ 667
Associated....................... 174 90
B&J.............................. 197 98
Cramer........................... 123 66
Shearer.......................... 285 116
Slater........................... 113 61
Tri-Star......................... 93 85
------- -------
$2,084 $1,183
======= =======
</TABLE>
n.Records the incremental provision for federal and state income taxes
assuming a 40% effective tax rate.
o.Reclassifies state income taxes paid by a Founding Company.
p.Records the retirement of certain related party liabilities.
q.Records the elimination of amounts due to/from IDG.
r.Records the estimated cash consideration due to the dissenting
shareholder of Predecessor-IDG.
s.Reflects the elimination of a one-time compensation expense related to
purchases of Common Stock of the Company.
5. POST COMBINATION ADJUSTMENTS
t.The proceeds from the issuance of 3,000,000 shares of the Company's
Common Stock, net of estimated offering costs (based on an assumed
initial public offering price of $15.00 per share, the midpoint of the
estimated price range), will be applied as follows (in thousands).
<TABLE>
<S> <C>
Gross proceeds of the Offering.............................. $45,000
Underwriting discount....................................... (3,150)
Estimated expenses.......................................... (2,700)
Payment of certain debt obligations......................... (25,493)
Payment of the consideration due to the dissenting
shareholder of Predecessor-IDG............................ (4,200)
-------
Net cash received in Offering............................... $ 9,457
=======
</TABLE>
Offering costs primarily consist of underwriting discounts and commissions,
accounting fees, legal fees, and printing expenses.
F-10
<PAGE> 58
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Industrial Distribution Group, Inc.:
We have audited the accompanying balance sheets of INDUSTRIAL DISTRIBUTION
GROUP, INC. (a Georgia corporation) as of December 31, 1995 and 1996 and the
related statements of income, shareholders' equity, and cash flows for each of
the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statements referred to above present fairly,
in all material respects, the financial position of Industrial Distribution
Group, Inc. as of December 31, 1995 and 1996 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
May 23, 1997
F-11
<PAGE> 59
INDUSTRIAL DISTRIBUTION GROUP, INC.
("PREDECESSOR-IDG")
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1995 1996 1997
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 12 $ 8 $ 13
Trade accounts receivable, net of allowance for doubtful
accounts of $148 in 1995, 1996, and 1997............... 7,154 9,256 9,924
Inventories, net.......................................... 11,927 14,074 14,649
Other receivables......................................... 141 144 269
Prepaid expenses and other assets......................... 67 460 295
------- ------- -------
Total current assets.............................. 19,301 23,942 25,150
PROPERTY AND EQUIPMENT, net................................. 2,142 2,166 1,961
OTHER ASSETS................................................ 909 320 1,055
------- ------- -------
Total assets...................................... $22,352 $26,428 $28,166
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities under line of credit................... $ 0 $ 1,062 $ 0
Current maturities of long-term debt...................... 42 47 54
Accounts payable.......................................... 6,168 4,730 6,679
Accrued expenses.......................................... 1,326 942 734
------- ------- -------
Total current liabilities......................... 7,536 6,781 7,467
------- ------- -------
LINE OF CREDIT, less current maturities..................... 9,368 13,993 14,539
------- ------- -------
LONG-TERM DEBT, less current maturities..................... 1,650 1,604 1,574
------- ------- -------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 1,000,000 shares authorized,
110,665 shares issued and outstanding in 1995, 1996,
and 1997............................................... 1 1 1
Additional paid-in capital................................ 307 307 307
Retained earnings......................................... 3,490 3,742 4,278
------- ------- -------
Total shareholders' equity........................ 3,798 4,050 4,586
------- ------- -------
Total liabilities and shareholders' equity........ $22,352 $26,428 $28,166
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-12
<PAGE> 60
INDUSTRIAL DISTRIBUTION GROUP, INC.
("PREDECESSOR-IDG")
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX-MONTH
PERIOD ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- -----------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES........................................ $75,624 $83,526 $90,786 $45,184 $49,960
COST OF SALES.................................... 55,948 62,361 67,330 34,308 37,562
------- ------- ------- ------- -------
Gross profit................................... 19,676 21,165 23,456 10,876 12,398
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES.... 17,447 18,803 21,160 9,785 10,747
------- ------- ------- ------- -------
Income from operations................. 2,229 2,362 2,296 1,091 1,651
------- ------- ------- ------- -------
OTHER INCOME (EXPENSE):
Gain (loss) on sale of assets.................. 10 3 12 4 3
Interest expense............................... (856) (963) (1,016) (511) (778)
Other income (expense)......................... 43 57 47 8 19
Litigation costs (Note 8)...................... (165) (245) (621) (84) (21)
------- ------- ------- ------- -------
(968) (1,148) (1,578) (583) (777)
------- ------- ------- ------- -------
Income before state income tax
provision............................ 1,261 1,214 718 508 874
STATE INCOME TAX PROVISION (Note 2).............. 6 12 25 25 41
------- ------- ------- ------- -------
NET INCOME....................................... $ 1,255 $ 1,202 $ 693 $ 483 $ 833
======= ======= ======= ======= =======
PRO FORMA FEDERAL INCOME TAX PROVISION........... $ 208 $ 292
------- -------
PRO FORMA NET INCOME............................. $ 485 $ 541
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-13
<PAGE> 61
INDUSTRIAL DISTRIBUTION GROUP, INC.
("PREDECESSOR-IDG")
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------- ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993..................... 110,665 $1 $307 $2,100 $2,408
Net income................................... 0 0 0 1,255 1,255
Distributions to shareholders................ 0 0 0 (517) (517)
------- -- ---- ------ ------
BALANCE, December 31, 1994..................... 110,665 1 307 2,838 3,146
Net income................................... 0 0 0 1,202 1,202
Distributions to shareholders................ 0 0 0 (550) (550)
------- -- ---- ------ ------
BALANCE, December 31, 1995..................... 110,665 1 307 3,490 3,798
Net income................................... 0 0 0 693 693
Distributions to shareholders................ 0 0 0 (441) (441)
------- -- ---- ------ ------
BALANCE, December 31, 1996..................... 110,665 1 307 3,742 4,050
Net income................................... 0 0 0 833 833
Distributions to shareholders................ 0 0 0 (297) (297)
------- -- ---- ------ ------
BALANCE, June 30, 1997 (unaudited)............. 110,665 $1 $307 $4,278 $4,586
======= == ==== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-14
<PAGE> 62
INDUSTRIAL DISTRIBUTION GROUP, INC.
("PREDECESSOR-IDG")
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX-MONTH
PERIOD ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------- ------------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................. $ 1,255 $ 1,202 $ 693 $ 483 $ 833
------- ------- ------- ------- -------
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation........................ 271 320 357 166 203
(Gain) loss on sale of assets....... (10) (3) (12) (4) (3)
Changes in assets and liabilities:
Trade accounts receivable, net.... (544) (510) (2,102) (2,258) (670)
Inventories, net.................. (1,500) (1,387) (2,147) (242) (608)
Other receivables................. 10 (59) (3) 126 (124)
Prepaid expenses and other
assets......................... 115 (338) 196 191 (494)
Accounts payable and accrued
expenses....................... 1,125 707 (1,822) (473) 1,741
------- ------- ------- ------- -------
Total adjustments.............. (533) (1,270) (5,533) (2,494) 46
------- ------- ------- ------- -------
Net cash provided by (used in)
operating activities......... 722 (68) (4,840) (2,011) 878
------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets........... 20 5 23 15 5
Capital expenditures................... (276) (202) (392) (171) (43)
------- ------- ------- ------- -------
Net cash used in investing
activities................... (256) (197) (369) (156) (38)
------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) borrowings under line
of credit........................... (80) 819 5,687 2,521 (516)
Principal repayments of long-term
debt................................ (20) (33) (41) (20) (23)
Repayment of note payable to
shareholder......................... 0 (150) 0 0 0
Distributions to shareholders.......... (517) (550) (441) (311) (296)
------- ------- ------- ------- -------
Net cash (used in) provided by
financing activities......... (617) 86 5,205 2,190 (835)
------- ------- ------- ------- -------
NET CHANGE IN CASH AND CASH
EQUIVALENTS............................ (151) (179) (4) 23 5
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD................................. 342 191 12 12 8
------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD................................. $ 191 $ 12 $ 8 $ 35 $ 13
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Noncash financing to purchase assets... $ 23 $ 60 $ 0
======= ======= =======
Interest paid.......................... $ 856 $ 963 $ 919
======= ======= =======
Income taxes paid...................... $ 6 $ 12 $ 25
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-15
<PAGE> 63
INDUSTRIAL DISTRIBUTION GROUP, INC.
("PREDECESSOR-IDG")
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995, AND 1996
1. DESCRIPTION OF THE BUSINESS
Industrial Distribution Group, Inc. (the "Company" or "Predecessor-IDG") is
a wholesale industrial supply distribution company headquartered in Tucker,
Georgia, with branch offices and warehouses in Georgia, North Carolina, South
Carolina, Indiana, Tennessee, and Oregon. The Company distributes industrial
supplies and equipment throughout the United States. The Company is also an
authorized repair center for many of its suppliers and provides additional
services, such as customizing conveyor belts and band saw blades, for its
customers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRESENTATION OF FINANCIAL STATEMENTS
The financial statements of the Company include the corporate headquarters
as well as its operating divisions, Boring-Smith, Dixie Industrial Supply, and
Ensco Supply. All significant interdivisional transactions and balances have
been eliminated.
CASH EQUIVALENTS
The Company considers all short-term investments with original maturities
of three months or less to be cash equivalents.
TRADE ACCOUNTS RECEIVABLE
An allowance for doubtful accounts has been established based on a review
of the current status of existing receivables, historical collection experience,
and management's evaluation of the effect of existing economic conditions.
Receivables are charged to the allowance account when deemed to be
uncollectible.
INVENTORIES
Inventories consist primarily of merchandise purchased for resale and are
stated at the lower of cost or market. Cost is determined by the first-in,
first-out basis, and market is considered to be net realizable value.
Inventories are stated net of an allowance of $150,000 to adjust cost to net
realizable value as of December 31, 1996.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, less accumulated depreciation.
Expenditures for repairs and maintenance are charged to expense as incurred.
Upon retirement or disposal of assets, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized as other income (expense) in the accompanying statements of income.
Depreciation of property and equipment is provided using either the
straight-line or accelerated method using the following estimated useful lives:
<TABLE>
<S> <C>
Buildings................................................... 19-31 years
Office and warehouse equipment.............................. 5-7 years
Vehicles.................................................... 3-5 years
</TABLE>
OTHER ASSETS
As of December 31, 1995, other assets included a receivable from a
shareholder for $52,000. During 1996, in connection with the settlement of a
lawsuit filed by the shareholder (Note 8), the Company forgave the receivable
from this shareholder.
INCOME TAXES
The Company, with the consent of its shareholders, has elected as of
January 1, 1990 to be taxed under the provisions of subchapter S of the Internal
Revenue Code. Accordingly, the financial statements do not
F-16
<PAGE> 64
INDUSTRIAL DISTRIBUTION GROUP, INC.
("PREDECESSOR-IDG")
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
include a provision for current income taxes because the Company does not incur
federal income taxes. Instead, its earnings and losses are included in the
shareholders' personal income tax returns, and the shareholders are taxed based
on their personal income tax strategies.
Subsequent to year-end, the Company will change from an S corporation to a
C corporation for federal and state income tax reporting purposes, which will
require the Company to recognize the tax consequences of operations in its
statements of income. The supplemental pro forma information included in the
accompanying statements of income reflects the estimated impact of recognizing
income tax expenses as if the Company had been a C corporation for tax reporting
purposes for the year ended December 31, 1996.
NATURE OF OPERATIONS, RISKS, AND UNCERTAINTIES
The Company operates primarily in wholesale distribution of industrial
supplies. There are no other significant business segments in which the Company
operates. The Company has a broad customer base representing many diverse
industries. As of December 31, 1994, 1995, and 1996, no one customer represented
greater than 10% of the Company's revenues or accounts receivable. The principal
industries served by Dixie Industrial Supply are the metal working, chemical,
transportation, textile, pulp and paper, and furniture industries. Dixie
Industrial Supply has seven branches located in North Carolina, South Carolina,
Georgia, and Tennessee. The principal customers of Boring-Smith are the
manufactured housing, recreational vehicle, and boating industries throughout
the continental United States who purchase production tools and supplies.
Boring-Smith distributes its products from three stationary warehouses and eight
mobile warehouses. Ensco Supply's principal customers are primarily commercial
mechanical, electrical, HVAC, and general contractors who purchase power tools
and related supplies. Ensco Supply has three warehouses, all located in North
Carolina.
The following schedule reflects the distribution in gross sales for the
years ended December 31, 1994, 1995, and 1996:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Dixie Industrial Supply..................................... 62% 62% 64%
Boring-Smith................................................ 27 28 26
Ensco Supply................................................ 11 10 10
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue is recognized on sales of products at the time of shipment.
COST OF SALES
Cost of sales consists of the cost of materials purchased offset by
discounts and rebates received from suppliers.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of," to be effective for
fiscal years beginning after December 15, 1995. The adoption of this
F-17
<PAGE> 65
INDUSTRIAL DISTRIBUTION GROUP, INC.
("PREDECESSOR-IDG")
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
statement as of January 1, 1996 did not have a significant impact on the
Company's financial position or results of operations.
RECLASSIFICATIONS
Certain reclassifications have been made to 1994 and 1995 amounts to
conform to current year presentation.
INTERIM UNAUDITED FINANCIAL INFORMATION
The financial statements as of June 30, 1997 and for the six months ended
June 30, 1996 and 1997 are unaudited; however, in the opinion of management, all
adjustments (consisting solely of normal recurring adjustments) necessary for a
fair presentation of the unaudited financial statements for these interim
periods have been included. The results of interim periods are not necessarily
indicative of the results to be obtained for a full year.
3. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1995 and 1996 consist of the
following (in thousands):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Land........................................................ $ 238 $ 238
Buildings................................................... 2,141 2,221
Furniture and fixtures...................................... 1,204 1,206
Computer equipment.......................................... 700 735
Trucks...................................................... 352 591
Leasehold improvements...................................... 746 746
------- -------
5,381 5,737
Less accumulated depreciation............................... (3,239) (3,571)
------- -------
Property and equipment, net....................... $ 2,142 $ 2,166
======= =======
</TABLE>
Depreciation expense was $271,000, $320,000, and $357,000 for the years
ended December 31, 1994, 1995, and 1996, respectively.
4. LINE OF CREDIT
The Company obtained a line of credit from a financial institution in
November 1993, which was amended in March 1996. The loan availability under the
line of credit is determined by a formula based on trade accounts receivable and
merchandise inventory, not to exceed $15,000,000. As of December 31, 1996, the
Company had an overadvancement on the line of credit. In accordance with the
loan agreement, the amount of overadvance is payable on demand and is included
in the accompanying balance sheet as a current liability. The line is secured by
trade accounts receivable, merchandise inventory, intangibles, and other assets.
Borrowings under the agreement bear interest, at the election of the
Company, at either the bank's prime rate, plus a margin based on the Company's
ratio of debt to adjusted tangible net worth, or LIBOR, plus a margin based on
the Company's ratio of debt to adjusted tangible net worth. The prime rate is
adjusted daily based on published rates, while the LIBOR rate is locked in for
one, two, or three months, based on the Company's election. Interest is payable
monthly with the principal balance due in March 1999. The effective interest
rate under the line of credit during 1996 was approximately 9.5%.
F-18
<PAGE> 66
INDUSTRIAL DISTRIBUTION GROUP, INC.
("PREDECESSOR-IDG")
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Borrowings outstanding under the line of credit as of December 31, 1995 and
1996 were as follows:
<TABLE>
<CAPTION>
1995 1996
------ -------
(IN THOUSANDS)
<S> <C> <C>
Variable rate line of credit, interest computed at prime
plus .75%
(9% as of December 31, 1996).............................. $9,368 $ 7,555
Variable rate line of credit, interest computed at LIBOR
plus 3.25%
(8.75% as of December 31, 1996)........................... 0 7,500
------ -------
Total borrowings under line of credit............. 9,368 15,055
Less current maturities..................................... 0 (1,062)
------ -------
Net long-term borrowings under line of credit............... $9,368 $13,993
====== =======
</TABLE>
The line of credit agreement contains various covenants pertaining to
maintenance of certain financial relationships. These covenants include
requirements on capital expenditures, maintaining a minimum adjusted tangible
net worth, a maximum ratio of debt to adjusted tangible net worth, a minimum
current ratio, a minimum EBITD ratio, and certain other covenants. The Company
was in default of certain of these covenants as of December 31, 1996. The
Company obtained a waiver in May 1997 for certain covenants, while other
covenants were amended on a going-forward basis.
5. LONG-TERM DEBT
Long-term debt as of December 31, 1995 and 1996 consists of the following:
<TABLE>
<CAPTION>
1995 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
9.75% mortgage payable, due in monthly installments of
$15,036, including interest through July 1999, at which
time remaining principal and interest are due; secured by
a building................................................ $1,623 $1,600
8% note payable, due in monthly installments of $553,
including interest through October 1998, at which time
remaining principal and interest are due; secured by a
vehicle and personal guaranty of a shareholder............ 17 11
9% note payable, due in monthly installments of $822,
including interest through March 1999, at which time
remaining principal and interest are due; secured by a
vehicle................................................... 27 20
8.5% note payable, due in monthly installments of $665,
including interest through September 1999, at which time
remaining principal and interest are due; secured by a
vehicle................................................... 25 20
------ ------
Total long-term debt.............................. 1,692 1,651
Less current portion........................................ (42) (47)
------ ------
Total long-term debt, less current portion........ $1,650 $1,604
====== ======
</TABLE>
Future maturities of long-term debt as of December 31, 1996 are as follows
(in thousands):
<TABLE>
<S> <C>
1997........................................................ $ 47
1998........................................................ 50
1999........................................................ 1,554
------
$1,651
======
</TABLE>
F-19
<PAGE> 67
INDUSTRIAL DISTRIBUTION GROUP, INC.
("PREDECESSOR-IDG")
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. EMPLOYEE BENEFIT PLAN
During 1994, the Company amended its profit-sharing plan and implemented a
401(k) savings plan (the "Plan") for all eligible employees. Employees of the
Company are eligible to participate in the Plan after satisfying certain
requirements as to age and length of service. The Company, at its discretion,
may make contributions equal to a matching percentage that it deems advisable
based on a tiered formula in relation to the employees' eligible contributions.
In addition, the Company, at its discretion, may contribute an amount which it
designates as a qualified nonelective contribution. For the plan years ended
December 31, 1994, 1995, and 1996, employer contributions to the Plan were $0,
$89,000, and $0, respectively.
7. RELATED-PARTY TRANSACTIONS
The Company leases, at customary terms and market rates, vehicles,
furniture, fixtures, and equipment from a limited partnership in which two
shareholders of the Company are partners. Rental expense paid to this limited
partnership amounted to $96,000, $71,000, and $31,000 during 1994, 1995, and
1996, respectively (Note 8).
The Company purchases business and health insurance through an independent
agency owned by a shareholder of the Company. The amount paid for such insurance
during 1994, 1995, and 1996 was approximately $289,000, $288,000, and $294,000,
respectively.
8. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company has entered into operating leases for certain office and
warehouse facilities and equipment. The Company also subleases a portion of its
warehouse facilities. Management expects that in the normal course of business,
leases that expire will be renewed or replaced by other leases.
As of December 31, 1996, minimum future rental payments due under
noncancelable operating lease arrangements are as follows (in thousands):
<TABLE>
<S> <C>
1997........................................................ $1,116
1998........................................................ 885
1999........................................................ 673
2000........................................................ 323
2001........................................................ 26
Thereafter.................................................. 0
------
$3,023
======
</TABLE>
Rental expense for all of the operating leases amounted to $1,309,000,
$1,208,000, and $1,258,000 during 1994, 1995, and 1996, respectively. Of these
amounts, $96,000, $71,000, and $31,000 were paid to related parties during 1994,
1995, and 1996, respectively (Note 7).
LITIGATION
In 1993, a shareholder brought suit against the Company and members of
management seeking dissolution of the Company on grounds that there was a
shareholder voting deadlock and that those in control of the Company had acted
in a fraudulent manner in the operation of the Company. The shareholder also
sought certain damages from the Company and management. The court refused to
dissolve the Company and found that management had not acted in a fraudulent
manner in the operation of the Company. In a related judgment, the court ordered
the Company to pay the shareholder's attorneys fees in the amount of $100,000.
F-20
<PAGE> 68
INDUSTRIAL DISTRIBUTION GROUP, INC.
("PREDECESSOR-IDG")
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has appealed that decision, but has recorded $100,000 as of December
31, 1996 in accrued expenses in the accompanying balance sheet. The parties
submitted certain other claims by the shareholder and counterclaims by the
Company to binding arbitration. Based on the arbitration, the Company was
required to pay the shareholder and a related party approximately $263,000 and
to forgive $68,000 owed the Company by the shareholder. During 1994, 1995, and
1996, the Company charged to expense approximately $165,000, $245,000, and
$621,000, respectively, for legal fees and resolution of the aforementioned case
and arbitration.
On November 18, 1996, Milliken & Company ("Milliken"), a textile
manufacturer and customer of the Company, filed suit against a manufacturer of
an industrial product and the Company in the Superior Court of Troup County,
Georgia. Milliken claims that a product sold to it by the Company as a
distributor of the defendant-manufacturer was defective and caused a fire,
severely damaging Milliken's textile manufacturing plant in LaGrange, Georgia,
and alleges damages of $500 million against the defendants. The Company
maintains insurance coverage under multiple policies in the aggregate amount of
$12 million. The Company has denied any liability, and its insurance carrier is
vigorously defending the lawsuit on its behalf. The litigation is in the early
stages of discovery. While the damages alleged by Milliken are exceptional in
amount, the inclusion of the distributor of a product, along with its
manufacturer, as a defendant in an action for alleged product defectiveness is
unexceptional. The litigation is in the early stages of discovery, and while it
is not possible to predict with accuracy the outcome of any such litigation
matter, the Company believes that its insurance will be adequate to cover any
loss to the Company that might result from the lawsuit.
The Company is subject to various claims and legal actions which arise in
the ordinary course of business. In the opinion of management, the ultimate
resolution of such matters will be adequately covered by insurance or will not
have a material adverse effect on the Company's financial position or results of
operations.
9. SUBSEQUENT EVENT (UNAUDITED)
Effective June 9, 1997, the judgment against the Company related to the
$100,000 of attorneys fees was reversed on appeal (Note 8).
F-21
<PAGE> 69
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Associated Suppliers, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of ASSOCIATED
SUPPLIERS, INC. (an Oregon corporation) AND SUBSIDIARIES as of December 31, 1995
and 1996 and the related consolidated statements of income, shareholders'
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these 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 financial statements referred to above present fairly,
in all material respects, the financial position of Associated Suppliers, Inc.
and subsidiaries as of December 31, 1995 and 1996 and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
May 1, 1997
F-22
<PAGE> 70
ASSOCIATED SUPPLIERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1995 1996 1997
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................... $ 29 $ 18 $ 41
Accounts receivable, less allowance for doubtful
accounts of $46, $51, and $66 in 1995, 1996, and
1997, respectively................................... 2,565 2,327 2,706
Inventories, net........................................ 3,190 2,806 3,192
Prepaid expenses and other.............................. 53 46 144
Deferred tax assets..................................... 52 56 56
------ ------ ------
Total current assets............................ 5,889 5,253 6,139
PROPERTY AND EQUIPMENT, net............................... 342 312 358
OTHER ASSETS.............................................. 39 121 156
------ ------ ------
Total assets.................................... $6,270 $5,686 $6,653
====== ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit.......................................... $2,305 $1,921 $2,457
Current portion of long-term debt and capital lease
obligations.......................................... 50 58 119
Current portion of company-guaranteed debt of ESOP...... 223 105 90
Accounts payable........................................ 1,541 1,255 1,410
Accrued expenses........................................ 204 236 110
Income taxes payable.................................... 73 123 53
------ ------ ------
Total current liabilities....................... 4,396 3,698 4,239
------ ------ ------
LONG-TERM DEBT and CAPITAL LEASE OBLIGATIONS, less current
portion................................................. 105 70 266
------ ------ ------
COMPANY-GUARANTEED DEBT OF ESOP, less current portion..... 316 204 156
------ ------ ------
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY:
Common stock, no par value; 500,000 shares authorized,
177,440, 164,420, and 163,672 shares issued and
outstanding in 1995, 1996, and 1997, respectively.... 0 0 0
Additional paid-in capital.............................. 782 587 575
Retained earnings....................................... 1,210 1,436 1,663
------ ------ ------
1,992 2,023 2,238
Unearned compensation under ESOP........................ (539) (309) (246)
------ ------ ------
Total shareholders' equity...................... 1,453 1,714 1,992
------ ------ ------
Total liabilities and shareholders' equity...... $6,270 $5,686 $6,653
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-23
<PAGE> 71
ASSOCIATED SUPPLIERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, JUNE 30,
------------------ ------------------
1995 1996 1996 1997
------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES........................................... $24,471 $24,481 $12,265 $12,654
COST OF SALES....................................... 19,554 19,574 9,723 9,954
------- ------- ------- -------
Gross profit...................................... 4,917 4,907 2,542 2,700
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES....... 4,226 4,156 2,372 2,250
------- ------- ------- -------
Income from operations............................ 691 751 170 450
INTEREST EXPENSE.................................... 269 278 127 128
OTHER (INCOME) EXPENSE.............................. (2) 89 (8) 1
------- ------- ------- -------
INCOME BEFORE INCOME TAXES.......................... 424 384 51 321
PROVISION FOR INCOME TAXES.......................... 173 158 17 94
------- ------- ------- -------
NET INCOME.......................................... $ 251 $ 226 $ 34 $ 227
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-24
<PAGE> 72
ASSOCIATED SUPPLIERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
UNEARNED
ADDITIONAL COMPENSATION
COMMON PAID-IN RETAINED UNDER
SHARES CAPITAL EARNINGS ESOP TOTAL
------- ---------- -------- ------------ ------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994..................... 180,746 $830 $ 959 $(469) $1,320
Acquisition of common stock from departing
ESOP participants......................... (3,306) (48) 0 (266) (314)
Compensation under ESOP...................... 0 0 0 196 196
Net income................................... 0 0 251 0 251
------- ---- ------ ----- ------
BALANCE, December 31, 1995..................... 177,440 782 1,210 (539) 1,453
Acquisition of common stock from departing
ESOP participants......................... (13,020) (195) 0 0 (195)
Compensation under ESOP...................... 0 0 0 230 230
Net income................................... 0 0 226 0 226
------- ---- ------ ----- ------
BALANCE, December 31, 1996..................... 164,420 587 1,436 (309) 1,714
Acquisition of common stock from departing
ESOP participants......................... (748) (12) 0 0 (12)
Compensation under ESOP...................... 0 0 0 63 63
Net income................................... 0 0 227 0 227
------- ---- ------ ----- ------
BALANCE, June 30, 1997 (unaudited)............. 163,672 $575 $1,663 $(246) $1,992
======= ==== ====== ===== ======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-25
<PAGE> 73
ASSOCIATED SUPPLIERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, JUNE 30,
------------- -------------
1995 1996 1996 1997
----- ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 251 $ 226 $ 34 $ 227
----- ----- ----- -----
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization.......................... 122 130 72 50
(Gain) loss on sale of equipment....................... (13) 12 0 0
Changes in operating assets and liabilities:
Accounts receivable.................................. (451) 238 (37) (379)
Inventories.......................................... (87) 384 404 (386)
Prepaid expenses and other assets.................... 10 (32) (24) (97)
Deferred tax assets.................................. 1 (4) (4) 0
Accounts payable, accrued expenses, and income taxes
payable........................................... 20 (204) (615) (40)
----- ----- ----- -----
Total adjustments................................. (398) 524 (204) (852)
----- ----- ----- -----
Net cash (used in) provided by operating
activities...................................... (147) 750 (170) (625)
----- ----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net.................. (167) (112) (34) (97)
Change in cash surrender value of officers' life
insurance.............................................. (8) 2 (9) (5)
Investment in joint venture............................... 0 (45) 0 (30)
----- ----- ----- -----
Net cash used in investing activities............. (175) (155) (43) (132)
----- ----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayment) under line of credit........... 397 (384) 231 536
Net (repayments) borrowings of long-term debt and capital
lease obligations...................................... (8) (27) (24) 256
Acquisition of common stock from departing ESOP
participants........................................... (48) (195) 0 (12)
----- ----- ----- -----
Net cash provided by (used in) financing
activities...................................... 341 (606) 207 780
----- ----- ----- -----
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... 19 (11) (6) 23
CASH AND CASH EQUIVALENTS, beginning of period.............. 10 29 29 18
----- ----- ----- -----
CASH AND CASH EQUIVALENTS, end of period.................... $ 29 $ 18 $ 23 $ 41
===== ===== ===== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid.......................................... $ 230 $ 240
===== =====
Income taxes paid -- net of refunds.................... $ 91 $ 116
===== =====
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-26
<PAGE> 74
ASSOCIATED SUPPLIERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Associated Suppliers, Inc. and its five wholly owned subsidiaries (the
"Company") are engaged in the wholesale distribution of industrial tools and
supplies. The Company is located in Oregon, Washington, and Arizona. MACS
Industrial Supply, Inc., a subsidiary located in New Mexico, was closed during
1995. A new subsidiary, Factory Tool Outlet, Inc., located in Oregon, was formed
and opened during 1996.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Associated Suppliers, Inc. and its wholly owned subsidiaries: Davis Industrial
Products, Co. (Oregon), Mining & Construction Suppliers, Inc. (Arizona),
Tri-State Industrial Supply Co. (Washington), Supplies for Industry, Inc.
(Washington), and Factory Tool Outlet, Inc. (Oregon). All significant
intercompany accounts and transactions have been eliminated in consolidation.
CASH EQUIVALENTS
The Company considers all short-term investments with original maturities
of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE
An allowance for uncollectible accounts has been established based on the
Company's collection experience and an assessment of the collectibility of
specific accounts.
INVENTORIES
Inventories consist primarily of merchandise purchased for resale and are
valued at the lower of the weighted average cost or market value. Cost is
determined on an average cost basis, and market is considered as net realizable
value. Inventories are stated net of an allowance to adjust cost to net
realizable value of $112,000 as of December 31, 1995 and 1996.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, less accumulated depreciation.
Expenditures for maintenance and repairs are charged to expense as incurred.
Upon retirement or disposal of assets, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized as other expense (income) in the accompanying financial statements.
Depreciation is computed using the straight-line and accelerated methods over
the estimated useful lives of the respective assets as follows:
<TABLE>
<S> <C>
Leasehold improvements...................................... Life of related lease
Machinery and office equipment.............................. Five to seven years
Motor vehicles.............................................. Five to seven years
Rental equipment............................................ One to three years
</TABLE>
OTHER ASSETS
Other assets as of December 31, 1995 and 1996 include the cash surrender
value of executive life insurance policies totaling $39,000 and $37,000,
respectively (face value of $550,000). In addition, during 1995, the Company
entered into a joint venture agreement with Hermientos Y Servicios USAMEX, a
Mexico corporation. The Company contributed capital of $45,000 to this joint
venture in 1996. As it is not expected
F-27
<PAGE> 75
ASSOCIATED SUPPLIERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
that the Company will be able to exercise control over the Mexican company, the
investment is accounted for using the cost method of accounting. There was no
operating activity in this Mexico corporation in either 1995 or 1996.
INCOME TAXES
The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
SFAS No. 109 requires recognition of deferred tax assets and liabilities using
currently enacted tax rates.
REVENUE RECOGNITION
Revenue is recognized on sales of products at the time of shipment.
COST OF SALES
Cost of sales includes the cost of merchandise purchased, less any
applicable rebates and volume discounts.
CONCENTRATION OF CREDIT RISK
The Company places its temporary cash investments with qualified financial
institutions and, by policy, limits the amount of credit exposure to one
financial institution. The Company has a broad customer base, representing many
diverse industries doing business in numerous geographic areas. As of December
31, 1996, one customer represented 11% of the Company's accounts receivables.
For the years ended December 31, 1995 and 1996, no one customer represented 10%
of the Company's sales and one supplier represented 20% and 22%, respectively,
of the Company's purchases.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INTERIM UNAUDITED FINANCIAL INFORMATION
The financial statements as of June 30, 1997 and for the six months ended
June 30, 1996 and 1997 are unaudited; however, in the opinion of management, all
adjustments (consisting solely of normal recurring adjustments) necessary for a
fair presentation of the unaudited financial statements for these interim
periods have been included. The results of interim periods are not necessarily
indicative of the results to be obtained for a full year.
F-28
<PAGE> 76
ASSOCIATED SUPPLIERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1995 and
1996 (in thousands):
<TABLE>
<CAPTION>
1995 1996
------- ------
<S> <C> <C>
Leasehold improvements...................................... $ 100 $ 70
Machinery and equipment..................................... 1,044 848
Motor vehicles.............................................. 224 174
Rental equipment............................................ 9 0
------- ------
1,377 1,092
Less accumulated depreciation............................... (1,035) (780)
------- ------
Property and equipment, net....................... $ 342 $ 312
======= ======
</TABLE>
Depreciation expense totaled $117,000 and $130,000 for the years ended
December 31, 1995 and 1996, respectively.
3. LINE OF CREDIT
The Company has a revolving operating line-of-credit agreement with a bank
maturing July 28, 1997. Interest is charged at the bank's prime lending rate
(8.25% as of December 31, 1996) plus .25% and is collateralized by eligible
accounts receivable, inventories, equipment, and other assets of the Company. At
December 31, 1996, the Company's maximum borrowing base is $3,500,000. The
outstanding balance on the line of credit at December 31, 1995 and 1996 is
$2,305,000 and $1,921,000, respectively.
4. LONG-TERM DEBT AND CAPITAL LEASES
At December 31, 1995 and 1996, long-term debt and capital leases consist of
the following:
<TABLE>
<CAPTION>
1995 1996
----- -----
(IN THOUSANDS)
<S> <C> <C>
Prime plus 1% note payable to bank, due in monthly
installments of $546 through June 1998; collateralized by
a vehicle................................................. $ 15 $ 10
8.25% note payable to bank, due in monthly installments of
$419 through October 1998; collateralized by a vehicle.... 13 8
9% note payable to bank, due in monthly installments of $518
through February 1998; collateralized by a vehicle........ 12 7
Capital leases.............................................. 115 103
---- ----
Total long-term debt and capital leases........... 155 128
Less current portion........................................ (50) (58)
---- ----
Long-term debt and capital leases, less current
portion......................................... $105 $ 70
==== ====
</TABLE>
Additionally, a bank has made available to the Company funds for foreign
investment (Note 1) in the amount of $150,000 at a stated interest rate of the
bank's prime lending rate plus 1%. At December 31, 1995 and 1996, no funds had
been borrowed under this agreement.
The capital lease obligations expire at various dates through July 2001,
with estimated residual values totaling approximately $16,000.
F-29
<PAGE> 77
ASSOCIATED SUPPLIERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Maturities of long-term debt and capital leases as of December 31, 1996 are
as follows (in thousands):
<TABLE>
<S> <C>
1997........................................................ $ 66
1998........................................................ 56
1999........................................................ 11
2000........................................................ 6
2001........................................................ 3
----
Total minimum obligations................................... 142
Less amount representing interest on capital leases......... (14)
----
Present value of minimum obligations........................ $128
====
</TABLE>
Additionally, the Company was required to issue a letter of credit for
$63,000 as security for one of the capital lease agreements. The letter of
credit is to be exercised only upon default of the capital lease agreement.
5. EMPLOYEE BENEFIT PLANS
The Company has a leveraged noncontributory employee stock ownership plan
("ESOP") covering substantially all employees meeting certain age and
length-of-service requirements.
Contributions to the ESOP are determined by the Company's management.
Management intends to fund the ESOP in an amount which, when aggregated with the
ESOP plan's dividend and interest earnings, at least equals the annual principal
and interest due on notes payable to former participants. The notes payable to
former participants represent the debt incurred by the ESOP to repurchase shares
held by these departing participants. The Company is contingently liable for
repayment of the notes, and accordingly, the liability is included in the
accompanying balance sheets with a corresponding amount representing unearned
compensation shown as a reduction to shareholders' equity.
Contributions for the years ended December 31, 1995 and 1996 are classified
as follows in thousands:
<TABLE>
<CAPTION>
1995 1996
---- -----
<S> <C> <C>
Compensation expense........................................ $196 $ 88
Interest expense............................................ 39 38
Current employer contribution............................... 17 0
---- -----
Total contribution................................ $252 $ 126
==== =====
</TABLE>
As payments are made on the notes, shares are released from collateral and
the Company recognizes compensation expense equal to the carrying value of the
shares allocated to participant accounts. The ESOP classifies shares which
collateralize the debt as unallocated shares. All other shares of the ESOP are
held in participant accounts and are considered allocated.
At December 31, 1995 and 1996, the unallocated, allocated, and total shares
held by the ESOP and their respective fair market values are as follows (in
thousands except share data):
<TABLE>
<CAPTION>
1995 1996
---------------- ----------------
FAIR FAIR
MARKET MARKET
SHARES VALUE SHARES VALUE
------- ------ ------- ------
<S> <C> <C> <C> <C>
Unallocated......................................... 35,000 $ 530 20,000 $ 303
Allocated........................................... 112,000 1,673 114,000 1,772
------- ------ ------- ------
Total..................................... 147,000 $2,203 134,000 $2,075
======= ====== ======= ======
</TABLE>
F-30
<PAGE> 78
ASSOCIATED SUPPLIERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The market value per share at December 31, 1995 and 1996 was $15.00 and
$15.50, respectively.
During 1996, the board of directors voted to terminate the ESOP. All funds
of nonseparated participants shall be rolled into a 401(k) savings plan.
Separated participants shall be paid out subsequent to year-end (Note 9).
6. PROVISION FOR INCOME TAXES
The provision for income taxes includes income taxes deferred because of
temporary differences between financial statement and tax bases of assets and
liabilities and consisted of the following for the years ended December 31, 1995
and 1996:
<TABLE>
<CAPTION>
1995 1996
----- -----
(IN THOUSANDS)
<S> <C> <C>
Current:
Federal................................................... $136 $132
State and local........................................... 31 30
---- ----
167 162
---- ----
Deferred:
Federal................................................... 4 (3)
State and local........................................... 2 (1)
---- ----
6 (4)
---- ----
Total provision................................... $173 $158
==== ====
</TABLE>
The provision for income taxes for the years ended December 31, 1995 and
1996 differs from the amount computed by applying the federal statutory rate of
34% due to the following:
<TABLE>
<CAPTION>
1995 1996
----- -----
(IN THOUSANDS)
<S> <C> <C>
Tax at federal statutory rate............................... $144 $131
State and local income taxes, net of federal benefit........ 20 18
Nondeductible travel and entertainment...................... 9 9
---- ----
Total provision................................... $173 $158
==== ====
</TABLE>
Deferred taxes are recorded on differences between the financial statement
and tax bases of assets and liabilities. Temporary differences which give rise
to a significant portion of deferred tax assets and liabilities at December 31,
1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
----- -----
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts........................... $ 18 $ 20
Inventory allowance....................................... 44 44
Other..................................................... 2 5
---- ----
64 69
Deferred tax liabilities:
Other..................................................... (12) (13)
---- ----
Net deferred tax assets................................... $ 52 $ 56
==== ====
</TABLE>
F-31
<PAGE> 79
ASSOCIATED SUPPLIERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company entered into operating leases for certain office, retail, and
warehouse facilities and equipment. The Company also subleases a portion of its
warehouse facilities. Management expects that in the normal course of business,
leases that expire will be renewed or replaced by other leases.
Future minimum lease payments under all leases as of December 31, 1996 were
as follows (in thousands):
<TABLE>
<S> <C>
1997........................................................ $288
1998........................................................ 334
1999........................................................ 305
2000........................................................ 217
2001........................................................ 183
Thereafter.................................................. 844
</TABLE>
Total rental expense for the years ended December 31, 1995 and 1996 was
approximately $287,000 and $351,000, respectively.
LITIGATION
The Company is subject to various claims and legal actions which arise in
the ordinary course of business. In the opinion of management, the ultimate
resolution of such matters will be adequately covered by insurance or will not
have a material adverse effect on the Company's financial position or results of
operations.
8. RELATED-PARTY TRANSACTIONS
Davis Industrial Products Co. leased its office and warehouse facilities
from a related party during the years ended December 31, 1995 and 1996. Total
lease payments were $145,000 and $169,000 for the years ended December 31, 1995
and 1996, respectively.
Mining & Construction Suppliers, Inc. leases its office and warehouse
facilities from parties related through common ownership. The operating lease
expires December 31, 1999. Total lease payments were approximately $70,000 for
the years ended December 31, 1995 and 1996.
9. SUBSEQUENT EVENTS
The Company secured a $300,000 commitment from a bank to liquidate all
outstanding debt obligations to separated participants in the ESOP plan (Note
5). Terms of the agreement call for 60 monthly principal payments of $5,000,
plus interest at the bank's prime lending rate plus .75%. The commitment matures
March 2002 and is secured by all assets of the Company.
F-32
<PAGE> 80
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To B & J Industrial Supply Company:
We have audited the accompanying consolidated balance sheets of B & J
INDUSTRIAL SUPPLY COMPANY (a Washington corporation) AND SUBSIDIARIES as of
December 31, 1995 and 1996 and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
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 financial statements referred to above present fairly,
in all material respects, the financial position of B & J Industrial Supply
Company and subsidiaries as of December 31, 1995 and 1996 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
April 24, 1997
F-33
<PAGE> 81
B & J INDUSTRIAL SUPPLY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1995 1996 1997
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,120 $ 1,407 $ 2,007
Short-term investments.................................... 915 948 972
Accounts receivable, less allowances for doubtful accounts
of $115, $125, and $125 in 1995, 1996, and 1997,
respectively........................................... 2,844 3,973 3,606
Prepaids and other current assets......................... 121 94 256
Deferred tax assets....................................... 247 324 232
Inventories, net.......................................... 3,896 4,455 4,669
------- ------- -------
Total current assets.............................. 9,143 11,201 11,742
------- ------- -------
PROPERTY AND EQUIPMENT, net................................. 1,187 1,114 1,085
------- ------- -------
OTHER ASSETS:
Cash surrender value of life insurance.................... 549 616 616
Other..................................................... 5 17 31
------- ------- -------
Total other assets................................ 554 633 647
------- ------- -------
Total assets...................................... $10,884 $12,948 $13,474
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit............................................ $ 900 $ 1,077 $ 980
Current portion of long-term debt and other long-term
obligations............................................ 118 128 129
Accounts payable.......................................... 1,360 2,056 1,932
Accrued liabilities....................................... 139 316 196
Accrued employee benefits................................. 421 446 669
Income taxes payable...................................... 93 228 278
------- ------- -------
Total current liabilities......................... 3,031 4,251 4,184
------- ------- -------
LONG-TERM DEBT.............................................. 459 373 376
------- ------- -------
DEFERRED TAX LIABILITIES.................................... 33 17 4
------- ------- -------
OTHER LONG-TERM OBLIGATIONS................................. 1,183 1,138 1,075
------- ------- -------
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY:
Common stock, $10 par value; 5,000 shares authorized, 950
shares issued and outstanding in 1995, 1996, and
1997................................................... 9 9 9
Retained earnings......................................... 6,348 7,339 8,005
------- ------- -------
6,357 7,348 8,014
Treasury stock, 50 shares................................. (179) (179) (179)
------- ------- -------
Total shareholders' equity........................ 6,178 7,169 7,835
------- ------- -------
Total liabilities and shareholders' equity........ $10,884 $12,948 $13,474
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-34
<PAGE> 82
B & J INDUSTRIAL SUPPLY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX-MONTH
PERIOD ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------- ------------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES................................ $22,108 $25,377 $29,083 $13,336 $16,767
COST OF SALES............................ 16,186 18,731 21,625 9,887 12,436
------- ------- ------- ------- -------
Gross profit........................... 5,922 6,646 7,458 3,449 4,331
SELLING, GENERAL, AND ADMINISTRATIVE
EXPENSES............................... 5,175 5,631 6,058 2,891 3,294
------- ------- ------- ------- -------
Income from operations................. 747 1,015 1,400 558 1,037
INTEREST EXPENSE......................... (113) (129) (213) (101) (156)
INTEREST INCOME.......................... 36 56 73 28 85
OTHER INCOME (EXPENSE)................... (31) 68 171 215 57
------- ------- ------- ------- -------
INCOME BEFORE INCOME TAXES............... 639 1,010 1,431 700 1,023
PROVISION FOR INCOME TAXES............... 229 323 440 238 357
------- ------- ------- ------- -------
NET INCOME............................... $ 410 $ 687 $ 991 $ 462 $ 666
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-35
<PAGE> 83
B & J INDUSTRIAL SUPPLY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
--------------- RETAINED TREASURY
SHARES AMOUNT EARNINGS STOCK TOTAL
------ ------ -------- -------- ------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993............................ 950 $9 $5,251 $(179) $5,081
Net income.......................................... 0 0 410 0 410
--- -- ------ ----- ------
BALANCE, December 31, 1994............................ 950 9 5,661 (179) 5,491
Net income.......................................... 0 0 687 0 687
--- -- ------ ----- ------
BALANCE, December 31, 1995............................ 950 9 6,348 (179) 6,178
Net income.......................................... 0 0 991 0 991
--- -- ------ ----- ------
BALANCE, December 31, 1996............................ 950 9 7,339 (179) 7,169
Net income.......................................... 0 0 666 0 666
--- -- ------ ----- ------
BALANCE, June 30, 1997 (unaudited).................... 950 $9 $8,005 $(179) $7,835
=== == ====== ===== ======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-36
<PAGE> 84
B & J INDUSTRIAL SUPPLY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX-MONTH
PERIOD ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------- ----------------
1994 1995 1996 1996 1997
----- ------ ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................. $ 410 $ 687 $ 991 $ 462 $ 666
----- ------ ------- ------ ------
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation............................. 128 153 132 62 65
Loss (gain) on sale of assets............ 41 (11) (7) 0 6
Deferred taxes........................... 9 15 (99) (40) 79
Changes in operating assets and
liabilities:
Accounts receivable.................... 9 (721) (1,128) 103 367
Inventories............................ (179) (232) (559) (445) (214)
Prepaids and other assets.............. (167) 271 15 (9) (176)
Accounts payable, accrued liabilities,
and income taxes payable............ (214) 471 1,035 263 22
----- ------ ------- ------ ------
Total adjustments................... (373) (54) (611) (66) 149
----- ------ ------- ------ ------
Net cash provided by (used in)
operating activities.............. 37 633 380 396 815
----- ------ ------- ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment, net.... (239) (117) (51) (47) (35)
Cash surrender value of life insurance...... (47) (100) (67) 0 0
Change in short-term investments............ 192 (133) (34) (915) (24)
----- ------ ------- ------ ------
Net cash used in investing
activities........................ (94) (350) (152) (962) (59)
----- ------ ------- ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in line of credit... 255 320 177 58 (97)
Repayments of other long-term obligations... (93) (105) (118) (54) (59)
----- ------ ------- ------ ------
Net cash provided by (used in)
financing activities.............. 162 215 59 (4) (156)
----- ------ ------- ------ ------
NET CHANGE IN CASH AND CASH EQUIVALENTS....... 105 498 287 (562) 600
CASH AND CASH EQUIVALENTS, beginning of
period...................................... 517 622 1,120 1,120 1,407
----- ------ ------- ------ ------
CASH AND CASH EQUIVALENTS, end of period...... $ 622 $1,120 $ 1,407 $ 558 $2,007
===== ====== ======= ====== ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid............................... $ 200 $ 213 $ 214
===== ====== =======
Income taxes paid........................... $ 359 $ 121 $ 309
===== ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-37
<PAGE> 85
B & J INDUSTRIAL SUPPLY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995, AND 1996
1. DESCRIPTION OF THE BUSINESS
B & J Industrial Supply Company and subsidiaries (the "Company") is a
Washington wholesale industrial distribution company headquartered in Seattle,
Washington, with branch offices and warehouses in Spokane and Tacoma,
Washington, and the People's Republic of China. The Company is also an
authorized repair center for many of its suppliers and provides additional
services, such as band saw welding and rigging equipment assembly, to its
customers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
B & J Industrial Supply Company and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
CASH EQUIVALENTS
The Company considers all short-term investments with original maturities
of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE
An allowance for uncollectible accounts has been established based on the
Company's collection experience and an assessment of the collectibility of
specific accounts.
INVENTORIES
Inventories consist primarily of merchandise purchased for resale and are
stated at the lower of cost or market value. Cost is determined on an average
cost basis, and market is considered to be net realizable value. Inventories are
stated net of an allowance to adjust cost to net realizable value of $220,000 as
of December 31, 1995 and 1996.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, less accumulated depreciation.
Expenditures for repairs and maintenance are charged to expense as incurred.
Upon retirement or disposal of assets, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized as other income (expense) in the consolidated statements of income.
Depreciation is computed using the straight-line method over the following
estimated useful lives:
<TABLE>
<S> <C>
Buildings and improvements.................................. 40 years
Leasehold improvements...................................... Life of related lease
Furniture, fixtures, and equipment.......................... 5 - 10 years
Computer hardware and software.............................. 5 years
</TABLE>
OTHER ASSETS
Other assets as of December 31, 1995 and 1996 included the cash surrender
values of executive life insurance policies totaling $549,000 and $616,000,
respectively.
F-38
<PAGE> 86
B & J INDUSTRIAL SUPPLY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
SFAS No. 109 requires recognition of deferred tax assets and liabilities using
currently enacted tax rates.
REVENUE RECOGNITION
Revenue is recognized on sales of products at the time of shipment.
COST OF SALES
Cost of sales consists of the cost of materials purchased, offset by
rebates received from suppliers.
CONCENTRATION OF CREDIT RISK
The Company maintains its cash balances in one financial institution
located in Seattle, Washington. The balances are insured by the Federal Deposit
Insurance Company ("FDIC") up to $100,000. The Company believes that its credit
risk related to its exposure above the FDIC insurance limits is minimal.
The Company has a broad customer base representing many diverse industries
doing business in the Pacific Northwest and China. As of December 31, 1995 and
1996, no one customer represented 10% of the Company's accounts receivable or
sales. For the years ended December 31, 1994, 1995, and 1996, one supplier
represented approximately 10% of the Company's purchases.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of," effective for fiscal years beginning after December 15, 1995. The
adoption of this statement as of January 1, 1996 did not have a significant
impact on the Company's financial position or results of operations.
INTERIM UNAUDITED FINANCIAL INFORMATION
The consolidated financial statements as of June 30, 1997 and for the six
months ended June 30, 1996 and 1997 are unaudited; however, in the opinion of
management, all adjustments (consisting solely of normal recurring adjustments)
necessary for a fair presentation of the unaudited consolidated financial
statements for these interim periods have been included. The results of interim
periods are not necessarily indicative of the results to be obtained for a full
year.
F-39
<PAGE> 87
B & J INDUSTRIAL SUPPLY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1995 and
1996 (in thousands):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Land, building, and improvements............................ $ 817 $ 817
Leasehold improvements...................................... 435 435
Furniture, fixtures, and equipment.......................... 805 804
Computer hardware and software.............................. 445 464
------- -------
2,502 2,520
Less accumulated depreciation............................... (1,315) (1,406)
------- -------
Property and equipment, net....................... $ 1,187 $ 1,114
======= =======
</TABLE>
Depreciation expense totaled $128,000, $153,000, and $132,000 for the years
ended December 31, 1994, 1995, and 1996, respectively.
4. LINE OF CREDIT
The Company has a line of credit with Seattle First National Bank requiring
monthly payments of interest at the prime rate (8.25% at December 31, 1996). The
maximum available line of credit was $1,250,000 at December 31, 1995 and 1996.
The line of credit is secured by accounts receivable of the Company. The balance
outstanding under the line of credit was $900,000 and $1,077,000 at December 31,
1995 and 1996, respectively.
5. LONG-TERM DEBT AND OTHER LONG-TERM OBLIGATIONS
Long-term debt at December 31, 1995 and 1996 consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
8.31% note payable to Seattle First National Bank; due in
monthly installments of $7,632, including interest,
through March 1, 2001; secured by real estate............. $390 $326
10% note payable to former shareholder; due in monthly
installments of $2,379 through January 15, 2003........... 145 130
---- ----
Total long-term debt.............................. 535 456
Less current portion........................................ 76 83
---- ----
Total long-term debt, less current portion........ $459 $373
==== ====
</TABLE>
The Company has an obligation to a former director, bearing interest of 10%
per annum with monthly payments of $925 through January 15, 2003. As of December
31, 1995 and 1996, the amount due under this obligation was $56,000 and $50,000,
respectively.
The Company also has an obligation to a retired officer to provide monthly
payments of $10,000 over his remaining life or, in the event he predeceases his
spouse, over the life of the spouse. Payments under this obligation have been
discounted at a 10% annual interest rate. As of December 31, 1995 and 1996, the
amount accrued under this obligation was $1,169,000 and $1,133,000,
respectively.
F-40
<PAGE> 88
B & J INDUSTRIAL SUPPLY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Maturities of long-term debt and other obligations as of December 31, 1996
are as follows (in thousands):
<TABLE>
<S> <C>
1997........................................................ $128
1998........................................................ 140
1999........................................................ 152
2000........................................................ 165
2001........................................................ 107
Thereafter.................................................. 947
</TABLE>
6. INCOME TAXES
The provision for income taxes includes income taxes deferred because of
temporary differences between financial statement and tax bases of assets and
liabilities and consisted of the following for the years ended December 31,
1994, 1995, and 1996:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Current..................................................... $219 $312 $532
Deferred.................................................... 10 11 (92)
---- ---- ----
Total provision............................................. $229 $323 $440
==== ==== ====
</TABLE>
The provision for income taxes for the years ended December 31, 1994, 1995,
and 1996 differs from the amount computed by applying the statutory rate of 34%
due to the following:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Tax at federal statutory rate............................... $217 $347 $480
Nondeductible expenses...................................... 69 41 29
Tax-exempt interest income.................................. (7) (10) (10)
Pension benefits paid....................................... (11) (12) (12)
Cash surrender value of life insurance...................... (34) (34) (23)
Other....................................................... (5) (9) (24)
---- ---- ----
Provision for income taxes.................................. $229 $323 $440
==== ==== ====
</TABLE>
F-41
<PAGE> 89
B & J INDUSTRIAL SUPPLY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred taxes are recorded based on differences between the financial
statement and tax bases of assets and liabilities. Temporary differences which
give rise to a significant portion of deferred tax assets and liabilities at
December 31, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
------ -----
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts........................... $ 39 $ 42
Accrued employee benefits................................. 144 153
Capitalized inventory costs............................... 91 83
Inventory allowance....................................... 75 75
----- ----
349 353
----- ----
Deferred tax liabilities:
Book over tax depreciation................................ (33) (17)
Prepaid insurance......................................... (34) (29)
Other..................................................... (68) 0
----- ----
(135) (46)
----- ----
Net deferred tax assets........................... $ 214 $307
===== ====
</TABLE>
7. EMPLOYEE BENEFIT PLANS
Beginning January 1, 1989, the Company established a 401(k) savings plan
(the "Plan") for the Company's nonunion employees under which the participants
may contribute up to 10% of their compensation. Employees over age 21 with more
than one year of service who are not covered by a union plan are eligible for
participation in the Plan. During 1994, 1995, and 1996, the Company made
contributions to the Plan equivalent to 5% of eligible participants' salaries.
The Company's contributions totaled $105,000, $101,000, and $149,000 during
1994, 1995, and 1996, respectively.
8. RELATED-PARTY TRANSACTIONS
The Company leases its Spokane facility from a company owned by four
current and former shareholders of the Company under an operating lease that
expires November 30, 2002. Minimum annual lease payments are $82,000 and are
subject to increases at five-year intervals, based on increases in the consumer
price index. Rental expense recognized under this lease was $82,000 for each of
the years ended December 31, 1994, 1995, and 1996.
The Company has entered into contracts with two former officers and a
former director to provide certain future retirement-related payments (Note 5).
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
In addition to the facility lease discussed in Note 8, the Company leases a
warehouse and office facility in Seattle under an operating lease that expires
in December 1998. The Company subleases certain of its properties under
operating leases that expire October 31, 1997. Management expects that in the
normal course of business, leases that expire will be renewed or replaced by
other leases.
F-42
<PAGE> 90
B & J INDUSTRIAL SUPPLY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The minimum future rental payments, net of sublease revenues, under all
leases as of December 31, 1996 were as follows (in thousands):
<TABLE>
<S> <C>
1997........................................................ $242
1998........................................................ 243
1999........................................................ 82
2000........................................................ 82
2001........................................................ 82
2002 and thereafter......................................... 75
</TABLE>
During the years ended December 31, 1994, 1995, and 1996, rental expense
under operating leases totaled $232,000, $232,000, and $254,000, respectively.
During the years ended December 31, 1994, 1995, and 1996, rental income related
to subleases was approximately $20,000, $23,000, and $20,000, respectively.
UNION CONTRACTS
The Company has labor contracts with two unions. Union employees are
covered by union-sponsored pension plans in accordance with the applicable labor
agreement. Under the terms of the Multiple Employers Pension Act of 1980,
employers under such plans are liable for the unfunded portion of said plans.
While a liability may exist, the amount is indeterminable at this time. The
amount becomes determinable upon withdrawal from said plan. In the opinion of
management, any such liability to the Company for the unfunded portion of said
plans will not have a material adverse effect on future results from operations.
LITIGATION
The Company is subject to various claims and legal actions which arise in
the ordinary course of business. In the opinion of management, the ultimate
resolution of such matters will be adequately covered by insurance or will not
have a material adverse effect on the Company's financial position or results of
operations.
F-43
<PAGE> 91
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cramer Industrial Supplies, Inc.
We have audited the accompanying consolidated balance sheet of CRAMER
INDUSTRIAL SUPPLIES, INC. (a New York corporation) AND SUBSIDIARY as of December
31, 1996 and the related consolidated statements of operations, stockholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cramer Industrial Supplies,
Inc. and subsidiary as of December 31, 1996 and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
June 20, 1997
F-44
<PAGE> 92
CRAMER INDUSTRIAL SUPPLIES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 17 $ 77
Accounts receivable, net of allowance for doubtful
accounts of $115 and $128 in 1996 and 1997............. 1,083 1,261
Inventories, net.......................................... 1,419 1,505
Prepaid expenses.......................................... 40 43
------ ------
Total current assets.............................. 2,559 2,886
------ ------
PROPERTY AND EQUIPMENT:
Land, building, and improvements.......................... 565 565
Furniture and fixtures.................................... 174 175
Machinery and equipment................................... 600 617
------ ------
1,339 1,357
Less accumulated depreciation............................. (818) (873)
------ ------
NET PROPERTY AND EQUIPMENT.................................. 521 484
DEPOSITS AND OTHER ASSETS................................... 16 82
------ ------
Total assets...................................... $3,096 $3,452
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit............................................ $1,273 $1,307
Current portion of long-term debt and capital lease
obligations............................................ 40 40
Accounts payable.......................................... 1,029 1,376
Accrued expenses.......................................... 177 69
------ ------
Total current liabilities......................... 2,519 2,792
------ ------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS................ 200 184
------ ------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Common stock, $1 par value; 20,000 shares authorized,
2,412 and 2,567 shares issued and outstanding in 1996
and 1997............................................... 2 3
Additional paid-in capital................................ 1,235 1,298
Accumulated deficit....................................... (860) (825)
------ ------
Total stockholders' equity........................ 377 476
------ ------
Total liabilities and stockholders' equity........ $3,096 $3,452
====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-45
<PAGE> 93
CRAMER INDUSTRIAL SUPPLIES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX-MONTH
PERIODS ENDED
JUNE 30,
---------------
1996 1996 1997
------- ------ ------
(UNAUDITED)
<S> <C> <C> <C>
NET SALES................................................... $11,467 $5,927 $5,903
COST OF SALES............................................... 9,294 4,699 4,633
------- ------ ------
Gross profit...................................... 2,173 1,228 1,270
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES............... 2,159 1,145 1,143
------- ------ ------
Income from operations............................ 14 83 127
INTEREST EXPENSE............................................ (173) (88) (81)
OTHER INCOME (EXPENSE)...................................... 0 0 (11)
------- ------ ------
(LOSS) INCOME BEFORE INCOME TAXES........................... (159) (5) 35
PROVISION FOR INCOME TAXES.................................. 0 0 0
------- ------ ------
NET (LOSS) INCOME........................................... $ (159) $ (5) $ 35
======= ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-46
<PAGE> 94
CRAMER INDUSTRIAL SUPPLIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995.................. 2,412 $2 $1,235 $(701) $ 536
Net loss.................................... 0 0 0 (159) (159)
----- -- ------ ----- -----
BALANCE AT DECEMBER 31, 1996.................. 2,412 2 1,235 (860) 377
Issuance of common stock.................... 155 1 63 0 64
Net income.................................. 0 0 0 35 35
----- -- ------ ----- -----
BALANCE AT JUNE 30, 1997 (unaudited).......... 2,567 $3 $1,298 $(825) $ 476
===== == ====== ===== =====
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-47
<PAGE> 95
CRAMER INDUSTRIAL SUPPLIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR SIX-MONTH
ENDED PERIOD ENDED
DECEMBER 31, JUNE 30,
------------ --------------
1996 1996 1997
------------ ----- -----
(UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income......................................... $(159) $ (5) $ 35
----- ----- -----
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization.......................... 92 49 55
Non cash compensation charge........................... 0 0 64
Change in assets and liabilities:
Accounts receivable, net............................. (14) (286) (178)
Inventory, net....................................... (129) 24 (86)
Prepaid expenses..................................... 21 (41) (3)
Other assets......................................... 0 0 (66)
Accounts payable..................................... 243 475 347
Accrued expenses..................................... (77) (128) (108)
----- ----- -----
Total adjustments................................. 136 93 25
----- ----- -----
Net cash (used in) provided by operating
activities...................................... (23) 88 60
----- ----- -----
INVESTING ACTIVITIES:
Capital expenditures...................................... (138) (59) (18)
FINANCING ACTIVITIES:
Net proceeds under line of credit agreement............... 153 103 34
Net issue (repayment) of debt and capital lease
obligations............................................ 3 (27) (16)
----- ----- -----
Net cash provided by financing activities......... 156 76 18
----- ----- -----
NET CHANGE IN CASH.......................................... (5) 105 60
CASH AT BEGINNING OF PERIOD................................. 22 22 17
----- ----- -----
CASH AT END OF PERIOD....................................... $ 17 $ 127 $ 77
===== ===== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid............................................. $ 184
=====
Noncash financing to purchase assets...................... $ 66
=====
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-48
<PAGE> 96
CRAMER INDUSTRIAL SUPPLIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. DESCRIPTION OF BUSINESS
Cramer Industrial Supplies, Inc. and subsidiary (the "Company") is a New
York wholesale industrial distribution company located in Tonawanda, New York.
There are no other significant business segments in which the Company operates.
The Company sells primarily to customers in the Western New York area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Cramer Industrial Supplies, Inc. and its majority-owned (99%) subsidiary, Fast
Tool, LLC ("Fast Tool"). All material intercompany accounts, transactions, and
profits have been eliminated in consolidation.
ACCOUNTS RECEIVABLE
An allowance for doubtful accounts has been established based on the
Company's collection experience and an assessment of the collectibility of
specific accounts.
INVENTORIES
Inventories consist primarily of merchandise purchased for resale and are
stated at the lower of cost or market value. Cost of Cramer Industrial Supplies,
Inc. ("Cramer") inventory (89% of total inventory) is determined by the last-in,
first-out ("LIFO") method. The inventory of Fast Tool (11% of total inventory)
is determined by the first-in, first-out ("FIFO") method. If LIFO inventories
were valued at current costs, the inventory amount would have been $95,000
higher than that reported at December 31, 1996.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, less accumulated depreciation.
Expenditures for repairs and maintenance not considered to substantially
lengthen the asset lives are charged to expense as incurred. Upon retirement or
disposal of assets, the cost and related accumulated depreciation are removed
from the accounts and any resulting gain or loss is recognized as other income
(expense) in the statements of operations. Depreciation is computed using
straight-line or accelerated methods over the following estimated useful lives:
<TABLE>
<S> <C>
Buildings and improvements......................... 20 years -- straight line
5 to 8
Furniture and fixtures............................. years -- accelerated
5 to 8
Machinery and equipment............................ years -- accelerated
</TABLE>
INCOME TAXES
The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
SFAS No. 109 requires recognition of deferred tax assets and liabilities using
currently enacted tax rates.
REVENUE RECOGNITION
Revenue is recognized on sales of products at the time of shipment.
F-49
<PAGE> 97
CRAMER INDUSTRIAL SUPPLIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COST OF SALES
Cost of sales consists of the cost of materials purchased, offset by
discounts and rebates received from suppliers.
CONCENTRATION OF CREDIT RISK
The Company has a broad customer base representing many diverse industries
doing business in the Western New York area. For the year ended December 31,
1996, one customer represented 10% of the Company's sales and ten customers
represented 50% of the Company's sales. No one supplier represented 10% of the
Company's purchases.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of," effective for fiscal years beginning after December 15, 1995. The
adoption of this statement as of January 1, 1996 did not have a significant
impact on the Company's financial position or results of operations.
INTERIM UNAUDITED FINANCIAL INFORMATION
The consolidated financial statements as of June 30, 1997 and for the six
months ended June 30, 1996 and 1997 are unaudited; however, in the opinion of
management, all adjustments (consisting solely of normal recurring adjustments)
necessary for a fair presentation of the unaudited consolidated financial
statements for these interim periods have been included. The results of interim
periods are not necessarily indicative of the results to be obtained for a full
year.
3. LINE OF CREDIT
The Company has a line of credit with a bank requiring monthly payments of
interest at the prime rate plus 2% (10.25% at December 31, 1996). The Company is
allowed to borrow up to 80% of qualified accounts receivable and 40% of
merchandise inventory up to $1.5 million. The maximum available line of credit
was $1,273,000 at December 31, 1996. The line of credit is secured by inventory
and accounts receivable of the Company. The balance outstanding under the line
of credit was $1,273,000 at December 31, 1996.
F-50
<PAGE> 98
CRAMER INDUSTRIAL SUPPLIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consists of the following at
December 31, 1996 (in thousands):
<TABLE>
<S> <C>
Mortgage payable in monthly installments of $1,944 through
November 1999 plus interest at prime plus 2% (10.25% at
December 31, 1996); secured by the commercial property and
a security interest in the building and fixtures, with a
combined net book value of approximately $335,000 at
December 31, 1996, and a limited guarantee of a
stockholder............................................... $181
Capital lease obligations on equipment; maturing September
1998; bearing interest at approximately 10%; with monthly
principal and interest payments of $2,321................. 59
----
240
Less current portion........................................ 40
----
Long term portion........................................... $200
====
</TABLE>
Minimum payments due subsequent to December 31, 1996 are as follows (in
thousands):
<TABLE>
<S> <C>
1997........................................................ $ 40
1998........................................................ 40
1999........................................................ 143
2000........................................................ 12
2001........................................................ 5
----
$240
====
</TABLE>
5. INCOME TAXES
The income tax provision (benefit) for the year ended December 31, 1996
includes income taxes deferred because of temporary differences between
financial statement and tax bases of assets and liabilities and differs from the
amount computed by applying the federal statutory rate of 34% due to the
following (in thousands):
<TABLE>
<S> <C>
Tax at federal statutory rate............................... $(54)
State income taxes, net of federal.......................... (6)
Nondeductible expenses...................................... 8
Other....................................................... 5
Change in valuation allowance............................... 47
----
Provision for income taxes.................................. $ 0
====
</TABLE>
Deferred taxes are recorded based on differences between the financial
statement and tax bases of assets and liabilities. Temporary differences which
give rise to a significant portion of deferred tax assets and liabilities at
December 31, 1996 are as follows (in thousands):
<TABLE>
<S> <C>
Deferred tax assets:
Allowance for doubtful accounts........................... $ 46
Net operating loss carryforwards.......................... 244
Inventory................................................. 58
-----
348
Valuation allowance......................................... (348)
-----
Net deferred tax assets........................... $ 0
=====
</TABLE>
F-51
<PAGE> 99
CRAMER INDUSTRIAL SUPPLIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has net operating loss carryforwards for federal income tax
purposes of approximately $600,000 as of December 31, 1996, which expire in 2008
through 2010. The loss carryforwards were used to offset fiscal 1996 taxable
income. The available deferred tax asset of $348,000 at December 31, 1996 has
been completely offset with a valuation allowance, since ultimate realization of
these benefits is uncertain.
6. RETIREMENT PLANS
The Company maintains a deferred compensation plan for virtually all
employees under Section 401(k) of the Internal Revenue Code. Under terms of the
plan, participants may elect to contribute up to 15% of their defined
compensation. In addition, the Company will contribute 25% of each respective
participant's contributions up to a maximum of 5% of defined compensation. Total
contributions to the plan were approximately $11,000 in 1996.
In addition, the Company maintains a defined contribution, discretionary
profit-sharing plan for all employees. No contributions have been made to the
plan for 1996.
7. RELATED PARTY TRANSACTIONS
The president of the Company has a loan from the Company. The loan was for
$10,500 on December 31, 1996.
Cramer and its 99% subsidiary, Fast Tool, sell a limited amount of
inventory between themselves. This inventory is sold at or near cost.
Intercompany profit is eliminated during consolidation.
8. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases various vehicles from lessors under operating leases
that expire over time through August 1999. Management expects that in the normal
course of business, leases that expire will be renewed or replaced by other
leases.
The minimum future rental payments, under operating leases as of December
31, 1996 were as follows (in thousands):
<TABLE>
<S> <C>
1997........................................................ $39
1998........................................................ 24
1999........................................................ 9
</TABLE>
During the year ended December 31, 1996 rental expense under operating
leases totaled $41,000.
LITIGATION
The Company has been named a third party defendant along with a previous
owner of Fast Tool Supply in a lawsuit filed by another previous owner of Fast
Tool Supply. The Company began purchasing inventory from Fast Tool Supply in
1995. Management will vigorously defend all claims and does not believe that the
results of the lawsuit will have a material adverse effect on the on the
Company's financial position or results of operations.
The Company is subject to various claims and legal actions which arise in
the ordinary course of business. In the opinion of management, the ultimate
resolution of such matters will be adequately covered by insurance or will not
have a material adverse effect on the Company's financial position or results of
operations.
F-52
<PAGE> 100
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Shearer Industrial Supply Co.:
We have audited the accompanying consolidated balance sheets of SHEARER
INDUSTRIAL SUPPLY CO. AND SUBSIDIARIES as of December 31, 1995 and 1996 and the
related consolidated statements of earnings, stockholder's equity, and cash
flows for the three years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these 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 balance sheets referred to above present
fairly, in all material respects, the consolidated financial position of Shearer
Industrial Supply Co. and Subsidiaries as of December 31, 1995 and 1996, and the
results of their operations and their cash flows for the three years in the
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
/s/ MILLER & CO. LLP
York, Pennsylvania
February 21, 1997
F-53
<PAGE> 101
SHEARER INDUSTRIAL SUPPLY CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- JUNE 30,
1995 1996 1997
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Accounts receivable, less allowance for doubtful accounts
of $0, $0, and $23 in 1995, 1996, and 1997,
respectively........................................... $4,008 $5,311 $4,979
Accounts receivable -- affiliates......................... 8 10 12
Life insurance receivable................................. 77 0 0
Inventories............................................... 3,818 3,515 3,136
Prepaid expenses.......................................... 50 57 289
------ ------ ------
Total current assets.............................. 7,961 8,893 8,416
------ ------ ------
EQUIPMENT AND IMPROVEMENTS
Trucks and automobiles.................................... 403 453 450
Office equipment.......................................... 479 479 479
Store and warehouse equipment............................. 376 376 376
Leasehold improvements.................................... 306 306 306
------ ------ ------
1,564 1,614 1,611
Less accumulated depreciation and amortization............ (839) (1,004) (1,054)
------ ------ ------
Total equipment and improvements, net............. 725 610 557
------ ------ ------
OTHER ASSETS
Cash surrender value of life insurance.................... 105 121 125
Goodwill.................................................. 111 89 78
Investments............................................... 142 149 149
Investments -- other...................................... 27 26 27
------ ------ ------
Total other assets................................ 385 385 379
------ ------ ------
Total assets...................................... $9,071 $9,888 $9,352
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-54
<PAGE> 102
SHEARER INDUSTRIAL SUPPLY CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 30,
1995 1996 1997
------ ------- ------------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Cash overdraft............................................ $ 214 $ 797 $ 768
Line of credit............................................ 3,618 3,296 2,311
Current maturities of notes payable....................... 229 127 117
Current maturities of obligations under capital leases.... 24 21 30
Accounts payable.......................................... 2,034 2,297 2,487
Other current liabilities................................. 499 592 601
------ ------- -------
Total current liabilities......................... 6,618 7,130 6,314
NOTES PAYABLE............................................... 827 726 676
OBLIGATIONS UNDER CAPITAL LEASES............................ 31 9 4
DEFERRED COMPENSATION....................................... 31 37 33
DEFERRED INCOME TAXES....................................... 47 52 52
------ ------- -------
Total liabilities................................. 7,554 7,954 7,079
------ ------- -------
COMMITMENTS AND CONTINGENCY
STOCKHOLDER'S EQUITY
Preferred stock -- voting (no par value; 5,000,000 shares
authorized; 17,500 shares issued; 258 shares
outstanding; $10 per share liquidation preference;
$1.40 noncumulative dividend).......................... 62 62 62
Common stock -- nonvoting (no par value; 5,000,000 shares
authorized; 9,500 shares issued; 2,375 shares
outstanding)........................................... 33 33 33
Retained earnings......................................... 1,934 2,347 2,686
Unrealized holding gains.................................. 83 87 87
------ ------- -------
2,112 2,529 2,868
Less treasury stock, at cost
(Preferred -- 17,242 shares)
(Common -- 7,125 shares)............................... 595 595 595
------ ------- -------
Total stockholder's equity........................ 1,517 1,934 2,273
------ ------- -------
Total liabilities and stockholder's equity........ $9,071 $ 9,888 $ 9,352
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-55
<PAGE> 103
SHEARER INDUSTRIAL SUPPLY CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX-MONTH PERIOD
DECEMBER 31, ENDED JUNE 30,
--------------------------- ---------------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES...................................... $32,689 $35,946 $44,184 $21,246 $23,110
COST OF SALES.................................. 25,385 28,222 34,165 16,769 18,291
------- ------- ------- ------- -------
Gross profit................................. 7,304 7,724 10,019 4,477 4,819
OPERATING EXPENSES............................. 1,967 1,900 2,297 1,420 1,393
SELLING EXPENSES............................... 4,885 5,350 6,788 2,684 2,820
------- ------- ------- ------- -------
Earnings from operations..................... 452 474 934 373 606
INTEREST EXPENSE............................... 317 328 437 223 182
OTHER EXPENSES................................. 314 216 266 145 201
OTHER INCOME................................... 446 550 501 386 342
------- ------- ------- ------- -------
Earnings before income taxes................. 267 480 732 391 565
INCOME TAXES................................... 131 179 319 156 226
------- ------- ------- ------- -------
Net earnings......................... $ 136 $ 301 $ 413 $ 235 $ 339
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-56
<PAGE> 104
SHEARER INDUSTRIAL SUPPLY CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED TOTAL
PREFERRED COMMON RETAINED HOLDING TREASURY STOCKHOLDER'S
STOCK STOCK EARNINGS GAINS STOCK EQUITY
--------- ------ -------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES -- DECEMBER 31, 1993......... $62 $33 $1,497 $ 0 $595 $ 997
Net earnings........................ 0 0 136 0 0 136
Unrealized holding gains (net of $53
of deferred income taxes)........ 0 0 0 76 0 76
--- --- ------ --- ---- ------
BALANCES -- DECEMBER 31, 1994......... 62 33 1,633 76 595 1,209
Net earnings........................ 0 0 301 0 0 301
Unrealized holding gains (net of $4
of deferred income taxes)........ 0 0 0 7 0 7
--- --- ------ --- ---- ------
BALANCES -- DECEMBER 31, 1995......... 62 33 1,934 83 595 1,517
Net earnings........................ 0 0 413 0 0 413
Unrealized holding gains (net of $3
of deferred income taxes)........ 0 0 0 4 0 4
--- --- ------ --- ---- ------
BALANCES -- DECEMBER 31, 1996......... 62 33 2,347 87 595 1,934
Net earnings........................ 0 0 339 0 0 339
--- --- ------ --- ---- ------
BALANCES -- JUNE 30, 1997
(unaudited)......................... $62 $33 $2,686 $87 $595 $2,273
=== === ====== === ==== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-57
<PAGE> 105
SHEARER INDUSTRIAL SUPPLY CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX-MONTH PERIOD
DECEMBER 31, ENDED JUNE 30,
------------------------- -----------------
1994 1995 1996 1996 1997
----- ------- ------- -------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED
BY (USED IN) OPERATING ACTIVITIES:
Net earnings...................................... $ 136 $ 301 $ 413 $ 235 $ 339
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization.................. 103 106 168 76 50
Amortization of goodwill....................... 9 0 22 11 11
Bad debts...................................... 131 22 30 0 23
Increase in cash surrender value of life
insurance.................................... (11) (18) (16) (2) (4)
Change in LIFO reserve......................... 26 67 44 0 0
Deferred income taxes.......................... 28 9 2 3 0
(Increase) decrease in assets:
Accounts receivable.......................... (943) 38 (1,333) (1,534) (309)
Accounts receivable -- affiliates............ 26 0 (2) 3 (2)
Life insurance receivable.................... 0 (65) 77 77 0
Inventories.................................. 97 (172) 259 126 379
Prepaid expenses............................. 51 (13) (7) 2 (237)
Increase (decrease) in liabilities:
Accounts payable............................. 266 94 263 463 190
Other current liabilities and deferred
compensation.............................. 207 (56) 99 (245) 9
----- ------- ------- ------- -----
Net cash provided by (used in) operating
activities................................ 126 313 19 (785) 1,067
----- ------- ------- ------- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net......................... (124) (47) (53) (10) 3
Repayment of note receivable...................... 0 38 0 0 0
Cash paid to acquire certain net assets........... 0 (1,407) 0 0 0
----- ------- ------- ------- -----
Net cash used in investing activities..... (124) (1,416) (53) (10) 3
----- ------- ------- ------- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in line of credit...................... (123) 1,307 (322) (108) (985)
Proceeds from notes payable....................... 44 100 27 0 0
Principal repayments of notes payable............. (131) (151) (230) (199) (60)
Principal (repayments) borrowings of obligations
under capital leases........................... (7) (5) (24) (55) 4
----- ------- ------- ------- -----
Net cash (used in) provided by financing
activities.............................. (217) 1,251 (549) (362) (1,041)
----- ------- ------- ------- -----
Net (decrease) increase in cash........... (215) 148 (583) (1,157) 29
CASH OVERDRAFT -- BEGINNING......................... (147) (362) (214) (214) (797)
----- ------- ------- ------- -----
CASH OVERDRAFT -- ENDING............................ $(362) $ (214) $ (797) $(1,371) $(768)
===== ======= ======= ======= =====
</TABLE>
The accompanying notes are an integral part of these statements.
F-58
<PAGE> 106
SHEARER INDUSTRIAL SUPPLY CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(IN THOUSANDS)
SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
IN 1994:
The Company reclassified $38,038 of a related party notes receivable, which
had been previously netted against notes payable, to notes receivable.
The Company recorded unrealized holding gains of $129,211, net of related
deferred income taxes of $53,000 on available-for-sale securities as a direct
increase to equity.
IN 1995:
The Company recorded unrealized holding gains of $11,306 on
available-for-sale securities, less related deferred income taxes of $4,000, as
a direct increase to equity.
The Company's subsidiary, Wm. H. Taylor & Co., Inc. incurred a note payable
of $75,000 for the purchase of goodwill.
The Company's subsidiary, Turner Industries, Inc., purchased the operations
and certain net assets of three companies for $1,406,850. In conjunction with
this acquisition, liabilities were assumed as follows:
<TABLE>
<CAPTION>
LIABILITIES
ASSUMED
--------------
(IN THOUSANDS)
<S> <C>
Fair value of assets acquired............................... $ 1,473
Cash paid for certain net assets............................ (1,407)
-------
$ 66
=======
</TABLE>
IN 1996:
The Company recorded unrealized holding gains of $6,584 on
available-for-sale securities, less related deferred income taxes of $3,000, as
a direct increase to equity.
F-59
<PAGE> 107
SHEARER INDUSTRIAL SUPPLY CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995, AND 1996
1. NATURE OF OPERATIONS
The Company and its subsidiaries are primarily distributors of general line
industrial products with customers located in the Mid-Atlantic states.
2. ESTIMATES AND SUMMARY OF ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and the
disclosure of contingent assets and liabilities, if any, at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Shearer
Industrial Supply Co. (the "Company") and its wholly owned subsidiaries,
Wm. H. Taylor & Co., Inc., and Turner Industries, Inc., all of which are
Pennsylvania corporations. All significant intercompany balances and
transactions are eliminated in consolidation.
ACCOUNTS RECEIVABLE
The Companies consider accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required. If amounts
become uncollectible, they will be charged to operations when that
determination is made.
INVENTORIES
Inventories are determined primarily from perpetual records.
Inventories owned by the Company are stated at cost using the last-in,
first-out ("LIFO") method. Inventories owned by the Company's subsidiaries
are stated at the lower of average cost or market.
EQUIPMENT AND IMPROVEMENTS
Equipment and improvements are stated at cost and depreciated or
amortized using the straight-line and accelerated methods over their
estimated average useful lives as follows: trucks and automobiles, 3 to 5
years; office equipment, 5 to 10 years; store and warehouse equipment, 5 to
7 years; and leasehold improvements, 31.5 to 39 years.
GOODWILL
Goodwill represents the excess of the purchase price over the fair
market value of net assets acquired. Goodwill is amortized using the
straight-line method over five years beginning January 1, 1996.
F-60
<PAGE> 108
SHEARER INDUSTRIAL SUPPLY CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INVESTMENTS
At the date of acquisition and each subsequent balance sheet date,
investments in debt and equity securities are classified into three
categories and accounted for as follows:
1. Debt securities that management has the positive intent and
ability to hold to maturity are classified as held-to-maturity
securities and stated at amortized cost.
2. Debt securities and equity securities having a readily
determinable fair value that are acquired and held principally for the
purpose of selling and benefiting from short-term price fluctuations are
classified as trading securities and stated at fair value. Unrealized
gains and losses are included in operating results.
3. Debt securities and equity securities having a readily
determinable fair value and not classified as held-to-maturity or
trading securities are classified as available-for-sale securities and
stated at fair value. Unrealized gains and losses are excluded from
operating results and are reported, net of tax, as a separate component
of equity.
Realized gains and losses, if any, on the sale or disposal of
investments are computed on a specific identification basis.
INVESTMENTS -- OTHER
Investments -- other represent investments in equity securities and
are stated at the lower of aggregate cost or estimated market value because
no readily determinable fair value is available.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
INCOME TAXES
Income taxes are provided for the tax effects of transactions reported
in the financial statements and consist of taxes currently due plus
deferred taxes. Deferred taxes relate to differences between the bases of
inventories, equipment and improvements, goodwill, investments, and
deferred compensation for financial and income tax reporting. Collectively,
these differences are referred to as temporary differences. Deferred tax
assets and liabilities represent the future tax return consequences of
those differences, which will either be taxable or deductible when the
temporary differences reverse, or when the underlying assets and
liabilities are recovered or settled.
INTERIM UNAUDITED FINANCIAL INFORMATION
The consolidated financial statements as of June 30, 1997 and for the
six months ended June 30, 1996 and 1997 are unaudited; however, in the
opinion of management, all adjustments (consisting solely of normal
recurring adjustments) necessary for a fair presentation of the unaudited
consolidated financial statements for these interim periods have been
included. The results of interim periods are not necessarily indicative of
the results to be obtained for a full year.
F-61
<PAGE> 109
SHEARER INDUSTRIAL SUPPLY CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVENTORIES
Inventories consist of the following as of December 31 (in thousands):
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Inventories owned by Shearer Industrial Supply Co. (at FIFO
costs).................................................... $2,968 $3,317
Less LIFO reserve........................................... 1,102 1,146
------ ------
Inventories owned by Shearer Industrial Supply Co. (at LIFO
costs).................................................... 1,866 2,171
Inventories owned by Wm. H. Taylor & Co., Inc. (at average
costs).................................................... 849 762
Inventories owned by Turner Industries, Inc................. 1,103 582
------ ------
$3,818 $3,515
====== ======
</TABLE>
The LIFO reserve increased by $25,565 in 1994, which caused gross profit to
decrease by $25,565. The LIFO reserve increased by $67,064 in 1995, which caused
gross profit to decrease by $67,064. The LIFO reserve increased $43,806 in 1996,
which caused gross profit to decrease by $43,806.
4. CASH SURRENDER VALUE OF LIFE INSURANCE
The Company is the owner and beneficiary of several life insurance policies
on the lives of its officers and former officers having an aggregate face value
of $2,936,000. As of December 31, 1995 and 1996, the cash surrender value is
stated net of policy loans totaling $41,304 and $40,304, respectively.
Wm. H. Taylor & Co., Inc. is the owner and beneficiary of life insurance
policies having an aggregate face value of $462,600. As of December 31, 1995 and
1996, the cash surrender value is stated net of policy loans totaling $198,544.
5. GOODWILL
Goodwill consists of the following as of December 31 (in thousands):
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Cost........................................................ $111 $111
Less accumulated amortization..................... 0 22
---- ----
$111 $ 89
==== ====
</TABLE>
6. INVESTMENTS
The cost, gross unrealized gains and losses, and fair value of
available-for-sale securities consist of the following as of December 31 (in
thousands):
<TABLE>
<CAPTION>
GROSS
UNREALIZED
-------------- FAIR
AVAILABLE-FOR-SALE COST GAINS LOSSES VALUE
- ------------------ ---- ----- ------ -----
<S> <C> <C> <C> <C>
1995:
Equity securities........................................... $2 $140 $0 $142
== ==== == ====
1996:
Equity securities........................................... $2 $147 $0 $149
== ==== == ====
</TABLE>
F-62
<PAGE> 110
SHEARER INDUSTRIAL SUPPLY CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Unrealized holding gains on available-for-sale securities included as a
separate component of equity consist of the following as of and for the years
ended December 31 (in thousands):
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Unrealized holding gains -- beginning (net of cumulative
deferred taxes of $53 and $57, respectively).............. $76 $84
Net unrealized holding gains................................ 11 6
Deferred income tax effect.................................. (4) (3)
--- ---
Unrealized holding gains -- ending (net of cumulative
deferred taxes of $57 and $60, respectively).............. $83 $87
=== ===
</TABLE>
7. INVESTMENTS -- OTHER
The Company's subsidiary, Turner Industries, Inc., owns shares of stock in
ServiStar as follows as of December 31 (in thousands):
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
8 shares of common stock.................................... $ 1 $ 1
521 shares of preferred stock............................... 26 25
--- ---
$27 $26
=== ===
</TABLE>
Cost is estimated to equal market value.
8. CASH OVERDRAFT
The cash overdraft represents net outstanding checks which have not been
presented to the bank for payment as of December 31, 1995 and 1996. Under the
Companies' cash management arrangement, as checks and deposits are presented to
the bank, they will be applied to the line of credit outstanding balance.
9. LINES OF CREDIT
The Company and its subsidiaries have an authorized $4,500,000 line of
credit with CoreStates Hamilton Bank. The line of credit is subject to a
borrowing base formula. The first $1,315,850 of borrowings on the line of credit
bear interest at the bank's prime rate, or 8.25% as of December 31, 1996.
Advances above $1,315,850 bear interest at the lower of the bank's prime rate or
the bank's money market loan rate, or 8.25% as of December 31, 1996. Total
borrowings outstanding as of December 31, 1995 and 1996 amounted to $3,295,850
and $3,617,850, respectively.
Additionally, in 1996 CoreStates Hamilton Bank has extended the Company an
additional authorized $500,000 line of credit. Borrowings bear interest at the
lower of the bank's prime rate or the bank's money market loan rate. There were
no borrowings against the additional line of credit as of December 31, 1996.
Both lines of credit are collateralized by the Company's assets. The lines
of credit, if not renewed by the bank, expire May 31, 1997. The lines of credit
agreements require the Companies to maintain certain financial covenants. The
agreements also require the Companies to obtain the bank's approval prior to
incurring any other indebtedness, excluding normal trade debt. The agreements
also contain certain other restrictive covenants.
F-63
<PAGE> 111
SHEARER INDUSTRIAL SUPPLY CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. NOTES PAYABLE
Notes payable consist of the following as of December 31, 1995 and 1996 (in
thousands):
<TABLE>
<CAPTION>
1995 1996
------ ----
<S> <C> <C>
Uncollateralized notes payable to former stockholders of Wm.
H. Taylor & Co., Inc.; originating from the purchase of
treasury stock; interest at 7% to 10.4%; payable in
varying installments...................................... $ 392 $369
Uncollateralized notes payable to former stockholders of the
Company; originating from the 1991 purchases of treasury
stock; interest at 8% to 9%; payable in varying
installments.............................................. 401 364
Uncollateralized noninterest bearing note payable to Air
Compressor Services, Inc.; originating from the purchase
of goodwill; payable in equal monthly principal
installments of $2,083; interest at 0%, beginning November
12, 1996; the effect of unrecorded imputed interest is
insignificant............................................. 75 71
Note payable to Navistar Financial; payable in equal monthly
principal and interest installments of $859; interest at
8.75%; collateralized by a truck.......................... 0 25
Note payable to CoreStates Hamilton Bank; payable in equal
monthly principal and interest installments of $1,382;
interest at 8.15%; collateralized by accounts receivable;
inventories and certain equipment......................... 27 12
Note payable to CoreStates Hamilton Bank; payable in equal
monthly principal and interest installments of $480;
interest at 10.65%........................................ 16 11
Note payable to CoreStates Hamilton Bank; payable in equal
monthly principal and interest installments of $673;
interest at 6.15%; collateralized by a truck.............. 8 1
Uncollateralized demand note payable to a related party;
interest at prime less 1%; repaid during 1996............. 100 0
Note payable to Phoenixcor, Inc.; payable in thirty monthly
principal and interest installments of $2,628, and then
thirty additional principal and interest installments of
$1,617; including interest at 11.88%; collateralized by
certain equipment owned by Turner Industries, Inc.; repaid
during 1996............................................... 17 0
Note payable to CoreStates Hamilton Bank; payable in equal
monthly principal and interest installments of $3,187;
interest at 6.5%; collateralized by accounts receivable
inventories and certain equipment; repaid during 1996..... 13 0
Note payable to Clarklift Services, Inc.; payable in equal
monthly principal and interest installments of $348;
interest at 10.74%; collateralized by a truck; repaid
during 1996............................................... 4 0
Note payable to Ford Credit Co.; payable in equal monthly
principal and interest installments of $454; interest at
9.5%; collateralized by a truck; repaid during 1996....... 3 0
------ ----
1,056 853
Less current maturities..................................... 229 127
------ ----
$ 827 $726
====== ====
</TABLE>
F-64
<PAGE> 112
SHEARER INDUSTRIAL SUPPLY CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Aggregate maturities of notes payable, assuming no change in current terms,
consist of the following for the five years ending December 31 (in thousands):
<TABLE>
<CAPTION>
AGGREGATE
MATURITIES
OF NOTES
PAYABLE
----------
<S> <C>
1997........................................................ 127
1998........................................................ 122
1999........................................................ 120
2000........................................................ 92
2001........................................................ 70
</TABLE>
11. OBLIGATIONS UNDER CAPITAL LEASES
The Company's subsidiary, Turner Industries, Inc. entered into a capital
lease agreement in order to finance the purchase of equipment. The lease term
was forty-eight months and required twenty-four payments of $750 and twenty-four
payments of $504, which included interest at 11.014%. The lease was repaid
during 1996.
During 1995, Turner Industries, Inc. also assumed a capital lease agreement
in order to finance the purchase of office equipment. The remaining lease term
is twenty-nine months and requires monthly payments of $1,938, which includes
interest at 8.75%.
Future minimum lease payments consist of the following for the remaining
two years ending December 31:
<TABLE>
<CAPTION>
FUTURE
MINIMUM
LEASE
PAYMENTS
--------
<S> <C>
1997........................................................ $23,253
1998........................................................ 9,689
-------
32,942
Less amount representing interest........................... 2,066
-------
30,876
Less current portion........................................ 21,396
-------
$ 9,480
=======
</TABLE>
The cost, accumulated amortization, net book value, and amortization
expense of the capital lease assets consist of the following as of and for the
years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Cost........................................................ $75 $76
Less accumulated amortization............................... 17 30
--- ---
$58 $46
=== ===
Amortization expense........................................ $ 4 $ 3 $12
=== === ===
</TABLE>
F-65
<PAGE> 113
SHEARER INDUSTRIAL SUPPLY CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Accrued interest............................................ $ 30 $ 16
Accrued payroll and commissions............................. 218 298
Deferred compensation....................................... 7 0
Accrued profit sharing...................................... 60 75
Payroll taxes withheld and accrued.......................... 25 15
Accrued expenses............................................ 34 33
Sales taxes payable......................................... 9 0
Accrued corporate taxes..................................... 116 155
---- ----
$499 $592
==== ====
</TABLE>
13. DEFERRED COMPENSATION AGREEMENTS
The Company's subsidiary, Wm. H. Taylor & Co., Inc., entered into deferred
compensation agreements with certain individuals. These agreements require the
payment of monthly amounts commencing with the retirement of these individuals.
The costs associated with these agreements are being accrued ratably over the
employment period of the individuals.
14. COMMITMENTS
The Company and its subsidiaries lease facilities and certain vehicles
under operating leases which have varying terms and monthly payments.
Future minimum lease payments consist of the following for each of the five
years ending December 31, 2001, and thereafter (in thousands):
<TABLE>
<CAPTION>
VEHICLES BUILDINGS TOTALS
-------- --------- ------
<S> <C> <C> <C>
1997........................................................ $152 $ 401 $ 553
1998........................................................ 79 255 334
1999........................................................ 24 174 198
2000........................................................ 0 151 151
2001........................................................ 0 165 165
Thereafter.................................................. 0 1,545 1,545
---- ------ ------
$255 $2,691 $2,946
==== ====== ======
</TABLE>
The Company also leases certain facilities on a year-to-year basis. Total
rent expense under operating leases for vehicles and buildings amounted to
$402,857, $427,204, and $593,264 for the years ended December 31, 1994, 1995,
and 1996, respectively.
During 1991, the Company entered into a noncompete agreement with its
former majority stockholder. The agreement, as amended, prohibits the former
stockholder from competing with the Company for a ten-year period. The $550,000
cost of the agreement is payable by the Company in monthly payments of $4,583.
Total noncompete agreement expense for the years ended December 31, 1994, 1995,
and 1996 was $55,000. The cost of the agreement is being expensed as paid over
the ten-year noncompete term. As of December 31, 1995 and 1996, future payments
required by the noncompete agreement amount to $293,333 and $238,333,
respectively.
F-66
<PAGE> 114
SHEARER INDUSTRIAL SUPPLY CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. CONTINGENCY
The Company self-insures its group health insurance coverage through an
insurance trust. The plan is administered through a third-party administrator
who approves all claims and draws checks from the trust to pay all claims. As
protection for substantial claims, the Company purchased stop-loss insurance,
therefore placing caps on specific and aggregate claims.
Approximate maximum exposure consists of the following as of December 31,
1996:
<TABLE>
<S> <C>
Specific loss (per person/per plan year).................... $ 30,000
Aggregate loss.............................................. 299,000
</TABLE>
No accrual has been made for incurred but unpaid claims as of December 31,
1995 and 1996, because it was determined that the insurance trust has sufficient
assets to provide for such claims. The assets of the insurance trust are not
included in the financial statements of the Company.
16. PROFIT SHARING PLAN
The Companies sponsor a combination profit sharing and 401(k) retirement
savings plan which covers substantially all of their employees. Contributions to
this plan are made at the sole discretion of management, and profit sharing
expense amounted to $55,000, $60,000, and $76,557 for the years ended December
31, 1994, 1995, and 1996, respectively.
17. INCOME TAXES
Income taxes consist of the following for the years ended December 31 (in
thousands):
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Current expense:
Federal................................................... $ 74 $140 $238
State..................................................... 29 30 79
---- ---- ----
103 170 317
Deferred expense............................................ 28 9 2
---- ---- ----
$131 $179 $319
==== ==== ====
</TABLE>
The federal income tax provision differs from the provision that would
result from applying graduated federal statutory rates to earnings before income
taxes because of the federal benefit of state income taxes and because certain
transactions, such as a portion of meals and entertainment, a portion of
noncompete expense, net life insurance expense, and certain dues, are without
tax consequence.
F-67
<PAGE> 115
SHEARER INDUSTRIAL SUPPLY CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net deferred income taxes in the accompanying balance sheets consist of the
following as of December 31 (in thousands):
<TABLE>
<CAPTION>
1995 1996
---- -----
<S> <C> <C>
Deferred income tax assets:
Inventories............................................... $ 24 $ 37
Deferred compensation..................................... 16 15
---- -----
40 52
Deferred income tax liabilities:
Equipment and improvements and goodwill................... (32) (45)
Investments............................................... (55) (59)
---- -----
(87) (104)
$(47) $ (52)
==== =====
</TABLE>
The Company and its subsidiaries' effective tax rate varied from the
statutory U.S. federal income tax rate for the years ended December 31:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
U.S. federal income tax rate................................ 32.7% 34.0% 34.0%
State income taxes, net of federal benefit.................. 8.0 6.6 6.6
Nondeductible meals and entertainment....................... 4.0 2.8 2.0
Nontaxable life insurance proceeds.......................... 0.0 (5.5) 0.0
Other individually insignificant items...................... 4.3 (0.6) 1.0
---- ---- ----
49.0% 37.3% 43.6%
==== ==== ====
</TABLE>
18. RELATED PARTY TRANSACTIONS
The Company is related to York Penn Machinery Co. through common management
and ownership. The Company receives reimbursements, primarily group insurance,
for payments made on behalf of the affiliates.
The Company also leases certain property used in its operations from
related parties under noncancelable lease agreements. Rent expense for these
properties was $244,602, $256,252, and $265,877 for the years ended December 31,
1994, 1995, and 1996, respectively.
The Company also paid interest to former stockholders of the Company on
uncollateralized notes payable. Total interest expense on these uncollateralized
notes payable is $0, $35,012, and $31,889, for the years ended December 31,
1994, 1995, and 1996, respectively.
19. ADVERTISING COSTS
Advertising costs for the years ended December 31, 1994, 1995, and 1996
amounted to $104,000, $141,710, and $142,228, respectively.
20. CONCENTRATION OF CREDIT RISK
The Company grants normal credit terms to its customers which are
principally manufacturing industries in Pennsylvania and surrounding states.
21. VENDOR DEPENDENCE
The Company purchased approximately 25%, 25%, and 24% of its inventory from
one vendor for the years ended December 31, 1994, 1995, and 1996, respectively.
F-68
<PAGE> 116
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To J. J. Stangel Company:
We have audited the accompanying balance sheet of J. J. STANGEL COMPANY as
of September 30, 1996 and the related statements of income and retained earnings
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of J. J. Stangel Company as of
September 30, 1996 and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ SCHENCK & ASSOCIATES, SC
Green Bay, Wisconsin
February 27, 1997
F-69
<PAGE> 117
J. J. STANGEL COMPANY
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1997
------------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 223 $ 379
Receivables:
Trade, net of allowance of $9 and $12, respectively.... 711 784
Other.................................................. 39 34
Note receivable........................................... 20 0
Inventories............................................... 1,087 988
Prepaid expenses.......................................... 52 106
Refundable income taxes................................... 29 0
------ ------
Total current assets.............................. 2,161 2,291
------ ------
PROPERTY AND EQUIPMENT:
Leasehold improvements.................................... 70 70
Office furniture and fixtures............................. 180 182
Data processing equipment................................. 258 264
Equipment................................................. 200 200
Vehicles.................................................. 221 267
------ ------
929 983
Less accumulated depreciation............................. (588) (666)
------ ------
341 317
Capital lease building, less accumulated amortization of
$251 and $264, respectively............................ 266 253
------ ------
Net property and equipment........................ 607 570
------ ------
OTHER ASSETS:
Deferred charge, net of amortization...................... 9 8
Cash surrender value of life insurance.................... 113 123
Deferred tax benefit...................................... 78 78
------ ------
Total other assets................................ 200 209
------ ------
Total assets...................................... $2,968 $3,070
====== ======
</TABLE>
See notes to financial statements.
F-70
<PAGE> 118
J. J. STANGEL COMPANY
BALANCE SHEETS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1997
------------- -----------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities........................................ $ 20 $ 22
Current maturities of deferred compensation............... 19 20
Accounts payable.......................................... 668 674
Accrued liabilities:
Profit sharing......................................... 67 17
Payroll and payroll taxes.............................. 137 103
Vacation............................................... 19 19
Other.................................................. 33 89
------ ------
Total current liabilities......................... 963 944
LONG-TERM DEBT, less current maturities..................... 645 628
DEFERRED COMPENSATION....................................... 102 88
------ ------
Total liabilities................................. 1,710 1,660
------ ------
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDER'S EQUITY:
Common stock, $100 par value:
Issued, 173 shares..................................... 17 17
Additional paid-in capital................................ 14 14
Retained earnings......................................... 1,528 1,680
------ ------
1,559 1,711
Less treasury stock, at cost, 83 shares................... (301) (301)
------ ------
Total stockholder's equity........................ 1,258 1,410
------ ------
Total liabilities and stockholder's equity........ $2,968 $3,070
====== ======
</TABLE>
See notes to financial statements.
F-71
<PAGE> 119
J. J. STANGEL COMPANY
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED NINE-MONTH PERIOD
SEPTEMBER 30, ENDED JUNE 30,
------------- ------------------
1996 1996 1997
------------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
NET SALES................................................... $11,713 $8,830 $8,951
COST OF SALES............................................... 8,990 6,717 6,783
------- ------ ------
Gross profit.............................................. 2,723 2,113 2,168
OPERATING EXPENSES.......................................... 2,534 1,782 1,840
------- ------ ------
Income from operations.................................... 189 331 328
------- ------ ------
OTHER INCOME (EXPENSE):
Interest and other income (expense)....................... 78 (24) (6)
Interest expense.......................................... (71) (63) (60)
------- ------ ------
OTHER INCOME (EXPENSE), Net................................. 7 (87) (66)
------- ------ ------
INCOME BEFORE INCOME TAXES.................................. 196 244 262
PROVISION FOR INCOME TAXES.................................. 72 99 110
------- ------ ------
NET INCOME.................................................. 124 $ 145 152
======
RETAINED EARNINGS:
Beginning of year......................................... 1,404 1,528
------- ------
End of year............................................... $ 1,528 $1,680
======= ======
</TABLE>
See notes to financial statements.
F-72
<PAGE> 120
J. J. STANGEL COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE-MONTH
PERIOD
YEAR ENDED ENDED JUNE 30,
SEPTEMBER 30, --------------
1996 1996 1997
------------- ----- -----
(UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income................................................ $124 $145 $152
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 104 90 90
Amortization........................................... 17 0 0
Increase in cash surrender value of life insurance..... (1) 0 0
Decrease (increase) in:
Receivables.......................................... 30 (34) (67)
Refundable income taxes.............................. (29) 0 0
Inventories.......................................... 105 27 99
Other current assets................................. 21 2 (54)
Deferred tax benefit................................. (2) 0 0
(Decrease) increase in:
Accounts payable..................................... (63) (27) 22
Accrued income taxes................................. (37) (16) 84
Other current liabilities............................ 56 (18) (99)
---- ---- ----
Net cash provided by operating activities......... 325 169 227
---- ---- ----
INVESTING ACTIVITIES:
Purchase of property and equipment........................ (84) (45) (54)
Collection on notes receivable............................ 72 0 20
Issuance of notes receivable.............................. (70) (49) 0
Purchase of cash surrender value of life insurance........ (11) (8) (9)
---- ---- ----
Net cash used for investing activities............ (93) (102) (43)
---- ---- ----
FINANCING ACTIVITIES:
Repayment of deferred compensation obligation............. (19) (15) (13)
Repayment of capital lease obligation..................... (7) (5) (5)
Retirement of long-term debt.............................. (12) (9) (10)
---- ---- ----
Net cash used for financing activities............ (38) (29) (28)
---- ---- ----
CASH AND CASH EQUIVALENTS:
Net increase.............................................. 194 38 156
Beginning of period....................................... 29 28 223
---- ---- ----
End of period............................................. $223 $ 66 $379
==== ==== ====
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid for:
Interest............................................... $ 71
====
Income taxes........................................... $140
====
</TABLE>
See notes to financial statements.
F-73
<PAGE> 121
J. J. STANGEL COMPANY
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
A. NATURE OF BUSINESS
J.J. Stangel Company (the "Company") (a Wisconsin corporation) provides
industrial tools and supplies for sale to customers located mainly in
northeastern Wisconsin.
B. ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
C. CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents. The Company did not have cash equivalents at September 30,
1996.
D. INVENTORIES
Inventories are stated at the lower of cost, determined on the last-in,
first-out ("LIFO") method, or market.
E. PROPERTY, EQUIPMENT, AND RELATED DEPRECIATION
Property and equipment are stated at cost. Expenditures for additions and
improvements are capitalized, while replacements, maintenance, and repairs which
do not improve or extend the lives of the respective assets are expensed
currently as incurred. Properties sold or otherwise disposed of are removed from
the property accounts, with gains or losses on disposal credited or charged to
the results of operations.
Depreciation for financial reporting purposes is provided over the
estimated useful lives of the respective assets, using both straight-line and
accelerated methods as follows:
<TABLE>
<S> <C>
Building and building improvements.......................... 19-31.5 years
Office furniture and fixtures............................... 5-10 years
Data processing equipment................................... 3-10 years
Equipment................................................... 5-15 years
Vehicles.................................................... 5 years
</TABLE>
For income tax purposes, accelerated depreciation methods are used.
F. DEFERRED CHARGE
A deferred charge has been established for a membership fee. The deferred
charge is amortized on the straight-line method over a 15-year period for
financial statement and income tax reporting purposes.
G. INCOME TAXES
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of property and equipment and
accrued between the basis of property and equipment and accrued liabilities for
financial and income tax reporting. The deferred tax assets and liabilities
represent the future tax return consequences
F-74
<PAGE> 122
J. J. STANGEL COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
of those differences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled.
H. ADVERTISING COSTS
Advertising and marketing costs are expensed as incurred. Advertising and
marketing costs amounted to $12,043 for the year ended September 30, 1996.
I. NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived
Assets and Long-Lived Assets to Be Disposed Of," to be effective for fiscal
years beginning after December 15, 1995. The Company does not anticipate that
the adoption of this statement will have a significant impact on the Company's
financial position or results of operations.
J. INTERIM UNAUDITED FINANCIAL INFORMATION
The financial statements as of June 30, 1997, and for the nine months ended
June 30, 1996 and 1997 are unaudited; however, in the opinion of management, all
adjustments (consisting solely of normal recurring adjustments) necessary for a
fair presentation of the unaudited financial statements for these interim
periods have been included. The results of interim periods are not necessarily
indicative of the results to be obtained for a full year.
2. CONCENTRATIONS OF CREDIT RISK
The Company maintains its cash in bank deposit accounts which, at times,
may exceed federally insured limits. The Company has not experienced any losses
in such accounts. The Company believes that it is not exposed to any significant
credit risk on cash and cash equivalents.
3. INVENTORIES
Inventories as of September 30, 1996 consist of the following (in
thousands):
<TABLE>
<S> <C>
Inventories at average cost................................. $1,470
Adjustment to LIFO basis.................................... (383)
------
Inventories at LIFO......................................... $1,087
======
</TABLE>
The Company uses the LIFO method of valuing inventories for both financial
reporting and income tax purposes. The use of the LIFO method of inventory
valuation had the effect of decreasing the income before tax of the Company by
approximately $29,000 for the year ended September 30, 1996.
During 1996, inventory quantities were reduced. This reduction resulted in
a liquidation of LIFO inventory quantities carried at lower costs prevailing in
prior years as compared with the cost of 1996 purchases, the effect of which
decreased cost of goods sold by approximately $2,500.
4. NOTE RECEIVABLE
The note receivable of $20,000 at September 30, 1996 was due on demand from
the Company's stockholder at an interest rate of 9.25%.
F-75
<PAGE> 123
J. J. STANGEL COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. LIFE INSURANCE
The Company is beneficiary of life insurance policies totaling $750,000 on
John J. Zimmer, President of the Company, and $135,000 on Joseph A. Zimmer,
former stockholder of the Company. There are no policy loans outstanding at
September 30, 1996.
6. NOTE PAYABLE
The Company has a $650,000 line of credit with First National Bank in
Manitowoc which provides for interest at 1% over prime (effectively 9.25% at
September 30, 1996). The line is secured by substantially all assets under a
Selective Business Security Agreement. There were no borrowings against the line
of credit at September 30, 1996.
7. LONG-TERM DEBT
Long-term debt at September 30, 1996 consists of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Joseph A. Zimmer:
8% note, due in monthly installments of $2,703 through
July 2008, under the terms of a stock redemption
agreement dated August 1, 1991, secured by treasury
stock.................................................. $247
Zimmer Family Trust:
Capital lease obligation due in monthly installments of
$2,887, including interest at 12%, through 2014 (Note
10).................................................... 265
Capital lease obligation due in monthly installments of
$1,668, including interest at 12%, through 2014 (Note
10).................................................... 153
----
665
Less current maturities..................................... 20
----
Long-term debt, less current maturities..................... $645
====
</TABLE>
Maturities of long-term debt for each of the five years succeeding
September 30, 1996 and in total are as follows (in thousands):
<TABLE>
<S> <C>
1997........................................................ $ 20
1998........................................................ 22
1999........................................................ 25
2000........................................................ 27
2001........................................................ 30
Thereafter.................................................. 541
----
$665
====
</TABLE>
8. PROFIT-SHARING PLAN
The Company maintains a defined contribution plan with Section 401(k)
features, which covers substantially all employees. Those covered may elect to
make contributions to the plan's trust fund. The Company may contribute a
discretionary amount based upon the profit of the Company. The Company
contributions under this plan approximated $89,000 for the year ended September
30, 1996.
F-76
<PAGE> 124
J. J. STANGEL COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES
The provision for income taxes for the year ended September 30, 1996
consists of the following (in thousands):
<TABLE>
<S> <C>
Current:
Federal................................................... $57
State..................................................... 17
Deferred.................................................... (2)
---
$72
===
</TABLE>
For tax purposes, the Company has approximately $36,000 of charitable
contribution carryforwards.
The provision for income taxes for the year ended September 30, 1996
differs from the amount computed by applying the federal statutory rate of 34%
due to the following (in thousands):
<TABLE>
<S> <C>
Tax at federal statutory rate............................... $67
State income taxes, net of federal benefit.................. 10
Nondeductible travel and entertainment...................... 4
Other....................................................... (9)
---
Total provision................................... $72
===
</TABLE>
The Company's total deferred tax assets and liabilities at September 30,
1996 are as follows (in thousands):
<TABLE>
<S> <C>
Deferred tax assets:
Allowance for doubtful accounts........................... $ 3
Inventory allowance....................................... 25
Accrued vacation.......................................... 7
Deferred compensation..................................... 44
Charitable contributions carryforward..................... 13
Fixed assets.............................................. 10
----
102
Deferred tax liabilities:
Other..................................................... (24)
----
$ 78
====
</TABLE>
The deferred tax assets have not been offset by a valuation allowance
because the Company believes there is at least a 50% chance that the deferred
tax assets will be realized.
10. CAPITAL LEASES
The Company leases its office and warehouse building from the Zimmer Family
Trust. These leases, which expire in 1999 with 15-year renewal options expiring
in 2014, are accounted for as capital leases.
F-77
<PAGE> 125
J. J. STANGEL COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The future minimum lease payments under the capital leases and the net
present value of the future minimum lease payments at September 30, 1996 are as
follows (in thousands):
<TABLE>
<S> <C>
1997........................................................ $ 55
1998........................................................ 55
1999........................................................ 55
2000........................................................ 55
2001........................................................ 54
Thereafter.................................................. 715
----
989
Less amount representing interest........................... 571
----
$418
====
</TABLE>
11. DEFERRED COMPENSATION
The Company has a deferred compensation agreement with one of its former
officers/stockholders. The agreement provides for monthly payments of $3,333
from July 1995 (the "agreed retirement date") to December 1995; $2,500 from
January 1996 through December 1999; and $1,667 from January 2000 through
December 2002. The present value (at 10%) of these payments at September 30,
1996 is $120,840.
12. COMMITMENTS
The Company has an outstanding obligation with a former employee to make
monthly retirement payments of $1,438 for the rest of her life. Based on the
former employee's age and a discount rate of 8.25%, the present value of these
future payments is $54,000. Management has not recorded this liability since
they do not believe it is material to the financial position of the Company.
The Company is subject to various claims and legal actions which arise in
the ordinary course of business. In the opinion of management, the ultimate
resolution of such matters will be adequately covered by insurance or will not
have a material adverse effect on the Company's financial position or results of
operations.
F-78
<PAGE> 126
INDEPENDENT ACCOUNTANTS' REPORT
To Tri-Star Industrial Supply, Inc.:
We have audited the accompanying balance sheets of TRI-STAR INDUSTRIAL
SUPPLY, INC. as of September 30, 1995 and 1996 and the related statements of
income, retained earnings and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statements referred to above present fairly,
in all material respects, the financial position of TRI-STAR INDUSTRIAL SUPPLY,
INC. as of September 30, 1995 and 1996, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ BAIRD, KURTZ & DOBSON
April 4, 1997
St. Louis, Missouri
F-79
<PAGE> 127
TRI-STAR INDUSTRIAL SUPPLY, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------- JUNE 30,
1995 1996 1997
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 8 $ 60 $ 176
Accounts receivable, less allowance for doubtful accounts;
1995 -- $25, 1996 -- $50, 1997 -- $62.................. 2,796 2,539 3,424
Inventory................................................. 2,543 2,362 4,437
Prepaid expenses.......................................... 67 67 176
Deferred income taxes..................................... 70 92 128
------ ------ ------
Total current assets.............................. 5,484 5,120 8,341
------ ------ ------
PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements.................................... 248 280 310
Machinery and equipment................................... 64 64 71
Furniture and fixtures.................................... 442 495 660
------ ------ ------
754 839 1,041
Less accumulated depreciation............................. 291 437 559
------ ------ ------
Property and equipment, net....................... 463 402 482
------ ------ ------
OTHER ASSETS:
Noncompete agreements, at amortized cost.................. 78 45 20
Deferred income taxes..................................... 32 35 0
------ ------ ------
Total other assets................................ 110 80 20
------ ------ ------
Total assets...................................... $6,057 $5,602 $8,843
====== ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks.................................... $1,500 $ 700 $3,300
Current maturities of long-term debt...................... 134 182 182
Accounts payable.......................................... 1,571 1,315 1,495
Accrued expenses.......................................... 325 275 224
Income taxes payable...................................... 132 63 59
------ ------ ------
Total current liabilities......................... 3,662 2,535 5,260
------ ------ ------
LONG-TERM DEBT.............................................. 1,107 1,400 1,277
------ ------ ------
DEFERRED INCOME TAXES....................................... 0 0 263
------ ------ ------
SHAREHOLDERS' EQUITY:
Common stock, $10 par value; authorized 3,000 shares;
issued and outstanding 501 shares...................... 5 5 5
Retained earnings......................................... 1,298 1,677 2,053
------ ------ ------
1,303 1,682 2,058
Treasury stock, 75 shares, at cost........................ (15) (15) (15)
------ ------ ------
Shareholders' equity...................................... 1,288 1,667 2,043
------ ------ ------
Total liabilities and shareholders' equity........ $6,057 $5,602 $8,843
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-80
<PAGE> 128
TRI-STAR INDUSTRIAL SUPPLY, INC.
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE-MONTH PERIOD
SEPTEMBER 30, ENDED JUNE 30,
----------------- -----------------
1995 1996 1996 1997
------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES................................................. $23,633 $23,588 $17,930 $20,688
COST OF GOODS SOLD........................................ 18,962 18,688 13,970 16,166
------- ------- ------- -------
Gross profit............................................ 4,671 4,900 3,960 4,522
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.............. 3,815 4,051 3,324 3,776
------- ------- ------- -------
Income from operations.................................. 856 849 636 746
------- ------- ------- -------
OTHER EXPENSE (INCOME):
Interest................................................ 199 214 169 147
Other................................................... 0 19 14 (22)
------- ------- ------- -------
199 233 183 125
------- ------- ------- -------
INCOME BEFORE INCOME TAXES................................ 657 616 453 621
PROVISION FOR INCOME TAXES................................ 270 237 175 245
------- ------- ------- -------
NET INCOME................................................ $ 387 $ 379 $ 278 $ 376
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-81
<PAGE> 129
TRI-STAR INDUSTRIAL SUPPLY, INC.
STATEMENTS OF RETAINED EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, NINE-MONTH
--------------- PERIOD ENDED
1995 1996 JUNE 30, 1997
------ ------ --------------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE, beginning of period................................ $ 911 $1,298 $1,677
Net income................................................ 387 379 376
------ ------ ------
BALANCE, end of period...................................... $1,298 $1,677 $2,053
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-82
<PAGE> 130
TRI-STAR INDUSTRIAL SUPPLY, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE-MONTH
YEAR ENDED PERIOD ENDED
SEPTEMBER 30, JUNE 30,
------------- ---------------
1995 1996 1996 1997
----- ----- ----- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 387 $ 379 $ 278 $ 376
Items not requiring (providing) cash:
Depreciation and amortization.......................... 164 180 105 122
Gain on sale of equipment.............................. (1) 0 0 0
Deferred income taxes.................................. (3) (26) 0 227
Payments on noncompete agreements...................... (33) 0 25 25
Changes in:
Accounts receivable.................................. (827) 257 475 (885)
Inventory............................................ (759) 181 174 (2,075)
Prepaid expenses..................................... (17) 0 0 (73)
Accounts payable..................................... 301 (255) (81) 180
Accrued expenses..................................... 59 (49) (127) (51)
Income taxes payable................................. 66 (70) (209) (4)
----- ----- ----- -------
Net cash (used in) provided by operating
activities...................................... (663) 597 640 (2,158)
----- ----- ----- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment........................... 1 0 0 0
Purchase of property and equipment........................ (133) (86) (79) (202)
----- ----- ----- -------
Net cash used in investing activities............. (132) (86) (79) (202)
----- ----- ----- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under line of credit
agreement.............................................. 925 (800) (950) 2,600
Payments on long-term debt................................ (149) (159) 0 (124)
Long-term debt borrowings................................. 0 500 387 0
----- ----- ----- -------
Net cash provided by (used in) financing
activities...................................... 776 (459) (563) 2,476
----- ----- ----- -------
(DECREASE) INCREASE IN CASH................................. (19) 52 (2) 116
CASH, beginning of period................................... 27 8 8 60
----- ----- ----- -------
CASH, end of period......................................... $ 8 $ 60 $ 6 $ 176
===== ===== ===== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-83
<PAGE> 131
TRI-STAR INDUSTRIAL SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Tri-Star Industrial Supply, Inc. ("the Company"), a Missouri corporation,
has sales which are predominately earned as a midwestern distributor of
industrial and construction tools, supplies and equipment. The Company generally
extends unsecured credit to its customers.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INVENTORY PRICING
Inventory is stated at the lower of moving average cost or market.
PROPERTY AND EQUIPMENT
Property and equipment are depreciated over the estimated useful life of
each asset. Leasehold improvements are depreciated over the shorter of the lease
term or the estimated useful lives of the improvements. Annual depreciation is
primarily computed using the straight-line method over the following estimated
useful lives:
<TABLE>
<S> <C>
Furniture and fixtures...................................... 3-5 years
Leasehold improvements...................................... 5 years
Machinery and equipment..................................... 3-5 years
</TABLE>
INCOME TAXES
Deferred tax liabilities and assets are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred tax asset will not be realized.
INTANGIBLE ASSETS
Noncompete agreements are stated at cost, and are being amortized using the
straight-line method over the lives of the contracts.
CONCENTRATION OF RISK
In 1995 and 1996, approximately 15% of the Company's inventory purchases
were from one supplier.
INTERIM UNAUDITED FINANCIAL INFORMATION
The financial statements as of June 30, 1997, and for the nine months ended
June 30, 1996 and 1997 are unaudited; however, in the opinion of management, all
adjustments (consisting solely of normal recurring adjustments) necessary for a
fair presentation of the unaudited financial statements for these interim
periods have been included. The results of interim periods are not necessarily
indicative of the results to be obtained for a full year.
F-84
<PAGE> 132
TRI-STAR INDUSTRIAL SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. NOTE PAYABLE TO BANK
The Company has a line-of-credit agreement which provides for borrowings up
to $1,500,000. This arrangement expires in February 1997 and is collateralized
by inventory, property and equipment, and accounts receivable. Interest is
charged at the prime rate plus 1/4%. Borrowings, which have been guaranteed by
the shareholders of the Company, aggregated $1,500,000 and $700,000 at September
30, 1995 and 1996, respectively.
3. LONG-TERM DEBT
<TABLE>
<CAPTION>
1995 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Note payable to bank, due February 1998; payable in monthly
installments of $11,500, plus interest at prime plus
1/4%; collateralized by inventory, property and
equipment, and accounts receivable and guaranteed by the
shareholders of the Company............................... $1,039 $1,424
Note payable to bank, due October 1999; payable in monthly
installments of $5,032, including interest at 8 3/4%;
collateralized by equipment............................... 202 158
------ ------
1,241 1,582
Less current maturities..................................... 134 182
------ ------
$1,107 $1,400
====== ======
</TABLE>
Aggregate annual maturities of long-term debt at September 30, 1996, were
as follows (in thousands):
<TABLE>
<S> <C>
1997........................................................ $ 182
1998........................................................ 1,338
1999........................................................ 57
2000........................................................ 5
------
$1,582
======
</TABLE>
The carrying value of long-term debt and notes payable to bank is
considered to approximate fair value, based upon available terms and rates for
similar bank borrowings. The effective interest rate on all borrowings was 8.89%
and 8.58% in 1995 and 1996, respectively.
4. OPERATING LEASES
The Company has entered into operating leases for office and warehouse
facilities expiring through 2009. These leases generally require the Company to
pay most executory costs (property taxes, maintenance and insurance). Rental
expense was $156,000 in 1995 and 1996. Rental expense to a lessor with common
ownership with the Company was $126,000 in 1995 and 1996.
F-85
<PAGE> 133
TRI-STAR INDUSTRIAL SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments at September 30, 1996, were as follows (in
thousands):
<TABLE>
<CAPTION>
RELATED
PARTY OTHER
------- -----
<S> <C> <C>
1997........................................................ $ 120 $26
1998........................................................ 120 12
1999........................................................ 121 0
2000........................................................ 126 0
2001........................................................ 126 0
Thereafter.................................................. 1,017 0
------ ---
$1,630 $38
====== ===
</TABLE>
5. INCOME TAXES
The provision for income taxes includes these components (in thousands):
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Current tax expense......................................... $273 $263
Deferred tax expense........................................ (3) (26)
---- ----
$270 $237
==== ====
</TABLE>
A reconciliation of income tax expense at the statutory rate to income tax
expense at the Company's effective rate is shown below (in thousands):
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Computed at the statutory rate (34%)........................ $223 $209
Increase (decrease) in taxes resulting from:
Non-deductible expenses................................... 15 21
State income taxes -- net of federal tax benefits......... 29 28
Change in expected rates.................................. 0 (21)
Change in valuation allowance............................. (2) 1
Other..................................................... 5 (1)
---- ----
$270 $237
==== ====
</TABLE>
F-86
<PAGE> 134
TRI-STAR INDUSTRIAL SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences related to deferred taxes shown on
the balance sheets were (in thousands):
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Accumulated depreciation.................................. $ 6 $ 13
Inventory -- uniform capitalization....................... 61 67
Allowance for doubtful accounts........................... 9 20
Straight line rents....................................... 2 5
Net operating loss carryforwards.......................... 24 23
Other..................................................... 10 10
---- ----
Net deferred tax asset before valuation allowance........... 112 138
---- ----
Valuation allowance:
Beginning balance......................................... (12) (10)
Change during the period.................................. 2 (1)
---- ----
Ending balance............................................ (10) (11)
---- ----
Net deferred tax asset...................................... $102 $127
==== ====
</TABLE>
The above net deferred tax assets are presented on the balance sheets as
follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Current asset............................................... $ 70 $ 92
Long-term asset............................................. 32 35
---- ----
$102 $127
==== ====
</TABLE>
For federal income tax purposes, the Company has $58,000 of operating loss
carryforwards which expire through 2002.
6. PROFIT-SHARING PLAN
The Company has a profit-sharing plan covering substantially all employees.
The Company makes matching contributions to the Plan equal to 25% of the first
2% and 5% of the next 4% of employee contributions. Contributions are limited to
15% of total compensation paid participants during the Plan year. Participant
interests are vested over a period from two to six years of service.
Contributions to the Plan were $9,600 and $11,000 for 1995 and 1996,
respectively.
7. ADDITIONAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1995 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Additional Cash Information
Interest paid............................................. $199 $214
==== ====
Income taxes paid......................................... $207 $333
==== ====
</TABLE>
8. SUBSEQUENT EVENT (UNAUDITED)
On June 2, 1997, the Company purchased the net assets of a local industrial
supplier for approximately $1,750,000. This transaction was principally financed
through bank borrowings.
F-87
<PAGE> 135
After the stock split discussed in Note 5 to Industrial Distribution Group,
Inc.'s financial statements is effected, we expect to be in a position to render
the following audit report.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
August 26, 1997
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Industrial Distribution Group, Inc.:
We have audited the accompanying balance sheet of INDUSTRIAL DISTRIBUTION
GROUP, INC. (a Delaware corporation) as of June 30, 1997 and the related
statements of income, stockholders' deficit, and cash flows from inception
(February 12, 1997) through June 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Industrial Distribution
Group, Inc. as of June 30, 1997 and the results of its operations and its cash
flows from inception (February 12, 1997) through June 30, 1997 in conformity
with generally accepted accounting principles.
F-88
<PAGE> 136
INDUSTRIAL DISTRIBUTION GROUP, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30,
1997
-----------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 94,000
Amounts due from Founding Companies....................... 131,000
Other current assets...................................... 49,000
-----------
Total current assets.............................. 274,000
DEFERRED OFFERING COSTS..................................... 1,309,000
-----------
Total assets...................................... $ 1,583,000
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses..................... $ 776,000
Advances from Founding Companies.......................... 705,000
Refundable advances....................................... 130,000
-----------
Total liabilities................................. 1,611,000
-----------
COMMITMENTS AND CONTINGENCIES (NOTE 4)
STOCKHOLDERS' DEFICIT:
Preferred stock, $.10 par value; 10,000,000 shares
authorized, none issued or outstanding................. 0
Common stock, $.01 par value; 50,000,000 shares
authorized, 129,749 shares issued and outstanding...... 0
Additional paid-in capital................................ 1,161,000
Subscriptions receivable.................................. (1,000)
Accumulated deficit....................................... (1,188,000)
-----------
Total stockholders' deficit....................... (28,000)
-----------
Total liabilities and stockholders' deficit....... $ 1,583,000
===========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-89
<PAGE> 137
INDUSTRIAL DISTRIBUTION GROUP, INC.
STATEMENT OF INCOME
FOR THE PERIOD FROM INCEPTION (FEBRUARY 12, 1997)
THROUGH JUNE 30, 1997
<TABLE>
<S> <C>
REVENUES.................................................... $ 0
COST OF SALES............................................... 0
-----------
Gross profit.............................................. 0
-----------
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES:
Salaries expense.......................................... 38,000
Compensation expense...................................... 1,150,000
-----------
OPERATING LOSS.............................................. (1,188,000)
INTEREST EXPENSE............................................ 0
-----------
NET LOSS.................................................... $(1,188,000)
===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-90
<PAGE> 138
INDUSTRIAL DISTRIBUTION GROUP, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM INCEPTION (FEBRUARY 12, 1997)
THROUGH JUNE 30, 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN SUBSCRIPTIONS STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE DEFICIT
------- ------ ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, Inception (February 12,
1997) 0 $0 $ 0 $ 0 $ 0 $ 0
Stock issuance................... 129,749 0 1,151,000 0 (1,000) 1,150,000
Nonrefundable advances........... 0 0 10,000 0 0 10,000
Net loss......................... 0 0 0 (1,188,000) 0 (1,188,000)
------- -- ---------- ----------- ------- -----------
BALANCE, June 30, 1997............. 129,749 $0 $1,161,000 $(1,188,000) $(1,000) $ (28,000)
======= == ========== =========== ======= ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-91
<PAGE> 139
INDUSTRIAL DISTRIBUTION GROUP, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (FEBRUARY 12, 1997)
THROUGH JUNE 30, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(1,188,000)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Compensation expense................................... 1,150,000
Increase in other current assets....................... (49,000)
Increase in accounts payable and accrued expenses...... 776,000
-----------
Net cash provided by operating activities......... 689,000
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... 0
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from Founding Companies, net of amounts due...... 574,000
Increase in refundable advances........................... 130,000
Deferred offering costs................................... (1,309,000)
Increase in nonrefundable advances........................ 10,000
-----------
Net cash used by financing activities............. (595,000)
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 94,000
CASH AND CASH EQUIVALENTS, beginning of period.............. 0
-----------
CASH AND CASH EQUIVALENTS, end of period.................... $ 94,000
===========
NONCASH TRANSACTIONS:
Issuance of common stock for subscription receivable...... $ 1,000
===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-92
<PAGE> 140
INDUSTRIAL DISTRIBUTION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
1. BUSINESS AND ORGANIZATION
Industrial Distribution Group, Inc. ("IDG" or the "Company," a Delaware
corporation) was originally founded in Georgia as IDN Formation Corp., Inc. on
February 12, 1997 ("Inception") to create a leading, nationwide supplier of
cost-effective, flexible procurement solutions for manufacturers and other users
of maintenance, repair, operating, and production ("MROP") products. In June
1997, the Company changed its name to Industrial Distribution Group, Inc. and
its state of incorporation to Delaware. The Company intends to merge with nine
local and regional industrial distribution companies (the "Founding Companies"),
concurrent with an initial public offering ("IPO") of its common stock (the "IPO
Transaction"), and, subsequent to the IPO, continue to acquire, through merger
or purchase, similar companies to expand the Company's national and regional
operations.
In June 1997, the Company signed definitive agreements to acquire by merger
the Founding Companies to be effective with the IPO. The Founding Companies are
Industrial Distribution Group, Inc. ("Predecessor-IDG"), Associated Suppliers,
Inc., B&J Industrial Supply Company, Cramer Industrial Supplies, Inc., Grinding
Supplies Company, Shearer Industrial Supply Co., Slater Industrial Supply, Inc.,
J.J. Stangel Co., and Tri-Star Industrial Supply, Inc.
As of June 30, 1997, the Company had not conducted any operations, and
activities to date have related primarily to the planned acquisitions and the
IPO. There is no assurance that the pending IPO Transaction discussed above will
be completed and that IDG will be able to generate future operating revenue. IDG
is dependent upon the IPO to fund the pending transactions and future
operations.
As of June 30, 1997, the Founding Companies have advanced approximately
$700,000 to the Company to help fund offering-related costs. These advances are
noninterest-bearing. In conjunction with the withdrawal of two of the original
founding companies, nonrefundable advances to the Company of $10,000 were
reflected as a component of additional paid-in capital and refundable advances
to the Company of $130,000 were reflected as a current liability in the
accompanying balance sheet.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
DEFERRED OFFERING COSTS
Deferred offering costs primarily represent professional fees incurred
through June 30, 1997 in conjunction with the planned IPO Transaction and, for
financial reporting purposes, will be netted against the offering proceeds upon
completion of the public offering.
INCOME TAXES
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109,
which requires recognition of deferred tax assets and liabilities using
currently enacted tax rates.
The Company has recorded a full valuation allowance against all deferred
tax assets due to the uncertainty of ultimate realizability. Accordingly, no
income tax benefit has been recorded for current year losses.
F-93
<PAGE> 141
INDUSTRIAL DISTRIBUTION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
OTHER
As of Inception, SFAS No. 123, "Accounting for Stock-Based Compensation,"
will be effective for the Company. SFAS No. 123 permits, but does not require, a
fair value-based method of accounting for employee stock option plans, which
results in compensation expense recognition when stock options are granted. As
permitted by SFAS No. 123, the Company will provide pro forma disclosure of net
income and earnings per share, as applicable, in the notes to future
consolidated financial statements.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings per Share," which specifies the computation,
presentation, and disclosure requirements for earnings per share. The Company
will be required to adopt this new standard in the 1997 fourth quarter.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
The Company will be required to adopt the new standard in 1998, and all prior
period information will be restated
Also in June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information." This statement requires companies to
determine segments based on how management makes decisions about allocating
resources to segments and measuring their performance. Disclosures for each
segment are similar to those required under current standards, with the addition
of certain quarterly disclosure requirements. SFAS No. 131 also requires
entity-wide disclosure about the products and services an entity provides, the
countries in which it holds material assets and reports material revenues, and
its significant customers. The Company will be required to adopt the new
standard in 1998, and all prior period information presented will be restated.
Management is evaluating the effect of this statement on reported segment
information.
3. STOCKHOLDERS' EQUITY
In connection with the organization and initial capitalization of IDG, the
Company issued 129,749 shares of common stock for $1,125 of subscriptions
receivable ($.009 per share). The Company recognized compensation expense of
$1,150,000 related to the shares issued (based upon the fair value of these
shares at the date of issuance.)
STOCK INCENTIVE PLAN
In July 1997, the Company adopted its Stock Incentive Plan to provide key
employees, officers, and directors an opportunity to own common stock of the
Company and to provide incentives for such persons to promote the financial
success of the Company. Awards under the Stock Incentive Plan may be structured
in a variety of ways, including "incentive stock options," shares of common
stock subject to terms and conditions set by the board of directors ("restricted
stock awards"), and stock appreciation rights ("SARs"). Incentive stock options
may be granted only to full-time employees (including officers) of the Company
and any subsidiaries. Nonqualified options, restricted stock awards, SARs, and
other permitted forms of awards may
F-94
<PAGE> 142
INDUSTRIAL DISTRIBUTION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
be granted to any person employed by or performing services for the Company,
including directors. The Stock Incentive Plan provides for the issuance of an
aggregate number of shares of common stock equal to 15% of the Company's fully
diluted shares of common stock outstanding from time to time, subject to the
issuance of a maximum of 1,000,000 shares pursuant to incentive stock options.
Incentive stock options are also subject to certain limitations prescribed
by the Internal Revenue Code and may not be exercised for more than five years
from the stated grant. The board of directors of the Company (or a committee
designated by the board) otherwise generally has discretion to set the terms and
conditions of options and other awards, including the term, exercise price, and
vesting conditions, if any; to select the persons who receive such grants and
awards; and to interpret and administer the Stock Incentive Plan.
As of the date of this Prospectus, options to purchase an aggregate of
392,157 shares of common stock will be granted under the Stock Incentive Plan,
including options for 103,799 and 20,760 shares of common stock to be issued to
Mr. Pinson and Mr. Healey, respectively.
EMPLOYEE STOCK PURCHASE PLAN
As of the date of this Prospectus, the Company has adopted an Employee
Stock Purchase Plan (the "Stock Purchase Plan") under which qualified employees
of the Company and its subsidiaries have the right to purchase shares of common
stock on a quarterly basis through payroll deductions by the employee. The stock
purchase plan will be administered by the compensation committee of the
Company's board of directors. The price to be paid for a share of common stock
under the plan is 85% of the fair market value (as defined in the Stock Purchase
Plan) of a share of common stock at the beginning or the end of each quarterly
purchase period, whichever is lower. The amount of any participant's payroll
deductions or cash contributions made pursuant to the Stock Purchase Plan may
not exceed 10% of such participant's total annual compensation and may not
exceed $25,000 per year. A maximum of 500,000 shares of common stock may be
issued under the Stock Purchase Plan. The Stock Purchase Plan may be terminated
or amended by the Company's board of directors.
4. COMMITMENTS AND CONTINGENCIES
Subsequent to June 30, 1997, the Company has incurred significant
additional costs, including professional fees and travel, associated with the
acquisition of the Founding Companies and the IPO which are not reflected in the
accompanying balance sheet. The Company anticipates that total offering costs
related to the IPO will approximate $5.9 million (unaudited), including
underwriting discount.
5. SUBSEQUENT EVENT
In July 1997, IDG filed a Registration Statement on Form S-1 for the sale
of its common stock. See "Risk Factors" included elsewhere herein this
Prospectus.
Effective September , 1997, the Company declared a 115.333 for 1 stock
split. All amounts in the financial statements and notes thereto have been
restated for this stock split.
F-95
<PAGE> 143
[INDUSTRIAL DISTRIBUTION GROUP LOGO]
[MAP, SHOWING NAMES AND LOCATION
OF NINE FOUNDING COMPANIES]
[TEXT BLOCK]
IDG represents the industry's leading manufacturers of high quality
Maintenance, Repair, Operating and Production (MROP) Supplies. We help our
customers lower Operating Costs by focusing on continous process improvement.
Industrial Distribution Group provides US customers with the products, services,
and in-plant storeroom management systems that keep industrial manufacturing
plants operating 24 hours per day, seven days per week, 365 days per year.
<PAGE> 144
======================================================
NO DEALER, SALES PERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS. IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Use of Proceeds....................... 11
Dividend Policy....................... 11
Capitalization........................ 12
Dilution.............................. 13
Selected Pro Forma Combined Financial
Data................................ 14
Predecessor-IDG Selected Financial
Data................................ 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 16
The Combination....................... 22
Business.............................. 26
Management............................ 35
Principal Stockholders................ 39
Certain Transactions.................. 39
Shares Eligible for Future Sale....... 41
Description of Capital Stock.......... 42
Underwriting.......................... 44
Legal Matters......................... 45
Experts............................... 46
Additional Information................ 46
Index to Financial Information........ F-1
</TABLE>
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
3,000,000 SHARES
[INDUSTRIAL DISTRIBUTION (TM) LOGO]
INDUSTRIAL DISTRIBUTION GROUP, INC.
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
MERRILL LYNCH & CO.
THE ROBINSON-HUMPHREY
COMPANY, INC.
, 1997
======================================================
<PAGE> 145
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate of the approximate amount of the fees and
expenses (other than underwriting commissions and discounts) payable by the
Registrant in connection with the issuance and distribution of the shares of
Common Stock.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 16,727.27
National Association of Securities Dealers Fee.............. $ 5,520.00
New York Stock Exchange Fees................................ $ 98,600.00
Blue Sky Fees and Expenses.................................. $ 2,000.00
Printing and Engraving Expenses............................. $ 225,000.00
Legal Fees and Expenses..................................... $ 900,000.00
Accounting Fees and Expenses................................ $1,000,000.00
Transfer Agent Fees and Expenses............................ $ 3,500.00
Miscellaneous............................................... $ 448,652.73
-------------
Total............................................. $2,700,000.00
=============
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Purchase Agreement provides for indemnification by the Underwriters of
the Company and by the Company of the Underwriters, for certain liabilities,
including liabilities arising under the Securities Act of 1933 (the "Securities
Act"), and affords certain rights of contribution with respect thereto.
The Company's Certificate of Incorporation provides that to the fullest
extent permitted by the Delaware General Corporation Law ("DGCL"), a director of
the Company shall not be liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director. Under the DGCL, liability of
a director may not be limited (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or that involve intentional misconduct or a knowing violation of law,
(iii) in respect of certain unlawful dividend payments or stock redemptions or
repurchases, and (iv) for any transaction from which the director derives an
improper personal benefit. The effect of the provisions of the Company's
Certificate of Incorporation is to eliminate the rights of the Company and its
stockholders (through stockholders' derivative suits on behalf of the Company)
to recover monetary damages against a director for breach of the fiduciary duty
of care as a director (including breaches resulting from negligent or grossly
negligent behavior), except in the situations described in clauses (i) through
(iv) above. This provision does not limit or eliminate the rights of the Company
or any stockholder to seek nonmonetary relief such as an injunction or
rescission in the event of a breach of a director's duty of care.
In addition, under the Company's Certificate of Incorporation and Article
Eight of the Company's Bylaws, the Company shall indemnify its directors,
officers, employees, and agents against losses incurred by any such person by
reason of the fact that such person was acting in such capacity or was serving
at the request of the Company as a director, officer, employee, or agent of
another entity. In addition, the Company has entered into indemnification
agreements with its directors and executive officers.
The Company's directors and officers are insured against losses arising
from any claim against them as such for wrongful acts or omissions, subject to
certain limitation.
The Company intends to obtain directors' and officers' liability insurance
coverage.
II-1
<PAGE> 146
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Registrant was incorporated in February 1997 in Georgia and was merged
into a Delaware corporation on July 2, 1997. Simultaneously with the closing of
the Offering, an aggregate of 3,330,224 shares of Common Stock will be issued in
connection with the merger or acquisition of nine corporations into the
Registrant, in reliance upon the exemptions contained in Section 4(2) of the
Securities Act. In exchange therefor, the Registrant will acquire all of the
outstanding shares in each of the nine corporations.
Since inception of the Registrant, the following persons were issued Common
Stock of the Registrant in reliance upon the exemption contained in Section 4(2)
of the 1993 Act, in the number of shares (adjusted for the stock split
anticipated to occur on September , 1997), on the date, and for the
consideration referenced below:
<TABLE>
<CAPTION>
NAME NO. SHARES DATE OF ISSUANCE CONSIDERATION
---- ---------- ---------------- -------------
<S> <C> <C> <C>
David K. Barth.............................. 11,533 February 1997 $100
Jack P. Healey.............................. 25,950 June 1997 $225
Martin S. Pinson............................ 69,200 June 1997 $600
Paul C. Smith............................... 11,533 June 1997 $100
David K. Barth.............................. 11,533 June 1997 $100
</TABLE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <C> <S>
**1.1 -- Form of Purchase Agreement
*3.1 -- Certificate of Incorporation, as amended, of the Company
*3.2 -- Bylaws of the Company
**4.1 -- Form of Common Stock Certificate of the Company
**5.1 -- Opinion of Kilpatrick Stockton LLP
*10.1 -- Form of Agreement and Plan of Merger and Reorganization
(reverse merger)
*10.2 -- Agreement and Plan of Merger and Reorganization among the
Registrant, Industrial Distribution Group, Inc., a Georgia
corporation, IDG Acquisition Company I, Inc. and the
Stockholders named therein
*10.3 -- Agreement and Plan of Reorganization between the Registrant
and the Stockholders named therein
*10.4 -- Uniform Provisions for the Acquisition of Founding Companies
***10.5 -- Industrial Distribution Group, Inc. Stock Incentive Plan
*10.6 -- Employment Agreement between the Registrant and Martin S.
Pinson
*10.7 -- Employment Agreement between the Registrant and Douglass C.
Smith
*10.8 -- Employment Agreement between the Registrant and Jack P.
Healey
**10.9 -- Form of proposed Indemnification Agreement
*10.10 -- Form of Escrow Agreement among the Registrant, American
Stock Transfer & Trust Company and the individuals named
therein
***21.1 -- Subsidiaries of the Company
**23.1 -- Consent of Kilpatrick Stockton LLP (See Exhibit 5.1)
**23.2 -- Consent of Arthur Andersen LLP
**23.3 -- Consent of Miller & Co. LLP
**23.4 -- Consent of Schenck & Associates, SC
**23.5 -- Consent of Baird, Kurtz & Dobson
*24.1 -- Powers of Attorney (see Signature Page)
*27.1 -- Financial Data Schedule (for SEC use only)
</TABLE>
- ---------------
* Previously filed
** Filed herewith
*** Refiled to reflect changes therein
(b) FINANCIAL STATEMENT SCHEDULES
II-2
<PAGE> 147
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide the underwriters at
the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question as to whether such indemnification by it
is against public policy as expressed in the Securities Act, and will be
governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 148
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized in the City of
Atlanta, State of Georgia, on the 18th day of September, 1997.
INDUSTRIAL DISTRIBUTION GROUP, INC.
By: /s/ MARTIN S. PINSON
------------------------------------
Martin S. Pinson
Chairman and Chief Executive Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed by the following persons on
the 18th day of September, 1997, in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE POSITION
--------- --------
<C> <S>
/s/ MARTIN S. PINSON Chairman of the Board and Chief Executive
- ----------------------------------------------------- Officer (Principal Executive Officer)
Martin S. Pinson
/s/ JACK P. HEALEY Vice President, Chief Financial Officer, and
- ----------------------------------------------------- Secretary (Principal Financial and
Jack P. Healey Accounting Officer)
* Director
- -----------------------------------------------------
David K. Barth
* Director
- -----------------------------------------------------
William J. Burkland
* Director
- -----------------------------------------------------
William R. Fenoglio
* Director
- -----------------------------------------------------
William T. Parr
* Director
- -----------------------------------------------------
George L. Sachs, Jr.
* Director
- -----------------------------------------------------
Richard M. Seigel
* Director
- -----------------------------------------------------
Andrew B. Shearer
/s/ DOUGLASS C. SMITH Director
- -----------------------------------------------------
Douglass C. Smith
*By: /s/ DOUGLASS C. SMITH
------------------------------------------------
as attorney-in-fact
</TABLE>
II-4
<PAGE> 1
EXHIBIT 1.1
DRAFT OF SEPTEMBER 16, 1997
================================================================================
INDUSTRIAL DISTRIBUTION GROUP, INC.
(a Delaware corporation)
3,000,000 Shares of Common Stock
PURCHASE AGREEMENT
Dated: September __, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PURCHASE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 1. Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
(a) Representations and Warranties by the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
(i) Compliance with Registration Requirements . . . . . . . . . . . . . . . . . . . . . . . . . 3
(ii) Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
(iii) Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
(iv) No Material Adverse Change in Business . . . . . . . . . . . . . . . . . . . . . . . . . . 4
(v) Good Standing of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
(vi) Good Standing of Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
(vii) Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
(viii) Authorization of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
(ix) Authorization and Description of Securities . . . . . . . . . . . . . . . . . . . . . . . . 6
(x) Absence of Defaults and Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
(xi) Absence of Labor Dispute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
(xii) Absence of Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
(xiii) Accuracy of Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
(xiv) Possession of Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
(xv) Absence of Further Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
(xvi) Possession of Licenses and Permits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
(xvii) Title to Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
(xviii) Compliance with Cuba Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
(xix) Investment Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
(xx) Environmental Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
(xxi) Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
(xxii) Tax Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
(xxiii) Certain Actions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
(xxiv) Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
(xxv) ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
(xxvi) Related Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
(xxvii) Proper Completion of Combination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
(b) Officer's Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 2. Sale and Delivery to Underwriters; Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
(a) Initial Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
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(b) Option Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
(c) Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
(d) Denominations; Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 3. Covenants of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(a) Compliance with Securities Regulations and Commission Requests . . . . . . . . . . . . . . . . . . . 13
(b) Filing of Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(c) Delivery of Registration Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(d) Delivery of Prospectuses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
(e) Continued Compliance with Securities Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
(f) Blue Sky Qualifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
(g) Rule 158 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
(h) Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
(i) Listing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
(j) Restriction on Sale of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
(k) Reporting Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
(l) Compliance with NASD Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
(m) Compliance with Rule 463 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
(n) Combination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 4. Payment of Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
(a) Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
(b) Termination of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 5. Conditions of Underwriters' Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
(a) Effectiveness of Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
(b) Opinion of Counsel for Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
(c) Opinion of Counsel for Underwriters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
(d) Officers' Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
(e) Accountant's Comfort Letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
(f) Bring-down Comfort Letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
(g) Approval of Listing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
(h) No Objection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
(i) Lock-up Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
(j) Combination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
(k) Credit Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
(m) Conditions to Purchase of Option Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
(n) Additional Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
(o) Termination of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
</TABLE>
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SECTION 6. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
(a) Indemnification of Underwriters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
(b) Indemnification of Company, Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . . . 21
(c) Actions against Parties; Notification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
(d) Settlement without Consent if Failure to Reimburse . . . . . . . . . . . . . . . . . . . . . . . . . 22
(e) Indemnification for Reserved Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 7. Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 8. Representations, Warranties and Agreements to Survive Delivery . . . . . . . . . . . . . . . . . . . 24
SECTION 9. Termination of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
(a) Termination; General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
(b) Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 10. Default by One or More of the Underwriters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 11. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 12. Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 13. GOVERNING LAW AND TIME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 14. Effect of Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
</TABLE>
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SCHEDULE A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sch A-1
SCHEDULE B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sch B-1
SCHEDULE C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sch C-1
SCHEDULE D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sch D-1
Exhibit A-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1-1
Exhibit B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
Annex A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Annex A-1
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<PAGE> 6
INDUSTRIAL DISTRIBUTION GROUP, INC.
(a Delaware corporation)
3,000,000 Shares of Common Stock
(Par Value $.01 Per Share)
PURCHASE AGREEMENT
September __, 1997
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
The Robinson-Humphrey Company, Inc.
as Representative(s) of the several Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
Industrial Distribution Group, Inc., a Delaware corporation (the
"Company"), confirms its agreement with Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and each of the other
Underwriters named in Schedule A hereto (collectively, the "Underwriters",
which term shall also include any underwriter substituted as hereinafter
provided in Section 10 hereof), for whom Merrill Lynch and The
Robinson-Humphrey Company, Inc. are acting as representative(s) (in such
capacity, the "Representative(s)"), with respect to the issue and sale by the
Company and the purchase by the Underwriters, acting severally and not jointly,
of the respective numbers of shares of Common Stock, par value $.01 per share,
of the Company ("Common Stock") set forth in said Schedule A, and with respect
to the grant by the Company to the Underwriters, acting severally and not
jointly, of the option described in Section 2(b) hereof to purchase all or any
part of 450,000 additional shares of Common Stock to cover over-allotments, if
any. The aforesaid 3,000,000 shares of Common Stock (the "Initial Securities")
to be purchased by the Underwriters and all or any part of the 450,000 shares
of Common Stock subject to the option described in Section 2(b) hereof (the
"Option Securities") are hereinafter called, collectively, the "Securities".
The Company understands that the Underwriters propose to make a public
offering of the Securities as soon as the Representatives deem advisable after
this Agreement has been executed and delivered.
<PAGE> 7
The Company and the Underwriters agree that up to 150,000 shares of
the Securities to be purchased by the Underwriters (the "Reserved Securities")
shall be reserved for sale by the Underwriters to certain eligible employees,
persons having business relationships with the Company and certain other
persons designated by the Company, as part of the distribution of the
Securities by the Underwriters, subject to the terms of this Agreement, the
applicable rules, regulations and interpretations of the National Association
of Securities Dealers, Inc. and all other applicable laws, rules and
regulations. To the extent that such Reserved Securities are not orally
confirmed for purchase by such eligible employees and persons having business
relationships with the Company by the end of the first business day after the
date of this Agreement, such Reserved Securities may be offered to the public
as part of the public offering contemplated hereby.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-31539) covering the
registration of the Securities under the Securities Act of 1933, as amended
(the "1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will
either (i) prepare and file a prospectus in accordance with the provisions of
Rule 430A ("Rule 430A") of the rules and regulations of the Commission under
the 1933 Act (the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule
424(b)") of the 1933 Act Regulations or (ii) if the Company has elected to rely
upon Rule 434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term
sheet (a "Term Sheet") in accordance with the provisions of Rule 434 and Rule
424(b). The information included in such prospectus or in such Term Sheet, as
the case may be, that was omitted from such registration statement at the time
it became effective but that is deemed to be part of such registration
statement at the time it became effective (a) pursuant to paragraph (b) of Rule
430A is referred to as "Rule 430A Information" or (b) pursuant to paragraph (d)
of Rule 434 is referred to as "Rule 434 Information." Each prospectus used
before such registration statement became effective, and any prospectus that
omitted, as applicable, the Rule 430A Information or the Rule 434 Information,
that was used after such effectiveness and prior to the execution and delivery
of this Agreement, is herein called a "preliminary prospectus." Such
registration statement, including the exhibits thereto and schedules thereto at
the time it became effective and including the Rule 430A Information and the
Rule 434 Information, as applicable, is herein called the "Registration
Statement." Any registration statement filed pursuant to Rule 462(b) of the
1933 Act Regulations is herein referred to as the "Rule 462(b) Registration
Statement," and after such filing the term "Registration Statement" shall
include the Rule 462(b) Registration Statement. The final prospectus in the
form first furnished to the Underwriters for use in connection with the
offering of the Securities is herein called the "Prospectus." If Rule 434 is
relied on, the term "Prospectus" shall refer to the preliminary prospectus
dated August 29, 1997 together with the Term Sheet and all references in this
Agreement to the date of the Prospectus shall mean the date of the Term Sheet.
For purposes of this Agreement, all references to the Registration Statement,
any preliminary prospectus, the Prospectus or any Term Sheet or any amendment
or supplement to any of the foregoing shall be deemed to include the copy filed
with the Commission pursuant to its Electronic Data Gathering, Analysis and
Retrieval system ("EDGAR").
2
<PAGE> 8
At the Closing Time (defined below), the Company will or will cause
one or more subsidiaries of the Company to merge with each of the companies
listed on Schedule D (each a "Founding Company" and, collectively, the
"Founding Companies"), in each case pursuant to an agreement and plan of merger
and/or reorganization (each an "Acquisition Agreement" and, collectively, the
"Acquisition Agreements"), as described in the Prospectus under "The
Combination" and "Certain Transactions" (collectively, the "Combination").
SECTION 1. Representations and Warranties.
(a) Representations and Warranties by the Company. The Company
represents and warrants to each Underwriter as of the date hereof, as of the
Closing Time referred to in Section 2(c) hereof, and as of each Date of
Delivery (if any) referred to in Section 2(b) hereof (except for the
representation set forth in paragraph (xxvii) which is given only as of the
Closing Time and as of each Delivery Date), and agrees with each Underwriter,
as follows:
(i) Compliance with Registration Requirements. Each of
the Registration Statement and any Rule 462(b) Registration Statement
has become effective under the 1933 Act, and no stop order suspending
the effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act, and no
proceedings for that purpose have been instituted or are pending or,
to the knowledge of the Company, are contemplated by the Commission,
and any request on the part of the Commission for additional
information has been complied with.
At the respective times the Registration Statement, any Rule
462(b) Registration Statement and any post-effective amendments
thereto became effective, and at the Closing Time (and, if any Option
Securities are purchased, at the Date of Delivery), the Registration
Statement, the Rule 462(b) Registration Statement and any amendments
and supplements thereto complied and will comply in all material
respects with the requirements of the 1933 Act and the 1933 Act
Regulations and did not and will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading.
Neither the Prospectus nor any amendments or supplements thereto, at
the time the Prospectus or any such amendment or supplement was issued
and at the Closing Time (and, if any Option Securities are purchased,
at the Date of Delivery), included or will include an untrue statement
of a material fact or omitted or will omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. If Rule 434
is used, the Company will comply with the requirements of Rule 434,
and the Prospectus shall not be "materially different", as such term
is used in Rule 434, from the prospectus included in the Registration
Statement at the time it became effective. The representations and
warranties in this subsection shall not apply to statements in or
omissions from the Registration Statement or Prospectus made in
reliance upon and in conformity with information furnished to the
Company in writing by any Underwriter through Merrill Lynch expressly
for use in the Registration Statement or Prospectus or any amendments
or supplement thereto.
3
<PAGE> 9
Each preliminary prospectus and the prospectus filed as part
of the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424 under the 1933 Act,
complied when so filed in all material respects with the 1933 Act
Regulations and each preliminary prospectus and the Prospectus
delivered to the Underwriters for use in connection with this offering
was substantially identical to the electronically transmitted copies
thereof filed with the Commission pursuant to EDGAR, except to the
extent permitted by Regulation S-T.
(ii) Independent Accountants. Each of the accountants who
certified the financial statements (including the historical financial
statements) and supporting schedules included in the Registration
Statement are independent public accountants as required by the 1933
Act and the 1933 Act Regulations.
(iii) Financial Statements. The historical financial
statements included in the Registration Statement and the Prospectus,
together with the related schedules and notes, present fairly the
financial position of the Company, each Founding Company and their
respective consolidated subsidiaries at the dates indicated and the
statement of operations, stockholders' equity and cash flows of the
Company, each Founding Company and their respective consolidated
subsidiaries for the periods specified; each of said financial
statements has been prepared in conformity with generally accepted
accounting principles ("GAAP") applied on a consistent basis
throughout the periods involved. The supporting schedules included in
the Registration Statement present fairly in accordance with GAAP the
information required to be stated therein. The selected financial
data and the summary financial information included in the Prospectus
present fairly the information shown therein and have been compiled on
a basis consistent with that of the audited financial statements
included in the Registration Statement. The pro forma combined
financial statements and the related notes thereto included in the
Registration Statement and the Prospectus present fairly the
information shown therein, have been prepared in accordance with the
Commission's rules and guidelines with respect to pro forma combined
financial statements and have been properly compiled on the bases
described therein, and the assumptions used in the preparation thereof
are reasonable and the adjustments used therein are appropriate to
give effect to the transactions and circumstances referred to therein.
No other financial statements or schedules of the Company or the
Founding Companies are required by the 1933 Act or the 1933 Act
Regulations to be included in the Registration Statement or the
Prospectus.
(iv) No Material Adverse Change in Business. Since the
respective dates as of which information is given in the Registration
Statement and the Prospectus, except as otherwise stated therein, (A)
there has been no material adverse change in the condition, financial
or otherwise, or in the earnings, business affairs or business
prospects of the Company and its Subsidiaries (defined below)
considered as one enterprise, whether or not arising in the ordinary
course of business (a "Material Adverse Effect"), (B) there have been
no transactions entered into by the Company or any of its
Subsidiaries, other than those in the ordinary course of business,
which are material with
4
<PAGE> 10
respect to the Company and its Subsidiaries considered as one
enterprise, (C) there has been no dividend or distribution of any kind
declared, paid or made by the Company on any class of its capital
stock and (D) except for regular dividends on the capital stock of the
Founding Companies in amounts per share that are consistent with past
practice, there has been no dividend or distribution of any kind
declared, paid or made by any Founding Company on any class of its
capital stock.
(v) Good Standing of the Company. The Company has been
duly organized and is validly existing as a corporation in good
standing under the laws of the State of Delaware and has corporate
power and authority to own, lease and operate its properties and to
conduct its business as described in the Prospectus and to enter into
and perform its obligations under this Agreement; and the Company is
duly qualified as a foreign corporation to transact business and is in
good standing in each other jurisdiction in which such qualification
is required, whether by reason of the ownership or leasing of property
or the conduct of business, except where the failure so to qualify or
to be in good standing would not result in a Material Adverse Effect.
(vi) Good Standing of Subsidiaries. Each subsidiary of
the Company, including without limitation each of the Founding
Companies and each of their respective subsidiaries (each a
"Subsidiary" and, collectively, the "Subsidiaries"), has been duly
organized and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has corporate
power and authority to own, lease and operate its properties and to
conduct its business as described in the Prospectus and is duly
qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the
conduct of business, except where the failure so to qualify or to be
in good standing would not result in a Material Adverse Effect; all of
the issued and outstanding capital stock of each such Subsidiary has
been duly authorized and validly issued, is fully paid and
non-assessable and after giving effect to the Combination will be
owned by the Company, directly or through Subsidiaries, free and clear
of any security interest, mortgage, pledge, lien, encumbrance, claim
or equity and no options, warrants or other rights to purchase,
agreements or other obligations to issue or other rights to convert
any obligations into shares of capital stock or ownership interests in
any Subsidiary are outstanding; none of the outstanding shares of
capital stock of any Subsidiary was issued in violation of the
preemptive or similar rights of any securityholder of such Subsidiary.
The only subsidiaries of the Company immediately after giving effect
to the Combination will be the Subsidiaries listed on Exhibit 21.1 to
the Registration Statement.
(vii) Capitalization. As of the Closing Time, the Company
has authorized capital stock consisting of 50,000,000 shares of Common
Stock, par value $.01 per share, and 10,000,000 shares of Preferred
Stock, par value $.10 per share (the "Preferred Stock"); prior to the
closing of the transactions contemplated by the Acquisition Agreements
and the issuance of shares of Common Stock as contemplated
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<PAGE> 11
thereby and hereby, the Company had issued and outstanding 129,749
shares of Common Stock and no shares of Preferred Stock; upon
consummation of the Combination and the issuance of 3,330,224 shares
of Common Stock as contemplated by the Acquisition Agreements (which,
together the 129,749 shares of Common Stock issued prior to the
Combination, are all the shares of Common Stock issued or to be issued
prior to the issuance and sale of the Securities), without giving
effect to the issuance of the Securities pursuant to the terms of this
Agreement, the Company will have issued and outstanding 3,459,973
shares of Common Stock and no shares of Preferred Stock. All of such
shares of Common Stock have been duly authorized and, when issued and
delivered to the purchasers thereof against payment therefor as
provided in the Acquisition Agreements, will be validly issued, fully
paid and nonassessable; none of the outstanding shares of capital
stock of the Company was issued in violation of the preemptive or
other similar rights of any securityholder of the Company. Except as
described in the Prospectus, there are no outstanding options,
warrants or other rights calling for the issuance of, and there are no
commitments to issue any shares of, capital stock of the Company or
any security convertible into or exchangeable or exercisable for
capital stock of the Company.
(viii) Authorization of Agreement. This Agreement has been
duly authorized, executed and delivered by the Company.
(ix) Authorization and Description of Securities. The
Securities have been duly authorized for issuance and sale to the
Underwriters pursuant to this Agreement and, when issued and delivered
by the Company pursuant to this Agreement against payment of the
consideration set forth herein, will be validly issued and fully paid
and non-assessable; the Common Stock conforms to all statements
relating thereto contained in the Prospectus and such description
conforms to the rights set forth in the instruments defining the same;
no holder of the Securities will be subject to personal liability
solely by reason of being such a holder; and the issuance of the
Securities is not subject to the preemptive or other similar rights of
any securityholder of the Company.
(x) Absence of Defaults and Conflicts. Neither the
Company nor any Subsidiary is in violation of its charter or bylaws or
in default in the performance or observance of any obligation,
agreement, covenant or condition contained in any contract, indenture,
mortgage, deed of trust, loan or credit agreement, note, lease or
other agreement or instrument to which the Company or such Subsidiary
is a party or by which it or any of them may be bound, or to which any
of the property or assets of the Company or such Subsidiary is subject
(collectively, "Agreements and Instruments") except for such defaults
that would not result in a Material Adverse Effect; and the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated herein and in the Registration Statement
(including the Combination and the issuance and sale of the Securities
and the use of the proceeds from the sale of the Securities as
described in the Prospectus under the caption "Use of Proceeds") and
compliance by the Company with its obligations hereunder have been
duly authorized by all necessary corporate action and do not and will
not, whether with
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<PAGE> 12
or without the giving of notice or passage of time or both, conflict
with or constitute a breach of, or default or Repayment Event (as
defined below) under, or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company
or any Subsidiary pursuant to, the Agreements and Instruments (except
for such conflicts, breaches or defaults or liens, charges or
encumbrances that have been or will be waived by the beneficiary
thereof at the Closing Time or would not result in a Material Adverse
Effect), nor will such action result in any violation of the
provisions of the charter or by-laws of the Company or any Subsidiary
or any applicable law, statute, rule, regulation, judgment, order,
writ or decree of any government, government instrumentality or court,
domestic or foreign, having jurisdiction over the Company or any
Subsidiary or any of their assets, properties or operations except
such violations that would not have a Material Adverse Effect. As
used herein, a "Repayment Event" means any event or condition which
gives the holder of any note, debenture or other evidence of
indebtedness (or any person acting on such holder's behalf) the right
to require the repurchase, redemption or repayment of all or a portion
of such indebtedness by the Company or any Subsidiary.
(xi) Absence of Labor Dispute. No labor dispute with the
employees of the Company or any Subsidiary exists or, to the actual
knowledge of Martin S. Pinson, Douglass C. Smith, Jack P. Healy and
the president of each Subsidiary (the "Designated Officers"), is
imminent, and the Designated Offices are not aware of any existing or
imminent labor disturbance by the employees of any of its or any
Subsidiary's principal suppliers, manufacturers, customers or
contractors, which, in either case, may reasonably be expected to
result in a Material Adverse Effect.
(xii) Absence of Proceedings. There is no action, suit,
proceeding, inquiry or investigation before or brought by any court or
governmental agency or body, domestic or foreign, now pending, or, to
the knowledge of the Company, threatened, against or affecting the
Company or any Subsidiary, which is required to be disclosed in the
Registration Statement (other than as disclosed therein), or which
might reasonably be expected to result in a Material Adverse Effect,
or which might reasonably be expected to materially and adversely
affect the properties or assets thereof or the consummation of the
Combination or the transactions contemplated in this Agreement or the
performance by the Company of its obligations hereunder or the
performance by the Company or any Subsidiary of their obligations in
connection with the Combination; the aggregate of all pending legal or
governmental proceedings to which the Company or any Subsidiary is a
party or of which any of their respective property or assets is the
subject which are not described in the Registration Statement,
including ordinary routine litigation incidental to the business,
could not reasonably be expected to result in a Material Adverse
Effect.
(xiii) Accuracy of Exhibits. There are no contracts or
documents which are required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits thereto which
have not been so described and filed as required.
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<PAGE> 13
(xiv) Possession of Intellectual Property. The Company and
the Subsidiaries own or possess, or can acquire on reasonable terms,
adequate patents, patent rights, licenses, inventions, copyrights,
know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks, trade names or other
intellectual property (collectively, "Intellectual Property")
necessary to carry on the business now operated by them and to be
operated following the Combination, and neither the Company nor any of
its Subsidiaries has received any notice or is otherwise aware of any
infringement of or conflict with asserted rights of others with
respect to any Intellectual Property or of any facts or circumstances
which would render any Intellectual Property invalid or inadequate to
protect the interest of the Company or any of its Subsidiaries
therein, and which infringement or conflict (if the subject of any
unfavorable decision, ruling or finding) or invalidity or inadequacy,
singly or in the aggregate, would result in a Material Adverse Effect.
(xv) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or
agency is necessary or required for the performance by the Company of
its obligations hereunder, in connection with the offering, issuance
or sale of the Securities hereunder or the consummation of the
Combination or the transactions contemplated by this Agreement, except
(i) such as have been already obtained or as may be required under the
1933 Act or the 1933 Act Regulations or state securities laws and (ii)
such as have been obtained under the laws and regulations of
jurisdictions outside the United States in which the Reserved
Securities are offered.
(xvi) Possession of Licenses and Permits. The Company and
its Subsidiaries possess such permits, licenses, approvals, consents
and other authorizations (collectively, "Governmental Licenses")
issued by the appropriate federal, state, local or foreign regulatory
agencies or bodies necessary to conduct the business now operated by
them, except where the failure to possess the same would not have a
Material Adverse Effect; the Company and its Subsidiaries are in
compliance with the terms and conditions of all such Governmental
Licenses, except where the failure so to comply would not, singly or
in the aggregate, have a Material Adverse Effect; all of the
Governmental Licenses are valid and in full force and effect, except
when the invalidity of such Governmental Licenses or the failure of
such Governmental Licenses to be in full force and effect would not
have a Material Adverse Effect; and neither the Company nor any of its
Subsidiaries has received any notice of proceedings relating to the
revocation or modification of any such Governmental Licenses which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would result in a Material Adverse Effect.
(xvii) Title to Property. The Company and its Subsidiaries
have good and marketable title to all real property owned by the
Company or any Subsidiary and good title to all other properties owned
by any of them, in each case, free and clear of all
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<PAGE> 14
mortgages, pledges, liens, security interests, claims, restrictions or
encumbrances of any kind except liens for taxes not yet due and
payable except such as (a) are described in the Prospectus or (b)
would not reasonably be expected to have a Material Adverse Effect;
and all of the leases and subleases material to the business of the
Company and the Subsidiaries, considered as one enterprise are in full
force and effect, and neither the Company nor any Subsidiary has
received any notice of any material claim of any sort that has been
asserted by anyone adverse to the rights of the Company or any
Subsidiary under any of the leases or subleases mentioned above, or
affecting or questioning the rights of the Company or such Subsidiary
to the continued possession of the leased or subleased premises under
any such lease or sublease.
(xviii) Compliance with Cuba Act. The Company has complied
with, and is and will be in compliance with, the provisions of that
certain Florida act relating to disclosure of doing business with
Cuba, codified as Section 517.075 of the Florida statutes, and the
rules and regulations thereunder (collectively, the "Cuba Act") or is
exempt therefrom.
(xix) Investment Company Act. The Company is not, and upon
the issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the
Prospectus will not be, an "investment company" or an entity
"controlled" by an "investment company" as such terms are defined in
the Investment Company Act of 1940, as amended (the "1940 Act").
(xx) Environmental Laws. Except as described in the
Registration Statement and except as would not, singly or in the
aggregate, result in a Material Adverse Effect, (A) neither the
Company nor any Subsidiary is in violation of any federal, state,
local or foreign statute, law, rule, regulation, ordinance, code or
policy, or any judicial or administrative interpretation thereof,
including any judicial or administrative order, consent, decree or
judgment, relating to Hazardous Materials (as hereinafter defined) or
protection of human health, the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or
subsurface strata) or wildlife, including, without limitation, laws
and regulations relating to the release or threatened release of
Hazardous Materials or to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of Hazardous
Materials (collectively, "Environmental Laws"), (B) the Company and
its Subsidiaries have all permits, authorizations and approvals
required under any applicable Environmental Laws and are each in
compliance with their requirements, (C) there are no pending or
threatened administrative, regulatory or judicial actions, suits,
demands, demand letters, claims, liens, notices of noncompliance or
violation, investigation or proceedings relating to any Environmental
Law against the Company or any Subsidiary and (D) there are no events
or circumstances that might reasonably be expected to form the basis
of an order for clean-up or remediation, or an action, suit or
proceeding by any private party or governmental body or agency,
against or affecting the Company or any of its Subsidiaries relating
to Hazardous Materials or any Environmental Laws. "Hazardous
Materials"
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<PAGE> 15
mean any and all materials whose presence, quantities or
concentrations are or are reasonably likely to be regulated under any
Environmental Law.
(xxi) Registration Rights. There are no persons with
registration rights or other similar rights to have any securities
registered pursuant to the Registration Statement or otherwise
registered by the Company under the 1933 Act.
(xxii) Tax Returns. The Company and each Subsidiary have
filed all Federal, state, local and foreign income tax returns which
have been required to be filed and have paid all taxes indicated by
said returns and all assessments received by it or any of them to the
extent that such taxes have become due and are not being contested in
good faith, except for the filing of those returns, and the paying of
those taxes, the failure to file or pay, respectively, individually or
in the aggregate, would not have a Material Adverse Effect. All tax
liabilities have been adequately provided for in the financial
statements of the Company and the Subsidiaries, as applicable.
(xxiii) Certain Actions. Neither the Company nor, to the
Company's best knowledge, any of its affiliates or any of the
Subsidiaries or any of their affiliates has taken or will take,
directly or indirectly, any action designed to cause or result in, or
which has constituted or which might reasonably be expected to
constitute, the stabilization or manipulation of the price of the
shares of Common Stock to facilitate the sale or resale of the
Securities.
(xxiv) Insurance. The Company and the Subsidiaries carry,
or are covered by, insurance in such amounts and covering such risks
as is reasonably adequate for the conduct of their respective
businesses and the value of their respective properties and as is
customary for companies in the Company's industry.
(xxv) ERISA. The Company and the Subsidiaries are in
compliance in all material respects with all presently applicable
provisions of the Employee Retirement Income Security Act of 1974, as
amended, including the regulations and published interpretations
thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has
occurred with respect to any "pension plan" (as defined in ERISA) for
which the Company or any of the Subsidiaries would have any liability;
neither the Company nor any of the Subsidiaries has incurred or
expects to incur liability under (i) Title IV of ERISA with respect to
termination of, or withdrawal from, any "pension plan," or (ii)
Section 412 or 4971 of the Internal Revenue Code of 1986, as amended,
including the regulations and published interpretations thereunder
(the "Code"); and each "pension plan" for which the Company or any of
the Subsidiaries would have any liability that is intended to be
qualified under Section 401(a) of the Code is so qualified in all
material respects and nothing has occurred, whether by action or by
failure to act, which would cause the loss of such qualification.
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<PAGE> 16
(xxvi) Related Party Transactions. No relationship, direct
or indirect, exists between or among the Company and its Subsidiaries
on the one hand, and the directors, officers, shareholders, customers
or suppliers of the Company and its Subsidiaries on the other hand,
which is required to be described in the Prospectus which is not so
described.
(xxvii) Proper Completion of Combination. The Closing (as
defined in each Acquisition Agreement) contemplated by each
Acquisition Agreement has occurred or is occurring simultaneously with
the Closing Time and all conditions to the obligations of the Company
under each Acquisition Agreement have been satisfied on or prior to
the Closing Time, except for waivers thereof as to which the
Underwriters have been informed in writing by the Company at or prior
to the Closing Time. At or prior to the Closing Time, each Founding
Company has been or will be merged with and into, or acquired by, the
Company or a Subsidiary of the Company upon the terms described in the
Prospectus, and each Founding Company shall be a wholly-owned direct
or indirect subsidiary of the Company.
(xxviii) Reserved Shares. Each of the persons identified by
the Company to the Underwriters to receive Reserved Shares is a
citizen of the United States and currently is a resident of one of the
United States.
(b) Officer's Certificates. Any certificate signed by any
officer of the Company or any of its Subsidiaries delivered to the
Representative(s) or to counsel for the Underwriters shall be deemed a
representation and warranty by the Company to each Underwriter as to the
matters covered thereby.
SECTION 2. Sale and Delivery to Underwriters; Closing.
(a) Initial Securities. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company agrees to sell to each Underwriter, severally and not
jointly, and each Underwriter, severally and not jointly, agrees to purchase
from the Company, at the price per share set forth in Schedule B, the number of
Initial Securities set forth in Schedule A opposite the name of such
Underwriter, plus any additional number of Initial Securities which such
Underwriter may become obligated to purchase pursuant to the provisions of
Section 10 hereof.
(b) Option Securities. In addition, on the basis of the
representations and warranties herein contained and subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
Underwriters, severally and not jointly, to purchase up to an additional
450,000 shares of Common Stock at the price per share set forth in Schedule B,
less an amount per share equal to any dividends or distributions declared by
the Company and payable on the Initial Securities but not payable on the Option
Securities. The option hereby granted will expire 30 days after the date
hereof and may be exercised in whole or in part from time to time only for the
purpose of covering over-allotments which may be made in connection with the
offering
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<PAGE> 17
and distribution of the Initial Securities upon notice by the Representative(s)
to the Company setting forth the number of Option Securities as to which the
several Underwriters are then exercising the option and the time and date of
payment and delivery for such Option Securities. Any such time and date of
delivery (a "Date of Delivery") shall be determined by the Representative(s),
but shall not be later than seven full business days after the exercise of said
option, nor in any event prior to the Closing Time, as hereinafter defined. If
the option is exercised as to all or any portion of the Option Securities, each
of the Underwriters, acting severally and not jointly, will purchase that
proportion of the total number of Option Securities then being purchased which
the number of Initial Securities set forth in Schedule A opposite the name of
such Underwriter bears to the total number of Initial Securities, subject in
each case to such adjustments as the Representatives in their discretion shall
make to eliminate any sales or purchases of fractional shares.
(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of
Kilpatrick Stockton LLP, 1100 Peachtree Street Atlanta, Georgia, or at such
other place as shall be agreed upon by the Representative(s) and the Company,
at 9:30 A.M. (Eastern time) on the third (fourth, if the pricing occurs after
4:30 P.M. (Eastern time) on any given day) business day after the date hereof
(unless postponed in accordance with the provisions of Section 10), or such
other time not later than ten business days after such date as shall be agreed
upon by the Representative(s) and the Company (such time and date of payment
and delivery being herein called "Closing Time").
In addition, in the event that any or all of the Option Securities are
purchased by the Underwriters, payment of the purchase price for, and delivery
of certificates for, such Option Securities shall be made at the
above-mentioned offices, or at such other place as shall be agreed upon by the
Representative(s) and the Company, on each Date of Delivery as specified in the
notice from the Representative(s) to the Company.
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery
to the Representative(s) for the respective accounts of the Underwriters of
certificates for the Securities to be purchased by them. It is understood that
each Underwriter has authorized the Representative(s), for its account, to
accept delivery of, receipt for, and make payment of the purchase price for,
the Initial Securities and the Option Securities, if any, which it has agreed
to purchase. Merrill Lynch, individually and not as representative of the
Underwriters, may (but shall not be obligated to) make payment of the purchase
price for the Initial Securities or the Option Securities, if any, to be
purchased by any Underwriter whose funds have not been received by the Closing
Time or the relevant Date of Delivery, as the case may be, but such payment
shall not relieve such Underwriter from its obligations hereunder.
(d) Denominations; Registration. Certificates for the Initial
Securities and the Option Securities, if any, shall be in such denominations
and registered in such names as the Representative(s) may request in writing at
least one full business day before the Closing Time or the relevant Date of
Delivery, as the case may be. The certificates for the Initial Securities
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<PAGE> 18
and the Option Securities, if any, will be made available for examination and
packaging by the Representative(s) in the City of New York not later than 10:00
A.M. (Eastern time) on the business day immediately prior to the Closing Time
or the relevant Date of Delivery, as the case may be.
SECTION 3. Covenants of the Company. The Company covenants with
each Underwriter as follows:
(a) Compliance with Securities Regulations and Commission
Requests. The Company, subject to Section 3(b), will comply with the
requirements of Rule 430A or Rule 434, as applicable, and will notify the
Representative(s) immediately, and confirm the notice in writing, (i) when any
post-effective amendment to the Registration Statement shall become effective,
or any supplement to the Prospectus or any amended Prospectus shall have been
filed, (ii) of the receipt of any comments from the Commission, (iii) of any
request by the Commission for any amendment to the Registration Statement or
any amendment or supplement to the Prospectus or for additional information,
and (iv) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of any order preventing or
suspending the use of any preliminary prospectus, or of the suspension of the
qualification of the Securities for offering or sale in any jurisdiction, or of
the initiation or threatening of any proceedings for any of such purposes. The
Company will promptly effect the filings necessary pursuant to Rule 424(b) and
will take such steps as it deems necessary to ascertain promptly whether the
form of prospectus transmitted for filing under Rule 424(b) was received for
filing by the Commission and, in the event that it was not, it will promptly
file such prospectus. The Company will make every reasonable effort to prevent
the issuance of any stop order and, if any stop order is issued, to obtain the
lifting thereof at the earliest possible moment.
(b) Filing of Amendments. The Company will give the
Representative(s) notice of its intention to file or prepare any amendment to
the Registration Statement (including any filing under Rule 462(b)), any Term
Sheet or any amendment, supplement or revision to either the prospectus
included in the Registration Statement at the time it became effective or to
the Prospectus and will furnish the Representative(s) with copies of any such
documents a reasonable amount of time prior to such proposed filing or use, as
the case may be, and will not file or use any such document to which the
Representative(s) or counsel for the Underwriters shall reasonably object.
(c) Delivery of Registration Statements. The Company has
furnished or will deliver to the Representative(s) and counsel for the
Underwriters, without charge, signed copies of the Registration Statement as
originally filed and of each amendment thereto (including exhibits filed
therewith or incorporated by reference therein) and signed copies of all
consents and certificates of experts, and will also deliver to the
Representative(s), without charge, a conformed copy of the Registration
Statement as originally filed and of each amendment thereto (without exhibits)
for each of the Underwriters. The copies of the Registration Statement and
each amendment thereto furnished to the Underwriters will be substantially
identical to the electronically
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<PAGE> 19
transmitted copies thereof filed with the Commission pursuant to EDGAR, except
to the extent permitted by Regulation S-T.
(d) Delivery of Prospectuses. The Company has delivered to each
Underwriter, without charge, as many copies of each preliminary prospectus as
such Underwriter reasonably requested, and the Company hereby consents to the
use of such copies for purposes permitted by the 1933 Act. The Company will
furnish to each Underwriter, without charge, during the period when the
Prospectus is required to be delivered under the 1933 Act or the Securities
Exchange Act of 1934 (the "1934 Act"), such number of copies of the Prospectus
(as amended or supplemented) as such Underwriter may reasonably request. The
Prospectus and any amendments or supplements thereto furnished to the
Underwriters will substantially identical to the electronically transmitted
copies thereof filed with the Commission pursuant to EDGAR, except to the
extent permitted by Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company will
comply with the 1933 Act and the 1933 Act Regulations so as to permit the
completion of the distribution of the Securities as contemplated in this
Agreement and in the Prospectus. If at any time when a prospectus is required
by the 1933 Act to be delivered in connection with sales of the Securities, any
event shall occur or condition shall exist as a result of which it is
necessary, in the opinion of counsel for the Underwriters or for the Company,
to amend the Registration Statement or amend or supplement the Prospectus in
order that the Prospectus will not include any untrue statements of a material
fact or omit to state a material fact necessary in order to make the statements
therein not misleading in the light of the circumstances existing at the time
it is delivered to a purchaser, or if it shall be necessary, in the opinion of
such counsel, at any such time to amend the Registration Statement or amend or
supplement the Prospectus in order to comply with the requirements of the 1933
Act or the 1933 Act Regulations, the Company will promptly prepare and file
with the Commission, subject to Section 3(b), such amendment or supplement as
may be necessary to correct such statement or omission or to make the
Registration Statement or the Prospectus comply with such requirements, and the
Company will furnish to the Underwriters such number of copies of such
amendment or supplement as the Underwriters may reasonably request.
(f) Blue Sky Qualifications. The Company will use its best
efforts, in cooperation with the Underwriters, to qualify the Securities for
offering and sale under the applicable securities laws of such states and other
jurisdictions (domestic or foreign) as the Representative(s) may designate and
to maintain such qualifications in effect for a period of not less than one
year from the later of the effective date of the Registration Statement and any
Rule 462(b) Registration Statement; provided, however, that the Company shall
not be obligated to file any general consent to service of process or to
qualify as a foreign corporation or as a dealer in securities in any
jurisdiction in which it is not so qualified or to subject itself to taxation
in respect of doing business in any jurisdiction in which it is not otherwise
so subject. In each jurisdiction in which the Securities have been so
qualified, the Company will file such statements and reports as may be required
by the laws of such jurisdiction to continue such qualification
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<PAGE> 20
in effect for a period of not less than one year from the effective date of the
Registration Statement and any Rule 462(b) Registration Statement.
(g) Rule 158. The Company will timely file such reports pursuant
to the 1934 Act as are necessary in order to make generally available to its
securityholders as soon as practicable an earnings statement for the purposes
of, and to provide the benefits contemplated by, the last paragraph of Section
11(a) of the 1933 Act.
(h) Use of Proceeds. The Company will use the net proceeds
received by it from the sale of the Securities in the manner specified in the
Prospectus under "Use of Proceeds".
(i) Listing. The Company will use its best efforts to effect and
maintain the listing of the Securities on the New York Stock Exchange under the
symbol IDG and will file with the New York Stock Exchange all documents and
notices required by the New York Stock Exchange of companies that have
securities that are traded on the New York Stock Exchange.
(j) Restriction on Sale of Securities. During a period of 180
days from the date of the Prospectus, the Company will not, without the prior
written consent of Merrill Lynch, (i) directly or indirectly, offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of any share of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or file any
registration statement under the 1933 Act with respect to any of the foregoing
or (ii) enter into any swap or any other agreement or any transaction that
transfers, in whole or in part, directly or indirectly, the economic
consequence of ownership of the Common Stock, whether any such swap or
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise. The foregoing
sentence shall not apply to (A) the Securities to be sold hereunder, (B) any
shares of Common Stock issued by the Company to the holders of securities of
the Founding Companies on the Closing Date in connection with the Combination,
(C) any shares of Common Stock issued by the Company upon the exercise of an
option or warrant or the conversion of a security outstanding on the date
hereof and referred to in the Prospectus, (D) any shares of Common Stock issued
or options to purchase Common Stock granted pursuant to existing employee
benefit plans of the Company referred to in the Prospectus or (E) any shares of
Common Stock issued pursuant to any non-employee director stock plan or
dividend reinvestment plan.
(k) Reporting Requirements. The Company, during the period when
the Prospectus is required to be delivered under the 1933 Act or the 1934 Act,
will file all documents required to be filed with the Commission pursuant to
the 1934 Act within the time periods required by the 1934 Act and the rules and
regulations of the Commission thereunder.
(l) Compliance with NASD Rules. The Company hereby agrees that it
will ensure that the Reserved Securities will be restricted as required by the
National Association of Securities Dealers, Inc. (the "NASD") or the NASD rules
from sale, transfer, assignment,
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pledge or hypothecation for a period of three months following the date of this
Agreement. The Underwriters will notify the Company as to which persons will
need to be so restricted. At the request of the Underwriters, the Company will
direct the transfer agent to place a stop transfer restriction upon such
securities for such period of time. Should the Company release, or seek to
release, from such restrictions any of the Reserved Securities, the Company
agrees to reimburse the Underwriters for any reasonable expenses (including,
without limitation, legal expenses) they incur in connection with such release.
(m) Compliance with Rule 463. The Company shall report to the
Commission its use of proceeds from the sale of the Securities as required
pursuant to Rule 463 of the 1933 Act Regulations.
(n) Combination. The Company will (i) use its best efforts to
satisfy all conditions to the consummation of the Combination, (ii) use its
best efforts to cause each Founding Company to satisfy all conditions to the
consummation of the Combination and (iii) promptly notify the Representatives
of the occurrence of any event which may result in the non-consummation of the
Combination.
SECTION 4. Payment of Expenses. (a) Expenses. The Company will
pay all expenses incident to the performance of its obligations under this
Agreement, including (i) the preparation, printing and filing of the
Registration Statement (including financial statements and exhibits) as
originally filed and of each amendment thereto, (ii) the preparation, printing
and delivery to the Underwriters of this Agreement, any Agreement among
Underwriters and such other documents as may be required in connection with the
offering, purchase, sale, issuance or delivery of the Securities, (iii) the
preparation, issuance and delivery of the certificates for the Securities to
the Underwriters, including any stock or other transfer taxes and any stamp or
other duties payable upon the sale, issuance or delivery of the Securities to
the Underwriters, (iv) the fees and disbursements of the Company's counsel,
accountants and other advisors, (v) the qualification of the Securities under
securities laws in accordance with the provisions of Section 3(f) hereof,
including filing fees and the reasonable fees and disbursements of counsel for
the Underwriters in connection therewith and in connection with the preparation
of the Blue Sky Survey and any supplement thereto, (vi) the printing and
delivery to the Underwriters of copies of each preliminary prospectus, any Term
Sheets and of the Prospectus and any amendments or supplements thereto, (vii)
the preparation, printing and delivery to the Underwriters of copies of the
Blue Sky Survey and any supplement thereto, (viii) the fees and expenses of any
transfer agent or registrar for the Securities, (ix) the filing fees incident
to, and the reasonable fees and disbursements of counsel to the Underwriters in
connection with, the review by the National Association of Securities Dealers,
Inc. (the "NASD") of the terms of the sale of the Securities, (x) the fees and
expenses incurred in connection with the inclusion of the Securities on the New
York Stock Exchange and (xi) all costs and expenses of the Underwriters,
including the fees and disbursements of counsel for the Underwriters, in
connection with matters related to the Reserved Securities which are designated
by the Company for sale to employees and others having a business relationship
with the Company.
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(b) Termination of Agreement. If this Agreement is terminated by
the Representative(s) in accordance with the provisions of Section 5 or Section
9(a)(i) hereof, the Company shall reimburse the Underwriters for all of their
out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the Underwriters.
SECTION 5. Conditions of Underwriters' Obligations. The
obligations of the several Underwriters hereunder are subject to the accuracy
of the representations and warranties of the Company contained in Section 1
hereof or in certificates of any officer of the Company or any subsidiary of
the Company delivered pursuant to the provisions hereof, to the performance by
the Company of its covenants and other obligations hereunder, and to the
following further conditions:
(a) Effectiveness of Registration Statement. The Registration
Statement, including any Rule 462(b) Registration Statement, has become
effective, and at Closing Time, no stop order suspending the effectiveness of
the Registration Statement shall have been issued under the 1933 Act or
proceedings therefor initiated or threatened by the Commission, and any request
on the part of the Commission for additional information shall have been
complied with to the reasonable satisfaction of counsel to the Underwriters. A
prospectus containing the Rule 430A Information shall have been filed with the
Commission in accordance with Rule 424(b) (or a post-effective amendment
providing such information shall have been filed and declared effective in
accordance with the requirements of Rule 430A) or, if the Company has elected
to rely upon Rule 434, a Term Sheet shall have been filed with the Commission
in accordance with Rule 424(b).
(b) Opinion of Counsel for Company. At Closing Time, the
Representative(s) shall have received the favorable opinion, dated as of
Closing Time, of Kilpatrick Stockton LLP, counsel for the Company, in form and
substance reasonably satisfactory to counsel for the Underwriters, together
with signed or reproduced copies of such letter for each of the other
Underwriters to the effect set forth in Exhibit A hereto and to such further
effect as counsel to the Underwriters may reasonably request, and to the extent
necessary, Kilpatrick Stockton LLP may rely as to matters of other than the
laws of the State of Georgia, the General Corporation Law of the State of
Delaware and federal laws on opinions of local counsel reasonably satisfactory
to counsel to the Underwriters. Such counsel may also state that they have
relied, as to factual matters, upon certificates of officers of the Company and
subsidiaries and certificates of public officials.
(c) Opinion of Counsel for Underwriters. At Closing Time, the
Representative(s) shall have received the favorable opinion, dated as of
Closing Time, of Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel for
the Underwriters, together with signed or reproduced copies of such letter for
each of the other Underwriters with respect to the matters set forth in clauses
(i), (ii), (v), (vi) (solely as to preemptive or other similar rights arising
by operation of law or under the charter or bylaws of the Company), (viii)
through (x), inclusive, (xii), (xiv) (solely as to the information in the
Prospectus under "Description of Capital Stock--Common Stock") and the
penultimate paragraph of Exhibit A hereto. In giving such opinion such counsel
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<PAGE> 23
may rely, as to all matters governed by the laws of jurisdictions other than
the law of the State of Illinois, the federal law of the United States and the
General Corporation Law of the State of Delaware, upon the opinions of counsel
satisfactory to the Representative(s). Such counsel may also state that,
insofar as such opinion involves factual matters, they have relied, to the
extent they deem proper, upon certificates of officers of the Company and its
subsidiaries and certificates of public officials.
(d) Officers' Certificate. At Closing Time, there shall not have
been, since the date hereof or since the respective dates as of which
information is given in the Prospectus, any material adverse change in the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company and its subsidiaries considered as one
enterprise, whether or not arising in the ordinary course of business, and the
Representative(s) shall have received a certificate of the President or a Vice
President of the Company and of the chief financial or chief accounting officer
of the Company, dated as of Closing Time, to the effect that (i) there has been
no such material adverse change, (ii) the representations and warranties in
Section 1(a) hereof are true and correct with the same force and effect as
though expressly made at and as of Closing Time, (iii) the Company has complied
with all agreements and satisfied all conditions on its part to be performed or
satisfied at or prior to Closing Time, and (iv) no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceedings
for that purpose have been instituted or are pending or are contemplated by the
Commission.
(e) Accountant's Comfort Letter. At the time of the execution of
this Agreement, the Representative(s) shall have received from each of Arthur
Andersen LLP, Miller & Co. LLP, Schenck & Associates, SC and Baird, Kurtz &
Dobson a letter dated such date, in form and substance satisfactory to the
Representative(s), together with signed or reproduced copies of such letter for
each of the other Underwriters containing statements and information of the
type ordinarily included in accountants' "comfort letters" to underwriters with
respect to the financial statements and certain financial information prepared
by them contained in the Registration Statement and the Prospectus.
(f) Bring-down Comfort Letter. At Closing Time, the
Representative(s) shall have received from each of Arthur Andersen LLP, Miller
& Co. LLP, Schenck & Associates, SC and Baird, Kurtz & Dobson a letter, dated
as of Closing Time, to the effect that they reaffirm the statements made in the
letter furnished pursuant to subsection (e) of this Section, except that the
specified date referred to shall be a date not more than three business days
prior to Closing Time.
(g) Approval of Listing. At Closing Time, the Securities shall
have been approved for inclusion on the New York Stock Exchange, subject only
to official notice of issuance.
(h) No Objection. The NASD has confirmed that it has not raised
any objection with respect to the fairness and reasonableness of the
underwriting terms and arrangements.
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(i) Lock-up Agreements. At the date of this Agreement, the
Representative(s) shall have received an agreement substantially in the form of
Exhibit B (a "Lock-up Agreement") hereto signed by the persons listed on
Schedule C hereto provided, however, that such persons may during the period
set forth in a Lock-up Agreement transfer Common Stock by way of off-market
transfers to those of their respective affiliates (as that term is defined in
Rule 144 under the Act) which agree in writing with the Representatives to be
bound by the provisions of a Lock-up Agreement, and may also during the period
set forth in the Lock-up Agreement pledge Common Stock to any person which,
prior to such pledge taking effect, agrees to be bound by the provisions of the
Lock-up Agreement.
(j) Combination. Each Founding Company shall have been merged
with and into, or acquired by, the Company or a Subsidiary of the Company upon
the terms described in the Prospectus simultaneously with the closing of the
purchase of the Initial Shares by the Underwriters, and each Founding Company
shall be a wholly-owned direct or indirect subsidiary of the Company.
(k) Credit Agreement. At or before Closing Time, the Company
shall have entered into a credit agreement with _______________ pursuant to
which the Company shall have available to it a credit facility in the amount of
$__________.
(l) Employment Agreement. At or before Closing Time, the Company
shall have entered into an employment agreement with each of Martin S. Pinson,
Douglass C. Smith and Jack P. Healey.
(m) Conditions to Purchase of Option Securities. In the event
that the Underwriters exercise their option provided in Section 2(b) hereof to
purchase all or any portion of the Option Securities, the representations and
warranties of the Company contained herein and the statements in any
certificates furnished by the Company or any Subsidiary hereunder shall be true
and correct as of each Date of Delivery and, at the relevant Date of Delivery,
the Representative(s) shall have received:
(i) Officers' Certificate. A certificate, dated such
Date of Delivery, of the President or a Vice President of the Company
and of the chief financial or chief accounting officer of the Company
confirming that the certificate delivered at the Closing Time pursuant
to Section 5(d) hereof remains true and correct as of such Date of
Delivery.
(ii) Opinion of Counsel for Company. The favorable
opinion of Kilpatrick Stockton LLP, counsel for the Company, in form
and substance reasonably satisfactory to counsel for the Underwriters,
dated such Date of Delivery, relating to the Option Securities to be
purchased on such Date of Delivery and otherwise to the same effect as
the opinion required by Section 5(b) hereof.
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(iii) Opinion of Counsel for Underwriters. The favorable
opinion of Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel
for the Underwriters, dated such Date of Delivery, relating to the
Option Securities to be purchased on such Date of Delivery and
otherwise to the same effect as the opinion required by Section 5(c)
hereof.
(iv) Bring-down Comfort Letter. A letter from each of
Arthur Andersen LLP, Miller & Co. LLP, Schenck & Associates, SC and
Baird, Kurtz & Dobson, in form and substance satisfactory to the
Representative(s) and dated such Date of Delivery, substantially in
the same form and substance as the letter furnished to the
Representative(s) pursuant to Section 5(f) hereof, except that the
"specified date" in the letter furnished pursuant to this paragraph
shall be a date not more than five days prior to such Date of
Delivery.
(n) Additional Documents. At Closing Time and at each Date of
Delivery, counsel for the Underwriters shall have been furnished with such
documents and opinions as they may require for the purpose of enabling them to
pass upon the issuance and sale of the Securities as herein contemplated, or in
order to evidence the accuracy of any of the representations or warranties, or
the fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Company in connection with the issuance and sale of the Securities
as herein contemplated shall be reasonably satisfactory in form and substance
to the Representative(s) and counsel for the Underwriters.
(o) Termination of Agreement. If any condition specified in this
Section shall not have been fulfilled when and as required to be fulfilled,
this Agreement, or, in the case of any condition to the purchase of Option
Securities, on a Date of Delivery which is after the Closing Time, the
obligations of the several Underwriters to purchase the relevant Option
Securities, may be terminated by the Representative(s) by notice to the Company
at any time at or prior to Closing Time or such Date of Delivery, as the case
may be, and such termination shall be without liability of any party to any
other party except as provided in Section 4 and except that Sections 1, 6, 7
and 8 shall survive any such termination and remain in full force and effect.
SECTION 6. Indemnification.
(a) Indemnification of Underwriters. The Company agrees to
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage
and expense whatsoever, as incurred, arising out of any untrue
statement or alleged untrue statement of a material fact contained in
the Registration Statement (or any amendment thereto), including the
Rule 430A Information and the Rule 434 Information, if applicable, or
the omission or alleged omission therefrom of a material fact required
to be stated therein or necessary to make the statements therein not
misleading or arising out of any untrue statement or alleged untrue
statement of a material fact included in any preliminary prospectus or
the
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Prospectus (or any amendment or supplement thereto), or the omission
or alleged omission therefrom of a material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage
and expense whatsoever, as incurred, to the extent of the aggregate
amount paid in settlement of any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or
threatened, or of any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or
omission; provided that (subject to Section 6(d) below) any such
settlement is effected with the written consent of the Company; and
(iii) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by Merrill
Lynch), reasonably incurred in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, to the
extent that any such expense is not paid under (i) or (ii) above, or
pursuant to the terms of that certain letter agreement between the
Representatives and the Company of even date herewith;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
Underwriter through Merrill Lynch expressly for use in the Registration
Statement (or any amendment thereto), including the Rule 430A Information and
the Rule 434 Information, if applicable, or any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto); and provided, further,
that the Company will not be liable to an Underwriter with respect to any
preliminary prospectus to the extent that the Company shall sustain the burden
of proving that any such loss, liability, claim, damage or expense resulted
from the fact that such Underwriter, in contravention of a requirement of this
Agreement or applicable law, sold Securities to a person to whom such
Underwriter failed to send or give, at or prior to the Closing Date, a copy of
the final Prospectus as then amended or supplemented if (i) the Company has
previously furnished copies thereof (sufficiently in advance of the Closing
Date to allow for distribution by the Closing Date) to the Underwriters and the
loss, liability, claim, damage or expense of such Underwriter resulted from an
untrue statement or omission or alleged untrue statement or omission of a
material fact contained in or omitted from the preliminary prospectus which was
corrected in the final Prospectus as, if applicable, amended or supplemented
prior to the Closing Date and (ii) such failure to give or send such final
Prospectus by the Closing Date to the party or parties asserting such loss,
liability, claim, damage or expense would have constituted the sole defense to
the claim asserted by such person.
(b) Indemnification of Company, Directors and Officers. Each
Underwriter severally agrees to indemnify and hold harmless the Company, its
directors, each of its officers who signed the Registration Statement, and each
person, if any, who controls the Company within
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<PAGE> 27
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against
any and all loss, liability, claim, damage and expense described in the
indemnity contained in subsection (a) of this Section, as incurred, but only
with respect to untrue statements or omissions, or alleged untrue statements or
omissions, made in the Registration Statement (or any amendment thereto),
including the Rule 430A Information and the Rule 434 Information, if
applicable, or any preliminary prospectus or the Prospectus (or any amendment
or supplement thereto) in reliance upon and in conformity with written
information furnished to the Company by such Underwriter through Merrill Lynch
expressly for use in the Registration Statement (or any amendment thereto) or
such preliminary prospectus or the Prospectus (or any amendment or supplement
thereto).
(c) Actions against Parties; Notification. Each indemnified party
shall give notice as promptly as reasonably practicable to each indemnifying
party of any action commenced against it in respect of which indemnity may be
sought hereunder, but failure to so notify an indemnifying party shall not
relieve such indemnifying party from any liability hereunder to the extent it
is not materially prejudiced as a result thereof and in any event shall not
relieve it from any liability which it may have otherwise than on account of
this indemnity agreement. In the case of parties indemnified pursuant to
Section 6(a) above, counsel to the indemnified parties shall be selected by
Merrill Lynch, and, in the case of parties indemnified pursuant to Section 6(b)
above, counsel to the indemnified parties shall be selected by the Company. An
indemnifying party may participate at its own expense in the defense of any
such action; provided, however, that counsel to the indemnifying party shall
not (except with the consent of the indemnified party) also be counsel to the
indemnified party. In no event shall the indemnifying parties be liable for
fees and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances. No
indemnifying party shall, without the prior written consent of the indemnified
parties, settle or compromise or consent to the entry of any judgment with
respect to any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim whatsoever
in respect of which indemnification or contribution could be sought under this
Section 6 or Section 7 hereof (whether or not the indemnified parties are
actual or potential parties thereto), unless such settlement, compromise or
consent (i) includes an unconditional release of each indemnified party from
all liability arising out of such litigation, investigation, proceeding or
claim and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act by or on behalf of any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any
time an indemnified party shall have requested an indemnifying party to
reimburse the indemnified party for fees and expenses of counsel, such
indemnifying party agrees that it shall be liable for any settlement of the
nature contemplated by Section 6(a)(ii) effected without its written consent if
(i) such settlement is entered into more than 45 days after receipt by such
indemnifying party of the aforesaid request, (ii) such indemnifying party shall
have received notice of the terms of such settlement at least 30 days prior to
such settlement being entered into and (iii) such indemnifying
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<PAGE> 28
party shall not have reimbursed such indemnified party in accordance with such
request prior to the date of such settlement.
(e) Indemnification for Reserved Securities. In connection with
the offer and sale of the Reserved Securities, the Company agrees, promptly
upon a request in writing, to indemnify and hold harmless the Underwriters from
and against any and all losses, liabilities, claims, damages and expenses
incurred by them as a result of the failure of eligible employees and persons
having a business relationship with the Company to pay for and accept delivery
of Reserved Securities which, by the end of the first business day following
the date of this Agreement, were subject to a properly confirmed agreement to
purchase.
SECTION 7. Contribution. If the indemnification provided for in
Section 6 hereof is for any reason unavailable to or insufficient to hold
harmless an indemnified party in respect of any losses, liabilities, claims,
damages or expenses referred to therein, then each indemnifying party shall
contribute to the aggregate amount of such losses, liabilities, claims, damages
and expenses incurred by such indemnified party, as incurred, (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriters on the other hand from the
offering of the Securities pursuant to this Agreement or (ii) if the allocation
provided by clause (i) is not permitted by applicable law, in such proportion
as is appropriate to reflect not only the relative benefits referred to in
clause (i) above but also the relative fault of the Company on the one hand and
of the Underwriters on the other hand in connection with the statements or
omissions which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the
Underwriters on the other hand in connection with the offering of the
Securities pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the
Securities pursuant to this Agreement (before deducting expenses) received by
the Company and the total underwriting discount received by the Underwriters,
in each case as set forth on the cover of the Prospectus, or, if Rule 434 is
used, the corresponding location on the Term Sheet, bear to the aggregate
initial public offering price of the Securities as set forth on such cover.
The relative fault of the Company on the one hand and the Underwriters
on the other hand shall be determined by reference to, among other things,
whether any such untrue or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Underwriters and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of
the equitable considerations referred to above in this Section 7.
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The aggregate amount of losses, liabilities, claims, damages and expenses
incurred by an indemnified party and referred to above in this Section 7 shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever based upon any such
untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no Underwriter shall
be required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of any such untrue or
alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the 1933 Act) shall be entitled to contribution with
respect thereto from any person who was not guilty of such fraudulent
misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such Underwriter,
and each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company
within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act
shall have the same rights to contribution as the Company. The Underwriters'
respective obligations to contribute pursuant to this Section 7 are several in
proportion to the number of Initial Securities set forth opposite their
respective names in Schedule A hereto and not joint.
SECTION 8. Representations, Warranties and Agreements to Survive
Delivery. All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company or any of its
subsidiaries submitted pursuant hereto, shall remain operative and in full
force and effect, regardless of any investigation made by or on behalf of any
Underwriter or controlling person, or by or on behalf of the Company, and shall
survive delivery of the Securities to the Underwriters.
SECTION 9. Termination of Agreement.
(a) Termination; General. The Representative(s) may terminate
this Agreement, by notice to the Company, at any time at or prior to Closing
Time (i) if there has been, since the time of execution of this Agreement or
since the respective dates as of which information is given in the Prospectus,
any material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business, or (ii) if there has occurred any material adverse
change in the financial markets in the United States or the international
financial markets, any outbreak of hostilities or escalation thereof or other
calamity or crisis or any change or development involving a prospective change
in national or
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<PAGE> 30
international political, financial or economic conditions, in each case the
effect of which is such as to make it, in the judgment of the
Representative(s), impracticable to market the Securities or to enforce
contracts for the sale of the Securities, or (iii) if trading in any securities
of the Company has been suspended or materially limited by the Commission or
the New York Stock Exchange, or if trading generally on the American Stock
Exchange or the New York Stock Exchange or in the Nasdaq National Market has
been suspended or materially limited, or minimum or maximum prices for trading
have been fixed, or maximum ranges for prices have been required, by any of
said exchanges or by such system or by order of the Commission, the National
Association of Securities Dealers, Inc. or any other governmental authority, or
(iv) if a banking moratorium has been declared by either Federal or New York
authorities or (v) there has occurred any event that makes untrue or incorrect
in any material respect any statement or information contained in the
Registration Statement or Prospectus or that is not reflected in the
Registration Statement or Prospectus but should be reflected therein in order
to make the statements or information therein (in the case of the Prospectus,
in light of the circumstances in which they were made) not misleading in any
material respect.
(b) Liabilities. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that
Sections 1, 6, 7 and 8 shall survive such termination and remain in full force
and effect.
SECTION 10. Default by One or More of the Underwriters. If one or
more of the Underwriters shall fail at Closing Time or a Date of Delivery to
purchase the Securities which it or they are obligated to purchase under this
Agreement (the "Defaulted Securities"), the Representative(s) shall have the
right, within 24 hours thereafter, to make arrangements for one or more of the
non-defaulting Underwriters, or any other underwriters, to purchase all, but
not less than all, of the Defaulted Securities in such amounts as may be agreed
upon and upon the terms herein set forth; if, however, the Representative(s)
shall not have completed such arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10% of
the number of Securities to be purchased on such date, each of the
non-defaulting Underwriters shall be obligated, severally and not jointly, to
purchase the full amount thereof in the proportions that their respective
underwriting obligations hereunder bear to the underwriting obligations of all
non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the
number of Securities to be purchased on such date, this Agreement or, with
respect to any Date of Delivery which occurs after the Closing Time, the
obligation of the Underwriters to purchase and of the Company to sell the
Option Securities to be purchased and sold on such Date of Delivery shall
terminate without liability on the part of any non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
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<PAGE> 31
In the event of any such default which does not result in a
termination of this Agreement or, in the case of a Date of Delivery which is
after the Closing Time, which does not result in a termination of the
obligation of the Underwriters to purchase and the Company to sell the relevant
Option Securities, as the case may be, either the Representative(s) or the
Company shall have the right to postpone the Closing Time or the relevant Date
of Delivery, as the case may be, for a period not exceeding seven days in order
to effect any required changes in the Registration Statement or Prospectus or
in any other documents or arrangements. As used herein, the term "Underwriter"
includes any person substituted for an Underwriter under this Section 10.
SECTION 11. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriters shall be directed to the Representative(s) at Sears Tower
Building, Suite 5500, Chicago, Illinois 60606, attention of Gray Stevens; with
a copy to William R. Kunkel, Skadden, Arps, Slate, Meagher & Flom (Illinois),
Suite 2100, 333 West Wacker Drive, Chicago, Illinois 60606; and notices to the
Company shall be directed to it at 2500 Royal Place, Tucker, Georgia 30084,
attention of Martin S. Pinson; with a copy to W. Randy Eaddy, Kilpatrick
Stockton LLP, Suite 2800, 1100 Peachtree Street, Atlanta, Georgia 30309-4530.
SECTION 12. Parties. This Agreement shall each inure to the benefit
of and be binding upon the Underwriters and the Company and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
Underwriters and the Company and their respective successors and the
controlling persons and officers and directors referred to in Sections 6 and 7
and their heirs and legal representatives, any legal or equitable right, remedy
or claim under or in respect of this Agreement or any provision herein
contained. This Agreement and all conditions and provisions hereof are
intended to be for the sole and exclusive benefit of the Underwriters and the
Company and their respective successors, and said controlling persons and
officers and directors and their heirs and legal representatives, and for the
benefit of no other person, firm or corporation. No purchaser of Securities
from any Underwriter shall be deemed to be a successor by reason merely of such
purchase.
SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 14. Effect of Headings. The Article and Section headings
herein and the Table of Contents are for convenience only and shall not affect
the construction hereof.
26
<PAGE> 32
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof,
whereupon this instrument, along with all counterparts, will become a binding
agreement between the Underwriters and the Company in accordance with its
terms.
Very truly yours,
INDUSTRIAL DISTRIBUTION GROUP, INC.
By
-----------------------------------
Name:
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
THE ROBINSON-HUMPHREY COMPANY, INC.
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By:
-----------------------------------
Authorized Signatory
For themselves and as Representative(s) of the other Underwriters named in
Schedule A hereto.
27
<PAGE> 33
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Initial
Name of Underwriter Securities
------------------- ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Robinson-Humphrey Company, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
---------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
===============
</TABLE>
Sch A-1
<PAGE> 34
SCHEDULE B
INDUSTRIAL DISTRIBUTION GROUP, INC.
3,000,000 Shares of Common Stock
(Par Value $.01 Per Share)
1. The initial public offering price per share for the
Securities, determined as provided in said Section 2, shall be $__________.
2. The purchase price per share for the Securities to be paid by
the several Underwriters shall be $__________, being an amount equal to the
initial public offering price set forth above less $__________ per share;
provided that the purchase price per share for any Option Securities purchased
upon the exercise of the over-allotment option described in Section 2(b) shall
be reduced by an amount per share equal to any dividends or distributions
declared by the Company and payable on the Initial Securities but not payable
on the Option Securities.
Sch B-1
<PAGE> 35
SCHEDULE C
List of Persons and Entities
Subject to Lock-up
David K. Barth
Charles T. Burkland
Martin C. Burkland
William J. Burkland
William R. Fenoglio
Jack P. Healy
Industrial Distribution Group, Inc.
William J. Janner, Jr.
Charles A. Lingenfelter
William T. Parr
Martin S. Pinson
George L. Sachs, Jr.
Richard M. Seigel
Andrew B. Shearer
Douglass C. Smith
Paul Smith
Thomas W. Stewart
Roy R. Woleben
Robert C. Skidmore
John Zimmer
[OTHER PERSONS RECEIVING COMPANY STOCK BEFORE THE OFFER]
Sch C-1
<PAGE> 36
SCHEDULE D
List of Founding Companies
Associated Suppliers, Inc.
B & J Industrial Supply Company
Cramer Industrial Supplies, Inc.
Grinding Supplies Company
Industrial Distribution Group, Inc. ("Predecessor-IDG")
J.J. Stangel Co.
Shearer Industrial Supply Co.
Slater Industrial Supply, Inc.
Tri-Star Industrial Supply, Inc.
Sch D-1
<PAGE> 37
Exhibit A-1
FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware.
(ii) The Company has corporate power and authority to own,
lease and operate its properties and to conduct its business as
described in the Prospectus and to enter into and perform its
obligations under the Purchase Agreement.
(iii) The Company is duly qualified as a foreign
corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by
reason of the ownership or leasing of property or the conduct of
business, except where the failure so to qualify or to be in good
standing would not result in a Material Adverse Effect.
(iv) As of the Closing Date, the Company has authorized
capital stock consisting of 50,000,000 shares of Common Stock, par
value $.01 per share, and 10,000,000 shares of Preferred Stock, par
value $.10 per share (the "Preferred Stock"); prior to the closing of
the transactions contemplated by each of the Acquisition Agreements
and the issuance of shares of Common Stock as contemplated thereby and
by the Purchase Agreement, the Company had issued and outstanding
129,749 shares of Common Stock and no shares of Preferred Stock; upon
consummation of the Combination and the issuance of 3,330,224 shares
of Common Stock as contemplated by the Acquisition Agreements, (which,
together with the 129,749 shares of Common Stock issued prior to the
Combination, are all the shares of Common Stock issued or to be issued
prior to the issuance and sale of the Securities), but without giving
effect to the issuance of the Securities pursuant to the terms of this
Agreement, the Company will have issued and outstanding 3,459,973
shares of Common Stock and no shares of Preferred Stock. All of such
shares of Common Stock have been duly authorized and, when issued and
delivered to the purchasers thereof against payment therefor as
provided in the Acquisition Agreements, will be validly issued, fully
paid and nonassessable; none of the outstanding shares of capital
stock of the Company was issued in violation of the preemptive or
other similar rights of any securityholder of the Company, arising by
operation of law or under the Certificate of Incorporation or bylaws
of the Company and to our knowledge under any agreement to which the
Company or its Subsidiaries are parties. Except as described in the
Prospectus, there are no outstanding options, warrants or other rights
calling for the issuance of, and there are no commitments to
A-1-1
<PAGE> 38
issue any shares of, capital stock of the Company or any security
convertible into or exchangeable or exercisable for capital stock of
the Company.
(v) The Securities have been duly authorized for issuance
and sale to the Underwriters pursuant to the Purchase Agreement and,
when issued and delivered by the Company pursuant to the Purchase
Agreement against payment of the consideration set forth in the
Purchase Agreement, will be validly issued and fully paid and
non-assessable and no holder of the Securities is or will be subject
to personal liability solely by reason of being such a holder.
(vi) The issuance of the Securities is not subject to
preemptive or other similar rights of any securityholder of the
Company arising by operation of law under the Certificate of
Incorporation or By-Laws of the Company or to the best of our
knowledge under any agreement to which the Company is a party.
(vii) Each subsidiary of the Company existing on the date
prior to the date of this opinion letter, which does not include any
Founding Company (such existing subsidiaries are collectively referred
to herein as "Existing Subsidiaries" and individually referred to as
an "Existing Subsidiary"), and, based solely on opinions of counsel to
each Founding Company, the names of which firms are set forth on
schedule 1 hereto, upon which we rely with your permission
(collectively the "Founding Company Counsel Opinions"), each Founding
Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has corporate power and authority to own, lease and
operate its properties and conduct its business as described in the
Prospectus and is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the
failure to qualify or to be in good standing would not result in a
Material Adverse Effect; except as otherwise disclosed in the
Registration Statement, all the issued and outstanding capital stock
of each Existing Subsidiary, and, based solely on the Founding Company
Counsel Opinions, of each Founding Company has been duly authorized
and validly issued, is fully paid and non-assessable; after giving
effect to the Combination, and with respect to a Founding Company,
based solely on a review of the stock records and minute books of each
Founding Company; all of the issued and outstanding capital stock of
each Existing Subsidiary and each Founding Company will be owned by
the Company, directly or through subsidiaries, free and clear of any
security interest, mortgage, pledge, lien, encumbrance, claim,
shareholders agreement, or voting trust and no options, warrants or
other rights to purchase, agreements, or other obligations to issue or
other rights to convert any other obligations into shares of capital
stock or ownership interests in any Existing Subsidiary or Founding
Company is outstanding; none of the outstanding shares of the capital
stock of any Existing Subsidiary or, based solely on the Founding
Company Counsel Opinions, of any Founding Company was issued in
violation of the preemptive or similar rights of any security holder
thereof arising by operation of law, under its
A-1-2
<PAGE> 39
charter or by-laws or to the best of our knowledge under any agreement
to which any Existing Subsidiary or Founding Company, as the case may
be, is a party.
(viii) The Purchase Agreement has been duly authorized,
executed and delivered by the Company.
(ix) Based solely on a telephone conversation between
_____ of the Staff and Jan M. Davidson of this firm, the Registration
Statement, not including any Rule 462(b) Registration Statement, which
was effective upon filing, has been declared effective under the 1933
Act as of _______, 1997; any required filing of the Prospectus
pursuant to Rule 424(b) has been made in the manner and within the
time period required by Rule 424(b); and, to the best of our
knowledge, no stop order suspending the effectiveness of the
Registration Statement or any Rule 462(b) Registration Statement has
been issued under the 1933 Act, and no proceedings for that purpose
have been instituted or are pending or threatened by the Commission.
(x) The Registration Statement, including any Rule 462(b)
Registration Statement, the Rule 430A Information and the Rule 434
Information, as applicable, the Prospectus and each amendment or
supplement to the Registration Statement and Prospectus as of their
respective effective or issue dates (other than the financial
statements and other financial information derived therefrom and
supporting schedules included therein or omitted therefrom, as to
which we need express no opinion) complied as to form in all material
respects with the requirements of the 1933 Act and the 1933 Act
Regulations.
(xi) If Rule 434 has been relied upon, the Prospectus was
not "materially different," as such term is used in Rule 434, from the
prospectus included in the Registration Statement at the time it
became effective.
(xii) The Securities, subject to official notice of
issuance, have been duly approved for listing on the New York Stock
Exchange. The form of certificate used to evidence the Common Stock
complies in all material respects with all applicable statutory
requirements, with any applicable requirements of the Certificate of
Incorporation, as amended, and bylaws of the Company and the
requirements of the New York Stock Exchange.
(xiii) To the best of our knowledge, there is not pending or
threatened in writing any action, suit, proceeding, inquiry or
investigation, to which the Company or any subsidiary is a party, or
to which the property of the Company or any subsidiary is subject,
before or brought by any court or governmental agency or body,
domestic or foreign, which might reasonably be expected to result in a
Material Adverse Effect, or which might reasonably be expected to
materially and adversely affect the properties or assets thereof or
the consummation of the Combination or the transactions contemplated
in the Purchase Agreement or the performance by the Company of its
obligations
A-1-3
<PAGE> 40
thereunder or the performance by the Company of its obligations in
connection with the Combination.
(xiv) The information in the Prospectus under "Description
of Capital Stock," "Risk Factors--Legal Proceeding," "Business--Legal
Matters," and "Shares Eligible for Future Sale" and in the
Registration Statement under Item 14, to the extent that it
constitutes matters of law, summaries of legal matters, the Company's
Certificate of Incorporation, as amended, and by-laws or legal
proceedings, or legal conclusions, has been reviewed by us and fairly
presents the information set forth therein.
(xv) To the best of our knowledge, there are no statutes
or regulations that are required to be described in the Prospectus
that are not so described.
(xvi) All descriptions in the Registration Statement of
contracts and other documents to which the Company or its Subsidiaries
are a party are accurate in all material respects; to the best of our
knowledge, there are no franchises, contracts, indentures, mortgages,
loan agreements, notes, leases or other instruments required to be
described or referred to in the Registration Statement or to be filed
as exhibits thereto other than those described or referred to therein
or filed or incorporated by reference as exhibits thereto, and the
descriptions thereof or references thereto are correct in all material
respects.
(xvii) To the best of our knowledge and, with respect to
each Founding Company, based solely on the respective Founding Company
Counsel Opinion, neither the Company, any Founding Company nor any
Existing Subsidiary is in violation of its charter or by-laws, and no
default by the Company, any Founding Company or any Existing
Subsidiary exists in the due performance or observance of any material
obligation, agreement, covenant or condition contained in any
contract, indenture, mortgage, loan agreement, note, lease or other
agreement or instrument that is described or referred to in the
Registration Statement or the Prospectus or filed or incorporated by
reference as an exhibit to the Registration Statement (a "Material
Contract").
(xviii) No filing with, or authorization, approval, consent,
license, order, registration, qualification or decree of, any court or
governmental authority or agency, either federal or Delaware (other
than under the 1933 Act and the 1933 Act Regulations, which have been
obtained, or as may be required under the securities or blue sky laws
of the various states, as to which we need express no opinion) is
necessary or required in connection with the due authorization,
execution and delivery of the Purchase Agreement or for the offering,
issuance or sale of the Securities.
(xix) The execution, delivery and performance of the
Purchase Agreement and the consummation of the transactions
contemplated in the Purchase Agreement and in the Registration
Statement (including the Combination, the issuance and sale of the
Securities and the use of the proceeds from the sale of the Securities
as described in the Prospectus
A-1-4
<PAGE> 41
under the caption "Use Of Proceeds") and compliance by the Company
with its obligations under the Purchase Agreement do not and will not,
whether with or without the giving of notice or lapse of time or both,
conflict with or constitute a breach of, or default or Repayment Event
(as defined in Section 1(a)(x) of the Purchase Agreement) under or
result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company, any Founding
Company (based solely on the respective Founding Company Opinions) or
any Existing Subsidiary pursuant to any Material Contract, (except for
such conflicts, breaches or defaults or liens, charges or encumbrances
that would not have a Material Adverse Effect), nor will such action
result in any violation of the provisions of the charter or by-laws of
the Company, any Founding Company (based solely on the respective
Founding Company Opinions) or any Existing Subsidiary, any law,
statute, rule, regulation, which in our experience are applicable to
transactions of this type, or any judgment, order, writ or decree,
known to us, of any government, government instrumentality or court,
domestic or foreign, having jurisdiction over the Company or any
Subsidiary or any of their respective properties, assets or
operations.
(xx) To the best of our knowledge, there are no agreements
between the Company and any person granting such person the right to
require the Company to file a registration statement under the 1933
Act with respect to any securities of the Company or to require the
Company to include such securities in a registration statement filed
under the 1933 Act.
(xxi) The Company is not an "investment company" or an
entity "controlled" by an "investment company," as such terms are
defined in the 1940 Act.
(xxii) Each Acquisition Agreement (which have been filed
with the Commission as exhibits to the Registration Statement) with
respect to the Combination has been duly and validly authorized,
executed and delivered by the Company, the respective Founding Company
and the respective Existing Subsidiary and constitutes the valid and
binding obligation of each of the Company, each Founding Company
(based solely on the respective Founding Company Opinion) and the
respective Existing Subsidiary enforceable in accordance with its
terms, except as may be limited by bankruptcy, insolvency and other
laws affecting creditors' rights generally, or as may be modified by a
court of equity; to the best of our knowledge, no Founding Company
shareholder has elected dissenters rights other than Alvis Jay Waite
and no other contractual rights exist giving any of the owners of the
Founding Companies any preemptive rights or rights of first offer or
first refusal with respect to the Securities.
(xxiii) The transactions contemplated by each Acquisition
Agreement have been consummated in accordance with the terms of the
respective Acquisition Agreement. Each of the acquisitions of the
Founding Companies by an Existing Subsidiary of the Company is
effective under the law of the jurisdiction of the surviving entity.
A-1-5
<PAGE> 42
(xxiv) The shares of Common Stock issued and sold to the
shareholders of the Founding Companies pursuant to the Acquisition
Agreements (the "Combination Common Stock") (a) are not be subject to
any preemptive or similar rights of any securityholder of the Company
arising by operation of law, under the Certificate of Incorporation or
by-laws of the Company or to the best of our knowledge under any
agreement to which the Company is a party. Based solely upon, as to
certain factual matters, the representations and warranties of all of
the parties to the Acquisition Agreements and certain other documents
delivered in connection therewith (including, but not limited to,
investor questionnaires), the sale of the Combination Common Stock
will be exempt from the registration requirements of the 1933 Act and
will be the subject of an available exemption from the requirements of
all applicable state securities or Blue Sky laws.
Nothing has come to our attention that would lead us to believe that
the Registration Statement or any amendment thereto, including the Rule 430A
Information and Rule 434 Information (if applicable), (except for financial
statements and schedules and other financial data included therein or omitted
therefrom, as to which we need make no statement), at the time such
Registration Statement or any such amendment became effective, contained an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading or that the Prospectus or any amendment or supplement thereto
(except for financial statements and schedules and other financial data
included therein or omitted therefrom, as to which we need make no statement),
at the time the Prospectus was issued, at the time any such amended or
supplemented prospectus was issued or at the Closing Time, included or includes
an untrue statement of a material fact or omitted or omits to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
In rendering such opinion, such counsel may rely (A) on the Founding
Company Opinions and (B), as to matters of fact (but not as to legal
conclusions), to the extent they deem proper, on certificates of responsible
officers of the Company, the Founding Companies and public officials. Such
opinion shall not state that it is to be governed or qualified by, or that it
is otherwise subject to, any treatise, written policy or other document
relating to legal opinions, including, without limitation, the Legal Opinion
Accord of the ABA Section of Business Law (1991).
A-1-6
<PAGE> 43
FORM OF LOCK-UP FROM DIRECTORS, OFFICERS
OR OTHER STOCKHOLDERS PURSUANT TO SECTION 5(I)
Exhibit B
__________ ___, 1997
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated,
The Robinson-Humphrey Company, Inc.
as Representative(s) of the several
Underwriters to be named in the
within-mentioned Purchase Agreement
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Re: Proposed Public Offering by Industrial Distribution Group, Inc.
Dear Sirs:
The undersigned, a stockholder of a Founding Company (as defined in
the Purchase Agreement) or an officer or director of Industrial Distribution
Group, Inc., a Delaware corporation (the "Company"), understands that Merrill
Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") and The Robinson-Humphrey Company, Inc. propose to enter into a
Purchase Agreement (the "Purchase Agreement") with the Company providing for
the public offering of shares (the "Securities") of the Company's common stock,
par value $.01 per share (the "Common Stock"). In recognition of the benefit
that such an offering will confer upon the undersigned, as a stockholder of a
Founding Company or as an officer or director of the Company, and for other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the undersigned agrees with each underwriter to be named
in the Purchase Agreement that, during a period of 180 days from the date of
the Purchase Agreement, the undersigned will not, without the prior written
consent of Merrill Lynch, directly or indirectly, (i) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant for the sale of, or
otherwise dispose of or transfer any shares of the Company's Common Stock or
any securities convertible into or exchangeable or exercisable for Common
Stock, whether now owned or hereafter acquired by the undersigned or with
respect to which the undersigned has or hereafter acquires the power of
disposition, or file any registration statement under the Securities Act of
1933, as amended, with respect to any of the foregoing or (ii) enter into any
swap or any other agreement or any transaction that transfers, in whole or in
part, directly or
B-1
<PAGE> 44
indirectly, the economic consequence of ownership of the Common Stock, whether
any such swap transaction is to be settled by delivery of Common Stock or other
securities, in cash or otherwise. Notwithstanding the foregoing, the
undersigned may, during the 180 days from the date of the Purchase Agreement,
transfer Common Stock by way of off-market transfers to its respective
affiliates (as that term is defined in Rule 144 under the Securities Act of
1933, as amended) which agree in writing with Merrill Lynch to be bound by the
provisions of a Lock-up Agreement (as defined in the Purchase Agreement) and
may also pledge Common Stock to any person which, prior to such pledge taking
effect, agrees to be bound by the provisions of a Lock-up Agreement (as defined
in the Purchase Agreement).
Very truly yours,
Signature: _________________________
Print Name: _______________________
B-2
<PAGE> 45
Annex A
FORM OF ACCOUNTANTS' COMFORT LETTER PURSUANT TO SECTION 5(e)
We are independent public accountants with respect to the Company within the
meaning of the 1933 Act and the applicable published 1933 Act Regulations:
(i) in our opinion, the audited financial statements [and
the related financial statement schedules] included in the
Registration Statement and the Prospectus comply as to form in all
material respects with the applicable accounting requirements of the
1933 Act and the published rules and regulations thereunder;
(ii) on the basis of procedures (but not an examination in
accordance with generally accepted auditing standards) consisting of a
reading of the unaudited interim [consolidated] financial statements
of the Company for the [three month periods ended _________, 19___ and
_________, 19___ , the three and six month periods ended _________,
19___ and _________, 19___ and the three and nine month periods ended
_________, 19___ and _________, 19___, included in the Registration
Statement and the Prospectus (collectively, the "Quarterly
Financials")](1), a reading of the unaudited interim [consolidated]
financial statements of the Company for the _____-month periods ended
_________, 19___ and _________, 19___, included in the Registration
Statement and the Prospectus (the "____-month financials")]
(2) [, a reading of the latest available
unaudited interim [consolidated] financial statements of the
Company], (3) a reading of the minutes of all meetings of the
stockholders and directors of the Company [and its subsidiaries] and
the _________________ and __________________ Committees of the
Company's Board of Directors [and any subsidiary committees] since
[day after end of last audited period], inquiries of certain officials
of the Company [and its subsidiaries] responsible for financial and
accounting matters, a review of interim financial information in
accordance with standards established by the American Institute of
Certified Public Accountants in Statement on Auditing Standards No.
71, Interim Financial Information ("SAS 71"),
________________________
(1) Include the appropriate dates of the Quarterly Financials.
(2) Include if non-Quarterly unaudited interim financial statements are
included in the Registration Statement.
(3) Include if the most recent unaudited interim financial statements are
not included in the Registration Statement.
(4) Note that a review in accordance with Statements on Auditing Standards
("SAS") No. 71 is required for an accountant to give negative
assurance on unaudited interim financial information. A review in
accordance with SAS No. 71 will only be performed at the
(continued..)
Annex A-1
<PAGE> 46
request of the Company and the accountant's report, if any, related to
that review will be addressed only to the Company. Many companies
have a SAS No. 71 review performed in connection with the preparation
of their Quarterly financial statements. See Codification of Statements
on Auditing Standards, AU # 722 for a description of the procedures
that constitute such a review. The comfort letter itself should recite
that the review was performed and a copy of the report, if any, should
be attached to the comfort letter. Any report issued pursuant to SAS
No. 71 that is mentioned in the Registration Statement should also be
included in the Registration Statement as an exhibit. If a review in
accordance with SAS No. 71 has not and will not be performed by the
accountants, they should be prepared to perform certain agreed-upon
procedures on the interim financial information and to report their
findings thereon in the comfort letter. See SAS No. 75 for a
discussion of reports related to the accountant's performance of
agreed-upon procedures. Any question as to whether a review in
accordance with SAS No. 71 will be performed by the accountants should
be resolved early. periods](5) and such other inquiries and procedures
as may be specified in such letter, nothing came to our attention that
caused us to believe that:
[(A) the Quarterly Financials included in the Registration
Statement and the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements
of the 1933 Act and the 1933 Act Regulations or any material
modifications should be made to the unaudited [consolidated]
financial statements included in the Registration Statement
and the Prospectus for them to be in conformity with generally
accepted accounting principles;](6)
[( ) the _____-month financials included in the
Registration Statement and the Prospectus do not comply as to
form in all material respects with the applicable accounting
requirements of the 1933 Act and the 1933 Act Regulations
applicable to unaudited interim financial statements included
in registration statements or any material modifications
should be made to the _____-month financials included in the
Registration Statement and the Prospectus for them to be in
conformity with generally accepted accounting principles;]
(7)
__________________________________
(4)(..continued)
request of the Company and the accountant's report, if any, related to
that review will be addressed only to the Company. Many companies have a
SAS No. 71 review performed in connection with the preparation of their
Quarterly financial statements. See Codification of Statements on Auditing
Standards, AU Section 722 for a description of the procedures that
constitute such a review. The comfort letter itself
(5) The relevant periods include interim unaudited condensed consolidated
financial statements included or incorporated by reference into the
Registration Statement.
(6) Include if the Quarterly financials are included in the Registration
Statement.
(7) Include if non-quarterly, unaudited interim financial statements, not just
selected unaudited data, are included in the Registration Statement.
Annex A-2
<PAGE> 47
( ) at [_________, 19___ and at](8) a specified date not
more than five days(9) prior to the date of this Agreement,
there was any change in the ___________ of the Company [and
its subsidiaries] or any decrease in the __________ of the
Company [and its subsidiaries] or any increase in the
__________ of the Company [and its subsidiaries,](10) in each
case as compared with amounts shown in the latest balance
sheet included in the Registration Statement, except in each
case for changes, decreases or increases that the Registration
Statement discloses have occurred or may occur; or
( ) [for the period from _________, 19___ to _________,
19___ and ](11) for the period from _________, 19___ to a
specified date not more than five days prior to the date of
this Agreement, there was any decrease in _________,
__________ or ___________,(12) in each case as compared with
the comparable period in the preceding year, except in each
case for any decreases that the Registration Statement
discloses have occurred or may occur;
__________________________________
(8) Include, and insert the date of most recent balance sheet of the
Company, if those statements are more recent than the unaudited
interim financial statements included in the Registration Statement.
(9) According to Example A of SAS No. 72, the specified date should be
five calendar days prior to the date of the Underwriting
Agreement rather than five business days prior to such date.
However, in unusual circumstances, five business days may be used.
(10) The blanks should be filled in with significant balance sheet items,
selected by the banker and tailored to the issuer's industry in
general and operations in particular. While the ultimate decision of
which items should be included rests with the banker, comfort is
routinely requested for certain balance sheet items, including
long-term debt, stockholders' equity, capital stock and net current
assets.
(11) Include, and insert dates to describe the period from the date of
the most recent financial statements in the Registration
Statement to the date of the most recent unaudited interim financial
statements of the Company, if those dates are different. Regardless
of whether this language is inserted or not, the period including
five days prior to the date of the Underwriting Agreement should run
from the date of the last financial statement included in the
Registration Statement, not from the later one that is not included
in the Registration Statement.
(12) The blanks should be filled in with significant income statement
items, selected by the banker and tailored to the issuer's
industry in general and operations in particular. While the ultimate
decision of which items should be included rests with the banker,
comfort is routinely requested for certain income statement items,
including net sales, total and per share amounts of income before
extraordinary items and of net income.
Annex A-3
<PAGE> 48
(iii) based upon the procedures set forth in clause (ii)
above and a reading of the [Selected Financial Data] included
in the Registration Statement [and a reading of the financial
statements from which such data were derived], (13) nothing came to
our attention that caused us to believe that the [Selected Financial
Data] included in the Registration Statement do not comply as to form
in all material respects with the disclosure requirements of Item 301
of Regulation S-K of the 1933 Act [, that the amounts included in the
[Selected Financial Data] are not in agreement with the corresponding
amounts in the audited [consolidated] financial statements for the
respective periods or that the financial statements not included in
the Registration Statement from which certain of such data were
derived are not in conformity with generally accepted accounting
principles];(14)
(iv) we have compared the information in the Registration
Statement under selected captions with the disclosure requirements of
Regulation S-K of the 1933 Act and on the basis of limited procedures
specified herein. nothing came to our attention that caused us to
believe that this information does not comply as to form in all
material respects with the disclosure requirements of Items 302, 402
and 503(d), respectively, of Regulation S-K;
[(v) based upon the procedures set forth in clause (ii)
above, a reading of the unaudited financial statements of the Company
for [the most recent period] that have not been included in the
Registration Statement and a review of such financial statements in
accordance with SAS 71, nothing came to our attention that caused us
to believe that the unaudited amounts for _____________ for the [most
recent period] do not agree with the amounts set forth in the
unaudited consolidated financial statements for those periods or that
such unaudited amounts were not determined on a basis substantially
consistent with that of the corresponding amounts in the audited
[consolidated] financial statements;](15)
__________________________________
(13) Include only if there are selected financial data that have been
derived from financial statements not included in the Registration
Statement.
(14) In unusual circumstances, the accountants may report on "Selected
Financial Data" as described in SAS No. 42, Reporting on
Condensed Financial Statements and Selected Financial Data, and
include in their report in the Registration Statement the paragraph
contemplated by SAS No. 42.9. This situation may arise only if the
Selected Financial Data do not include interim period data and the
five-year selected data are derived entirely from financial statements
audited by the auditors whose report is included in the Registration
Statement. If the guidelines set forth in SAS No. 42 are followed and
the accountant's report as included in the Registration Statement
includes the additional language prescribed by SAS No. 42.9, the
bracketed language may be eliminated.
(15) This language should be included when the Registration Statement
includes earnings or other data for a period after the date of
the latest financial statements in the Registration Statement, but
the unaudited interim financial statements from which the earnings
orother data is derived is not included in the Registration
Statement. The blank should be filled in with a description of the
financial statement item(s) included.
Annex A-4
<PAGE> 49
<PAGE> 50
[(vi)] we are unable to and do not express any opinion on
the [Pro Forma Combining Statement of Operations] (the "Pro Forma
Statement") included in the Registration Statement or on the pro forma
adjustments applied to the historical amounts included in the Pro
Forma Statement; however, for purposes of this letter we have:
(A) read the Pro Forma Statement;
(B) performed [an audit] [a review in accordance
with SAS 71] of the financial statements to which the pro
forma adjustments were applied;
(C) made inquiries of certain officials of the
Company who have responsibility for financial and accounting
matters about the basis for their determination of the pro
forma adjustments and whether the Pro Forma Statement complies
as to form in all material respects with the applicable
accounting requirements of Rule 11-02 of Regulation S-X; and
(D) proved the arithmetic accuracy of the
application of the pro forma adjustments to the historical
amounts in the Pro Forma Statement; and
on the basis of such procedures and such other inquiries and
procedures as specified herein, nothing came to our attention
that caused us to believe that the Pro Forma Statement
included in the Registration Statement does not comply as to
form in all material respects with the applicable requirements
of Rule 11-02 of Regulation S-X or that the pro forma
adjustments have not been properly applied to the historical
amounts in the compilation of those statements;(16) and
[(vii)] in addition to the procedures referred to in clause
(ii) above, we have performed other procedures, not constituting an
audit, with respect to certain amounts, percentages, numerical data
and financial information appearing in the Registration Statement,
which are specified herein, and have compared certain of such items
with, and
__________________________________
(16) If an audit or a review in accordance with SAS No. 71 has not been
performed by the accountants with respect to the underlying
historical financial statements, or if negative assurance on the
Company's pro forma financial statements is not otherwise available,
the accountants should be requested to perform certain other
procedures with respect to such pro forma financial statements. See
Example O of SAS No. 72.
Annex A-5
<PAGE> 51
have found such items to be in agreement with, the accounting and
financial records of the Company; (17) and
[(viii) in addition, we [COMFORT ON A FINANCIAL FORECAST THAT
IS INCLUDED IN THE REGISTRATION STATEMENT](18)
__________________________________
(17) This language is intended to encompass all other financial/numerical
information appearing in the Registration Statement for which
comfort may be given, including (but not limited to) amounts appearing
in the Registration Statement narrative and other summary financial
data appearing in tabular form (e.g. the capitalization table).
(18) Accountants' services with respect to a financial forecast may be in
one of three forms: an examination of the forecast, a compilation of
the forecast or the application of agreed-upon Procedures to the
forecast. If the accountant is to perform an examination of
the forecast included in the Registration Statement, delivery of the
related report should be treated separately in Section 5(f) as follows
(remember to change subsequent letters accordingly):
(f) At the time that this Agreement is executed by
the Company, you shall have received from ___________________
a report, dated such date, in form and substance satisfactory
to you, together with signed or reproduced copies of such
report for each of the other Underwriters, stating that, in
their opinion, the forecasted financial statements for the
[relevant period or periods] included in the Registration
Statement are presented in conformity with guidelines for
presentation of a forecast established by the AICPA, and that
the underlying assumptions provide a reasonable basis for
management s forecast.
If the accountant is to perform a compilation of the forecasted
financial statements included in the Registration Statement, delivery
of the related report should be treated separately in Section 5(f) as
follows:
(f) At the time that this Agreement is executed by
the Company, you shall have received from _________________
a report, dated such date, in form and substance satisfactory
to you, together with signed or reproduced copies of such
report for each of the other Underwriters, stating that they
have compiled the forecasted financial statements for the
[relevant period or periods] included in the Registration
Statement in accordance with the guidelines established by
the AICPA.
Finally, if the accountant is to perform agreed-upon procedures on a
forecast included in the Registration Statement, SAS No. 72 requires
that the accountant first prepare acompilation report with respect to
the forecast and attach that report to the comfort letter. The
accountant may then report on specific procedures performed and
findings obtained.
Annex A-6
<PAGE> 1
EXHIBIT 4.1
INDUSTRIAL DISTRIBUTION GROUP, INC.
IDG
SEE REVERSE FOR
CERTAIN DEFINITIONS
CUSIP 456061 10
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK,
PAR VALUE $.01 PER SHARE, OF
INDUSTRIAL DISTRIBUTION GROUP, INC., TRANSFERABLE ON THE BOOKS OF THE
CORPORATION BY THE HOLDER HEREOF, IN PERSON OR BY DULY AUTHORIZED ATTORNEY,
UPON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED. THIS CERTIFICATE IS NOT
VALID UNTIL COUNTESIGNED AND REGISTERED BY THE TRANSFER AGENT AND REGISTRAR.
WITNESS THE FACSIMILE SEAL OF THE CORPORATION AND THE FACSIMILE
SIGNATURES OF ITS AUTHORIZED OFFICERS.
DATED:
/s/ Jack P. Healey /s/ Martin S. Pinson
CHIEF FINANCIAL OFFICER AND SECRETARY CHAIRMAN AND CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
(NEW YORK, NEW YORK)
TRANSFER AGENT
AND REGISTRAR
BY
<PAGE> 2
INDUSTRIAL DISTRIBUTION GROUP, INC.
The Corporation will furnish to any stockholder on request and without
charge a full statement or summary of the designations and any preferences,
conversion, and othe rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption rights and
preferences between the shares of each series, if any, to the extent they have
been set, and of the authority of the Board of Directors to set the relative
rights and preferences of subsequent series. Such request may be made to the
Secretary of the Corporation.
The following abbreviations, when used in the inscription on the face
of this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT __________ Custodian _________
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants in common Act _________________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _________________ HEREBY SELL, ASSIGN AND TRANSFER UNTO
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ---------------------------------------------
- ---------------------------------------------
- ------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
________________________________________________________________________ SHARES
OF THE COMMON STOCK REPRESENTED BY THE WITHIN CERTIFICATE, AND DO HEREBY
IRREVOCABLY CONSTITUTE AND APPOINT
________________________________________________________________________
ATTORNEY TO TRANSFER THE SAID STOCK ON THE BOOKS OF THE WITHIN NAMED
CORPORATION WITH FULL POWER OF SUBSTITUTION IN THE PREMISES.
DATED _______________________
------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON
THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED: _____________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP
IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17 Ad-15.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, MUTILATED, OR
DESTROYED, THE CORPORATION MAY REQUIRE A BOND OF INDEMNITY AS A CONDITION TO
THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
<PAGE> 1
EXHIBIT 5.1
[KILPATRICK STOCKTON LLP LETTERHEAD]
Suite 2800
Peachtree Street
Atlanta, Georgia 30309-4530
September 17, 1997
Industrial Distribution Group, Inc.
2500 Royal Place
Tucker, Georgia 30084
Re: Industrial Distribution Group, Inc.
Registration Statement on Form S-1 (File No. 333-31539)
Gentlemen:
At your request, we have examined the Registration Statement on Form
S-1 (the "Registration Statement") filed by Industrial Distribution Group, Inc.
(the "Company"), a Delaware corporation, with the Securities and Exchange
Commission with respect to the registration under the Securities Act of 1933, as
amended, of 3,000,000 shares of Common Stock, par value $0.01 per share, of the
Company (the "Common Stock"), to be sold by the Company to the underwriters as
contemplated to be named in the Registration Statement (the "Underwriters") for
resale by them to the public, together with an additional 450,000 shares of
Common Stock subject to an over-allotment option granted to the Underwriters by
the Company.
As your counsel, and in connection with the preparation of the
Registration Statement, we have examined the originals or copies of such
documents, corporate records, certificates of public officials and officers of
the Company, and other instruments related to the authorization and issuance of
the Common Stock as we deemed relevant or necessary for the opinion expressed
herein. Based upon the foregoing, it is our opinion that the shares of Common
Stock to be issued and sold by the Company to the Underwriters will be, upon
issuance, sale, and delivery in the manner and under the terms and conditions
described in the Registration Statement, validly issued, fully paid, and
nonassessable.
<PAGE> 2
Industrial Distribution Group, Inc.
September 17, 1997
Page 2
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and further consent to the use of our name in the "Legal
Matters" section of the Registration Statement, including the Prospectus
constituting a part thereof, and any amendments thereto.
Yours truly,
KILPATRICK STOCKTON LLP
/s/ W. Randy Eaddy
-----------------------------------
W. Randy Eaddy,
a Partner
<PAGE> 1
EXHIBIT 10.5
INDUSTRIAL DISTRIBUTION GROUP, INC.
STOCK INCENTIVE PLAN
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
<S> <C> <C>
ARTICLE 1. ESTABLISHMENT, PURPOSE, AND DURATION ........................... 1
1.1 Establishment of the Plan ................................... 1
1.2 Purpose of the Plan ......................................... 1
1.3 Duration of the Plan ........................................ 2
ARTICLE 2. DEFINITIONS .................................................... 2
ARTICLE 3. ADMINISTRATION ................................................. 8
3.1 The Committee ............................................... 8
3.2 Authority of the Committee .................................. 8
3.3 Decisions Binding ........................................... 9
ARTICLE 4. SHARES SUBJECT TO THE PLAN ..................................... 9
4.1 Number of Shares ............................................ 9
4.2 Lapsed Awards ............................................... 10
4.3 Adjustments In Authorized Shares ............................ 10
ARTICLE 5. ELIGIBILITY AND PARTICIPATION .................................. 11
ARTICLE 6. STOCK OPTIONS .................................................. 11
6.1 Grant of Options ............................................ 11
6.2 Agreement ................................................... 12
6.3 Option Price ................................................ 12
6.4 Duration of Options ......................................... 13
6.5 Exercise of Options ......................................... 13
6.6 Payment ..................................................... 13
6.7 Limited Transferability ..................................... 14
6.8 Shareholder Rights .......................................... 15
ARTICLE 7. STOCK APPRECIATION RIGHTS ...................................... 15
7.1 Grants of SARs .............................................. 15
7.2 Duration of SARs ............................................ 16
7.3 Exercise of SAR ............................................. 16
7.4 Determination of Payment of Cash and/or
Common Stock Upon Exercise of SAR .......................... 16
7.5 Nontransferability .......................................... 16
7.6 Shareholder Rights .......................................... 17
ARTICLE 8. RESTRICTED STOCK; STOCK AWARDS ................................. 17
8.1 Grants ...................................................... 17
8.2 Restricted Period; Lapse of Restrictions .................... 18
8.3 Rights of Holder; Limitations Thereon ....................... 18
8.4 Delivery of Unrestricted Shares ............................. 20
8.5 Nonassignability of Restricted Stock ........................ 20
ARTICLE 9. PERFORMANCE SHARE AWARDS ....................................... 21
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
9.1 Award ....................................................... 21
9.2 Earning the Award ........................................... 21
9.3 Payment ..................................................... 21
9.4 Shareholder Rights .......................................... 22
ARTICLE 10. BENEFICIARY DESIGNATION ....................................... 22
ARTICLE 11. DEFERRALS ..................................................... 23
ARTICLE 12. RIGHTS OF EMPLOYEES ........................................... 23
12.1 Employment ................................................. 23
12.2 Participation .............................................. 23
ARTICLE 13. CHANGE IN CONTROL ............................................. 24
13.1 Definition ................................................. 24
13.2 Limitation on Awards ....................................... 26
ARTICLE 14. AMENDMENT, MODIFICATION AND TERMINATION ....................... 27
14.1 Amendment, Modification and Termination .................... 27
14.2 Awards Previously Granted .................................. 27
14.3 Compliance With Code Section 162(m) ........................ 27
ARTICLE 15. WITHHOLDING ................................................... 28
15.1 Tax Withholding ............................................ 28
15.2 Share Withholding .......................................... 28
ARTICLE 16. INDEMNIFICATION ............................................... 28
ARTICLE 17. SUCCESSORS .................................................... 29
ARTICLE 18. LEGAL CONSTRUCTION ............................................ 29
18.1 Gender and Number .......................................... 29
18.2 Severability ............................................... 29
18.3 Requirements of Law ........................................ 30
18.4 Regulatory Approvals and Listing ........................... 30
18.5 Securities Law Compliance .................................. 30
18.6 Governing Law .............................................. 31
</TABLE>
<PAGE> 4
INDUSTRIAL DISTRIBUTION GROUP, INC.
STOCK INCENTIVE PLAN
ARTICLE 1. ESTABLISHMENT, PURPOSE, AND DURATION
1.1 ESTABLISHMENT OF THE PLAN. Industrial Distribution Group, Inc., a
Delaware Corporation (hereinafter referred to as the "COMPANY"), hereby
establishes a stock option and incentive award plan known as the "Industrial
Distribution Group, Inc. Stock Incentive Plan" (the "PLAN"), as set forth in
this document. The Plan permits the grant of Incentive Stock Options,
Nonqualified Stock Options, Restricted Stock, Stock Awards, Performance Share
Awards and Stock Appreciation Rights.
The Plan shall become effective on the date it is approved by the Board of
Directors (the "EFFECTIVE DATE"), subject to approval of the Plan by the
Company's stockholders within the 12-month period immediately thereafter, and
shall remain in effect as provided in SECTION 1.3.
1.2 PURPOSE OF THE PLAN. The purpose of the Plan is to secure for the
Company and its shareholders the benefits of the incentive inherent in stock
ownership in the Company by employees, directors, and other persons who perform
services for the Company, who are responsible for its future growth and
continued success. The Plan promotes the success and enhances the value of the
Company by linking the personal interests of Participants (as defined below) to
those of the Company's shareholders, and by providing Participants with an
incentive for outstanding performance.
<PAGE> 5
The Plan is further intended to provide flexibility to the Company in its
ability to motivate, attract and retain the services of Participants upon whose
judgment, interest and special effort the successful conduct of its operation
largely depends.
1.3 DURATION OF THE PLAN. The Plan shall commence on the Effective Date,
and shall remain in effect, subject to the right of the Board of Directors to
amend or terminate the Plan at any time pursuant to ARTICLE 14, until the day
prior to the tenth (10th) anniversary of the Effective Date.
ARTICLE 2. DEFINITIONS
Whenever used in the Plan, the following terms shall have the meanings set
forth below:
(a) "Agreement" means an agreement entered into by each Participant and
the Company, setting forth the terms and provisions applicable to
Awards granted to Participants under this Plan.
(b) "Award" means, individually or collectively, a grant under this Plan
of Incentive Stock Options, Nonqualified Stock Options, Restricted
Stock, Stock Awards, Performance Share Awards or Stock Appreciation
Rights.
(c) "Beneficial Owner" or "Beneficial Ownership" shall have the meaning
ascribed to such term in Rule 13d-3 of the Exchange Act.
(d) "Board" or "Board of Directors" means the Board of Directors of the
Company.
-2-
<PAGE> 6
(e) "Cause" means: (i) willful misconduct on the part of a Participant
that is materially detrimental to the Company; or (ii) the conviction
of a Participant for the commission of a felony. The existence of
"Cause" under either (i) or (ii) shall be determined by the Committee.
Notwithstanding the foregoing, if the Participant has entered into an
employment agreement that is binding as of the date of employment
termination, and if such employment agreement defines "Cause," and/or
provides a means of determining whether "Cause" exists, such
definition of "Cause" and means of determining its existence shall
supersede this provision.
(f) "Code" means the Internal Revenue Code of 1986, as amended from time
to time.
(g) "Committee" means a committee of two or more Non-Employee Directors
appointed by the Board to administer the Plan with respect to grants
of Awards, as specified in ARTICLE 3, and to perform the function set
forth therein.
(h) "Common Stock" means the common stock of the Company, par value $.01
per share.
(i) "Company" means Industrial Distribution Group, Inc., a Delaware
corporation, or any successor thereto as provided in ARTICLE 17.
(j) "Corresponding SAR" means an SAR that is granted in relation to a
particular Option and that can be exercised only upon the surrender to
the Company, unexercised, of that portion of the Option to which the
SAR relates.
-3-
<PAGE> 7
(k) "Director" means any individual who is a member of the Board of
Directors of the Company.
(l) "Disability" shall have the meaning ascribed to such term in the
Company's long-term disability plan covering the Participant, or in
the absence of such plan, a meaning consistent with Section 22(e)(3)
of the Code.
(m) "Employee" means any employee of the Company, or the Company's
Subsidiaries. Directors who are not otherwise employed by the Company
or the Company's Subsidiaries are not considered Employees under this
Plan.
(n) "Effective Date" shall have the meaning ascribed to such term in
SECTION 1.1.
(o) "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, or any successor act thereto.
(p) "Fair Market Value" shall be determined as follows:
(i) If, on the relevant date, the Shares are traded on a national or
regional securities exchange or on The Nasdaq Stock Market
("Nasdaq") and closing sale prices for the Shares are customarily
quoted, on the basis of the closing sale price on the principal
securities exchange on which the Shares may then be traded or, if
there is no such sale on the relevant date, then on the
immediately preceding day on which a sale was reported;
(ii) If, on the relevant date, the Shares are not listed on any
securities exchange or traded on Nasdaq, but nevertheless are
publicly traded and reported on Nasdaq
-4-
<PAGE> 8
without closing sale prices for the Shares being customarily
quoted, on the basis of the mean between the closing bid and
asked quotations in such other over-the-counter market as
reported by Nasdaq; but, if there are no bid and asked quotations
in the over-the-counter market as reported by Nasdaq on that
date, then the mean between the closing bid and asked quotations
in the over-the-counter market as reported by Nasdaq on the
immediately preceding day such bid and asked prices were quoted;
and
(iii) If, on the relevant date, the Shares are not publicly traded as
described in (i) or (ii), on the basis of the good faith
determination of the Committee.
(q) "Incentive Stock Option" or "ISO" means an option to purchase Shares
granted under ARTICLE 6 which is designated as an Incentive Stock
Option and is intended to meet the requirements of Section 422 of the
Code.
(r) "Initial Value" means, with respect to a Corresponding SAR, the Option
Price per share of the related Option, and with respect to an SAR
granted independently of an Option, the Fair Market Value of one share
of Common Stock on the date of grant.
(s) "Insider" shall mean an Employee who is, on the relevant date, an
officer or a director, or a ten percent (10%) beneficial owner of any
class of the Company's equity securities that is registered pursuant
to Section 12 of the Exchange Act or any successor provision, as
"officer" and "director" are defined under Section 16 of the Exchange
Act.
-5-
<PAGE> 9
(t) "Named Executive Officer" means a Participant who, as of the date of
vesting and/or payout of an Award is one of the group of "covered
employees," as defined in the regulations promulgated under Code
Section 162(m), or any successor statute.
(u) "Non-Employee Director" means a Director of the Company who satisfies
the requirements under Rule 16b-3(b)(3) of the Exchange Act.
(v) "Nonqualified Stock Option" or "NQSO" means an option to purchase
Shares granted under ARTICLE 6, and which is not intended to meet the
requirements of Code Section 422.
(w) "Option" means an Incentive Stock Option or a Nonqualified Stock
Option.
(x) "Option Price" means the price at which a Share may be purchased by a
Participant pursuant to an Option, as determined by the Committee. The
Option Price may not be less than the Fair Market Value of a Share on
the date the Option is granted.
(y) "Participant" means an Employee, a Director, or other person who
performs services for the Company or a Subsidiary, who has been
determined by the Committee to contribute significantly to the profits
or growth of the Company and who has been granted an Award under the
Plan which is outstanding.
(z) "Performance Share Award" means an Award, which, in accordance with
and subject to an Agreement, will entitle the Participant, or his
estate or beneficiary in the event of the
-6-
<PAGE> 10
Participant's death, to receive cash, Common Stock or a combination
thereof.
(aa) "Person" shall have the meaning ascribed to such term in Section
3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d)
thereof, including a "group" as defined in Section 13(d) thereof.
(bb) "Retirement" shall mean retiring from employment with the Company or
any Subsidiary on or after attaining age 65.
(cc) "Restricted Stock" means an Award of Common Stock granted in
accordance with the terms of ARTICLE 8 and the other provisions of the
Plan, and which is nontransferable and subject to a substantial risk
of forfeiture. Shares of Common Stock shall cease to be Restricted
Stock when, in accordance with the terms hereof and the applicable
Agreement, they become transferable and free of substantial risk of
forfeiture.
(dd) "SAR" means a stock appreciation right that entitles the holder to
receive, with respect to each share of Common Stock encompassed by the
exercise of such SAR, the amount determined by the Committee and
specified in an Agreement. In the absence of such specification, the
holder shall be entitled to receive in cash, with respect to each
share of Common Stock encompassed by the exercise of such SAR, the
excess of the Fair Market Value on the date of exercise over the
Initial Value. References to "SARs" include both Corresponding SARs
and SARs granted independently of Options, unless the context requires
otherwise.
-7-
<PAGE> 11
(ee) "Shares" means the shares of Common Stock of the Company (including
any new, additional or different stock or securities resulting from
the changes described in Section 4.3).
(ff) "Stock Award" means a grant of Shares under ARTICLE 8 that is not
generally subject to restrictions and pursuant to which a certificate
for the Shares is transferred to the Employee.
(gg) "Subsidiary" means any corporation, partnership, joint venture or
other entity in which the Company has a fifty percent (50%) or greater
voting interest.
ARTICLE 3. ADMINISTRATION
3.1 THE COMMITTEE. The Plan shall be administered by the Compensation
Committee of the Board, or by any other Committee appointed by the Board that is
granted authority to administer the Plan, with such Committee consisting of not
less than two (2) Directors who are Non-Employee Directors. The members of the
Committee shall be appointed from time to time by, and shall serve at the
discretion of, the Board of Directors.
3.2 AUTHORITY OF THE COMMITTEE. Subject to the provisions of the Plan, the
Committee shall have full power to select the Employees, Directors, and other
persons who perform services for the Company or a Subsidiary, who are
responsible for the future growth and success of the Company who shall
participate in the Plan (who may change from year to year); determine the size
and types of Awards; determine the terms and conditions of Awards in a manner
consistent with the Plan (including conditions on the exercisability of all or a
part of an Option or SAR, restrictions on transferability and vesting provisions
on Restricted
-8-
<PAGE> 12
Stock or Performance Share Awards and the duration of the Awards); construe and
interpret the Plan and any agreement or instrument entered into under the Plan;
establish, amend or waive rules and regulations for the Plan's administration;
and (subject to the provisions of ARTICLE 14) amend the terms and conditions of
any outstanding Award to the extent such terms and conditions are within the
discretion of the Committee as provided in the Plan, including accelerating the
time any Option or SAR may be exercised and establishing different terms and
conditions relating to the effect of the termination of employment or other
services to the Company. Further, the Committee shall make all other
determinations which may be necessary or advisable in the Committee's opinion
for the administration of the Plan. All expenses of administering this Plan
shall be borne by the Company.
3.3 DECISIONS BINDING. All determinations and decisions made by the
Committee pursuant to the provisions of the Plan and all related orders and
resolutions of the Board shall be final, conclusive and binding on all Persons,
including the Company, the shareholders, Employees, Participants and their
estates and beneficiaries.
ARTICLE 4. SHARES SUBJECT TO THE PLAN
4.1 NUMBER OF SHARES. Subject to adjustment as provided in SECTION 4.3, the
total number of Shares available for grant of Awards under the Plan shall not
exceed fifteen percent (15%) of the total issued and outstanding shares as of
the date any Award is granted; provided, that the number of Shares available for
grant as ISOs under the Plan shall not exceed an aggregate of 1,000,000 Shares.
The Shares may, in the discretion of the Company, be either authorized but
unissued Shares or Shares held as treasury shares, including Shares purchased by
the Company.
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The following rules shall apply for purposes of the determination of the
number of Shares available for grant under the Plan:
(a) While an Option, SAR, Stock Award, Restricted Stock Award or
Performance Share Award is outstanding, it shall be counted
against the authorized pool of Shares, regardless of its vested
status.
(b) The grant of an Option, SAR, Stock Award, Restricted Stock Award
or Performance Share Award shall reduce the Shares available for
grant under the Plan by the number of Shares subject to such
Award.
4.2 LAPSED AWARDS. If any Award granted under this Plan is canceled,
terminates, expires or lapses for any reason, or if Shares are withheld in
payment of the Option Price or for withholding taxes, any Shares subject to such
Award or that are withheld shall again be available for the grant of an Award
under the Plan. However, in the event that prior to the Award's cancellation,
termination, expiration or lapse, the holder of the Award at any time received
one or more "benefits of ownership" pursuant to such Award (as defined by the
Securities and Exchange Commission, pursuant to any rule or interpretation
promulgated under Section 16 of the Exchange Act), the Shares subject to such
Award shall not again be made available for regrant under the Plan.
4.3 ADJUSTMENTS IN AUTHORIZED SHARES. In the event of any change in
corporate capitalization, such as a stock split, or a corporate transaction,
such as any merger, consolidation, separation, including a spin-off, or other
distribution of stock or property of the Company, any reorganization (whether or
not such reorganization comes within the definition of such term in Code Section
368) or any partial or complete liquidation of the Company, such adjustment
shall be made in the number
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and class of Shares which may be delivered under the Plan, and in the number and
class of and/or price of Shares subject to outstanding Awards granted under the
Plan, as may be determined to be appropriate and equitable by the Committee, in
its sole discretion, to prevent dilution or enlargement of rights; provided,
however, that the number of Shares subject to any Award shall always be a whole
number and the Committee shall make such adjustments as are necessary to insure
Awards of whole Shares.
ARTICLE 5. ELIGIBILITY AND PARTICIPATION
Any key Employee of the Company or any Subsidiary, including any such
Employee who is also a director of the Company or any Subsidiary, any
non-employee Director, and any other person who performs services for the
Company or a Subsidiary, whose judgment, initiative and efforts contribute or
may be expected to contribute materially to the successful performance of the
Company or any Subsidiary shall be eligible to receive an Award under the Plan.
In determining the individuals to whom such an Award shall be granted and the
number of Shares which may be granted pursuant to that Award, the Committee
shall take into account the duties of the respective individual, his or her
present and potential contributions to the success of the Company or any
Subsidiary, and such other factors as the Committee shall deem relevant in
connection with accomplishing the purpose of the Plan.
ARTICLE 6. STOCK OPTIONS
6.1 GRANT OF OPTIONS. Subject to the terms and provisions of the Plan,
Options may be granted to Participants at any time and from time to time as
shall be determined by the Committee. The Committee shall have discretion in
determining the number of Shares subject to Options
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granted to each Participant. An Option may be granted with or without a
Corresponding SAR. No Participant may be granted ISOs (under the Plan and all
other incentive stock option plans of the Company and any Subsidiary) which are
first exercisable in any calendar year for Common Stock having an aggregate Fair
Market Value (determined as of the date an Option is granted) that exceeds
$100,000. The preceding annual limit shall not apply to NQSOs. The Committee may
grant a Participant ISOs, NQSOs or a combination thereof, and may vary such
Awards among Participants.
6.2 AGREEMENT. Each Option grant shall be evidenced by an Agreement that
shall specify the Option Price, the duration of the Option, the number of Shares
to which the Option pertains and such other provisions as the Committee shall
determine. The Option Agreement shall further specify whether the Award is
intended to be an ISO or an NQSO. Any portion of an Option that is not
designated as an ISO or otherwise fails or is not qualified as an ISO (even if
designated as an ISO) shall be a NQSO. If the Option is granted in connection
with a Corresponding SAR, the Agreement shall also specify the terms that apply
to the exercise of the Option and Corresponding SAR.
6.3 OPTION PRICE. The Option Price for each grant of an ISO or NQSO shall
not be less than one hundred percent (100%) of the Fair Market Value of a Share
on the date the ISO is granted. In no event, however, shall any Participant who,
at any time would otherwise be granted an Option, owns (within the meaning of
Section 424(d) of the Code) stock of the Company possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of the
Company be eligible to receive an ISO at an Option Price less than one hundred
ten percent (110%) of the Fair Market Value of a share on the date the ISO is
granted.
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6.4 DURATION OF OPTIONS. Each Option shall expire at such time as the
Committee shall determine at the time of grant; provided, however, that no
Option shall be exercisable later than the tenth (10th) anniversary date of its
grant; provided, further, however, that any ISO granted to any Participant who
at such time owns (within the meaning of Section 424(d) of the Code) stock of
the Company possessing more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company, shall be exercisable not later
than the fifth (5th) anniversary date of its grant.
6.5 EXERCISE OF OPTIONS. Options granted under the Plan shall be
exercisable at such times and be subject to such restrictions and conditions as
the Committee shall in each instance approve, including conditions related to
the employment of the Participant with the Company or any Subsidiary, which need
not be the same for each grant or for each Participant. Each Option shall be
exercisable for such number of Shares and at such time or times, including
periodic installments, as may be determined by the Committee at the time of the
grant. The Committee may provide in the Agreement for automatic accelerated
vesting and other rights upon the occurrence of a Change in Control of the
Company. Except as otherwise provided in the Agreement and ARTICLE 13, the right
to purchase Shares that are exercisable in periodic installments shall be
cumulative so that when the right to purchase any Shares has accrued, such
Shares or any part thereof may be purchased at any time thereafter until the
expiration or termination of the Option. The exercise or partial exercise of
either an Option or its Corresponding SAR shall result in the termination of the
other to the extent of the number of Shares with respect to which the Option or
Corresponding SAR is exercised.
6.6 PAYMENT. Options shall be exercised by the delivery of a written
notice of exercise to the Company, setting forth the number of Shares with
respect to which the Option is to be exercised, accompanied
<PAGE> 17
by full payment for the Shares. The Option Price upon exercise of any Option
shall be payable to the Company in full, either: (a) in cash, (b) cash
equivalent approved by the Committee, (c) if approved by the Committee, by
tendering previously acquired Shares (or delivering a certification of ownership
of such Shares) having an aggregate Fair Market Value at the time of exercise
equal to the total Option Price (provided that the Shares which are tendered
must have been held by the Participant for six months [if required for
accounting purposes] and for the period required by law, if any, prior to their
tender to satisfy the Option Price), or (d) by a combination of (a), (b) and
(c). The Committee also may allow cashless exercises as permitted under Federal
Reserve Board's Regulation T, subject to applicable securities law restrictions,
or by any other means which the Committee determines to be consistent with the
Plan's purpose and applicable law.
As soon as practicable after receipt of a written notification of exercise
and full payment, the Company shall deliver to the Participant, in the
Participant's name, Share certificates in an appropriate amount based upon the
number of Shares purchased under the Option(s), and may place appropriate
legends on the certificates representing such Shares.
6.7 LIMITED TRANSFERABILITY. If permitted by the Committee in the
Agreement, a Participant may transfer an Option granted hereunder, including but
not limited to transfers to members of his or her Immediate Family (as defined
below), to one or more trusts for the benefit of such Immediate Family members,
or to one or more partnerships where such Immediate Family members are the only
partners, if (i) the Participant does not receive any consideration in any form
whatsoever for such transfer, (ii) such transfer is permitted under applicable
tax laws, and (iii) the Participant is an Insider, such transfer is permitted
under Rule 16b-3 of the Exchange Act as in effect from time to time. Any Option
so transferred shall continue to be subject to the
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same terms and conditions in the hands of the transferee as were applicable to
said Option immediately prior to the transfer thereof. Any reference in any such
Agreement to the employment by or performance of services for the Company by the
Participant shall continue to refer to the employment of, or performance by, the
transferring Participant. For purposes hereof, "IMMEDIATE FAMILY" shall mean the
Participant and the Participant's spouse, children and grandchildren. Any Option
that is granted pursuant to any Agreement that did not initially expressly allow
the transfer of said Option and that has not been amended to expressly permit
such transfer, shall not be transferable by the Participant otherwise than by
will or by the laws of descent and distribution and such Option thus shall be
exercisable in the Participant's lifetime only by the Participant.
6.8 SHAREHOLDER RIGHTS. No Participant shall have any rights as a
shareholder with respect to Shares subject to his Option until the issuance of
such Shares to the Participant pursuant to the exercise of such Option.
ARTICLE 7. STOCK APPRECIATION RIGHTS
7.1 GRANTS OF SARS. The Committee shall designate Participants to whom SARs
are granted, and will specify the number of Shares of Common Stock subject to
each grant. An SAR may be granted with or without a related Option. All SARs
granted under this Plan shall be subject to an Agreement in accordance with the
terms of this Plan. A payment to the Participant upon the exercise of a
Corresponding SAR may not be more than the difference between the Fair Market
Value of the Shares subject to the ISO on the date of grant and the Fair Market
Value of the Shares on the date of exercise of the Corresponding SAR.
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7.2 DURATION OF SARS. The duration of an SAR shall be set forth in the
Agreement as determined by the Committee. An SAR that is granted as a
Corresponding SAR shall have the same duration as the Option to which it
relates. An SAR shall terminate due to the Participant's termination of
employment at the same time as the date specified in ARTICLE 6 with respect to
Options, regardless of whether the SAR was granted in connection with the grant
of an Option.
7.3 EXERCISE OF SAR. An SAR may be exercised in whole at any time or in
part from time to time and at such times and in compliance with such
requirements as the Committee shall determine as set forth in the Agreement;
provided, however, that a Corresponding SAR that is related to an Incentive
Stock Option may be exercised only to the extent that the related Option is
exercisable and only when the Fair Market Value of the Shares exceeds the Option
Price of the related ISO. An SAR granted under this Plan may be exercised with
respect to any number of shares less than a full number of whole shares for
which the SAR could be exercised. A partial exercise of an SAR shall not affect
the right to exercise the SAR from time to time in accordance with this Plan and
the applicable Agreement with respect to the remaining shares subject to the
SAR. The exercise of either an Option or Corresponding SAR shall result in the
termination of the other to the extent of the number of Shares with respect to
which the Option or its Corresponding SAR is exercised.
7.4 DETERMINATION OF PAYMENT OF CASH AND/OR COMMON STOCK UPON EXERCISE OF
SAR. At the Committee's discretion, the amount payable as a result of the
exercise of an SAR may be settled in cash, Common Stock, or a combination of
cash and Common Stock. A fractional share shall not be deliverable upon the
exercise of an SAR, but a cash payment shall be made in lieu thereof.
7.5 NONTRANSFERABILITY. Each SAR granted under the Plan shall be
nontransferable except by will or by the laws of descent and
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distribution. During the lifetime of the Participant to whom the SAR is granted,
the SAR may be exercised only by the Participant. No right or interest of a
Participant in any SAR shall be liable for, or subject to any lien, obligation
or liability of such Participant. A Corresponding SAR shall be subject to the
same restrictions on transfer as the ISO to which it relates.
Notwithstanding the foregoing, if the Agreement so provides, a Participant
may transfer an SAR (other than a Corresponding SAR that relates to an Incentive
Stock Option) under the same rules and conditions as are set forth in SECTION
6.7.
7.6 SHAREHOLDER RIGHTS. No Participant shall have any rights as a
shareholder with respect to Shares subject to his SAR until the issuance of
Shares (if any) to the Participant pursuant to the exercise of such SAR.
ARTICLE 8. RESTRICTED STOCK; STOCK AWARDS
8.1 GRANTS. The Committee may from time to time in its discretion grant
Restricted Stock and Stock Awards to Participants and may determine the number
of Shares of Restricted Stock or Stock Awards to be granted. The Committee shall
determine the terms and conditions of, and the amount of payment, if any, to be
made by the Employee for, such Restricted Stock. A grant of Restricted Stock
may, in addition to other conditions, require the Participant to pay for such
Shares of Restricted Stock, but the Committee may establish a price below Fair
Market Value at which the Participant can purchase the Shares of Restricted
Stock. Each grant of Restricted Stock shall be evidenced by an Agreement
containing terms and conditions not inconsistent with the Plan as the Committee
shall determine to be appropriate in its sole discretion.
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8.2 RESTRICTED PERIOD; LAPSE OF RESTRICTIONS. At the time a grant of
Restricted Stock is made, the Committee shall establish a period or periods of
time (the "RESTRICTED PERIOD") applicable to such grant which, unless the
Committee otherwise provides, shall not be less than one year. Subject to the
other provisions of this SECTION 8, at the end of the Restricted Period all
restrictions shall lapse and the Restricted Stock shall vest in the Participant.
At the time a grant is made, the Committee may, in its discretion, prescribe
conditions for the incremental lapse of restrictions during the Restricted
Period and for the lapse or termination of restrictions upon the occurrence of
other conditions in addition to or other than the expiration of the Restricted
Period with respect to all or any portion of the Restricted Stock. Such
conditions may, but need not, include the following:
(a) The death, Disability or Retirement of the Employee to whom
Restricted Stock is granted, or
(b) The occurrence of a Change in Control (as defined in SECTION
13.1).
The Committee may also, in its discretion, shorten or terminate the Restricted
Period, or waive any conditions for the lapse or termination of restrictions
with respect to all or any portion of the Restricted Stock at any time after the
date the grant is made.
8.3 RIGHTS OF HOLDER; LIMITATIONS THEREON. Upon a grant of Restricted
Stock, a stock certificate (or certificates) representing the number of Shares
of Restricted Stock granted to the Participant shall be registered in the
Participant's name and shall be held in custody by the Company or a bank
selected by the Committee for the Participant's account. Following such
registration, the Participant shall have the rights and privileges of a
shareholder as to such Restricted Stock, including the right to receive
dividends, if and when declared by the
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Board of Directors, and to vote such Restricted Stock, except that the right to
receive cash dividends shall be the right to receive such dividends either in
cash currently or by payment in Restricted Stock, as the Committee shall
determine, and except further that, the following restrictions shall apply:
(a) The Participant shall not be entitled to delivery of a
certificate until the expiration or termination of the Restricted
Period for the Shares represented by such certificate and the
satisfaction of any and all other conditions prescribed by the
Committee;
(b) None of the Shares of Restricted Stock may be sold, transferred,
assigned, pledged, or otherwise encumbered or disposed of during
the Restricted Period and until the satisfaction of any and all
other conditions prescribed by the Committee; and
(c) All of the Shares of Restricted Stock that have not vested shall
be forfeited and all rights of the Participant to such Shares of
Restricted Stock shall terminate without further obligation on
the part of the Company, unless the Participant has remained an
employee (or non-Employee Director) of the Company or any of its
Subsidiaries, until the expiration or termination of the
Restricted Period and the satisfaction of any and all other
conditions prescribed by the Committee applicable to such Shares
of Restricted Stock. Upon the forfeiture of any shares of
Restricted Stock, such forfeited Shares shall be transferred to
the Company without further action by the Participant and shall,
in accordance with SECTION 4.2, again be available for grant
under the Plan.
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With respect to any Shares received as a result of adjustments under
SECTION 4.3 hereof and any Shares received with respect to cash dividends
declared on Restricted Stock, the Participant shall have the same rights and
privileges, and be subject to the same restrictions, as are set forth in this
SECTION 8.
8.4 DELIVERY OF UNRESTRICTED SHARES. Upon the expiration or termination of
the Restricted Period for any Shares of Restricted Stock and the satisfaction of
any and all other conditions prescribed by the Committee, the restrictions
applicable to such Shares of Restricted Stock shall lapse and a stock
certificate for the number of Shares of Restricted Stock with respect to which
the restrictions have lapsed shall be delivered, free of all such restrictions
except any that may be imposed by law, to the holder of the Restricted Stock.
The Company shall not be required to deliver any fractional Share but will pay,
in lieu thereof, the Fair Market Value (determined as of the date the
restrictions lapse) of such fractional share to the holder thereof. Concurrently
with the delivery of a certificate for Restricted Stock, the holder shall be
required to pay an amount necessary to satisfy any applicable federal, state and
local tax requirements as set out in ARTICLE 15 below.
8.5 NONASSIGNABILITY OF RESTRICTED STOCK. Unless the Committee provides
otherwise in the Agreement, no grant of, nor any right or interest of a
Participant in or to, any Restricted Stock, or in any instrument evidencing any
grant of Restricted Stock under the Plan, may be assigned, encumbered or
transferred except, in the event of the death of a Participant, by will or the
laws of descent and distribution.
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ARTICLE 9. PERFORMANCE SHARE AWARDS
9.1 AWARD. The Committee may designate Participants to whom Performance
Share Awards will be granted from time to time for no consideration and specify
the number of shares of Common Stock covered by the Award.
9.2 EARNING THE AWARD. A Performance Share Award, or portion thereof, will
be earned, and the Participant will be entitled to receive Common Stock, a cash
payment or a combination thereof, only upon the achievement by the Participant,
the Company, or a Subsidiary of such performance objectives as the Committee, in
its discretion, shall prescribe on the date of grant. To the extent required,
the performance objectives applicable to Awards to Named Executive Officers
intended to qualify under Code Section 162(m) shall be selected from among the
following measures: return on equity or assets, earnings per share, total
earnings, earnings growth, return on capital, economic value added and increase
in Fair Market Value of the Shares. The determination as to whether such
objectives have been achieved shall be made by the Committee, and such
determination shall be conclusive; provided, however, that the period in which
such performance is measured shall be at least one year.
9.3 PAYMENT. In the discretion of the Committee, the amount payable when a
Performance Share Award is earned may be settled in cash, by the grant of Common
Stock or a combination of cash and Common Stock. The aggregate Fair Market Value
of the Common Stock received by the Participant pursuant to a Performance Share
Award, together with any cash paid to the Participant, shall be equal to the
aggregate Fair Market Value, on the date the Performance Shares are earned, of
the number of shares of Common Stock equal to each Performance Share earned. A
fractional share will not be deliverable when a Performance Share Award is
earned, but a cash payment will be made in lieu thereof.
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9.4 SHAREHOLDER RIGHTS. No Participant shall have, as a result of
receiving a Performance Share Award, any rights as a shareholder until and to
the extent that the Performance Shares are earned and Common Stock is
transferred to such Participant. If the Agreement so provides, a Participant may
receive a cash payment equal to the dividends that would have been payable with
respect to the number of shares of Common Stock covered by the Award between (a)
the date that the Performance Shares are awarded and (b) the date that a
transfer of Common Stock to the Participant, cash settlement, or combination
thereof is made pursuant to the Performance Share Award. A Participant may not
sell, transfer, pledge, exchange, hypothecate, or otherwise dispose of a
Performance Share Award or the right to receive Common Stock thereunder other
than by will or the laws of descent and distribution. After a Performance Share
Award is earned and paid in Common Stock, a Participant will have all the rights
of a shareholder with respect to the Common Stock so awarded.
ARTICLE 10. BENEFICIARY DESIGNATION
To the extent applicable, each Participant under the Plan may, from time to
time, name any beneficiary or beneficiaries (who may be named contingently or
successively) to whom any benefit under the Plan is to be paid in case of his or
her death before he or she receives any or all of such benefit. Each such
designation shall revoke all prior designations by the same Participant, shall
be in a form prescribed by the Company and shall be effective only when filed by
the Participant, in writing, with the Company during the Participant's lifetime.
In the absence of any such designation, benefits remaining unpaid at the
Participant's death shall be paid to the Participant's estate.
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If required, the spouse of a married Participant domiciled in a community
property jurisdiction shall join in any designation of a beneficiary or
beneficiaries other than the spouse.
ARTICLE 11. DEFERRALS
The Committee may permit a Participant to defer to another plan or program
such Participant's receipt of Shares or cash that would otherwise be due to such
Participant by virtue of the exercise of an Option, the vesting of Restricted
Stock, or the earning of a Performance Share Award. If any such deferral
election is required or permitted, the Committee shall, in its sole discretion,
establish rules and procedures for such payment deferrals.
ARTICLE 12. RIGHTS OF EMPLOYEES
12.1 EMPLOYMENT. Nothing in the Plan shall interfere with or limit in any
way the right of the Company or a Subsidiary to terminate any Participant's
employment by, or performance of services for, the Company at any time, nor
confer upon any Participant any right to continue in the employ or service of
the Company or a Subsidiary. For purposes of the Plan, transfer of employment of
a Participant between the Company and any one of its Subsidiaries (or between
Subsidiaries) shall not be deemed a termination of employment.
12.2 PARTICIPATION. No Employee shall have the right to be selected to
receive an Award under this Plan, or, having been so selected, to be selected to
receive a future Award.
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ARTICLE 13. CHANGE IN CONTROL
13.1 DEFINITION. For purposes of the Plan, a "Change in Control" shall be
deemed to have occurred if:
(a) An acquisition by any Person of Beneficial Ownership of the
shares of Common Stock of the Company then outstanding (the
"COMPANY COMMON STOCK OUTSTANDING") or the voting securities of
the Company then outstanding entitled to vote generally in the
election of directors (the "COMPANY VOTING SECURITIES
OUTSTANDING"), if such acquisition of Beneficial Ownership
results in the Person beneficially owning (within the meaning of
Rule 13d-3 promulgated under the Exchange Act) twenty-five
percent (25%) or more of the Company Common Stock Outstanding or
twenty-five percent (25%) or more of the combined voting power of
the Company Voting Securities Outstanding; provided, that
immediately prior to such acquisition such Person was not a
direct or indirect Beneficial Owner of twenty-five percent (25%)
or more of the Company Common Stock Outstanding or twenty-five
percent (25%) or more of the combined voting power of Company
Voting Securities Outstanding, as the case may be; or
(b) The approval by the shareholders of the Company of a
reorganization, merger, consolidation, complete liquidation or
dissolution of the Company, the sale or disposition of all or
substantially all of the assets of the Company or similar
corporate transaction (in each case referred to in this SECTION
13 as a "CORPORATE TRANSACTION") or, if consummation of such
Corporate Transaction is subject, at the time of such
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approval by shareholders, to the consent of any government or
governmental agency, the obtaining of such consent (either
explicitly or implicitly); or
(c) A change in the composition of the Board such that the
individuals who, as of the Effective Date, constitute the Board
(such Board shall be hereinafter referred to as the "INCUMBENT
BOARD") cease for any reason to constitute at least a majority of
the Board; provided, however, for purposes of this SECTION 13
that any individual who becomes a member of the Board subsequent
to the Effective Date whose election, or nomination for election
by the Company's shareholders, was approved by a vote of at least
a majority of those individuals who are members of the Board and
who were also members of the Incumbent Board (or deemed to be
such pursuant to this proviso) shall be considered as though such
individual were a member of the Incumbent Board; but, provided,
further, that any such individual whose initial assumption of
office occurs as a result of either an actual or threatened
election contest (as such terms are used in Rule 14a-11 of
Regulation 14A promulgated under the Exchange Act, including any
successor to such Rule), or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person
other than the Board, shall not be so considered as a member of
the Incumbent Board.
Notwithstanding the provisions set forth in subsections (a) and
(b), the following shall not constitute a Change in Control for
purposes of this Plan: (1) any acquisition of shares of Common
Stock by, or consummation of a Corporate Transaction with, any
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Subsidiary or any employee benefit plan (or related trust)
sponsored or maintained by the Company or an affiliate; or (2)
any acquisition of shares of Common Stock, or consummation of a
Corporate Transaction, following which more than fifty percent
(50%) of, respectively, the shares then outstanding of common
stock of the corporation resulting from such acquisition or
Corporate Transaction and the combined voting power of the voting
securities then outstanding of such corporation entitled to vote
generally in the election of directors is then beneficially
owned, directly or indirectly, by all or substantially all of the
individuals and entities who were Beneficial Owners,
respectively, of the Company Common Stock Outstanding and Company
Voting Securities Outstanding immediately prior to such
acquisition or Corporate Transaction in substantially the same
proportions as their ownership, immediately prior to such
acquisition or Corporate Transaction, of the Company Common Stock
Outstanding and Company Voting Securities Outstanding, as the
case may be.
13.2 LIMITATION ON AWARDS. Notwithstanding any other provisions of the
Plan, if the right to receive or benefit from any Award under this Plan, either
alone or together with payments that a Participant has the right to receive from
the Company or a Subsidiary, would constitute a "parachute payment" (as defined
in Section 280G of the Code), all such payments shall be reduced to the largest
amount that will result in no portion being subject to the excise tax imposed by
Section 4999 of the Code.
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ARTICLE 14. AMENDMENT, MODIFICATION AND TERMINATION
14.1 AMENDMENT, MODIFICATION AND TERMINATION. The Board may, at any time
and from time to time, alter, amend, suspend or terminate the Plan in whole or
in part; provided, that, unless approved by the holders of a majority of the
total number of Shares of the Company represented and voted at a meeting at
which a quorum is present, no amendment shall be made to the Plan if such
amendment would (a) materially modify the eligibility requirements provided in
ARTICLE 5; (b) increase the total number of Shares (except as provided in
SECTION 4.3) which may be granted under the Plan, as provided in SECTION 4.1;
(c) extend the term of the Plan; or (d) amend the Plan in any other manner which
the Board, in its discretion, determines should become effective only if
approved by the shareholders even though such shareholder approval is not
expressly required by the Plan or by law.
14.2 AWARDS PREVIOUSLY GRANTED. No termination, amendment or modification
of the Plan shall adversely affect in any material way any Award previously
granted under the Plan, without the written consent of the Participant holding
such Award. The Committee shall, with the written consent of the Participant
holding such Award, have the authority to cancel Awards outstanding and grant
replacement Awards therefor.
14.3 COMPLIANCE WITH CODE SECTION 162(M). At all times when the Committee
determines that compliance with Code Section 162(m) is required or desired, all
Awards granted under this Plan to Named Executive Officers shall comply with the
requirements of Code Section 162(m). In addition, in the event that changes are
made to Code Section 162(m) to permit greater flexibility with respect to any
Award or Awards under the Plan, the Committee may, subject to this ARTICLE 14,
make any adjustments it deem appropriate.
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ARTICLE 15. WITHHOLDING
15.1 TAX WITHHOLDING. The Company shall have the power and the right to
deduct or withhold, or require a Participant to remit to the Company, an amount
sufficient to satisfy federal, state and local taxes (including the
Participant's FICA obligation) required by law to be withheld with respect to
any taxable event arising in connection with an Award under this Plan.
15.2 SHARE WITHHOLDING. With respect to withholding required upon the
exercise of Options, or upon any other taxable event arising as a result of
Awards granted hereunder which are to be paid in the form of Shares,
Participants may elect, subject to the approval of the Committee, to satisfy the
withholding requirement, in whole or in part, by having the Company withhold
Shares having a Fair Market Value on the date the tax is to be determined equal
to the minimum statutory total tax which could be imposed on the transaction.
All elections shall be irrevocable, made in writing, signed by the Participant,
and elections by Insiders shall additionally comply with all legal requirements
applicable to Share transactions by such Participants.
ARTICLE 16. INDEMNIFICATION
Each person who is or shall have been a member of the Committee, or the
Board, shall be indemnified and held harmless by the Company against and from
any loss, cost, liability or expense that may be imposed upon or reasonably
incurred by him or her in connection with or resulting from any claim, action,
suit or proceeding to which he or she may be a party or in which he or she may
be involved by reason of any action taken or failure to act under the Plan and
against and from any and all amounts paid by him or her in settlement thereof,
with the Company's
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approval, or paid by him in satisfaction of any judgment in any such action,
suit or proceeding against him, provided he shall give the Company an
opportunity, at its own expense, to handle and defend the same before he
undertakes to handle and defend it on his own behalf. The foregoing right of
indemnification shall be in addition to any other rights of indemnification to
which such persons may be entitled under the Company's Articles of Incorporation
or Bylaws, as a matter of law, or otherwise, or any power that the Company may
have to indemnify them or hold them harmless.
ARTICLE 17. SUCCESSORS
All obligations of the Company under the Plan, with respect to Awards
granted hereunder, shall be binding on any successor to the Company, whether the
existence of such successor is the result of a direct or indirect purchase,
merger, consolidation or otherwise, of all or substantially all of the business
and/or assets of the Company.
ARTICLE 18. LEGAL CONSTRUCTION
18.1 GENDER AND NUMBER. Except where otherwise indicated by the context,
any masculine term used herein also shall include the feminine; the plural shall
include the singular and the singular shall include the plural.
18.2 SEVERABILITY. In the event any provision of the Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining parts of the Plan, and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.
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18.3 REQUIREMENTS OF LAW. The granting of Awards and the issuance of Shares
under the Plan shall be subject to all applicable laws, rules and regulations,
and to such approvals by any governmental agencies or national securities
exchanges as may be required.
18.4 REGULATORY APPROVALS AND LISTING. The Company shall not be required to
issue any certificate or certificates for Shares under the Plan prior to (i)
obtaining any approval from any governmental agency which the Company shall, in
its discretion, determine to be necessary or advisable, (ii) the admission of
such shares to listing on any national securities exchange or Nasdaq on which
the Company's Shares may be listed, and (iii) the completion of any registration
or other qualification of such Shares under any state or federal law or ruling
or regulations of any governmental body which the Company shall, in its sole
discretion, determine to be necessary or advisable.
Notwithstanding any other provision set forth in the Plan, if required by
the then-current Section 16 of the Exchange Act, any "derivative security" or
"equity security" offered pursuant to the Plan to any Insider may not be sold or
transferred for at least six (6) months after the date of grant of such Award.
The terms "equity security" and "derivative security" shall have the meanings
ascribed to them in the then-current Rule 16(a) under the Exchange Act.
18.5 SECURITIES LAW COMPLIANCE. With respect to Insiders, transactions
under this Plan are intended to comply with all applicable conditions of Rule
16b-3 or its successors under the Exchange Act. To the extent any provisions of
the Plan or action by the Committee fails to so comply, it shall be deemed null
and void, to the extent permitted by law and deemed advisable by the Committee.
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18.6 GOVERNING LAW. To the extent not preempted by Federal law, the Plan,
and all agreements hereunder, shall be construed in accordance with and
governed by the laws of the State of Delaware.
AS APPROVED BY THE BOARD OF DIRECTORS OF INDUSTRIAL DISTRIBUTION GROUP,
INC. ON July 10, 1997.
INDUSTRIAL DISTRIBUTION GROUP, INC.
By:
-----------------------------------
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EXHIBIT 10.9
FORM OF PROPOSED
INDEMNIFICATION AGREEMENT
THIS AGREEMENT is made this ____ day of September, 1997, by and between
INDUSTRIAL DISTRIBUTION GROUP, INC., a Delaware corporation (the "CORPORATION"),
and _________________ (the "INDEMNIFIED PARTY").
W I T N E S S E T H:
WHEREAS, the Indemnified Party currently serves as a director, officer,
or both of the Corporation, and in such capacity is performing a valuable
service; and
WHEREAS, pursuant to the Corporation's Certificate of Incorporation and
Bylaws, each as amended to date (collectively the "CHARTER"), the Corporation
may indemnify its directors and officers to the fullest extent authorized by
applicable law; and
WHEREAS, Section 145 of the Delaware General Corporation Law, as
amended to date (the "STATE STATUTE"), provides the statutory basis for the
indemnification of directors and officers of a Delaware corporation; and
WHEREAS, in order to induce the Indemnified Party to continue to serve,
the Corporation has determined and agreed to enter into this Agreement with the
Indemnified Party;
NOW, THEREFORE, in consideration of Indemnified Party's continued
service on behalf of the Corporation after the date hereof, the parties hereto
agree as follows:
1. INDEMNITY. The Corporation hereby agrees to hold harmless and
indemnify the Indemnified Party to the fullest extent authorized or permitted by
the provisions of the State Statute with respect to the indemnification of
directors and officers, or by any amendment thereof or other statutory provision
authorizing or permitting such indemnification that is adopted after the date
hereof.
2. ADDITIONAL INDEMNITY. Subject only to the exclusions set forth in
SECTION 3 hereof, the Corporation hereby further agrees to hold harmless and
indemnify Indemnified Party against any and all expenses (including reasonable
attorneys' fees), judgments, fines, and amounts paid in settlement actually and
reasonably incurred by Indemnified Party in connection with any threatened,
pending, or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative (including an action by or in the right of the
Corporation) to which Indemnified Party is, was or at any time becomes a party,
or is threatened to be made a party, by reason of the fact that Indemnified
Party is, was or at any time becomes a director, officer, employee, or agent of
the Corporation, or is or was serving or at any time serves at the
<PAGE> 2
request of the Corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust or other enterprise.
3. LIMITATIONS ON ADDITIONAL INDEMNITY. No indemnity pursuant to
SECTIONS 1 or 2 hereof shall be paid by the Corporation:
(a) In respect of expenses, judgments, fines, and settlement
amounts to the extent attributable to remuneration paid or other financial
benefit provided to Indemnified Party by the Corporation if it shall be
determined by a final judgment or other final adjudication that such
remuneration or financial benefit was paid or provided in violation of
Indemnified Party's duties and obligations to the Corporation;
(b) On account of any suit in which judgment is rendered
against Indemnified Party for an accounting of profits, made from the purchase
or sale by Indemnified Party of securities of the Corporation, pursuant to the
provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended,
or similar provisions of any federal or state law, or on account of any payment
by Indemnified Party to the Corporation in respect of any claim for such
accounting;
(c) On account of Indemnified Party's conduct if it shall be
determined by a final judgment or other final adjudication to have been
knowingly fraudulent, deliberately dishonest, or grossly negligent, or to have
constituted willful misconduct; or
(d) If a final decision by a court having jurisdiction in the
matter shall determine that such indemnification is not lawful.
4. CONTRIBUTION. (a) If the indemnification provided in SECTIONS 1 or 2
is unavailable and may not be paid to the Indemnified Party for any reason
(other than pursuant to SECTIONS 3(A), (B), and (C)), then in respect of any
threatened, pending, or completed action, suit, or proceeding in which the
Corporation is jointly liable with the Indemnified Party (or would be if joined
in such action, suit, or proceeding), the Corporation shall contribute to the
amount of expenses, judgments, fines, penalties, and settlements paid or payable
by the Indemnified Party in such proportion as is appropriate to reflect (i) the
relative benefits received by the Corporation on the one hand and the
Indemnified Party on the other from the transaction from which such action,
suit, or proceeding arose, and (ii) the relative fault of the Corporation on the
one hand and of the Indemnified Party on the other in connection with the events
that resulted in such expenses, judgments, fines, penalties, or settlement
amounts, as well as any other relevant equitable considerations. The relative
fault of the Corporation on the one hand and of the Indemnified Party on the
other shall be determined by reference to, among other things, the parties'
relative intent, knowledge, access to information, and opportunity to correct or
prevent the circumstances resulting in such expenses, judgments, fines,
penalties, or settlement amounts. The Corporation agrees that it would not be
just and equitable if contribution pursuant to this SECTION 4 were determined by
pro rata allocation or any other method of allocation that does not take account
of the foregoing equitable considerations.
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<PAGE> 3
(b) The determination as to the amount of the contribution, if
any, shall be made by: (i) a court of competent jurisdiction upon the
application of both the Indemnified Party and the Corporation (if an action or
suit had been brought in, and final determination had been rendered by, such
court); (ii) the Board of Directors by a majority vote of a quorum consisting of
directors who were not parties to such action, suit, or proceeding; or (iii)
regular outside counsel of the Corporation, if a quorum is not obtainable for
purposes of clause (ii) above, or, even if obtainable, a quorum of disinterested
directors so directs.
5. CONTINUATION OF OBLIGATIONS. All agreements and obligations of the
Corporation contained herein shall continue during the period the Indemnified
Party is a director, officer, employee, or agent of the Corporation (or is
serving at the request of the Corporation as a director, officer, employee, or
agent of another corporation, partnership, joint venture, trust, employee
benefit plan, or other enterprise), and shall continue thereafter for so long as
the Indemnified Party shall be subject to any possible claim or threatened,
pending, or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative, by reason of the fact that the Indemnified
Party was serving in any such capacity on behalf of the Corporation.
6. ADVANCEMENT OF EXPENSES. Expenses (including attorneys' fees),
judgments, fines, penalties, and amounts paid in settlement actually and
reasonably incurred by the Indemnified Party with respect to any action, suit,
or proceeding referred to in SECTIONS 1 or 2 shall be advanced by the
Corporation prior to the time of the disposition of such action, suit, or
proceeding promptly upon the receipt of a (a) written affirmation from the
Indemnified Party of his good faith belief that he is entitled to be indemnified
by the Corporation for such expenses, judgments, fines, penalties, or amounts
paid in settlement under the provisions of the State Statute, the Charter, this
Agreement, or otherwise, and (b) written undertaking to return promptly any
amounts advanced hereunder if it shall ultimately be determined that the
Indemnified Party is not entitled to indemnification from the Corporation for
such amounts under the provisions of the State Statute, the Charter, this
Agreement, or otherwise.
7. NOTIFICATION AND DEFENSE OF CLAIM. Promptly after receipt by the
Indemnified Party of notice of the commencement of any action, suit, or
proceeding, the Indemnified Party will, if a claim in respect thereof is to be
made against the Corporation under this Agreement, notify the Corporation of the
commencement thereof, but the failure to notify the Corporation will not relieve
it from any liability that it may have to the Indemnified Party otherwise than
under this Agreement. With respect to any such action, suit, or proceeding as to
which the Indemnified Party so notifies the Corporation:
(a) The Corporation will be entitled to participate at its own
expense;
(b) Except as otherwise provided below, the Corporation may
assume the defense thereof, with counsel reasonably satisfactory to the
Indemnified Party. After notice from the Corporation to the Indemnified Party of
its election to assume such defense, the Corporation will not be liable to the
Indemnified Party under this Agreement for any legal or other expenses
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<PAGE> 4
subsequently incurred by the Indemnified Party in connection with the defense
thereof, other than reasonable costs of investigation or as otherwise provided
below. The Indemnified Party shall have the right to employ its own counsel in
such action, suit, or proceeding, but the fees and expenses of such counsel
incurred after notice from the Corporation of its assumption of the defense
thereof shall be at the expense of the Indemnified Party, unless (i) the
employment of counsel by the Indemnified Party has been authorized by the
Corporation, (ii) counsel to the Indemnified Party shall have reasonably
concluded that there may be a conflict of interest between the Corporation and
the Indemnified Party in the conduct of the defense of such action and has
advised the Indemnified Party in writing that such a conflict of interest
exists, or (iii) the Corporation shall not in fact have employed counsel to
assume the defense of such action, in each of which cases the fees and expenses
of counsel for the Indemnified Party shall be at the expense of the Corporation.
The Corporation shall not be entitled to assume the defense of any action, suit,
or proceeding brought by or on behalf of the Corporation or as to which the
Indemnified Party shall have made the conclusion provided for in clause (ii)
above; and
(c) The Corporation shall have no obligation to indemnify the
Indemnified Party under this Agreement for any amounts paid in settlement of any
action or claim effected without the Corporation's prior written consent. The
Corporation shall not settle any action or claim in any manner that would impose
any penalty or limitation on the Indemnified Party without the Indemnified
Party's prior written consent. Neither the Corporation nor the Indemnified Party
will unreasonably withhold their consent to any proposed settlement.
8. REPAYMENT OF EXPENSES. The Indemnified Party agrees to reimburse the
Corporation for all reasonable expenses, judgments, fines, penalties, and
settlement amounts paid by the Corporation in defending any civil, criminal,
administrative, or investigative action, suit, or proceeding against the
Indemnified Party or advanced by the Corporation to the Indemnified Party in
such event, but only to the extent that it shall be ultimately determined that
the Indemnified Party is not entitled to be indemnified by the Corporation for
such expenses, judgments, fines, penalties, or amounts paid in settlement under
the provisions of the State Statute, the Charter, this Agreement, or otherwise.
9. ENFORCEMENT. (a) The Corporation expressly confirms and agrees that
it has entered into this Agreement and assumed the obligations imposed on it
hereby in order to induce the Indemnified Party to continue to serve on behalf
of the Corporation, and acknowledges that the Indemnified Party is relying upon
this Agreement in continuing to serve in such capacity.
(b) If the Indemnified Party is required to bring any action
to enforce rights or to collect moneys due under this Agreement and is
successful in such action, then the Corporation shall reimburse the Indemnified
Party for all of the Indemnified Party's reasonable fees and expenses in
bringing and pursuing such action.
10. SEVERABILITY. Each of the provisions of this Agreement is a
separate and distinct agreement and independent of the others, so that if any
provision hereof shall be held to be
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<PAGE> 5
invalid or unenforceable in whole or in part for any reason, such invalidity or
unenforceability shall not affect the validity or enforceability of the other
provisions hereof.
11. GENERAL AND MISCELLANEOUS. (a) This Agreement shall be governed by
and construed and enforced in accordance with the laws of the State of Delaware,
without regard to its conflicts of laws rules.
(b) This Agreement shall be binding upon the Indemnified
Party, his heirs, personal representative, and assigns and upon the Corporation
and its successors and assigns, and shall inure to the benefit of and be
enforceable by the Indemnified Party, his heirs, personal representatives, and
assigns, and by the Corporation and its successors and assigns.
(c) No amendment, modification, termination, or cancellation
of this Agreement shall be effective unless in a writing signed by both parties
hereto.
12. NO DUPLICATION OF PAYMENTS. The Corporation shall not be liable
under this Agreement to make any payment to the extent the Indemnified Party has
otherwise actually received payment (under any insurance policy, Charter
provision, or otherwise) of the amounts otherwise indemnifiable hereunder.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
and as of the day and year first above written.
"Corporation"
INDUSTRIAL DISTRIBUTION GROUP, INC.
By:
-------------------------------------
Martin S. Pinson
Chairman and Chief Executive Officer
"Indemnified Party"
----------------------------------------
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EXHIBIT 21.1
Subsidiaries of the Registrant
Associated Suppliers, Inc.
B & J Industrial Supply Company
Cramer Industrial Supplies, Inc.
Grinding Supplies Company
The Distribution Group, Inc.
J.J. Stangel Co.
Shearer Industrial Supply Co.
Slater Industrial Supply, Inc.
Tri-Star Industrial Supply, Inc.
<PAGE> 1
EXHIBIT 23.2
As independent public accountants, we hereby consent to the use of our reports
and to all references to our firm included in or made part of this registration
statement.
/s/ Arthur Andersen LLP
Atlanta, Georgia
September 18, 1997
<PAGE> 1
EXHIBIT 23.3
As independent public accountants, we hereby consent to the use of our report
and to all references to our firm included in or made part of this
registration statement.
/s/ Miller & Co. LLP
York, Pennsylvania
September 18, 1997
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EXHIBIT 23.4
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Schenck & Associates, SC
Green Bay, Wisconsin
September 18, 1997
<PAGE> 1
EXHIBIT 23.5
We hereby consent to the inclusion and use of our audit report respecting the
financial statements of Tri-Star Industrial Supply, Inc., St. Louis, Missouri,
at and for the years ended September 30, 1996 and 1995, in Amendment No. 2 to
the Registration Statement on Form S-1 of Industrial Distribution Group, Inc.,
and to the references made to our firm in such Registration Statement.
/s/ Baird, Kurtz & Dobson
St. Louis, Missouri
September 18, 1997