<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
TO
----------------------- -----------------------
COMMISSION FILE NUMBER 001-13195
INDUSTRIAL DISTRIBUTION GROUP, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
Delaware 58-2299339
- -------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
2500 Royal Place, Tucker, Georgia 30084
----------------------------------------------------
(Address of principal executive offices and zip code)
(770) 243-9000
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Shares outstanding of the issuer's Common Stock at June 30, 1998: 8,466,713
shares of Common Stock, $0.01 par value share.
<PAGE> 2
INDEX
INDUSTRIAL DISTRIBUTION GROUP, INC.
<TABLE>
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PART I. Financial Information
ITEM 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at June 30, 1998 and December 31, 1997
Consolidated Statements of Operations for the three months ended June 30, 1998 and 1997
Consolidated Statements of Operations for the six months ended June 30, 1998 and 1997
Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and 1997
Notes to the Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. Other Information
ITEM 1. Legal Proceedings
ITEM 2. Changes in Securities
ITEM 6. Exhibits and Reports on Form 8-K
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDUSTRIAL DISTRIBUTION GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
(Unaudited)
(Note 1)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
*Restated
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $ 5,579 $ 31,534
Accounts Receivable, net 50,043 36,099
Inventory, net 52,032 42,427
Prepaid and Other Current Assets 6,381 4,018
-------- --------
TOTAL CURRENT ASSETS 114,035 114,078
Property and Equipment, net 13,603 9,910
Intangible Assets, net 37,618 19,584
Other Assets 2,106 3,689
-------- --------
TOTAL ASSETS $167,362 $147,261
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short Term Debt $ 5,125 $ 5,506
Accounts Payable 29,861 23,489
Accrued Compensation 2,910 2,131
Other Accrued Liabilities 3,296 3,307
-------- --------
TOTAL CURRENT LIABILITIES 41,192 34,433
Long-Term Debt 3,257 5,036
Deferred Income Taxes 217 880
Other Long-Term Liabilities 9,209 7,422
-------- --------
TOTAL LIABILITIES 53,875 47,771
STOCKHOLDERS' EQUITY:
Common Stock, par value $.01 per share, 50,000,000 85 79
shares authorized; 8,466,713 shares issued and
outstanding in 1998; 7,880,110 shares in 1997
Additional Paid-In Capital 100,213 89,298
Retained Earnings 13,189 10,113
-------- --------
Total Stockholders' Equity 113,487 99,490
-------- --------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $167,362 $147,261
======== ========
</TABLE>
*Restated for acquisitions accounted for under the pooling-of-interests method.
The accompanying notes are an integral part of these financial statements.
3
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INDUSTRIAL DISTRIBUTION GROUP, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30
1998 1997
----------- -----------
* Restated
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NET SALES ................................... $ 106,638 $ 20,674
COST OF SALES ............................... 82,722 15,821
----------- -----------
Gross profit .............................. 23,916 4,853
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 21,261 3,941
----------- -----------
Income from operations .................... 2,655 912
INTEREST EXPENSE ............................ 193 236
OTHER (INCOME) EXPENSE ...................... (216) (138)
----------- -----------
INCOME BEFORE INCOME TAXES .................. 2,678 814
PROVISION FOR INCOME TAXES .................. 978 291
----------- -----------
NET INCOME .................................. $ 1,700 $ 523
=========== ===========
BASIC EARNINGS PER SHARE .................... $ .21 $ .35
=========== ===========
DILUTED EARNINGS PER SHARE .................. $ .21 $ .35
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING (Basic) . 8,199,927 1,498,383
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING (Diluted) 8,258,983 1,498,383
=========== ===========
</TABLE>
*Restated for acquisitions accounted for under the pooling-of-interests method.
The accompanying notes are an integral part of these financial statements.
4
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INDUSTRIAL DISTRIBUTION GROUP, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
1998 1997
------------ ------------
* Restated
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NET SALES ................................................................. $ 196,401 $ 40,113
COST OF SALES ............................................................. 151,560 30,926
------------ ------------
Gross profit ............................................................ 44,841 9,187
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES .............................. 40,076 7,859
------------ ------------
Income from operations .................................................. 4,765 1,328
INTEREST EXPENSE .......................................................... 487 443
OTHER (INCOME) EXPENSE .................................................... (702) (202)
------------ ------------
INCOME BEFORE INCOME TAXES ................................................ 4,980 1,087
PROVISION FOR INCOME TAXES ................................................ 1,904 382
------------ ------------
NET INCOME ................................................................ $ 3,076 $ 705
============ ============
BASIC EARNINGS PER SHARE .................................................. $ .38 $ .47
============ ============
DILUTED EARNINGS PER SHARE ................................................ $ .38 $ .47
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING (Basic) ............................... 8,052,006 1,495,061
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING (Diluted) ............................. 8,110,302 1,495,061
============ ============
</TABLE>
*Restated for acquisitions accounted for under the pooling-of-interests method.
The accompanying notes are an integral part of these financial statements.
5
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INDUSTRIAL DISTRIBUTION GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands) (Unaudited)
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Six Months Ended
June 30
1998 1997
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*Restated
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................................. $ 3,076 $ 705
------------ ------------
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization ........................................... 1,369 197
Amortization of deferred loan cost ...................................... 30 -
Provision for deferred taxes ........................................... (483) (232)
Loss on disposal of equipment ........................................... 24 6
Gain on sale of investments ............................................. (6) -
Changes in operating assets and liabilities:
Accounts receivable, net ................................................ (3,603) 124
Inventories, net ........................................................ 672 490
Prepaid assets .......................................................... (445) 50
Other assets ............................................................ (15) -
Accounts payable ........................................................ (950) (595)
Accrued compensation .................................................... 448 509
Deferred loan costs ..................................................... (15) -
Other accrued liabilities ............................................... (468) (355)
------------ ------------
Total adjustments .................................................. (3,442) 194
------------ ------------
Net cash (used in) provided by operating activities ............... (366) 899
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment, net ................................ (3,325) (197)
Proceeds from the sale of property and equipment ........................ 32 -
Cash paid in acquisitions ............................................... (12,086) -
Deposits ................................................................ (12) -
Cash surrender value of life insurance .................................. 914 -
Cash from acquired companies ........................................... 839 -
Proceeds from sale of investments ....................................... (3) (24)
------------ ------------
Net cash used in investing activities ................................... (13,641) (221)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock .................................. 178 (3)
Payments on short term debt ............................................. (7,257) (387)
Payments on long-term debt .............................................. (4,865) 366
Adjustments to conform year ends of certain pooled companies ............ (4) (8)
------------ ------------
Net cash used in financing activities ................................... (11,948) (32)
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS ................................... (25,955) 646
CASH AND CASH EQUIVALENTS, beginning of period ............................ 31,534 1,585
============ ============
CASH AND CASH EQUIVALENTS, end of period .................................. $ 5,579 $ 2,231
============ ============
Supplemental Cash Flow Information:
Cash Paid for Interest ................................................ $ 273 $ 183
============ ============
Cash Paid for Income Taxes ............................................ $ 1,709 $ 39
============ ============
</TABLE>
*Restated for acquisitions accounted for under the pooling-of- interests method.
The accompanying notes are an integral part of these financial statements
6
<PAGE> 7
INDUSTRIAL DISTRIBUTION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998
1. BASIS OF PRESENTATION
Industrial Distribution Group, Inc., a Delaware corporation ("IDG" or the
"Company"), was formed on February 12, 1997 to create a nationwide supplier of
cost-effective, flexible procurement solutions for manufacturers and other users
of maintenance, repair, operating and production products. In September 1997,
IDG completed an initial public offering (the "offering") of its Common Stock,
and at the same time, acquired the following nine industrial distribution
companies: Associated Suppliers, Inc. ("Associated"), B&J Industrial Supply
Company ("B&J"), Cramer Industrial Supplies ("Cramer"), Grinding Supplies
Company ("Grinding"), J.J. Stangel Company ("J.J. Stangel"), Shearer Industrial
Supply Company ("Shearer"), Slater Industrial Supply Company ("Slater"), The
Distribution Group ("TDG") and Tri-Star Industrial Supply, Inc. ("Tri-Star"),
collectively referred to as the "Founding Companies". The consideration for the
acquisitions of the Founding Companies consisted of a total of 3,330,224 shares
of Company Common Stock. B&J has been identified as the acquiror for financial
statement presentation purposes pursuant to Staff Accounting Bulletin 97 ("SAB
97"). The acquisitions were accounted for using the purchase method of
accounting. The allocations of purchase price to the assets acquired and
liabilities assumed of the Founding Companies were recorded based on fair value.
The closing of the acquisitions and the offering occurred on September 29, 1997.
For accounting purposes, however, September 24, 1997 has been established as the
effective date of the acquisitions because management has determined that
effective control of the operations of the Founding Companies transferred to IDG
on that date.
The accompanying unaudited interim financial statements of IDG represent B&J (as
the SAB 97 financial acquiror) for the three and six months ended June 30, 1997.
They also represent B&J, the eight Founding Companies and acquisitions treated
as purchases from the date of purchase for the three and six months ended June
30, 1998. All periods presented give retroactive effect to the results of
companies acquired by IDG in business combinations accounted for under the
pooling-of-interests method (the "Pooled Companies"). See Note 3.
The accompanying unaudited interim financial statements are prepared pursuant to
the rules and regulations for reporting on Form 10-Q. Accordingly, certain
information and footnotes required by generally accepted accounting principles
for complete financial statements are not included herein. The Company believes
all adjustments necessary for a fair presentation of these interim statements
have been included and are of a normal and recurring nature.
The interim statements should be read in conjunction with the Company's
financial statements and notes thereto, included in its annual report on form
10-K for the fiscal year ended December 31, 1997, Commission File Number
001-13195.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There were no significant changes in the accounting policies of the Company
during the periods presented.
3. ACQUISITIONS
During March 1998, the Company acquired three industrial distributors, E.C.
Blackstone Company, Continental Air Tools, Inc. d/b/a/ Continental-McLaughlin,
and Northern Tool & Supply, Inc. Blackstone was accounted for using the purchase
method of accounting while Continental and Northern Tool were accounted for
using the pooling-of-interests method of accounting.
During the second quarter of 1998, the Company acquired seven industrial supply
distributors, REFCO, Inc., Hawley Industrial Supplies, Inc., New England Group
Industrial Distributors, Inc. d/b/a Industrial Suppliers of New England,
Industrial and Tool Suppliers, L.L.C., Buford Brothers, Inc., Knox Industrial
Supplies, Inc., and L.D. Supply, Inc.
REFCO, Inc., Hawley Industrial Supplies, Inc., New England Group Industrial
Distributors, Inc. and Industrial and Tool Suppliers, L.L.C. were acquired in
May, 1998 to give IDG a presence in the New England area. REFCO, Inc., located
in Boylston, Massachusetts, and New England Group Industrial Distributors, Inc.,
located in Nashua, New Hampshire, were each acquired for cash and stock. Hawley
Industrial Supplies, Inc., located in Bridgeport, Connecticut, and Industrial
and Tool Suppliers, L.L.C., located in Portland, Maine, were
7
<PAGE> 8
acquired for stock. The New England acquisitions, except for Hawley, were
accounted for using the purchase method of accounting. Under the purchase method
of accounting, the Company's financial statements include their operating
results from the date of acquisition. Likewise, goodwill recorded in connection
with their acquisition is being amortized on a straight-line basis over 40
years. Hawley was accounted for using the pooling-of-interests method of
accounting. The Company's financial statements give retroactive effect to the
acquisition of Hawley for all periods presented.
Buford Brothers, located in Nashville, Tennessee, was acquired in May, 1998.
This acquisition was accounted for using the purchase method of accounting.
Knox Industrial Supplies, located in Santa Ana, California, will expand the
Company's market in the Southern California area. Knox, acquired in May, 1998,
was accounted for as an asset purchase. Accordingly, the Company's financial
statements include their operating results from the date of their acquisition.
No goodwill is recorded in conjunction with an asset purchase.
L.D. Supply, located in Wichita, Kansas, was acquired in June, 1998. L.D. Supply
was accounted for using the purchase method of accounting.
4. CREDIT FACILITY
In December 1997, the Company entered into a $75,000,000 revolving credit
facility with a five-bank syndicate. The facility has a three-year term, bears
interest at either the bank's corporate base rate or a Eurodollar rate plus
applicable margins, and is secured by a first security interest in the capital
stock of the Company's business units. The agreement provides that the facility
be used for operations and acquisitions and provides $5,000,000 each for
swinglines and letters of credit. There is an annual commitment fee on the
unused portion of the facility equal to between 20 and 30 basis points of the
average daily unused portion of the aggregate commitment depending on the
indebtedness to adjusted EBITDA ratio, as defined. At June 30, 1998, $4,000,000
was outstanding under this facility at an effective interest rate of 6.35%. The
revolving credit facility contains various covenants pertaining to maintenance
of certain financial relationships. The Company was in compliance with these
covenants as of June 30, 1998.
5. CAPITAL STOCK
During the second quarter of 1998, the Company issued 652,322 shares of its
Common Stock to acquire five companies.
6. INCOME TAXES
The Company intends to file a consolidated federal income tax return, which
includes the operations of all acquired companies for periods subsequent to
their respective acquisition dates. Each acquired company will file a "short
period" federal income tax return through its acquisition date.
7. COMMITMENTS AND CONTINGENCIES
On November 18, 1996, Milliken & Company, a textile manufacturer and customer of
TDG, filed suit against a manufacturer of an industrial product and TDG.
Milliken claims that a product sold to it by TDG as a distributor of the
defendant-manufacturer was defective and caused fire, severely damaging
Milliken's textile manufacturing plant in LaGrange, Georgia. Milliken alleges
damages of $500 million against the defendants. TDG has denied any liability,
and its insurance carrier is vigorously defending the lawsuit on its behalf. 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 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 TDG that might result from the lawsuit.
On December 22, 1997, TDG brought an action in DeKalb County Superior Court,
Georgia, File No. 97-14388-4, against a former stockholder, under the Georgia
dissenters' rights provisions of the Georgia Business Corporation Code (the
"GBCC). On July 24, 1998, the Dekalb County Superior Court issued an order
transferring the case to the Superior Court of Fulton County. The former
stockholder of TDG had exercised his rights pursuant to the GBCC to dissent from
the merger of TDG with the Company. In accordance with the GBCC, TDG offered to
pay the former stockholder $4.2 million for his interest in TDG. The former
stockholder
8
<PAGE> 9
rejected that offer and demanded payment of $9 million. TDG brought this action
to seek a judicial determination of the value of his interest in TDG as of the
time of the merger. The proceedings are still in discovery, and it is not
possible to predict the outcome at this time.
The Company is subject to various claims and legal actions which arise in the
ordinary course of business. The Company believes that the ultimate resolution
of such matters, including those identified above, will not have a material
adverse effect on the Company's financial position or results of operations.
8. NEW PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No.130 establishes standards for the
reporting of comprehensive income in a company's financial statements.
Comprehensive income includes all changes in a company's equity during the
period that result from transactions and other economic events other than
transactions with its stockholders. For the Company, SFAS No.130 is effective
for the year beginning January 1, 1998. Implementation of SFAS No. 130 did not
have a significant effect on its current financial reporting.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." SFAS No.
131 requires that an enterprise disclose certain information about operating
segments. SFAS No. 131 is effective for financial statements for the Company's
fiscal year ending December 31, 1998. The Company does not expect that SFAS No.
131 will have a significant impact on its current financial statements nor will
it require significant revision of prior disclosures.
9. PRO FORMA COMBINED FINANCIAL INFORMATION
The following pro forma combined financial information for the six months ended
June 30, 1998 reflects the results of the Company. For the six months ended June
30, 1997, it includes the historical results of B&J and the Pooled Companies
combined with the other eight Founding Companies as if the acquisitions had
occurred on January 1. This pro forma combined financial information includes
the effects of (a) the acquisitions; (b) the offering; (c) amortization of
goodwill resulting from the acquisitions; (d) elimination of interest expense
for the debt that was paid from the offering proceeds; and (e) provision for
income taxes at 40%, even though one of the acquired companies had a Chapter S
corporate tax status.
The earnings per share amounts are based on 8,466,713 and 7,880,110 common
shares deemed to be outstanding for the periods ended June 30, 1998 and 1997
respectively. For the six months ended June 30, 1997, the net income amounts
include estimates of the federal and state taxes that would have been applicable
to the Company had the acquisitions occurred at the beginning of the period. The
underlying tax rates differ from statutory federal and state rates primarily
because amortization of goodwill related to the acquisitions is not deductible
for tax purposes.
The pro forma combined financial information does 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 results of operations for any future period. (Amounts are
in thousands, except for per share amounts.)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1998 1997
----------------------
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Net Sales $ 196,401 $160,936
--------- --------
Net Income $ 3,076 $ 2,711
========= ========
Earnings per $ .36 $ .34
Share ========= ========
</TABLE>
ITEM. 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Under SAB 97, B&J was designated as the financial acquiror in the Company's
acquisition and combination of the nine Founding Companies (the "Combination").
The consolidated financial statements of B&J are deemed to be the historical
financial statements of
9
<PAGE> 10
the Company for purposes of all SEC reporting. Accordingly, the Company must
include in this management's discussion and analysis a discussion that is based
on those financial statements. As discussed in Note 1 of the Company's unaudited
interim financial statements, such financial statements reflect the results of
the Company for the three and six months ended June 30, 1998, while reflecting
the results of only B&J and the Pooled Companies for the three and six months
ended June 30, 1997. Accordingly, management has also included herein its
discussion and analysis of certain information on a combined basis that includes
the Company, all nine Founding Companies, and the Pooled Companies, as a whole,
in order to provide other important information with respect to the Company in
light of certain effects of the Combination and these acquisitions. The
following discussion has been organized on that basis.
In this discussion, 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.
This discussion may contain certain forward-looking statements 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 that 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
include, but are not limited to, the availability of attractive acquisition
opportunities, the successful integration and profitable management of acquired
businesses, improvement of operating efficiencies, the availability of working
capital and financing for future acquisitions, the Company's ability to grow
internally through expansion of services and customer bases, its ability to
reduce overhead, seasonality, the continuation of key supplier relationships,
the ability of the Company to compete successfully in the highly competitive and
diverse MROP market, the Company's ability to maintain key personnel, the
availability of key personnel for employment by the Company, the effects of the
Year 2000 issue, and other factors discussed in more detail under "Item
1-Business" of the Company's Annual Report on Form 10-K for fiscal 1997.
The timing and magnitude of acquisitions and assimilation costs may also
materially affect quarterly results. Accordingly, the operating results for any
interim period are not necessarily indicative of the results that may be
achieved for any subsequent interim period or for a full year.
RESULTS OF OPERATIONS - COMBINED
The combined financial information for the three and six months ended June
30, 1998 and 1997 discussed in this subsection includes the operating results of
(i) the Company for the three and six months ended June 30, 1998 and (ii) B&J
together with the results of the other eight Founding Companies and the Pooled
Companies on a combined basis for the three and six months ended June 30, 1997.
These combined operating results may not be indicative of the Company's
post-Combination results of operations for several reasons. The Founding
Companies and the Pooled Companies operated as separate privately owned entities
until the closing of the Combination or the Pooled Companies' acquisitions, as
appropriate. Until that time, 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 companies. In addition, as a result of the Combination,
the Company has new senior management, has incurred implementation costs of the
Combination, and is incurring amortization expenses from the goodwill associated
with the Combination. Moreover, for 1997 the 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 and the
Pooled Companies.
The Company anticipates that, in the future, it will realize savings from
several sources as a result of the Combination, including (i) increased volume
discounts and rebates from vendors, (ii) consolidation of certain administrative
functions, and (iii) the reduction in interest payments related to the repayment
of certain former Founding Company and acquired company debt; and (iv) its
ability to borrow at lower interest rates than the Founding Companies and
acquired companies. 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 anticipated effect is reflected in the following
information or discussion for the three and six months ended June 30, 1997. Any
such effect that has been realized as of June 30, 1998 is reflected in the
following information and discussion.
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
The following table sets forth certain selected financial data and shows
such data as a percentage of net sales for the periods indicated (dollars in
thousands):
10
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<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-------------------------------
1998 1997
-------- -------
<S> <C> <C> <C> <C>
Net Sales $106,638 100.0% $82,691 100.0%
Cost of Sales 82,722 77.6 63,882 77.3
-------- ----- ------- -----
Gross Profit 23,916 22.4 18,809 22.7
Selling, General and Administrative 21,261 19.9 16,127 19.5
-------- ----- ------- -----
Operating Income $ 2,655 2.5% $ 2,682 3.2%
======== ===== ======= =====
</TABLE>
Net sales increased $23.9 million or 29.0% from $82.7 million for the three
months ended June 30, 1997 to $106.6 million for the three months ended June 30,
1998. Acquisitions accounted for $16.8 million of the increase. In addition, the
nine Founding Companies experienced a 9.2% internal growth rate over 1997. This
increase was a result of increased integrated supply and other specialized
services contract sales. Management believes that the Company did not
experience significant effects during the quarter from the Asian monetary
crisis, the now concluded General Motors strike and the apparent slowing in the
rate of growth of the manufacturing segment of the economy. The Company
experienced delays and slowing of orders from certain customers whose operations
were impacted more directly and severely by these events. The Company will
continue to monitor these trends carefully.
Cost of sales increased $18.8 million or 29.5% from $63.9 million for the three
months ended June 30, 1997 to $82.7 million for the three months ended June 30,
1998. As a percentage of net sales, cost of sales increased from 77.3% in 1997
to 77.6% in 1998. The increase in cost of sales as a percentage of net sales is
due to a change in product mix resulting primarily from acquisitions.
Selling, general, and administrative expenses increased $5.2 million or 31.8%
for the three months ended June 30, 1997 from $16.1 million in 1997 to $21.3
million in 1998. As a percentage of net sales, selling, general, and
administrative expenses increased from 19.5% in 1997 to 19.9% in 1998. The
increase includes $133,000 of non-recurring expenses related to acquisitions
made during the second quarter of 1998. Excluding these non-recurring expenses,
selling, general, and administrative expenses for the first quarter of 1998 were
$21.1 million or 19.8% of net revenues. In addition, during 1998, the Company
incurred increased professional fees and expenses related to staffing a
corporate office and incurred costs related to being a public company. Excluding
non-recurring expenses and corporate expenses, selling, general, and
administrative expenses were 18.9% of net revenues for the quarter ended June
30, 1998. The decrease in expenses is a result of lower selling, general, and
administrative expenses of the nine Founding Companies in the 1998 quarter as
compared to the 1997 quarter. In addition, the acquired companies have lower
selling, general, and administrative expenses as a percentage of net revenues.
Operating income remained at $2.7 million for the three months ended June 30,
1998 as compared with the prior year. As a percentage of net sales, operating
income decreased from 3.2% in 1997 to 2.5% in 1998.
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
The following table sets forth certain selected financial data and shows
such data as a percentage of net sales for the periods indicated (dollars in
thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------
1998 1997
-------- -------
<S> <C> <C> <C> <C>
Net Sales $196,401 100.0% $160,660 100.0%
Cost of Sales 151,560 77.2 123,679 77.0
-------- ----- -------- ------
Gross Profit 44,841 22.8 36,981 23.0
Selling, General and Administrative 40,076 20.4 32,002 19.9
-------- ----- -------- ------
Operating Income $ 4,765 2.4% $ 4,979 3.1%
======== ===== ======== ======
</TABLE>
Net sales increased $35.7 million or 22.2% from $160.7 million for the six
months ended June 30, 1997 to $196.4 million for the six months ended June 30,
1998. Acquisitions contributed $18.9 million in revenues for the period. The
nine Founding Companies experienced a 10.6% internal growth rate over 1997.
Several of IDG's larger customers made large purchases during the first
quarter of 1998.
Cost of sales increased $27.9 million or 22.5% from $123.7 million for the six
months ended June 30, 1997 to $151.6 million for the six months ended June 30,
1998. The cost of sales increase is due to the increase in net sales. As a
percentage of net sales, however, cost of sales increased from 77.0% in 1997 to
77.2% in 1998. The increase in cost of sales as a percentage of net sales is due
to a change in product mix resulting primarily from acquisitions.
Selling, general, and administrative expenses increased $8.1 million or 25.2%
for the six months ended June 30, 1997 from $32.0 million in 1997 to $40.1
million in 1998. As a percentage of net sales, selling, general, and
administrative expenses increased from
11
<PAGE> 12
19.9% in 1997 to 20.4% in 1998. The increase included $317,000 of non-recurring
expenses related to acquisitions. Excluding these non-recurring expenses,
selling, general, and administrative expenses for the first quarter of 1998 were
$39.8 million or 20.2% of net revenues. In addition, during 1998, the Company
incurred increased professional fees and expenses related to staffing a
corporate office and incurred costs related to being a public company. Excluding
non-recurring expenses and corporate expenses, selling, general, and
administrative expenses were 19.2% of net revenues for the quarter ended June
30, 1998. Part of the decrease in expenses is a result of the companies using
the existing infrastructure to support increased sales during the six months
ended June 30, 1998 as compared to the same period in 1997. The acquired
companies have lower selling, general, and administrative expenses as a
percentage of net revenues.
Operating income decreased $214,000 or 4.3% from $5.0 million for the six months
ended June 30, 1997 to $4.8 million for the six months ended June 30, 1998. As a
percentage of net sales, operating income decreased from 3.1% in 1997 to 2.4% in
1998.
RESULTS OF OPERATIONS -- HISTORICAL
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
The following table sets forth certain historical financial data for IDG and
shows such data as a percentage of net sales for the periods indicated (dollars
in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-------------------------------
1998 1997
-------- -------
<S> <C> <C> <C> <C>
Net Sales $106,638 100.0% $20,674 100.0%
Cost of Sales 82,722 77.6 15,821 76.5
-------- ----- ------- -----
Gross Profit 23,916 22.4 4,853 23.5
Selling, General and Administrative 21,261 19.9 3,941 19.1
-------- ----- ------- -----
Operating Income $ 2,655 2.5% $ 912 4.4%
======== ===== ======= =====
</TABLE>
Net sales increased $86.0 million or 415.8% from $20.7 million for the three
months ended June 30, 1997 to $106.6 million for the three months ended June 30,
1998. This was primarily due to the contributed revenue of the other eight
Founding Companies following the Combination on September 24, 1997. In addition,
acquisitions accounted for $21.6 million in revenue.
Cost of sales increased $66.9 million from $15.8 million for the three months
ended June 30, 1997 to $82.7 million for the three months ended June 30, 1998.
As a percentage of net sales, cost of sales increased from 76.5% in 1997 to
77.6% in 1998. This reflects the effect of the Founding Companies and the
acquired companies which have a higher cost of sales percentage than B&J.
Selling, general, and administrative expenses increased $17.3 million for the
three months ended June 30, 1997 from $3.9 million in 1997 to $21.3 million in
1998, primarily attributable to the effect of the SAB 97 accounting for the
Combination and acquisitions. As a percentage of net sales, selling, general,
and administrative expenses increased from 19.1% in 1997 to 19.9% in 1998. The
increase in expenses included $133,000 of non-recurring expenses related to
acquisitions. Excluding these non-recurring expenses, selling, general, and
administrative expenses for the first quarter of 1998 were $21.1 million or
19.8% of net revenues. In addition, during 1998, the Company incurred increased
professional fees and expenses related to staffing a corporate office and
incurred costs related to being a public company. Excluding non-recurring
acquisition charges and corporate expenses, selling, general, and administrative
expenses were 18.9% of revenues. The decrease in selling, general, and
administrative expenses as a percentage of net revenues is primarily due to
acquired companies having lower expenses as a percentage of sales.
Operating income increased $1.7 million from $912,000 for the three months ended
June 30, 1997 to $2.7 million for the three months ended June 30, 1998,
reflecting income of the Founding Companies and the acquired companies. As a
percentage of net sales, however, operating income decreased from 4.4% in 1997
to 2.5% in 1998.
12
<PAGE> 13
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
The following table sets forth certain historical financial data for IDG and
shows such data as a percentage of net sales for the periods indicated (dollars
in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------
1998 1997
-------- -------
<S> <C> <C> <C> <C>
Net Sales $196,401 100.0% $40,113 100.0%
Cost of Sales 151,560 77.2 30,926 77.1
-------- ----- ------- -----
Gross Profit 44,841 22.8 9,187 22.9
Selling, General and Administrative 40,076 20.4 7,859 19.6
-------- ----- ------- -----
Operating Income $ 4,765 2.4% $ 1,328 3.3%
======== ===== ======= =====
</TABLE>
Net sales increased $156.3 million from $40.1 million for the six months ended
June 30, 1997 to $196.4 million for the six months ended June 30, 1998. This was
primarily due to the contributed revenue of the other eight Founding Companies
and the $23.7 million in acquisition revenue during the first two quarters of
1998.
Cost of sales increased $120.7 million from $30.9 million for the six months
ended June 30, 1997 to $151.6 million for the six months ended June 30, 1998.
The increase in cost of sales as a percentage of net sales is due to the higher
cost of sales percentage of the Founding Companies and the acquired companies.
Selling, general, and administrative expenses increased $32.2 million for the
six months ended June 30, 1997 from $7.9 million in 1997 to $40.1 million in
1998, again primarily attributable to the effect of the SAB 97 accounting for
the Combination and acquisitions. As a percentage of net sales, selling,
general, and administrative expenses increased from 19.6% in 1997 to 20.4% in
1998. Expenses included $317,000 of non-recurring expenses related to
acquisitions. Excluding these non-recurring expenses, selling, general, and
administrative expenses for the six months ended June 30, 1998 were $39.8
million or 20.2% of net revenues. In addition, during 1998, the Company incurred
increased professional fees and expenses related to staffing a corporate office
and incurred costs related to being a public company. Excluding such corporate
expenses, selling, general, and administrative expenses were 19.1% of revenues.
The decrease in selling, general, and administrative expenses as a percentage of
net revenues is primarily due to these costs being lower as a percentage of net
sales for the acquired companies.
Operating income increased $3.4 million from $1.3 million for the six months
ended June 30, 1997 to $4.8 million for the six months ended June 30, 1998,
reflecting the effects of the Combination and the acquisitions. As a percentage
of net sales, however, operating income decreased from 3.3% in 1997 to 2.4% in
1998.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had $5.6 million in cash, $67.5 million of
working capital, and $71,000,000 available under its $75,000,000 revolving
credit facility with a five-bank syndicate.
The Company's liquidity position continues to be sufficient to enable the
Company to fund its current operations and to fund anticipated internal
expansion and acquisitions for at least the current year.
On an historical basis, net cash (used in) provided by operating activities
for the six months ended June 30, 1998 and 1997 was ($366,000) and $899,000,
respectively. The change was principally due to acquired working capital. This
was partially offset by the amortization, depreciation and net income from the
acquired companies.
On an historical basis, net cash used in investing activities for the six
months ended June 30, 1998 and 1997 was ($13,641,000) and ($221,000),
respectively. The change was primarily attributable to cash used for
acquisitions.
On an historical basis, net cash used in financing activities for the six
months ended June 30, 1998 and 1997 was ($11,948,000) and ($32,000),
respectively. The change was principally due to repayment of lines of credit
of certain acquired companies.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
13
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997, Commission File No. 001-13195, previously filed with the
Commission, regarding certain legal proceedings in which the Company is
involved.
ITEM 2. CHANGES IN SECURITIES
During the second quarter of 1998, 652,322 shares of common stock were
issued to a limited number of persons to acquire five companies owned by such
persons, as discussed in Note 3 to the financial statements included in Part I
of this Report. Such shares were issued pursuant to section 4(2) of the
Securities Act, as amended, and Regulation D promulgated pursuant to the Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibits
Exhibit 11 -- Computation of Earnings Per Share
Exhibit 27A -- Financial Data Schedule (for SEC use only)
27B -- Financial Data Schedule (restatement of prior data)
(for SEC use only)
Reports on Form 8-K
The Company filed a Current Report on Form 8-K on June 19, 1998, reporting an
Item 2, Acquisition or Disposition of Assets, relating to the acquisition of
L.D. Supply, Inc. The Company intends to file a Form 8-K/A with the historical
financial statements of L.D. Supply, Inc. and proforma financial statements of
the Company, as required by Item 7 of Form 8-K, by August 18, 1998.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INDUSTRIAL DISTRIBUTION GROUP, INC.
(Registrant)
Date: August 14, 1998 By: /s/ Jack P. Healey
-------------------------------------------------
Jack P. Healey
Senior Vice President and Chief Financial Officer
Date: August 14, 1998 /s/ Jack P. Healey
--------------------------------------------------
Jack P. Healey
Senior Vice President and Chief Financial Officer
(Principal accounting and Financial Officer)
15
<PAGE> 1
EXHIBIT 11
INDUSTRIAL DISTRIBUTION GROUP, INC.
COMPUTATION OF EARNINGS PER SHARE
FOR THE THREE MONTHS AND SIX MONTHS PERIODS ENDED JUNE 30, 1998 AND 1997
(In Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, June 30,
----------------- -----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income $1,700 $ 523 $3,076 $ 705
====== ====== ====== ======
Weighted average common
shares outstanding 8,200 1,498 8,052 1,495
Add - Dilutive effect of outstanding options
(as determined by the application of the
treasury stock method) 59 0 58 0
------ ------ ------ ------
Weighted average common and
common equivalent
shares outstanding 8,259 1,498 8,110 1,495
====== ====== ====== ======
Primary earnings per share: $ .21 $ .35 $ .38 $ .47
====== ====== ====== ======
Diluted earnings per share: $ .21 $ .35 $ .38 $ .47
====== ====== ====== ======
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF INDUSTRIAL DISTRIBUTION GROUP, INC. FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 5,579
<SECURITIES> 0
<RECEIVABLES> 51,257
<ALLOWANCES> (1,214)
<INVENTORY> 52,032
<CURRENT-ASSETS> 114,035
<PP&E> 19,025
<DEPRECIATION> (5,422)
<TOTAL-ASSETS> 167,362
<CURRENT-LIABILITIES> 41,074
<BONDS> 0
0
0
<COMMON> 85
<OTHER-SE> 113,402
<TOTAL-LIABILITY-AND-EQUITY> 167,362
<SALES> 196,401
<TOTAL-REVENUES> 196,401
<CGS> 151,560
<TOTAL-COSTS> 191,636
<OTHER-EXPENSES> (702)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 487
<INCOME-PRETAX> 4,980
<INCOME-TAX> 1,904
<INCOME-CONTINUING> 3,076
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF INDUSTRIAL DISTRIBUTION GROUP, INC. FOR THE TWELVE
MONTHS ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 31,534
<SECURITIES> 0
<RECEIVABLES> 37,093
<ALLOWANCES> (994)
<INVENTORY> 42,427
<CURRENT-ASSETS> 114,078
<PP&E> 13,854
<DEPRECIATION> (3,944)
<TOTAL-ASSETS> 147,261
<CURRENT-LIABILITIES> 34,433
<BONDS> 0
0
0
<COMMON> 73
<OTHER-SE> 99,490
<TOTAL-LIABILITY-AND-EQUITY> 147,261
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
