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'
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to __________
Commission File No. 001-13195
INDUSTRIAL DISTRIBUTION GROUP, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 58-2299339
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2500 ROYAL PLACE, TUCKER, GEORGIA 30084
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 243-9000
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
<S> <C>
Title of Each Class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, Par Value $0.01 Per Share New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10K. [ ]
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The aggregate market value of the voting stock held by nonaffiliates
(which for purposes hereof are all holders other than executive officers and
directors) of the Registrant as of March 1, 1998 is $117,888,787.50 (based on
6,287,402 shares held by nonaffiliates at $18.75 per share, the last sales price
on the NYSE on February 28, 1998).
At March 1, 1998, there were issued and outstanding 7,261,551 shares of
Common Stock, par value $0.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Stockholders for the
fiscal year ended December 31, 1997, filed as an exhibit hereto, are
incorporated by reference into Part I and Part II. Portions of the Registrant's
definitive Proxy Statement for the 1998 Annual Meeting of Stockholders, to be
filed with the Commission, are incorporated by reference into Part III.
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PART I
ITEM 1. 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.
In September 1997, IDG completed its initial public offering of Common
Stock and, at the same time, acquired the following nine industrial distribution
companies: Associated Suppliers, Inc., B&J Industrial Supply Company, Cramer
Industrial Supplies, Grinding Supplies Company, J.J. Stangel Co., Shearer
Industrial Supply Company, Slater Industrial Supply Company, The Distribution
Group, Inc. ("TDG") (formerly known as Industrial Distribution Group, Inc.), and
Tri-Star Industrial Supply, Inc., collectively referred to as the "Founding
Companies." In March 1998, the Company completed the acquisition of three
additional companies: Continental Air Tools, Inc., Northern Tool & Supply, Inc.,
and E.C. Blackstone Company.
The Company intends to establish a nationwide presence, with MROP
product and service capability in all or most of the top 50 U. S. industrial
markets. Currently, the Company has 53 operating locations in 48 cities, along
with four small facilities abroad. The Company's more than 24,000 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 $284.9 million for the year ended December 31, 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 U.S. MROP market is
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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
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 and product knowledge 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. Moreover,
management believes that the Company's overall 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
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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, the Company's proprietary software for
the management of integrated supply sites; 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 is consolidating 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 is employing 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.
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.
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GROWTH STRATEGY
Internal Growth. Management believes that significant opportunities
exist to increase revenues and earnings through internal expansion. 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 has launched an
acquisitions program to take advantage of consolidation opportunities within the
highly fragmented industrial MROP market. The Company will continue to focus
primarily on industrial MROP markets in the United States, and has initially
focused on expanding its existing markets as well as those major markets where
the Company does not presently operate. The Company will continue to 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 continue to seek to
retain the management of acquired businesses.
"Hub and Spoke" Expansion Strategy. The Company is utilizing 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, 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
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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 December 31, 1997, the Company had in place 18 fully integrated
supply arrangements with customers covering 24 sites, and supply contracts for
specialized services with over 250 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 is able to offer
significant depth and breadth in its core product lines to customers throughout
its nationwide operations, which distinguishes it from most of its present
competitors. The Company's products may be ordered electronically, by telephone,
by mail, or by facsimile. The Company seeks at all times to provide its
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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.
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 1997:
<TABLE>
<CAPTION>
% of
Aggregate
Product Category Typical Products Revenue
- ---------------- ---------------- ---------
<S> <C> <C>
Cutting Tools.......................... Drills, Taps, Carbide Tools, End Mills 17.7%
Abrasives.............................. Grinding Wheels, Sanding Belts, Discs, Sheets or 17.6%
Rolls
Hand Tools............................. Wrenches, Socket Sets, Screw Drivers, Hammers 11.2%
Power Tools............................ Air and Electric Drills, Air Compressors, Impact 9.8%
Wrenches, Screwdrivers
Maintenance Equipment & Supplies...... Hydraulic Tools, Paint, Lubrication Equipment 7.3%
Coolants, Lubricants, and Adhesives.... Metal Cutting Coolants, Aerosols, Industrial 6.2%
Adhesives
Material Handling Equipment............ Hoist, Slings, Chain, Shelving, Casters 4.9%
Safety Products........................ Gloves, Signs, Absorbents, Glasses 4.4%
Contractor Supplies.................... Powder-Actuated Tools, Ladders, Shovels 2.2%
Machine Tools & Accessories............ Milling Machines, Work Holding Vises, Tool 1.8%
Holders
Fasteners.............................. Socket Screws, Hex Screws, Anchors 1.6%
Electrical............................. Fuses, Electrical Switches, Controls 1.5%
Saw Blades............................. Band, Hack, Hole, Jig Saw Blades 1.4%
Tapes.................................. Masking, Filament and Duct Tape 1.4%
Fluid Power............................ Hydraulic and Pneumatic Valves, Cylinders 1.3%
Quality Control Products............... Electronic Calipers, Micrometers 1.0%
Tool & Die Supplies.................... Ground Stock, Drill Rod, Die Sets 1.0%
Power Transmission Equipment........... Belts, Drives, Bearings, Gears, Pulleys 0.9%
Brushes................................ Wire Wheel, Floor Brooms 0.7%
Welding Equipment & Supplies........... Welders, Weld Rod 0.5%
Industrial Pipe, Valves & Fittings..... Pipes, Valve, Fittings 0.4%
Industrial Hose........................ Air Hose, Water Hose 0.1%
Metal Goods............................ Angle Iron, Conduit 0.1%
Other Products......................... Special Order Items and Miscellaneous 5.0%
---
Total 100%
</TABLE>
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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.
The Company obtains its products from approximately 14,800 vendors.
During 1997, only one vendor provided as much as 10% of the products sold by the
Company, and no other vendor provided more than 3%. 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.
CUSTOMERS
The Company's customers, who number over 24,000 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. During 1997, the Company sold products
to over 840 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 200 outside sales representatives, 220
inside sales/customer service representatives, and 27 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 improving 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.
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The Company has centralized the administration of Company-wide training
programs and provides intensive ongoing TQM training programs for all Company
personnel. In addition, each of the Company's operating subsidiaries provides
regular training programs for its sales personnel and special training programs
for any products distributed only in its market area. Each operating subsidiary
also maintains 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.
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 of its acquired businesses 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, the
Company is drawing upon the best features of the existing systems that have been
utilized by its acquired businesses. Once these systems 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.
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.
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PERSONNEL
The Company had approximately 933 full-time and 26 part-time associates
as of December 31, 1997. Eleven of the Company's associates are employed
pursuant to a collective bargaining agreement with local unions affiliated with
the International Brotherhood of Teamsters. Management believes that the
subsidiary 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.
EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information regarding the executive officers of the Company is
set forth in the following table and paragraphs.
<TABLE>
<CAPTION>
NAME AGE POSITION
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<S> <C> <C>
Martin S. Pinson 52 Chairman of the Board and Chief Executive Officer
Douglass C. Smith 57 President and Chief Operating Officer
Jack P. Healey 38 Senior Vice President, Chief Financial Officer, and
Secretary
</TABLE>
Mr. Pinson joined the Company in June 1997. Prior to joining the
Company, Mr. Pinson had 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 and which he co-founded in 1994. 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 TDG and served as its President and Chief Executive
Officer from inception until its acquisition by the Company in September 1997.
Mr. Smith was also a co-founder in 1972, and President, of Boring & Smith
Industries, Inc., a predecessor of TDG. 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. 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 TDG. 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.
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CERTAIN FACTORS AFFECTING FORWARD LOOKING STATEMENTS
Many of the matters discussed in this Annual Report on Form 10-K are
forward looking statements, as defined in the Private Securities Litigation
Reform Act of 1995. Any forward looking statements included herein have been
included based upon facts available to management as of the date of the
statements. These statements involve a number of risks and uncertainties that
could cause actual results to differ materially from any such statements. The
following is a nonexclusive list of factors that could cause such results to
differ materially:
Limited Combined Operating History. Although each of the Founding
Companies has operated for over 20 years, IDG's operations of these businesses
as a combined entity only commenced in September 1997 when they were acquired.
There can be no assurance that the Company will be able to integrate
successfully the businesses of the Founding Companies or any subsequently
acquired 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 its acquired
businesses 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 several companies it acquires 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 the ongoing 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. 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.
The Company intends to use a combination of shares of Common Stock and
other types of consideration in making 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 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
-12-
<PAGE> 13
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.
Dependence on Supplier Relationships. Each of the Company's acquired
businesses has distribution rights for certain product lines in its respective
geographic market. For the foreseeable future, until it implements procedures
for more centralized procurement arrangements, the Company will depend upon the
maintenance of these distribution rights for a substantial portion of its
business. A significant percentage of these current distribution arrangements
with suppliers are oral, and many of them can 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 will depend for
the foreseeable future on the continuing efforts of its executive officers and
the senior management of the businesses it acquires, 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.
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.
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.
-13-
<PAGE> 14
Control by Management and Former Owners of Founding Companies.
Directors and officers of the Company, and former stockholders of the Founding
Companies, beneficially own an aggregate of approximately 45% the outstanding
Common Stock. 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.
Year 2000 Compliance. The "year 2000 issue" arises from the widespread
use of computer programs that rely on two-digit date codes to perform
computations or decision-making functions. Many of these programs may fail due
to an inability to properly interpret date codes beginning January 1, 2000. For
example, such programs may misinterpret "00" as the year 1900 rather than 2000.
In addition, some equipment, being controlled by microprocessor chips, may not
deal appropriately with the year "00." The Company is evaluating its computer
systems to determine which modifications and expenditures will be necessary to
make its systems compatible with 2000 year requirements. The Company believes
that its systems will be year-2000 compliant upon implementation of such
modifications. The Company currently estimates the total cost of such
modifications to be approximately $250,000. However, there can be no assurance
that all necessary modifications will be identified and corrected or that
unforeseen difficulties or cost will not arise. In addition, there can be no
assurance that the systems of other companies on which the Company's systems
rely will be modified on a timely basis, or that the failure by another company
to properly modify its systems will not negatively impact the systems or
operations of the Company.
ITEM 2. DESCRIPTION OF FACILITIES.
Currently, the Company owns eight properties and leases 45 properties
in 48 cities in the United States for its warehouse, sales, and administrative
offices. The Company also leases four properties in four cities in other
countries. Certain property locations contain multiple operations such as a
warehouse and a sales office. The facilities range in size from 550 square feet
to 68,064 square feet. Leases for the facilities expire at various periods
between 1998 and 2009. The aggregate annual lease payments for real properties
in 1997 were approximately $850,000.
The Company's principal corporate offices are located at 2500 Royal
Place, Tucker, Georgia, where the Company is expanding a portion of TDG's
principal operating location to accommodate its executive offices. The Company
also leases approximately 3,018 square feet of executive office space in Chevy
Chase, Maryland for use by Mr. Pinson as a satellite office.
The Company believes that its facilities are adequate for its needs and
does not anticipate inordinate difficulty in replacing such facilities or
opening additional facilities, if needed.
ITEM 3. LEGAL PROCEEDINGS.
On November 18, 1996, Milliken & Company ("Milliken"), a textile
manufacturer and customer of TDG, filed suit against a manufacturer of an
industrial product and TDG in the Superior Court of Troup County, Georgia, Civil
Action No. 96-CV-964. Milliken claims that a product sold to it by TDG 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. TDG 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
-14-
<PAGE> 15
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 August 27, 1997, Robert Hallager filed suit in the Court of Common
Pleas of Philadelphia, Pennsylvania, Civil Action No. 3222, against his former
employer, Jessop Steel Company, and several manufacturers and distributors of
industrial products, including Shearer Industrial Supply Company, one of the
Company's subsidiaries ("Shearer"). Mr. Hallager claims that he contracted
cobalt poisoning and other pulmonary problems requiring his cessation of work
and lifetime monitoring as a result of his exposure to steel containing cobalt,
chromium, and nickel through a grinding process utilizing abrasive tools
supplied to his employer by the various defendant-manufacturers and
distributors. Mr. Hallager alleges damages "in excess of $50,000". The
litigation is in the very early stages, and no answer is yet due from or has
been filed by Shearer. Shearer intends to deny any liability, and its insurance
carrier is expected to defend the lawsuit on Shearer's behalf. 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 $7 million of coverage,
will be adequate to cover any loss to Shearer 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, Alvis J.
Waite, under the Georgia dissenters' rights provisions of the Georgia Business
Corporation Code (the "GBCC"). Mr. Waite, as a 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 Mr. Waite $4.2 million
for his interest in TDG. Mr. Waite rejected that offer and demanded payment of
$9 million. TDG brought this action to seek a judicial determination of the
value of Mr. Waite's interest in TDG as of the time of the merger. The
proceeding is in the early stages of discovery and it is not possible to predict
the outcome at this time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders of the
Registrant during the fourth quarter of the fiscal year covered by this Report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock began trading on the New York Stock Exchange ("NYSE")
under the symbol "IDG" on September 24, 1997. Prior to that time, there was no
trading market for the Common Stock. The following table sets forth for the
periods indicated the high and low sales prices of the Common Stock on the NYSE.
<TABLE>
<CAPTION>
PRICE RANGE
-----------
HIGH LOW
---- ---
1997
----
<S> <C> <C>
Third Quarter (from September 24, 1997)................. $21 $20 7/16
Fourth Quarter.......................................... $22 9/16 $14 11/16
1998
----
First Quarter (through March 13, 1998).................. $18 3/4 $15 9/16
--------- ---------
</TABLE>
-15-
<PAGE> 16
As of February 28, 1998, there were 88 holders of record of the
Common Stock. Investors who beneficially own Common Stock that is held in street
name by brokerage firms or similar holders are not included in this number.
Accordingly, based upon the quantities of periodic reports requested by such
brokerage firms, the Company believes that the actual number of individual
beneficial owners of its Common Stock exceeds 1,778.
The Company has not paid dividends on its Common Stock. 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. In addition, the
Company's loan agreement with the First National Bank of Chicago and other
lenders prohibits the payment of dividends if there exists, or would exist as a
result thereof, a default under the loan agreement.
ITEM 6. SELECTED FINANCIAL DATA.
The information contained under the heading "Selected Financial Data"
in the Company's Annual Report to Stockholders, filed as an exhibit hereto, is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information contained under the heading "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Company's
Annual Report to Stockholders, filed as an exhibit hereto, is incorporated
herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information contained under the headings "Independent Auditors
Report" and "Consolidated Financial Statements and Notes to the Consolidated
Financial Statements" in the Company's Annual Report to Stockholders, filed as
an exhibit hereto, is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information contained under the heading "Election of Directors" in
the definitive Proxy Statement used in connection with the solicitation of
proxies for the Company's 1998 Annual Meeting of Stockholders, to be filed with
the Commission, is incorporated herein by reference. Pursuant to
-16-
<PAGE> 17
instruction 3 to paragraph (b) of Item 401 of Regulation S-K, information
relating to the executive officers of the Company is included in Item 1 of this
Report.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained under the heading "Executive Compensation" in
the definitive Proxy Statement used in connection with the solicitation of
proxies for the Company's 1998 Annual Meeting of Stockholders, to be filed with
the Commission, is incorporated herein by reference. In no event shall the
information contained in the Proxy Statement under the heading "Stock
Performance Graph" be deemed incorporated herein by such reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contained under the heading "Voting Securities and
Principal Stockholders" in the definitive Proxy Statement used in connection
with the solicitation of proxies for the Company's 1998 Annual Meeting of
Stockholders, to be filed with the Commission, is incorporated herein by
reference. For purposes of determining the aggregate market value of the
Company's voting stock held by nonaffiliates, shares held by all directors and
executive officers of the Company have been excluded. The exclusion of such
shares is not intended to, and shall not, constitute a determination as to which
persons or entities may be "affiliates" of the Company as defined by the
Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained under the heading "Certain Transactions" in
the definitive Proxy Statement to be used in connection with the solicitation of
proxies for the Company's 1998 Annual Meeting of Stockholders, to be filed with
the Commission, is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORT ON FORM
8-K.
(A) The following financial statements and notes thereto are incorporated by
reference in Item 8 of this Report:
1. FINANCIAL STATEMENTS
Independent Auditors' Report.
Consolidated Balance Sheets as of December 31, 1997 and 1996.
Consolidated Statements of Operations for the years ended December 31,
1997,1996, and 1995.
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995.
Notes to Consolidated Financial Statements as of December 31, 1997 and
1996 for the years ended December 31, 1997, 1996, and 1995.
2. FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts
-17-
<PAGE> 18
3. EXHIBITS
The exhibits set forth below are required to be filed with this Report
pursuant to Item 601 of Regulation S-K:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
<S> <C>
3.1 Certificate of Incorporation, as amended, of
the Company (filed as Exhibit 3.1 of the
Company's Registration Statement on Form S-1
(File No. 333-36233) is hereby incorporated
by reference)
3.2 Bylaws of the Company (filed as Exhibit 3.2
of the Company's Registration Statement on
Form S-1 (File No. 333-36233) is hereby
incorporated by reference)
4.1 Form of Common Stock Certificate of the
Company (filed as Exhibit 3.1 of the
Company's Registration Statement on Form S-1
(File No. 333-36233) is hereby incorporated
by reference) 10.1 Form of Agreement and
Plan of Merger and Reorganization (reverse
merger) (filed as Exhibit 10.1 of the
Company's Registration Statement on Form S-1
(File No. 333-36233) is hereby incorporated
by reference)
10.2 Agreement and Plan of Merger and
Reorganization among the Company, Industrial
Distribution Group, Inc., a Georgia
corporation, IDG Acquisition Company I, Inc.
and the Stockholders named therein (filed as
Exhibit 10.2 of the Company's Registration
Statement on Form S-1 (File No. 333-36233)
is hereby incorporated by reference)
10.3 Agreement and Plan of Reorganization between
the Company and the Stockholders named
therein (filed as Exhibit 10.3 of the
Company's Registration Statement on Form S-1
(File No. 333-36233) is hereby incorporated
by reference)
10.4 Uniform Provisions for the Acquisition of
Founding Companies (filed as Exhibit 10.4 of
the Company's Registration Statement on Form
S-1 (File No. 333-36233) is hereby
incorporated by reference)
*10.5 Industrial Distribution Group, Inc. Stock
Incentive Plan (filed as Exhibit 10.5 of the
Company's Registration Statement on Form S-1
(File No. 333-36233) is hereby incorporated
by reference)
*10.6 Employment Agreement between the Company and
Martin S. Pinson (filed as Exhibit 10.6 of
the Company's Registration Statement on Form
S-1 (File No. 333-36233) is hereby
incorporated by reference)
*10.7 Employment Agreement between the Company and
Douglass C. Smith (filed as Exhibit 10.7 of
the Company's Registration Statement on Form
S-1 (File No. 333-36233) is hereby
incorporated by reference)
*10.8 Employment Agreement between the Company and
Jack P. Healey (filed as Exhibit 10.8 of the
Company's Registration Statement on Form S-1
(File No. 333-36233) is hereby incorporated
by reference)
*10.9 Form of Indemnification Agreement entered
into between the Company and each of the
executive officers and directors of the
Company (filed as Exhibit 10.9 of the
Company's Registration Statement on Form S-1
(File No. 333-36233) is hereby incorporated
by reference)
</TABLE>
-18-
<PAGE> 19
<TABLE>
<CAPTION>
<S> <C>
10.10 Form of Escrow Agreement among the Company,
American Stock Transfer & Trust Company and
the individuals named therein (filed as
Exhibit 10.10 of the Company's Registration
Statement on Form S-1 (File No. 333-36233)
is hereby incorporated by reference)
10.11 Letter Agreement dated October 1, 1997 by
and between the Company and the Barth Smith
Company.
13.1 Portions of the 1997 Annual Report to
Stockholders that are incorporated in the
Company's Form 10-K for the year ended
December 31, 1997.
21.1 Subsidiaries of the Company
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule (for SEC use only)
99 Proxy Statement for the 1998 Annual Meeting
of Stockholders
</TABLE>
---------------------------
*Management contract or compensatory plan or arrangement
required to be filed as an exhibit.
-19-
<PAGE> 20
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Industrial Distribution Group, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in Industrial Distribution Group,
Inc.'s annual report to stockholders incorporated by reference in this Form
10-K, and have issued our report thereon dated February 13, 1998. Our audits
were made for the purpose of forming an opinion on those consolidated statements
taken as a whole. The schedule listed in the index is the responsibility of
the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
/s/ Arthur Andersen LLP
Atlanta, Georgia
February 13, 1998
-20-
<PAGE> 21
INDUSTRIAL DISTRIBUTION GROUP, INC.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
Additions
---------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts(2) Deductions(1) Period
- ----------------------------- ---------- ---------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Allowance for doubtful
accounts $125 $315 $441 $35 $846
Year ended December 31, 1996:
Allowance for doubtful
accounts 115 37 0 27 125
Year ended December 31, 1995:
Allowance for doubtful
accounts 115 27 0 27 115
</TABLE>
NOTES:
(1) Deductions represent the write off of uncollectible
receivables, net of recoveries.
(2) Reserves acquired in connection with the acquisition of the
Founding Companies in 1997.
-21-
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(a) 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 in the City of Atlanta,
State of Georgia, on the 24th day of March, 1998.
INDUSTRIAL DISTRIBUTION GROUP, INC.
By: /s/ Martin S. Pinson
--------------------------------------------
Martin S. Pinson
Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the Company
in the capacities set forth and on the 24th day of March, 1998.
Signature Position
/s/ Martin S. Pinson
- ---------------------------------------- Chairman of the Board and Chief
Martin S. Pinson Executive Officer
(Principal Executive Officer)
/s/ Jack P. Healey Senior Vice President, Chief
- ---------------------------------------- Financial Officer, and
Jack P. Healey Secretary (Principal Financial and
Accounting Officer)
/s/ David K. Barth Director
- ----------------------------------------
David K. Barth
/s/ William J. Burkland Director
- ----------------------------------------
William J. Burkland
/s/ William R. Fenoglio Director
- ----------------------------------------
William R. Fenoglio
/s/ William T. Parr Director
- ----------------------------------------
William T. Parr
/s/ George L. Sachs, Jr. Director
- ----------------------------------------
George L. Sachs, Jr.
/s/ Richard M. Seigel Director
- ----------------------------------------
Richard M. Seigel
/s/ Andrew B. Shearer Director
- ----------------------------------------
Andrew B. Shearer
/s/ Douglas C. Smith Director
- ----------------------------------------
Douglass C. Smith
- 22 -
<PAGE> 23
<TABLE>
<CAPTION>
Exhibit Index
-------------
<S> <C>
10.11 Letter Agreement dated October 1, 1997 by
and between the Company and the Barth Smith
Company.
13.1 Portions of the 1997 Annual Report to
Stockholders that are incorporated in the
Company's Form 10-K for the year ended
December 31, 1997.
21.1 Subsidiaries of the Company
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule (for SEC use only)
99 Proxy Statement for the 1998 Annual Meeting
of Stockholders
</TABLE>
-23-
<PAGE> 1
EXHIBIT 10.11
October 1, 1997
Mr. David K. Barth
President
Barth Smith Company
1000 Skokie Boulevard
Wilmette, Illinois 60093
Re: Acquisition and Special Services Agreement
Dear Dave:
This letter will confirm the agreement between Industrial Distribution
Group, Inc. ("IDG") and Barth Smith Company ("BSC") regarding BSC's role with
and compensation by IDG.
BSC will assist the management of IDG in the implementation of its
acquisition program. Within the parameters established by IDG, BSC will identify
and establish contacts with potential acquisition targets; coordinate the flow
of information relating to prospective or pending acquisitions, including
maintenance of a database of targets and contacts; assist with IDG's internal
pricing methodologies and, if and to the extent requested, participate in
pricing and deal structure negotiations; and create the templates for IDG's
financial plans with respect to consummating and integrating its acquisitions.
BSC will also help IDG management coordinate steps in the acquisition process,
such as the procurement of confidentiality agreements and letters of intent, and
the conduct of financial and business due diligence. BSC's specific services and
role may vary among transactions, as considered appropriate by IDG, but in
general shall be considered to be completed as to any particular transaction
upon the closing of IDG's acquisition of the target company, except that BSC
shall assist IDG management with the preparation of appropriate files and
records and the assembly of data necessary for any required SEC or related
reports. In addition to such acquisition-related work, BSC shall be available to
assist on other matters as may be requested by IDG's Chief Executive, Chief
Operating, or Chief Financial Officers.
For the above services, BSC will be compensated as follows: (a) a
monthly retainer of $12,500, plus ordinary course of business out-of-pocket
expenses reasonably incurred by BSC in performing services to or for IDG
hereunder; (b) a transaction fee of $5,000 for each IDG acquisition of a company
with under $10 million in annual revenues and $10,000 for each IDG acquisition
of a company with annual revenues of $10 million or more for the most recent
past twelve month period; and (c) an IDG performance-based bonus calculated on a
sliding percentage scale, where 100% yields an aggregate bonus of $180,000 for
the period ending December 31, 1998, based on IDG achieving post-IPO "annualized
acquired sales revenues" of $250 million by December 31, 1998, together with
"earnings per share" for the calendar year 1998 of $.98 per share, with such
bonus percentage subject to increase or decrease on a sliding scale to reflect a
formula that is consistent with the components of any IDG incentive compensation
plan for its management that is based on the above two or similar criteria.
Invoices for category (a) payments may be presented on the first of
each month, with the retainer billed in advance and the expenses reimbursed in
arrears, and payments shall be due within ten days of each invoice; category (b)
payments shall be due upon the closing of the acquisitions to which they relate;
and any category (c) bonus payment shall be due in the first quarter of fiscal
1999, following preparation of IDG's audited financial statements for fiscal
1998.
<PAGE> 2
Mr. David K. Barth
October 1, 1997
Page 2 of 2
BSC will be indeminified by IDG with respect to incidents and claims
arising as a result of its services hereunder on the same terms provided in the
standard IDG indemnification agreement approved for IDG's directors and
executive officers.
This agreement shall commence on October 1, 1997 and extend to December
31, 1998, provided that IDG agrees to pay BSC the category (a) amounts for
August and September 1997, in recognition of the value of services already
performed by BSC and accepted by IDG.
If you agree to these terms, please so indicate by signing in the space
provided below on both copies of this letter and returning one such copy to me.
Marty, Doug and I look forward to our work with you to generate a successful
acquisition program over the next 15 months.
Very truly yours,
INDUSTRIAL DISTRIBUTION GROUP, INC.
/s/ Jack P. Healey
-----------------------------------
Jack P. Healey
Chief Financial Officer
Agreed as of the date
first above written:
BARTH SMITH COMPANY
By: /s/ David K. Barth
-------------------------
David K. Barth, President
JPH:prb
<PAGE> 1
Selected Financial Data
The following selected financial data as of and for the years ended December 31,
1994, 1995, 1996, and 1997 have been derived from audited financial statements
of the Company; the financial data as of and for the year ended December 31,
1993 have been derived from unaudited financial statements of the Company. All
such financial statements of the Company reflect the requirements of the
Securities and Exchange Commission's Staff Accounting Bulletin No. 97 ("SAB
97"), which deem the historical financial statements of B&J Industrial Supply
Company ("B&J")--one of the nine companies acquired by IDG to commence its
current operations as a combined entity (the "Founding Companies"), effective
for accounting purposes as of September 24, 1997--to be the historical financial
statements of the Company for all periods prior to September 24, 1997. As a
result, the Company's financial statements, and the following data, reflect the
results of operations and financial condition of B&J alone for the periods prior
to September 24, 1997; the results of operations and financial condition of all
nine Founding Companies are reflected in the financial statements and data of
the Company for only the period of time from and after September 24, 1997. Those
facts account for a substantial difference in these financial data as of and for
the year ended December 31, 1997 as compared to prior periods; they make
comparisons of the data among the periods misleading; and they are a further
reason that these historical results are not indicative of the results that the
Company may achieve in the future. These selected financial data should be read
in conjunction with the Company's audited consolidated financial statements and
notes thereto, and Management's Discussion and Analysis of Financial Condition
and Results of Operations, included elsewhere in this Annual Report.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Year ended December 31, 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------
(In thousands)
Statements of Income Data:
<S> <C> <C> <C> <C> <C>
Net sales $105,919 $29,083 $25,377 $22,108 $20,867
- --------------------------------------------------------------------------------------------
Gross profit 25,757 7,458 6,646 5,922 5,804
Selling, general, and administrative 22,159 6,058 5,631 5,175 4,952
- --------------------------------------------------------------------------------------------
Operating income 3,598 1,400 1,015 747 852
Net income 2,409 991 687 410 551
Balance Sheet Data:
Working capital $ 77,631 $ 6,995 $ 6,112 $ 5,608 $ 5,406
Property and equipment, net 8,824 1,114 1,187 1,234 1,143
Total assets 132,643 12,948 10,884 9,504 9,145
Long-term debt, including current portion 6,009 1,533 1,435 1,181 982
Stockholders' equity 95,529 7,169 6,178 5,491 5,081
</TABLE>
29
<PAGE> 2
Management's Discussion and Analysis
GENERAL
The Company provides flexible procurement solutions for manufacturers and other
users of industrial MROP products, distributing a full line of such products and
providing specialized services to a diverse group of more than 20,000 customers.
The Company sells MROP supplies directly from stock using catalogs or similar
methods (stock sales); such sales, on a combined basis, were $177.8 million and
$157.5 million in 1997 and 1996, 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, on a combined basis, of $80.8
million and $81.5 million in 1997 and 1996, 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, on a combined basis,
have grown to $26.3 million in 1997 and $12.1 in 1996 from $6.3 million in 1995.
Total sales for 1997 and 1996 were $284.9 million and 251.3 million,
respectively.
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 and $842,000 in 1997 to develop and upgrade its
information systems, including 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.
Since B&J is deemed to be the acquiring company under provisions of Securities
and Exchange Commission Staff Accounting Bulletin No. 97, the Company's
historical financial information prior to September 24, 1997 reflects only the
operations of B&J. Management's analysis of such information alone would not
convey important information about the Company on a combined basis, or about the
historical results of operations achieved by the other eight Founding Companies
whose businesses were also acquired by the Company as of September 24, 1997.
Management has also included, therefore, its analysis of certain combined
financial information of the Company together with all nine Founding Companies.
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.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
These discussions may contain certain forward-looking information and 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 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 and reduction of
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 attract and retain key personnel,
and other factors discussed in more detail under "Item 1 - Business" of the
Company's Annual Report on Form 10-K for fiscal 1997.
30
<PAGE> 3
RESULTS OF OPERATIONS-COMBINED
The following table sets forth certain combined operating data and shows such
data as a percentage of net sales for the periods indicated. These combined
data include the operating results of B&J together with the results of the
other eight Founding Companies, on a combined basis, for the entire periods
presented.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Year ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net Sales $284,870 100.0% $251,303 100.0% $230,877 100.0%
Cost of Sales 218,213 76.6 191,221 76.1 176,696 76.5
- --------------------------------------------------------------------------------------------------------
Gross Profit 66,657 23.4 60,082 23.9 54,181 23.5
Selling, General, and Administrative 57,911 20.3 53,306 21.2 48,307 20.9
- --------------------------------------------------------------------------------------------------------
Operating Income $ 8,746 3.1% $ 6,776 2.7% $ 5,874 2.6%
- --------------------------------------------------------------------------------------------------------
</TABLE>
These combined operating data for the periods prior to the acquisition and
combination of the Founding Companies by IDG (the "Combination"), effective as
of September 24, 1997, may not be indicative of the Company's post-Combination
operations for several reasons. The Founding Companies operated as separate
privately owned entities until the Combination. 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, among other matters, may not be comparable among the
individual Founding Companies. As a result of the Combination, the Company has
new senior management, incurred implementation costs of the Combination, and
has begun to incur amortization expenses from the goodwill associated with the
Combination. Moreover, these combined operating data do not represent combined
results of operations presented in accordance with generally accepted
accounting principles; rather, for all periods prior to September 24, 1997,
they are only summations of the respective line items from historical financial
information of the individual Founding Companies.
As a result of the Combination, the Company expects to realize savings from
several sources, including (a) increased volume discounts and rebates from
vendors, (b) consolidation of certain administrative functions, (c) the
reduction in interest payments related to the repayment of certain former
Founding Company debt, and (d) its ability to borrow at lower interest rates
than the Founding Companies. These savings will be offset, to some extent, by
costs related to IDG's holding company structure and costs associated with
being a public company. No such anticipated effect is reflected in the combined
financial information or the following discussion; only results actually
achieved by the Company during the period since September 24, 1997 are
reflected.
1997 COMPARED TO 1996
Net sales increased $33.6 million, or 13.4%, from $251.3 million in 1996 to
$284.9 million in 1997. This increase was attributable, in major part, to an
increase in integrated supply and other specialized services supply contract
sales. In addition, new customers and existing customers increased orders.
Cost of sales increased $27.0 million, or 14.1%, from $191.2 million in 1996 to
$218.2 million in 1997, primarily as a result of increased sales during the
latter period. As a percentage of net sales, cost of sales also increased
slightly, from 76.1% to 76.6%, due to a change in product mix and certain large
sales to a few customers at lower margins.
Selling, general, and administrative expenses increased $4.6 million, or 8.6%,
from $53.3 in 1996 to $57.9 million in 1997. The increase is attributable to the
higher volume of business, start-up costs associated with new integrated supply
contracts, salary increases, and related benefits. In addition, the Company
incurred increased professional fees and costs associated with establishing and
staffing a corporate office during the 1997 period. As a percentage of net
sales, however, selling, general, and administrative expenses decreased .9% from
1996 to 1997.
Operating income increased $2.0 million, or 29.1%, from $6.8 million in 1996 to
$8.8 million in 1997. As a percentage of net sales, operating income increased
from 2.7% in 1996 to 3.1% in 1997.
31
<PAGE> 4
1996 COMPARED TO 1995
Net sales increased $20.4 million, or 8.9%, from $230.9 million in 1995 to
$251.3 million in 1996. The increase is attributable to an increase in all
revenue categories. In addition, price increases and an acquisition at the end
of 1995 contributed to increased revenues. These factors were offset by the loss
of revenues to one large customer due to a change in their billing arrangement.
Cost of sales increased $14.5 million, or 8.2%, from $176.7 million in 1995 to
$191.2 in 1996, primarily as a result of increased sales. 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 in the billing arrangement with the customer discussed
above, and increased vendor rebates.
Selling, general, and administrative expenses increased $5.0 million, or 10.4%,
from $48.3 million in 1995 to $53.3 million in 1996. This increase is
attributable to the higher volume of business, start-up costs associated with
new integrated supply contracts, and salary increases. 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 and an increase in
infrastructure including technological upgrades and enhancements needed to
support increased volume.
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.
RESULTS OF OPERATIONS - HISTORICAL
The following table sets forth certain operating data of the Company (which,
pursuant to the requirements of SAB 97, are based on the historical financial
results of B&J for the periods prior to September 24, 1997, and include the
other eight Founding Companies only for the period from September 24, 1997) and
shows such data as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Year ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net Sales $105,919 100.0% $29,083 100.0% $25,377 100.0%
Cost of Sales 80,162 75.7 21,625 74.4 18,731 73.8
- ------------------------------------------------------------------------------------------------------------
Gross Profit 25,757 24.3 7,458 25.6 6,646 26.2
Selling, General, and Administrative 22,159 20.9 6,058 20.8 5,631 22.2
- ------------------------------------------------------------------------------------------------------------
Operating Income $ 3,598 3.4% $ 1,400 4.8% $ 1,015 4.0%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
1997 COMPARED TO 1996
Net sales increased $76.8 million, or 264.2%, from $29.1 million in 1996 to
$105.9 million in 1997. This was due primarily to the contributed revenue of the
other eight Founding Companies following the Combination on September 24, 1997,
but it also reflects increased international sales and sales to a large customer
by B&J during the period.
Cost of sales increased $58.5 million, or 270.7%, from $21.6 million in 1996 to
$80.2 million in 1997. The increase is primarily due to the substantial increase
in sales, which reflected primarily the effect of the Combination discussed
above. As a percentage of net sales, cost of sales increased from 74.4% in 1996
to 75.7% in 1997, again primarily reflecting the effect of the Combination
because the Founding Companies as a whole have a higher cost of sales percentage
than B&J.
Selling, general, and administrative expenses increased $16.1 million, or
265.8%, from $6.1 million in 1996 to $22.2 million in 1997, which reflected
primarily the effect of the Combination discussed above. Selling, general, and
administrative expenses were relatively constant as a percentage of net sales in
1997. B&J's selling, general, and administrative expenses as a percentage of net
sales decreased from 1996 to 1997 due to the ability of B&J to use its existing
corporate overhead levels to accommodate increased sales.
Operating income increased $2.2 million, or 157.0%, from $1.4 million in 1996 to
$3.6 million in 1997. Operating income as a percentage of net sales decreased,
however, from 4.8% in 1996 to 3.4% in 1997.
32
<PAGE> 5
1996 COMPARED TO 1995
Net sales increased $3.7 million, or 14.6%, from $25.4 million in 1995 to $29.1
million in 1996. This increase was attributable to increased sales to B&J's
aerospace and international customers.
Cost of sales increased $2.9 million, or 15.5%, from $18.7 million in 1995 to
$21.6 million in 1996. As a percentage of net sales, cost of sales increased
from 73.8% in 1995 to 74.4% in 1996. The increase was primarily due to a change
in product mix.
Selling, general, and administrative expenses increased $400,000 or 7.6%, from
$5.6 million in 1995 to $6.1 million in 1996. As a percentage of net sales,
however, selling, general, and administrative expenses decreased from 22.2% in
1995 to 20.8% in 1996. The decrease was primarily due to the ability to support
increased sales volume with the existing infrastructure.
Operating income increased $400,000 or 37.9%, from $1.0 million in 1995 to $1.4
million in 1996. Operating income as a percentage of net sales increased from
4.0% to 4.8% in 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 1998, the Company had $31.1 million of cash and cash
equivalents, $78.3 million of working capital, and an aggregate of $75 million
of borrowing capacity under a revolving credit facility for $75 million with a
syndicate of commercial banks ("the Credit Facility"). At December 31, 1997,
these amounts were $31.4 million, $77.6 million, and $75 million, respectively.
The Credit Facility has a three-year term from December 11, 1997, may be used
for operations and acquisitions, and provides $5 million each for swinglines and
letters of credit. Amounts outstanding under the Credit Facility bear interest
at either the lead bank's corporate rate or LIBOR, plus applicable margins, as
selected by the Company from time to time. The Company incurs a fee between 20
and 30 basis points on the average daily unused capacity during the term. The
Credit Facility is secured by the stock of all the subsidiaries of the Company.
The principal operating capital requirements of the Company are for inventory
and accounts receivable and purchasing and upgrading property and equipment. The
Company also has implemented an acquisition program to pursue strategic
consolidation opportunities in the fragmented MROP industry, and while it
expects to fund such acquisitions primarily through the issuance of stock, the
Company expects that it will also use cash in connection with certain of its
acquisitions. The Company believes that it will have sufficient cash from
working capital, cash flow from operations, and borrowings, including use of
available capacity under the Credit Facility, to fund both its current
operations and anticipated internal expansion, as well as its acquisition
program for at least the next year.
On an historical basis (consistent with the requirements of SAB 97), net cash
provided by (used in) operating activities for fiscal years 1997, 1996 and 1995
was ($2.2 million), $380,000 and $633,000 respectively. The change was
principally due to increases in working capital requirements for inventory and
accounts receivable, and changes in accrued liabilities.
On an historical basis, net cash provided by (used in) investing activities was
primarily attributable to cash of the other eight Founding Companies acquired in
the Combination, capital expenditures, and proceeds from the sale of short-term
investments. For fiscal years 1997, 1996 and 1995 net cash provided by (used in)
investing activities was $2 million, ($150,000) and ($350,000), respectively.
On an historical basis, net cash provided by financing activities for fiscal
years 1997, 1996 and 1995 was $30.2 million, $60,000 and $215,000, respectively.
The change was principally due to the completion of the Company's initial public
offering on September 29, 1997 for $56.6 million of net proceeds and the use of
a portion of those proceeds for the repayment of substantially all amounts
outstanding under existing lines of credit of the Founding Companies.
33
<PAGE> 6
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------------
(In thousands, except share data)
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 31,382 $ 1,407
Short-term investments -- 948
Accounts receivable, net 30,394 3,973
Inventories, net 36,784 4,455
Deferred tax assets 1,385 324
Prepaid and other current assets 2,182 94
- -----------------------------------------------------------------------------------
Total current assets 102,127 11,201
PROPERTY AND EQUIPMENT, NET 8,824 1,114
INTANGIBLE ASSETS, NET 19,580 --
OTHER ASSETS 2,112 633
- -----------------------------------------------------------------------------------
Total assets $132,643 $ 12,948
- -----------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 582 $ 83
Lines of credit 1,111 1,077
Accounts payable 17,998 2,284
Accrued compensation 1,893 446
Other accrued liabilities 2,912 316
- -----------------------------------------------------------------------------------
Total current liabilities 24,496 4,206
- -----------------------------------------------------------------------------------
LONG-TERM DEBT 4,316 373
- -----------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES 880 17
- -----------------------------------------------------------------------------------
OTHER LONG-TERM LIABILITIES 7,422 1,183
- -----------------------------------------------------------------------------------
Total liabilities 37,114 5,779
- -----------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 8)
STOCKHOLDERS' EQUITY:
Preferred stock, $.10 par value per share;
10,000,000 shares authorized,
no shares issued or outstanding in 1997 and 1996 -- --
Common stock, $.01 par value per share;
50,000,000 shares authorized,
7,261,551 and 912,620 shares issued
in 1997 and 1996, respectively 73 9
Additional paid-in capital 85,708 --
Retained earnings 9,748 7,339
Treasury stock, at cost (0 and 45,628 shares
in 1997 and 1996, respectively) -- (179)
- -----------------------------------------------------------------------------------
Total stockholders' equity 95,529 7,169
- -----------------------------------------------------------------------------------
Total liabilities and stockholders' equity $132,643 $ 12,948
- -----------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
34
<PAGE> 7
Consolidated Statement of Operations
For the years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C>
NET SALES $ 105,919 $ 29,083 $ 25,377
COST OF SALES 80,162 21,625 18,731
- -------------------------------------------------------------------------------------------
Gross profit 25,757 7,458 6,646
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 22,159 6,058 5,631
- -------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 3,598 1,400 1,015
INTEREST EXPENSE 398 213 129
INTEREST INCOME (461) (73) (56)
OTHER INCOME, NET (64) (171) (68)
- -------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 3,725 1,431 1,010
PROVISION FOR INCOME TAXES 1,316 440 323
- -------------------------------------------------------------------------------------------
NET INCOME $ 2,409 $ 991 $ 687
- -------------------------------------------------------------------------------------------
EARNINGS PER SHARE:
Basic $ 0.91 $ 1.14 $ 0.79
- -------------------------------------------------------------------------------------------
Diluted $ 0.91 $ 1.14 $ 0.79
- -------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES:
Basic 2,639,996 866,992 866,992
- -------------------------------------------------------------------------------------------
Diluted 2,653,036 866,992 866,992
- -------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
35
<PAGE> 8
Consolidated Statements of Stockholders' Equity
For the years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Common Stock Additional
------------------- Paid-In Retained Treasury
Shares Amount Capital Earnings Stock Total
- -------------------------------------------------------------------------------------------------------------------
(In Thousands, Except Share Data)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 912,620 $ 9 $ 0 $5,661 $ (179) $ 5,491
Net income 0 0 0 687 0 687
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 912,620 9 0 6,348 (179) 6,178
Net income 0 0 0 991 0 991
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 912,620 9 0 7,339 (179) 7,169
Retired treasury stock (45,628) 0 (179) 0 179 0
Issuance of common stock to Founding
Companies and Management 2,592,981 26 29,239 0 0 29,265
Initial public offering 3,795,000 38 56,561 0 0 56,599
Sale of shares through employee
stock purchase plan 6,578 0 87 0 0 87
Net income 0 0 0 2,409 0 2,409
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 7,261,551 $ 73 $ 85,708 $9,748 $ 0 $95,529
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
36
<PAGE> 9
Consolidated Statements Of Cash Flows
For the years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $ 2,409 $ 991 $ 687
- ----------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 756 132 153
Gain on sale of assets (3) (7) (11)
Deferred taxes (276) (92) 11
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable (1,093) (1,138) (721)
Allowance for doubtful accounts 280 10 --
Inventories, net (119) (559) (232)
Prepaids and other assets (503) 8 275
Accounts payable (2,420) 833 433
Accrued compensation 105 25 86
Other accrued liabilities (1,413) 177 (48)
- ----------------------------------------------------------------------------------------------------------------
Total adjustments (4,686) (611) (54)
- ----------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by
operating activities (2,277) 380 633
- ----------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Changes in short-term investments 948 (34) (133)
Cash from acquired companies 1,851 -- --
Additions to property and equipment, net (747) (51) (117)
Cash surrender value of life insurance (24) (67) (100)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities 2,028 (152) (350)
- ----------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock,
net of issuance costs 56,599 -- --
Short term borrowings (repayments) (14,966) 177 320
Payments on long-term debt (11,409) (118) (105)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 30,224 59 215
- ----------------------------------------------------------------------------------------------------------------
Net Change in Cash and Cash Equivalents 29,975 287 498
CASH AND CASH EQUIVALENTS, beginning of year 1,407 1,120 622
- ----------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 31,382 $ 1,407 $ 1,120
- ----------------------------------------------------------------------------------------------------------------
Supplemental Disclosures:
Interest paid $ 398 $ 214 $ 213
- ----------------------------------------------------------------------------------------------------------------
Income taxes paid $ 867 $ 309 $ 121
- ----------------------------------------------------------------------------------------------------------------
Noncash Transactions:
Common stock issued in acquisitions (Note 1) $ 35,312 $ -- $ --
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
37
<PAGE> 10
Notes to Consolidated Financial Statements
December 31, 1997, 1996, and 1995
1. BASIS OF PRESENTATION
Organization and Business
Industrial Distribution Group, Inc. ("IDG" or the "Company"), a Delaware
corporation, 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. The Company conducts
business in 18 states and provides integrated supply, contract supply,
stock/nonstock sales as well as industrial services to a wide range of
industries.
Basis of Presentation
In September 1997, IDG completed an initial public offering of its common stock
(NYSE: IDG) and, concurrent with the offering, 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 Co. ("J.J. Stangel"),
Shearer Industrial Supply Co. ("Shearer"), Slater Industrial Supply Company
("Slater"), The Distribution Group ("TDG") (formerly known as "Industrial
Distribution Group, Inc."), and Tri-Star Industrial Supply, Inc. ("Tri-Star")
(collectively referred to as the "Founding Companies"). The accompanying
financial statements of IDG represent B&J (deemed to be the acquiring company
under the provisions of the Security and Exchange Commission's Staff Accounting
Bulletin No. 97) for the three years ended December 31, 1997 and include the
results of operations of the other eight Founding Companies since the effective
date of the acquisitions (Note 11).
Initial Public Offering and Acquisitions
Effective September 22, 1997, IDG declared a 115.333 for 1 stock split. All
amounts in the financial statements and notes thereto have been restated for
this stock split.
On September 24, 1997, the Company sold 3,795,000 shares of common stock to the
public at $17 per share (the "Offering"). The net proceeds to the Company from
the Offering (after deducting underwriting commissions and offering expenses)
were $56.6 million. Of this amount, $25.1 million was used to reduce the
Founding Companies' indebtedness under their lines of credit.
The consideration for the acquisitions of the Founding Companies consisted of
the Company's common stock. A total of 3,330,224 shares of Company common stock
was issued to the stockholders of the Founding Companies. These stockholders
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.
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 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 have been recorded based on preliminary estimates of fair
value as follows (in thousands):
<TABLE>
<S> <C>
Working capital, net $ 26,798
Property and equipment 7,664
Integrated supply contracts 570
Goodwill 19,144
Other assets 2,075
Liabilities assumed (20,939)
- ----------------------------------------------------------
$ 35,312
- ----------------------------------------------------------
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
all of its majority-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
38
<PAGE> 11
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.
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. The allowance amounted to $846,000 and $125,000 as of
December 31, 1997 and 1996, respectively.
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.
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
operations.
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>
Intangible Assets
Intangible assets consist primarily of goodwill, which is amortized using the
straight-line method over a period not to exceed 40 years. The Company
continually evaluates whether later events and circumstances have occurred that
indicate the remaining balance of goodwill may not be recoverable. In evaluating
possible impairment, the Company uses the most appropriate method of evaluation
given the circumstances surrounding the particular acquisition, which has
generally been an estimate of the related business unit's undiscounted operating
income before interest and taxes over the remaining life of the goodwill.
Additionally, $570,000 of the purchase price was allocated to the value of
integrated supply contracts which is included in intangible assets on the
balance sheet and is amortized over 13 years.
Amortization expense related to intangible assets for 1997, 1996, and 1995 was
$134,000, $0, and $0, respectively. At December 31, 1997 and 1996, accumulated
amortization of intangible assets was $134,000 and $0, respectively.
Other Assets
Other assets as of December 31, 1997 and 1996 included the cash surrender
values of executive life insurance policies totaling $1,287,000 and $616,000,
respectively.
Other Long-Term Liabilities
One stockholder of TDG who owned approximately 45% of its stock dissented from
the business unit's participation in the Offering. Pursuant to Georgia's
dissenters' rights statute, the stockholder will be paid cash for the fair value
of his interest in TDG (Note 8).
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.
39
<PAGE> 12
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.
Financial Instruments
The Company's carrying value of financial instruments (cash, trade receivables,
accounts payable, accrued liabilities, and debt) approximates fair value due to
the short maturity of those instruments. Credit risk on trade receivables is
minimized by the large and diverse nature of the Company's customer base. No one
customer represented more than 10% of the Company's accounts receivable or sales
for the periods presented.
Reclassifications
Certain reclassifications have been made to 1996 and 1995 amounts to conform to
the current year presentation.
New Accounting Pronouncements
In 1995, the Financial Accounting Standards Board ("FASB") 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.
The Company computes basic and diluted earnings per share in accordance with
SFAS No. 128, "Earnings Per Share." The adoption of this statement in 1997 had
no effect on previously reported earnings per share ("EPS").
In 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income," which
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
will be effective for the year beginning January 1, 1998. The Company has not
completed its analysis of the impact of this new pronouncement. However, based
on a preliminary review, the Company believes the implementation of SFAS No. 130
will not have a significant effect on its current financial reporting.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," which 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 require significant revision of
prior disclosures.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1997 and 1996
(in thousands):
<TABLE>
- -----------------------------------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Land, building, and improvements $ 4,528 $ 817
Leasehold improvements 1,363 435
Furniture, fixtures, and equipment 3,807 804
Computer hardware and software 1,390 464
- -----------------------------------------------------------------------------------------------------
11,088 2,520
Less accumulated depreciation (2,264) (1,406)
- -----------------------------------------------------------------------------------------------------
Property and equipment, net $ 8,824 $ 1,114
- -----------------------------------------------------------------------------------------------------
</TABLE>
Depreciation expense totaled $622,000, $132,000, and $153,000 for the years
ended December 31, 1997, 1996, and 1995, respectively.
40
<PAGE> 13
4. REVOLVING CREDIT FACILITIES
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 has 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. At December 31, 1997, no amounts were outstanding under this
facility. The revolving credit facility contains various covenants pertaining to
maintenance of certain financial relationships. These covenants include
requirements for interest coverage, cash flow, and net worth, among other
restrictions. The Company is in compliance with these covenants as of December
31, 1997.
Concurrent with the Offering, the Company obtained loan availability through a
line of credit of one of the acquired business units. This loan was originally
obtained in November 1993 and 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, 1997,
the Company had $1,111,000 drawn on this line of credit. 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 March 1998.
5. LONG-TERM DEBT:
At December 31, 1997 and 1996, long-term debt consisted of the following (in
thousands):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------
<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 with a net book value of approximately $2.3 million $ 1,573 $ 0
Note payable to bank, due February 1999, payable in monthly installments of
$11,500, plus interest at prime plus .25%; collateralized by inventory,
property and equipment and accounts receivable 1,251 0
Notes payable due to various parties through 2008, bearing interest
between 7% and 10.40% 1,148 326
Other 926 130
- ------------------------------------------------------------------------------------------------------
Total long-term debt 4,898 456
Less current portion (582) (83)
- ------------------------------------------------------------------------------------------------------
Total long-term debt, less current portion $ 4,316 $ 373
- ------------------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE> 14
Maturities of long-term debt as of December 31, 1997 are as follows (in
thousands):
<TABLE>
<S> <C>
1998 $ 582
1999 3,003
2000 266
2001 165
2002 132
Thereafter 750
</TABLE>
6. CAPITAL STOCK
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.
COMMON STOCK
Options to purchase 409,825 shares of common stock at $17 per share were granted
on September 24, 1997 and are included in the computation of diluted EPS because
the options' exercise price was less than the average market price of the common
shares during the year. The dilution effect of stock options outstanding during
1997 added 13,040 shares to the weighted average common shares outstanding for
purposes of calculating diluted EPS. The options, which expire in 2007, were
still outstanding at December 31, 1997 and vest ratably over a three-to-four
year period. No options or other dilutive securities were outstanding during
1996 and 1995.
At December 31, 1997, the Company has two stock-based compensation plans, which
are described below. The Company applies APB Opinion No. 25 and related
interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its stock incentive plan and its employee stock purchase
plan. Had compensation cost for the Company's stock-based compensation plans
been determined based on the fair value at the grant dates for awards under
those plans consistent with the method established in SFAS No. 123, the
Company's net income and EPS would have been reduced to the pro forma amounts
indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported $ 2,409 $ 991 $ 687
Pro forma 2,095 991 687
Basic EPS:
As reported $ 0.91 $ 1.14 $ 0.79
Pro forma 0.79 1.14 0.79
Diluted EPS:
As reported $ 0.91 $ 1.14 $ 0.79
Pro forma 0.79 1.14 0.79
</TABLE>
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions: risk-free
interest rate between 5.35% and 6.18%; an expected life of seven to eight years;
volatility of 42%; dividend yield of 0%. The total value of options granted in
1997, 1996, and 1995 was $3,696,000, $0, and $0, respectively.
42
<PAGE> 15
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 and 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 and any subsidiaries. Nonqualified 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 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 date. The board of directors of the Company (or a committee
designated by the board) 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.
A summary of the status of the stock incentive plan as of December 31, 1997 and
changes during the year then ended is presented below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Exercise
Shares Price
- ------------------------------------------------------------------
<S> <C> <C>
Fixed options:
Outstanding at beginning of year -- $ --
Granted 409,825 17.00
- ------------------------------------------------------------------
Outstanding at end of year 409,825 $17.00
- ------------------------------------------------------------------
Options exercisable at end of year -- --
- ------------------------------------------------------------------
Weighted average remaining contractual life 9.75 years
</TABLE>
Employee Stock Purchase Plan
In 1997, the Company 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 is
administered by the compensation committee of the Company's board of directors.
The price 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.
7. 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,
1997, 1996, and 1995 (in thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------
1997 1996 1995
- --------------------------------------------------
<S> <C> <C> <C>
Current $ 1,592 $ 532 $312
Deferred (276) (92) 11
- --------------------------------------------------
Total provision $ 1,316 $ 440 $323
- --------------------------------------------------
</TABLE>
43
<PAGE> 16
The provision for income taxes for the years ended December 31, 1997, 1996, and
1995 differs from the amount computed by applying the statutory rate of 34% due
to the following (in thousands):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------
<S> <C> <C> <C>
Tax at federal statutory rate $ 1,267 $486 $343
Nondeductible expenses 35 29 41
Tax-exempt interest income (11) (10) (10)
Goodwill amortization 47 -- --
State income tax, net of federal benefit 104 -- --
Cash surrender value of life insurance 3 (23) (34)
Other (129) (42) (17)
- ----------------------------------------------------------------
Provision for income taxes $ 1,316 $ 440 $323
- ----------------------------------------------------------------
</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,
1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 312 $ 42
Accrued employee benefits 199 153
Capitalized inventory costs 309 83
Inventory allowance 475 75
Accrued liabilities 828 --
Net operating loss carryforward 241 --
- ----------------------------------------------------------------------
2,364 353
- ----------------------------------------------------------------------
Deferred tax liabilities:
Book over tax depreciation (50) (17)
Prepaid insurance (5) (29)
Intangible integrated supply contract (206) --
Step-up in asset basis (917) --
Section 481--LIFO (584) --
Other (97) --
- ----------------------------------------------------------------------
(1,859) (46)
- ----------------------------------------------------------------------
Net deferred tax assets $ 505 $ 307
- ----------------------------------------------------------------------
</TABLE>
The Company has net operating loss carryforwards for federal income tax purposes
of approximately $650,000 as of December 31, 1997, which expire 2008 through
2010. The utilization of the related available deferred tax asset of $241,000 at
December 31, 1997 is subject to certain limitations of the Internal Revenue Code
Section 382.
The Company intends to file a consolidated federal income tax return, which
includes the operations of the Founding Companies for periods subsequent to the
acquisition date.
44
<PAGE> 17
8. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases certain warehouse and office facilities as well as certain
vehicles and office equipment under operating leases. 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, net of sublease revenues,
under all leases as of December 31, 1997 were as follows (in thousands):
<TABLE>
<S> <C>
1998 $1,989
1999 1,378
2000 610
2001 320
2002 287
Thereafter 908
- ------------------------------------------------
$5,492
- ------------------------------------------------
</TABLE>
During the years ended December 31, 1997, 1996, and 1995, rental expense under
operating leases totaled $805,000, $254,000, and $232,000, respectively.
LITIGATION
On November 18, 1996, Milliken & Company ("Milliken"), 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 a 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 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 TDG that might result from the lawsuit.
On August 27, 1997, Robert Hallager filed suit against his former employer,
Jessop Steel Company, and several manufacturers and distributors of industrial
products, including Shearer (one of the Founding Companies). Mr. Hallager claims
that he contracted cobalt poisoning and other pulmonary problems requiring his
cessation of work and lifetime monitoring as a result of this exposure to steel
containing cobalt, chromium, and nickel through a grinding process utilizing
abrasive tools supplied by his employer by the various defendant-manufacturers
and distributors. Mr. Hallager alleges damages "in excess of $50,000." The
litigation is in the very early stages, and no answer is yet due from or has
been filed by Shearer. Shearer intends to deny any liability, and its insurance
carrier is expected to defend the lawsuit on Shearer's behalf. 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 $7 million of coverage,
will be adequate to cover any loss to Shearer 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"). This 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 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 proceeding is in the
early stages of 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.
45
<PAGE> 18
Insurance
One of the Founding Companies began participating in a self-insured health
insurance plan during 1997. Estimated reserves for reported and unreported
claims are funded through a VEBA trust. The balance of this trust was
approximately $414,000 as of December 31, 1997 and represents management's best
estimate of its liability as of the end of the year. Revisions to estimated
reserves are recorded in the period in which they become known.
Employment Agreements
Included in the employment agreements of the Company's three executive officers
and each of the nine presidents of the Founding Companies is a change-of-control
provision. Upon certain changes in the majority stockholders or board of
directors, the executive officers and company presidents may elect to receive a
cash payment equal to the present value of their base salary for the longer of
two years or the remaining term of their contract.
9. SAVINGS PLANS
Beginning January 1, 1989, B&J established a 401(k) savings plan (the "Plan")
for the Company's nonunion employees under which 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 1996 and 1995, the Company made contributions to the Plan
equivalent to 5% of eligible participants' salaries. The Company's contributions
totaled $149,000 and $101,000 during 1996 and 1995, respectively. As a result of
the acquisition of the other Founding Companies, the Company had a total of
seven 401(k) plans in effect since September 24, 1997. Total Company
contributions to 401(k) plans during 1997 were $203,000.
Effective January 1, 1998, all existing 401(k) plans were merged into one new
plan (the "New Plan"). All employees who are age 21 or older and have completed
one year of service are eligible to participate in the New Plan. Once
eligibility requirements are met, employees may join the New Plan on a quarterly
basis. Employees may contribute between 1% and 15% of their compensation to the
New Plan, subject to tax law limitations. For 1998, the Company will match 25%
of the employee contribution up to a maximum of 1 1/2% of the employee's salary.
One of the Founding Companies had a profit-sharing plan in effect during 1997.
Employees must have one year of service and cannot be covered by a union plan.
Participation in the profit sharing plan was closed as of January 1, 1998.
Employer discretionary contributions vest over a seven-year period. No
contributions have been made since September 24, 1997. Participants in the plan
may continue participating in the plan while also participating in the New Plan.
10. RELATED-PARTY TRANSACTIONs
A business unit leases a facility from four former stockholders of the business
unit (one of whom is a current director 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, 1997, 1996, and 1995.
B&J was obligated 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. As of December 31, 1996, B&J had accrued $1,133,000,
discounted at a 10% annual interest rate to cover the cost of this obligation.
The Company made a lump-sum payment of $1.1 million during 1997 for relief from
its obligation through 2012. If either the retired officer or his spouse is
surviving as of January 2013, monthly payments of $10,000 shall resume. In
addition, the Company agreed to pay 75% of the health and dental insurance costs
of the retired officer and his spouse until their deaths.
A business unit of IDG leases certain properties used in its operations from a
related-party family trust. A current member of the board of directors of IDG
participates in this trust. Rent expense under these noncancelable leases was
approximately $67,000 during 1997.
46
<PAGE> 19
11. PRO FORMA COMBINED FINANCIAL INFORMATION (UNAUDITED)
The following pro forma combined financial information for the two years ended
December 31, 1997 includes the results of B&J (deemed to be the financial
acquiror) combined with the other eight Founding Companies as if the
acquisitions had occurred on January 1 of each respective period. 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 EPS amounts are based on 7,309,627 and 7,309,627 shares deemed to be
outstanding for the periods ended December 31, 1997 and 1996, respectively. 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 each respective 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. (in
thousands, except per share amounts)
<TABLE>
<CAPTION>
- ----------------------------------------
1997 1996
- ----------------------------------------
<S> <C> <C>
Net sales $284,870 $251,058
- ----------------------------------------
Net income $ 5,058 $ 3,375
- ----------------------------------------
Earnings per share $ 0.69 $ 0.46
- ----------------------------------------
</TABLE>
12. INTERIM FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth certain quarterly financial data for the periods
indicated (in thousands, except per share amounts):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997:
Net sales $8,161 $8,606 $15,427 $73,725
Gross profit 1,950 2,381 3,846 17,580
Net income 197 469 622 1,121
Diluted EPS* $ 0.23 $ 0.53 $ 0.42 $ 0.15
1996:
Net sales $6,582 $6,631 $ 7,830 $ 8,040
Gross profit 1,724 1,726 2,151 1,857
Net income 264 192 487 48
Diluted EPS $ 0.30 $ 0.22 $ 0.56 $ 0.06
</TABLE>
*The sum of the diluted EPS for 1997 by quarter does not agree with the amount
disclosed on the statement of operations due to the weighted average effect of
the shares issued in the Offering and to the Founding Companies late in the
third quarter of 1997.
13. SUBSEQUENT EVENTS (UNAUDITED)
In February 1998, the Company signed letters of intent to purchase Continental
Air Tools, Inc., d/b/a Continental-McLaughlin, E. C. Blackstone Company, and
Northern Tool & Supply. The combined annual revenue of these companies is
approximately $46 million. The aggregate purchase price is approximately $12.5
million, of which approximately $1 million will be cash and the balance will be
IDG common stock.
47
<PAGE> 20
Report of Independent Public Accountants
To the Board of Directors of
Industrial Distribution Group, Inc.
We have audited the accompanying consolidated balance sheets of INDUSTRIAL
DISTRIBUTION GROUP, INC. AND SUBSIDIARIES (a Delaware corporation) (Note 1) as
of December 31, 1997 and 1996 and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 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 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. and subsidiaries as of December 31, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 13, 1998
48
<PAGE> 1
EXHIBIT 21.1
Subsidiaries of the Company
Subsidiary State of Incorporation
- ---------- ----------------------
Associated Suppliers, Inc. Oregon
B & J Industrial Supply Company Washington
Cramer Industrial Supplies, Inc. New York
Continental Air Tool, Inc. California
E.C. Blackstone Company Georgia
Grinding Supplies Company Michigan
J.J. Stangel Co. Wisconsin
Northern Tool & Supply, Inc. Michigan
Shearer Industrial Supply Co. Pennsylvania
Slater Industrial Supplies, Inc. California
The Distribution Group, Inc. Georgia
Tri-Star Industrial Supply, Inc. Missouri
<PAGE> 1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-k of our report dated February 13, 1998 included in
Industrial Distribution Group, Inc.'s annual report to stockholders. In
addition, we hereby consent to the incorporation of our reports incorporated by
reference in this Form 10-k into the Company's previously filed Registration
Statements on Form S-8 (File No. 333-41921 and File No. 333-45323).
/s/ Arthur Andersen LLP
Atlanta, Georgia
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF INDUSTRIAL DISTRIBUTION GROUP, INC. FOR THE YEAR ENDED
DECEMBER 31, 1997 AND 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 31,382 1,407
<SECURITIES> 0 948
<RECEIVABLES> 31,240 4,098
<ALLOWANCES> (846) (125)
<INVENTORY> 36,784 4,455
<CURRENT-ASSETS> 102,127 11,201
<PP&E> 11,088 2,520
<DEPRECIATION> (2,264) (1,406)
<TOTAL-ASSETS> 132,643 12,948
<CURRENT-LIABILITIES> 24,496 4,206
<BONDS> 0 0
0 0
0 0
<COMMON> 73 9
<OTHER-SE> 95,456 7,160
<TOTAL-LIABILITY-AND-EQUITY> 132,643 12,948
<SALES> 105,919 29,083
<TOTAL-REVENUES> 105,919 29,083
<CGS> 80,162 21,625
<TOTAL-COSTS> 102,321 27,683
<OTHER-EXPENSES> (525) (244)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 398 213
<INCOME-PRETAX> 3,725 1,431
<INCOME-TAX> 1,316 440
<INCOME-CONTINUING> 2,409 991
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,409 991
<EPS-PRIMARY> 0.91 1.14
<EPS-DILUTED> 0.91 1.14
</TABLE>
<PAGE> 1
EXHIBIT 99
March 30,1998
To Our Stockholders:
On behalf of the Board of Directors and management of Industrial
Distribution Group, Inc., I cordially invite you to the Annual Meeting of
Stockholders to be held on May 7, 1998, at 11:00 a.m., Atlanta Time, at the
Galleria Doubletree Guest Suites, 2780 Whitley Road, Atlanta, Georgia.
At the Annual Meeting, stockholders will be asked to (i) elect nine
directors of the Company, all of the nominees for which are currently directors
of the Company, (ii) approve the Company's Stock Incentive Plan, and (iii)
approve the Company's Management Incentive Program. As explained in the Proxy
Statement, the Board of Directors believes that the Stock Incentive Plan and the
Management Incentive Program are both essential elements of the Company's
comprehensive compensation program. The Stock Incentive Plan facilitates the
Company's efforts to retain key employees and directors and to provide
incentives to these individuals to promote the financial success of the Company
over the long-term, primarily through the use of stock options that will create
value only as value is created for the Company's stockholders. The Management
Incentive Program is designed to reward key management personnel on an ongoing
basis for helping the Company achieve operating performance goals.
Information about the nominees for directors, the Stock Incentive Plan,
the Management Incentive Program, and certain other matters is contained in the
accompanying Proxy Statement. A copy of the Company's 1997 Annual Report to
Stockholders, which contains financial statements and other important
information about the Company's business, is also enclosed.
It is important that your shares of stock be represented at the
meeting, regardless of the number of shares you hold. You are encouraged to
specify your voting preferences by marking and dating the enclosed proxy card.
However, if you wish to vote for re-electing the directors, approving the Stock
Incentive Plan, and approving the Management Incentive Program, all you need to
do is sign and date the proxy card.
Please complete and return the proxy card in the enclosed envelope,
whether or not you plan to attend the meeting. If you do attend and wish to vote
in person, you may revoke your proxy at that time.
I hope you are able to attend, and look forward to seeing you.
Sincerely,
Martin S. Pinson
Chairman of the Board and
Chief Executive Officer
<PAGE> 2
INDUSTRIAL DISTRIBUTION GROUP, INC.
2500 ROYAL PLACE
TUCKER, GEORGIA 30084
-------------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 7, 1998
-------------------------------
To the Stockholders of
Industrial Distribution Group, Inc.:
Notice is hereby given that the Annual Meeting of Stockholders of
Industrial Distribution Group, Inc. will be held at 11:00 a.m., Atlanta Time, on
Thursday, May 7, 1998, at the Galleria Doubletree Guest Suites, 2780 Whitley
Road, Atlanta, Georgia for the following purposes:
1. To elect nine directors to constitute the Board of
Directors to serve until the next annual meeting and until their
successors are elected and qualified;
2. To approve the Company's Stock Incentive Plan;
3. To approve the Company's Management Incentive Program; and
4. To consider such other matters as may properly come before
the meeting and any adjournment or postponement thereof.
Only stockholders of record on March 23, 1998, are entitled to notice
of and to vote at the Annual Meeting and any adjournment or postponement
thereof.
BY ORDER OF THE BOARD OF DIRECTORS,
Jack P. Healey
MARCH 30, 1998 Secretary
WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE ANNUAL MEETING, PLEASE FILL IN,
DATE, SIGN, AND PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED BUSINESS
REPLY ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. THE
PROXY MAY BE REVOKED AT ANY TIME PRIOR TO EXERCISE, AND IF YOU ARE PRESENT AT
THE ANNUAL MEETING, YOU MAY, IF YOU WISH, REVOKE YOUR PROXY AT THAT TIME AND
EXERCISE THE RIGHT TO VOTE YOUR SHARES PERSONALLY.
<PAGE> 3
[IDG LOGO]
PROXY STATEMENT
DATED MARCH 30, 1998
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 7, 1998
This Proxy Statement is furnished to stockholders in connection with
the solicitation of proxies by the Board of Directors of Industrial Distribution
Group, Inc. ("IDG" or the "Company") for use at IDG's 1998 Annual Meeting of
Stockholders ("Annual Meeting") to be held on Thursday, May 7, 1998, including
any postponement, adjournment, or adjournments thereof, for the purposes set
forth in the accompanying Notice of Annual Meeting. Management intends to mail
this Proxy Statement and the accompanying form of proxy to stockholders on or
about March 31, 1998.
Only stockholders of record at the close of business on March 23, 1998
(the "Record Date"), are entitled to notice of and to vote in person or by proxy
at the Annual Meeting. As of the Record Date, there were 7,461,383 shares of
common stock, $.01 par value per share ("Common Stock"), of IDG outstanding and
entitled to vote at the Annual Meeting. The presence of a majority of such
shares is required, in person or by proxy, to constitute a quorum for the
conduct of business at the Annual Meeting. Each share is entitled to one vote on
any matter submitted for vote by the stockholders. The vote required for
approval of each matter submitted to the stockholders is described with the
discussion of that matter in this Proxy Statement.
Proxies in the accompanying form, duly executed and returned to the
management of the Company, and not revoked, will be voted at the Annual Meeting.
Any proxy given pursuant to this solicitation may be revoked by the stockholder
at any time prior to the voting of the proxy by delivery of a subsequently dated
proxy, by written notification to the Secretary of the Company, or by personally
withdrawing the proxy at the Annual Meeting and voting in person.
Proxies that are executed, but that do not contain any specific
instructions, will be voted for the election of all the nominees for directors
specified herein, for approval of the Stock Incentive Plan, for approval of the
Management Incentive Program, and in the discretion of the persons appointed as
proxies on any other matter that may properly come before the Annual Meeting or
any postponement, adjournment, or adjournments thereof, including any vote to
postpone or adjourn the Annual Meeting.
A copy of the Company's 1997 Annual Report to Stockholders is being
furnished herewith to each stockholder of record as of the close of business on
the Record Date. Additional copies of the 1997 Annual Report to Stockholders and
copies of the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 will be provided free of charge upon written request to:
INDUSTRIAL DISTRIBUTION GROUP, INC.
2500 ROYAL PLACE
TUCKER, GEORGIA 30084
ATTN: INVESTORS RELATIONS DEPARTMENT
If the person requesting the Form 10-K was not a stockholder of record
on the Record Date, the request must include a representation that the person
was a beneficial owner of Common Stock on that date. Copies of any exhibits to
the Form 10-K will also be furnished on request and upon payment of the
Company's expenses in furnishing the exhibits.
-1-
<PAGE> 4
VOTING SECURITIES AND PRINCIPAL STOCKHOLDERS
The following table sets forth the information concerning the
beneficial ownership of Common Stock, which is the only class of voting stock of
the Company, at March 1, 1998, by (i) each person known to the Company to
beneficially own more than 5% of the Common Stock, (ii) each director, nominee
for director, and designated highly compensated executive officer, and (iii) all
directors and executive officers of the Company as a group. Unless otherwise
indicated below, the persons named below had sole voting and investment power
with respect to all shares of the Common Stock shown as beneficially owned by
them.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED PERCENT(1)
- ------------------------ ------------------- ----------
<S> <C> <C>
Dresdner RCM Global Investors LLC (2) 544,700 7.50%
Andrew B. Shearer (3) 514,889 7.09%
West Highland Capital, Inc. (4) 500,000 6.89%
Northwestern Mutual Life Insurance Company (5) 364,600 5.02%
William J. Burkland (6) 143,582 1.98%
Douglass C. Smith (7) 123,874 1.71%
Martin S. Pinson 81,274 1.12%
George L. Sachs, Jr. 55,214 *
Jack P. Healey 28,050 *
David K. Barth (8) 23,066 *
William T. Parr (9) 2,200 *
William R. Fenoglio 1,000 *
Richard M. Seigel 1,000 *
All Directors and Executive Officers as a Group 974,149 13.42%
(10 persons)
</TABLE>
- -------------------
* Denotes less than 1%.
(1) The percentages shown are based on 7,261,551 shares of the Common Stock
outstanding on March 1, 1998 plus, as to each person and group listed,
the number of shares of Common Stock deemed owned by such holder
pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), assuming the exercise of options held by
such holder that are exercisable within 60 days of March 1, 1998.
(2) The address of Dresdner RCM Global Investors LLC is 4 Embaracadero
Center Suite 3000, San Francisco, California 94111.
(3) The address for Mr. Shearer is 2500 Royal Place, Tucker, Georgia 30084.
(4) The address of West Highland Capital, Inc. is 300 Drakes Landing Road,
Suite 290, Greenbrae, California 94904. The reporting person claims
shared voting and investment power with respect to all of the shares.
(5) The address of Northwestern Mutual Life Insurance Company is 720 E.
Wisconsin Avenue, Milwaukee, Wisconsin 53202. The reporting person
claims sole voting and investment power with respect 284,700 shares and
shared voting and investment power with respect to 79,900 shares.
(6) Includes an aggregate of 300 shares held by Mr. Burkland as custodian
for his three minor children. Does not include an aggregate of 28,291
shares owned by Mr. Burkland's wife, with respect to which Mr. Burkland
disclaims beneficial ownership.
(7) Does not include an aggregate of 372,331 shares owned by Mr. Smith's
wife and his two adult daughters, with respect to which Mr. Smith
disclaims beneficial ownership.
(8) 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.
(9) Does not include an aggregate of 1,200 shares owned by Mr. Parr's wife,
with respect to which Mr. Parr disclaims beneficial ownership.
-2-
<PAGE> 5
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Messrs. Burkland, Fenoglio, Healey, Parr, Pinson, Sachs, Seigel,
Shearer, and Smith inadvertently failed to timely report on Form 4 a purchase of
Common Stock by them in the Company's initial public offering.
ELECTION OF DIRECTORS
(ITEM NUMBER 1 ON THE PROXY CARD)
The Bylaws of IDG provide that the Board of Directors shall consist of
not less than three nor more than fifteen directors, with the exact number being
set from time to time by the Board. The Board presently consists of nine
directors, each of whom serves until the next annual meeting of stockholders and
until his successor, if there is to be one, is elected and qualified. Each of
the nominees is listed below and is presently serving as a director of the
Company.
Directors are elected by a plurality of the votes cast by the holders
of shares of Common Stock entitled to vote for the election of directors at a
meeting at which a quorum is present. A quorum will be present for the Annual
Meeting when the holders of a majority of the shares outstanding on the Record
Date are present in person or by proxy. An abstention and a broker non-vote are
included in determining whether a quorum is present, but will not affect the
outcome of the vote for the election of directors. Unless otherwise indicated on
a proxy, all duly executed proxies granted by the holders of Common Stock will
be voted individually at the Annual Meeting for the election of each nominee.
Each nominee has indicated that he will serve if elected, but if the situation
should arise that any nominee is no longer able or willing to serve, the proxy
may be voted for the election of such other person as may be designated by the
Board of Directors. Each person elected as a director shall serve a term that
continues until the next annual meeting and until his successor, if there is to
be one, is duly elected and qualified.
DAVID K. BARTH PRESIDENT
BARTH SMITH COMPANY
Mr. Barth, age 54, 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 and which assisted the Company with its formation in 1997.
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 1975, of Borg-Warner Corporation,
a multinational diversified manufacturing, finance, and services company.
WILLIAM J. BURKLAND VICE PRESIDENT
B&J INDUSTRIAL SUPPLY COMPANY
Mr. Burkland, age 36, 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 ("B&J"), one of the companies that founded the Company in 1997.
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.
WILLIAM R. FENOGLIO RETIRED
Mr. Fenoglio, age 58, 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
-3-
<PAGE> 6
Motor Division from 1981 to 1984. Mr. Fenoglio is currently a director of the
Southern New England Telecommunications Corporation, Southern New England
Telephone Company, and Standex International, Inc., and he has served as
Chairman of the Board of Connecticut Business & Industry Association. Mr.
Fenoglio is a member of the Executive, Compensation, and Audit Committees of the
Board of Directors.
WILLIAM T. PARR VICE CHAIRMAN
J. SMITH LANIER & CO.
Mr. Parr, age 61, 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 Company, Inc. 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, Inc. Mr. Parr is
a member of the Audit and Compensation Committees of the Board of Directors.
MARTIN S. PINSON CHAIRMAN AND CHIEF EXECUTIVE OFFICER
INDUSTRIAL DISTRIBUTION GROUP, INC.
Mr. Pinson, age 52, is the Chairman and Chief Executive Officer of the Company.
Prior to joining the Company, Mr. Pinson 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 and which Mr. Pinson co-founded in 1994. 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. Mr. Pinson is a
member of the Executive and Compensation Committees of the Board of Directors.
GEORGE L. SACHS, JR. PRESIDENT
TRI-STAR INDUSTRIAL SUPPLY, INC.
Mr. Sachs, age 57, is a co-founder of the Company. Mr. Sachs has served since
1985 as the President of Tri-Star Industrial Supply, Inc. ("Tri-Star"), one of
the companies that founded the Company in 1997, 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 is a member of the Executive Committee of the Board of Directors.
RICHARD M. SEIGEL RETIRED
Mr. Seigel, age 51, served as the Chairman and Chief Executive Officer 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, from 1990 to October 1997. 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 is a member of the Audit and
Compensation Committees of the Board of Directors.
-4-
<PAGE> 7
ANDREW B. SHEARER PRESIDENT
SHEARER INDUSTRIAL SUPPLY CO.
Mr. Shearer, age 34, is a co-founder of the Company. Mr. Shearer has served
since 1991 as the President of Shearer Industrial Supply Co. ("Shearer"), one of
the companies that founded the Company in 1997. Prior to becoming President, Mr.
Shearer was employed by Shearer in various positions from 1985.
DOUGLASS C. SMITH PRESIDENT AND CHIEF OPERATING OFFICER
INDUSTRIAL DISTRIBUTION GROUP, INC.
Mr. Smith, age 57, is a co-founder and President and Chief Operating Officer of
the Company. Mr. Smith was a co-founder in 1981 of The Distribution Group, Inc.
("TDG"), one of the companies that founded the Company in 1997, and served as
its President and Chief Executive Officer from inception until it was acquired
by the Company in September 1997. Mr. Smith was also a co-founder in 1972, and
President, of Boring & Smith Industries, Inc., a predecessor of TDG. Mr. Smith
is a member of the Executive Committee of the Board of Directors.
MEETINGS AND COMMITTEES OF THE BOARD
The Board of Directors of the Company meets on a regular basis to
supervise, review, and direct the business and affairs of the Company. During
the Company's 1997 fiscal year, the Board held two meetings. The Board of
Directors has established an Executive Committee, an Audit Committee, and a
Compensation Committee to which it has assigned certain responsibilities in
connection with the governance and management of the Company's affairs. The
Company has no standing nominating committee or other committee performing
similar functions.
Each of the directors attended all of the Board meetings and meetings
of committees on which he served.
Executive Committee. The Executive Committee, pursuant to authority
delegated by the Board, from time to time considers certain matters in lieu of
convening a meeting of the full Board, subject to any restrictions in applicable
law related to the delegation of certain powers to a committee of the Board.
Messrs. Fenoglio, Pinson, Sachs, and Smith, comprise the members of the
Executive Committee. The Executive Committee held two meetings during fiscal
1997.
Audit Committee. The Audit Committee recommends the appointment of
independent public accountants, reviews the scope of audits proposed by the
independent public accountants, reviews internal audit reports on various
aspects of corporate operations, and periodically consults with the independent
public accountants on matters relating to internal financial controls and
procedures. Messrs. Fenoglio, Parr, and Seigel comprise the members of the Audit
Committee. The Audit Committee held one meeting during fiscal 1997.
Compensation Committee. The Compensation Committee is responsible for
the review and approval of compensation of employees above a certain salary
level, the review of management recommendations relating to incentive
compensation plans, the administration of the Company's stock option and stock
purchase plans, the review of compensation of directors, and consultation with
management and the Board on senior executive continuity and organizational
matters. Messrs. Parr, Pinson, and Seigel comprised the membership of the
Compensation Committee during fiscal 1997. The Compensation Committee held one
meeting during fiscal 1997. In March 1998, Mr. Fenoglio was appointed to serve
on the Compensation Committee. Also in March 1998, Messrs. Fenoglio and Seigel
were appointed as the members of a subcommittee of the Compensation Committee to
act with respect to certain matters of compensation to the Company's most highly
compensated executive officers in order to comply with requirements of Section
162(m) of the Internal Revenue Code.
-5-
<PAGE> 8
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. The Company has granted each
outside director (Messrs. Barth, Fenoglio, Parr, and Seigel) options to purchase
15,000 shares of Common Stock at a price of $17.00 per share. Such options vest
in three equal installments on the first three anniversaries of the date of
grant.
APPROVAL OF STOCK INCENTIVE PLAN
(ITEM NUMBER 2 ON THE PROXY CARD)
PURPOSE OF THE STOCK INCENTIVE PLAN
The Board of Directors voted to adopt the Stock Incentive Plan on July
10, 1997 subject to stockholder approval. Prior to the Company's initial public
offering in September 1997, the Company's stockholders approved the Stock
Incentive Plan. The Board of Directors adopted several technical amendments to
the Stock Incentive Plan on March 5, 1998. The Board of Directors is proposing
that the Company's public stockholders approve the Stock Incentive Plan, as so
amended, for purposes of Section 162(m) of the Internal Revenue Code of 1986, as
amended (the "IRC"). See "Compliance with Section 162(m) of the Internal Revenue
Code" below.
The Board of Directors believes that the Stock Incentive Plan plays an
integral role in the ability of the Company to attract and retain key employees
and directors and to provide incentives for such persons to promote the
financial success of the Company. The following description of the material
features of the Stock Incentive Plan is a summary and is qualified in its
entirety by reference to the Stock Incentive Plan, a copy of which will be
provided to any stockholder upon written request to the Company.
DESCRIPTION OF AWARDS
Awards granted under the Stock Incentive Plan may be "incentive stock
options" ("ISOs"), as defined in Section 422 of the IRC, "nonqualified stock
options" ("NSOs"), shares of Common Stock subject to terms and conditions set by
the Board of Directors ("restricted stock awards"), stock appreciation rights
("SARs"), or other forms of awards that use (or are based on) shares of Common
Stock. ISOs may be granted only to full-time employees (including officers) of
the Company, including its subsidiaries. NSOs, 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 ISOs.
ISOs 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 (a
"principal stockholder") 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, an ISO granted to a principal stockholder may not be exercisable more
than five years from its date of grant.
The Compensation Committee of the Board of Directors (or a subcommittee
of the Compensation Committee comprised solely of "outside directors" within the
meaning of Section 162(m) of the IRC, in the case of option grants to the
Company's Chief Executive Officer and the four other most highly compensated
executive officers of the Company) otherwise generally has discretion to set the
terms and conditions of options and restricted stock 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. The Stock Incentive Plan limits the number of shares of Common
Stock with respect to which options may be granted to any individual during any
calendar year to 450,000.
-6-
<PAGE> 9
COMPLIANCE WITH SECTION 162(M) OF THE INTERNAL REVENUE CODE
Section 162(m) of the IRC denies a deduction by an employer for certain
compensation in excess of $1.0 million per year paid by a publicly traded
corporation to the chief executive officer or any of the four most highly
compensated executive officers other than the chief executive officer (the
"Designated Executive Officers"). Compensation with respect to stock options,
including upon exercise of an NSO or upon a disqualifying disposition of an ISO,
as described below under "Certain Federal Income Tax Consequences", or other
compensation pursuant to the Stock Incentive Plan, will be excluded from this
deduction limit if it satisfies certain requirements. The requirements include:
(i) the stock option must be granted at an exercise price not lower than fair
market value at date of grant; (ii) the stock option grant must be made by a
committee composed of two or more "outside directors" within the meaning of
Section 162(m); (iii) the plan under which the stock option is granted must
state the maximum number of shares with respect to which options may be granted
during a specified period to any individual; and (iv) the material terms
pursuant to which the compensation is to be paid must be disclosed to, and
approved by, the public stockholders of the corporation in a separate vote prior
to payment. The Stock Incentive Plan meets the requirements of paragraphs (i)
through (iii) above, and approval of the Stock Incentive Plan by the Company's
public stockholders is being proposed in order to comply with requirement (iv)
so that compensation with respect to stock options may be excluded from the
deduction limit under 162(m) of the IRC.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Under current tax law, a holder of an ISO under the Stock Incentive
Plan does not, as a general matter, realize taxable income upon the grant or
exercise thereof. (Depending upon the holder's income tax situation, however,
the exercise of the ISO may have alternative minimum tax implications.) In
general, a holder of an ISO will only recognize gain at the time that Common
Stock acquired through exercise of the ISO is sold or otherwise disposed of. In
that situation, the amount of gain that the optionee must recognize is equal to
the amount by which the value of the Common Stock on the date of the sale or
other disposition exceeds the option price. If the optionee disposes of the
stock after the required holding period - that is, no earlier than a date that
is two years after the date of grant of the option and one year after the date
of exercise - the gain is capital gain income. If disposition occurs prior to
expiration of the holding period, the gain is ordinary income, and the Company
is entitled to a tax deduction equal to the amount of income recognized by the
optionee.
An optionee will not realize income when an NSO is granted to him or her.
Upon exercise of such option, however, the optionee must recognize ordinary
income to the extent that the fair market value of the Common Stock on the date
the option is exercised exceeds the option price. Any such gain is taxed in the
same manner as ordinary income in the year the option is exercised. Thereafter,
any additional gain recognized upon the disposition of the shares of stock
obtained by the exercise of an NSO will be taxed at capital gains rates, if the
employee has held the shares of stock for at least one year after the exercise
of the NSO. The Company will not experience any tax consequences upon the grant
of an NSO, but will be entitled to take an income tax deduction equal to the
amount that the option holder includes in income (if any) when the NSO is
exercised.
The grant of a restricted stock award will not be a taxable event for
the holder thereof or result in a tax deduction for the Company at the time of
grant. Upon the lapse or termination of any restrictions on the award, the
holder will recognize ordinary income equal to the fair market value of the
portion of the restricted stock award no longer subject to the restrictions,
less any amount of payment by the holder of such restricted stock award. The
Company will be entitled to an income tax deduction in the same amount at the
time the holder is required to recognize income.
STOCK INCENTIVE PLAN BENEFITS
As of the date hereof, options for 413,825 shares of Common Stock had
been granted under the Stock Incentive Plan, including options for 211,600
shares of Common Stock to various directors and executive officers of the
Company. This amount includes options for 103,800 shares to Mr. Pinson, 27,000
shares to Mr. Smith, 20,800 shares to Mr. Healey, and 15,000 shares to each of
the four outside directors.
-7-
<PAGE> 10
The Company does not have any current plans to grant additional options
to directors and executive officers of the Company, although the Company expects
that the Compensation Committee of the Board will consider such persons, along
with other key personnel of the Company, from time to time, including during
fiscal 1998, to receive grants under the Stock Incentive Plan.
VOTE REQUIRED AND RECOMMENDATION OF THE BOARD
The affirmative vote of holders of a majority of the shares of the
Common Stock of the Company represented and voted at the Annual Meeting,
assuming the presence of a quorum, is required to approve the Stock Incentive
Plan.
The Board of Directors, which unanimously approved the Stock Incentive
Plan, as amended, recommends a vote "FOR" approval of the Stock Incentive Plan.
APPROVAL OF MANAGEMENT INCENTIVE PROGRAM
(ITEM NUMBER 3 ON THE PROXY CARD)
PURPOSE OF MANAGEMENT INCENTIVE PROGRAM
The Board of Directors on March 5, 1998 adopted the Industrial
Distribution Group, Inc. Management Incentive Program (the "Management Incentive
Program"), subject to approval by the Company's stockholders. Stockholder
approval is sought in order to qualify the Management Incentive Program under
Section 162(m) of the IRC and thereby to allow the Company to deduct as
performance-based compensation for federal income tax purposes all compensation
paid under the Management Incentive Program to the Company's Chief Executive
Officer and the other four most highly compensated executive officers of the
Company (the "Designated Executive Officers"). See "Approval of Stock Incentive
Plan - Compliance with 162(m) of the Internal Revenue Code" for a more detailed
description of Section 162(m) of the IRC.
The Board of Directors believes that the Management Incentive Program
will play a central role in providing incentives and rewarding key management
personnel of the Company and its business units for achieving performance goals
that promote the financial success of the Company and enhance value for the
Company's stockholders. The following description of the material features of
the Management Incentive Program is a summary and is qualified in its entirety
by reference to the Management Incentive Program, a copy of which will be
provided to any stockholder upon written request to the Company.
ADMINISTRATION AND ELIGIBILITY
The Management Incentive Program will be administered by a committee
designated by the Board of Directors (the "Program Committee") that meets the
requirements of Section 162(m) of the IRC. The Program Committee has the right
to delegate to the Chief Executive Officer, Chief Operating Officer, or Chief
Financial Officer of the Company administration of certain aspects of the
Management Incentive Program as it relates to participants other than Designated
Executive Officers. Persons eligible to participate in the Management Incentive
Program are the executive officers and other management personnel of the
Company, its business units, or its affiliates, approximately 20 persons at the
present time. Presently, the Compensation Committee of the Board serves as the
Program Committee, except that with respect to decisions concerning the
Designated Executive Officers, its subcommittee comprised of Messrs. Fenoglio
and Seigel will serve as the Program Committee.
DETERMINATION OF AWARDS
Prior to, or as soon as practical after, the commencement of each
fiscal year beginning with 1998, the Program Committee will establish the rules
or guidelines applicable under the Management Incentive Program for that fiscal
year (the "Program Rules") for one or more groups of eligible participants.
Program Rules in general will establish performance goals relating to, among
other things, increasing operating income and return on investment,
-8-
<PAGE> 11
increasing stockholder value, promoting growth and efficient use of resources,
and achieving specific individual goals. In addition to establishing general
Program Rules for the year, the Program Committee will determine: (a) the
individual executives to whom awards may be granted; (b) the performance targets
and the measurement criteria for individual awards; (c) the percentage of an
executive's base salary that may be paid as an award at specified levels of
achievement of the performance targets; (d) the conditions subject to which any
incentive award may become payable; and (e) the form in which any award will be
paid. The performance criteria applicable to Designated Executive Officers will
include one or more of the following: operating income, return on investment,
estimated earnings, net income, earnings per share, return on equity, return on
assets (or net assets), pre-tax profit, market value of the Company's stock, and
total stockholder return. The maximum incentive award payable to an executive in
any year will be $1.0 million, which will be paid in such form as the Program
Committee provides.
Awards shall be approved by the Program Committee, subject to
ratification by the Board of Directors. Any award may be decreased, in the
Program Committee's discretion, based on such factors as the Program Committee
may determine. The Program Committee may in its discretion grant awards to
deserving executives, except those who are Designated Executive Officers,
notwithstanding levels of achievement of performance criteria.
The Program Committee may provide that, upon the occurrence of a Change
in Control (as defined in the Management Incentive Program), the executive's
incentive award for that year will be deemed to have been fully earned for the
year, with performance at the target level and with no reductions for other
factors. The Program Committee may also provide for payment of partial awards in
the event of a Change in Control.
FORM AND PAYMENT OF AWARDS
Awards will generally be paid in cash, unless the Program Committee
specifies at the beginning of the year that some or all of the award will be
paid in shares of Common Stock (or that the executive can elect some or all of
the award to be paid in shares). Subject to adjustment for any change in
corporate capitalization, the maximum number of shares that can be issued under
the Management Incentive Program is 250,000. The Program Committee may also
provide that if an executive elects to receive a portion of his award in shares
of Common Stock, the executive will receive an additional number of shares equal
to a certain percentage (not to exceed 100%) of the number of shares received by
reason of his election, plus an additional cash bonus equal to the fair market
value (determined as of the last trading day of the fiscal year) of the
additional shares received multiplied by a percentage amount to help offset
income tax liability. The Program Committee may permit an executive to defer
receipt of all or a portion of his award pursuant to a plan or program
established by the Company.
AMENDMENT OR TERMINATION
The Management Incentive Program may be amended, suspended, or
terminated by the Program Committee at any time, subject to ratification by the
Board of Directors. The Management Incentive Program will remain in effect until
terminated by the Program Committee or the Board of Directors.
MATERIAL FEDERAL TAX CONSEQUENCES
An award under the Management Incentive Program will constitute
ordinary taxable income to the participant in such year that the award is paid.
Based on the Company's interpretation of Section 162(m) of the IRC, the Company
will be entitled to a corresponding deduction.
1998 AWARDS
For fiscal 1998, each of the Designated Executive Officers and certain
other executives are expected to be granted an opportunity to receive an award
under the Management Incentive Program (subject to approval of the Management
Incentive Program by stockholders). The Program Rules for fiscal 1998 applicable
to the Designated Executive Officers have not been finally established by the
Program Committee. However, any awards to Designated Executive Officers are
expected to be based on, among other criteria, the Company achieving certain
levels of return on investment and increase in operating income, and to be
subject to decrease if the Company does
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<PAGE> 12
not achieve a certain earnings per share, if the Designated Executive Officer
does not achieve his personal performance goals, or for such other reasons as
the Program Committee in its discretion may determine.
The future benefits to be received by participants in the Management
Incentive Program are not currently determinable because they are dependent upon
performance criteria and results that are not now known.
VOTE REQUIRED AND RECOMMENDATION OF THE BOARD
The affirmative vote of holders of a majority of the shares of the
Common Stock of the Company represented and voted at the Annual Meeting,
assuming the presence of a quorum, is required to approve the Management
Incentive Program
The Board of Directors, which unanimously approved the Management
Incentive Program, recommends a vote "FOR" approval of the Management Incentive
Program.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued
by the Company for services rendered during the fiscal year ended December 31,
1997, to or for the Company's chief executive officer and each of the Company's
two other executive officers during fiscal 1997 (the "Named Executive
Officers"). The Company was organized in February 1997, did not have any
executive officers until June 1997, and did not conduct any operations until
September 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------------------- SECURITIES
FISCAL OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS/SARS(#) COMPENSATION
- --------------------------- ------ ------ ----- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Martin S. Pinson, 1997 $145,833 $ -- -- 103,800 $ --
Chief Executive Officer (1)
Douglass C. Smith 1997 219,286 -- -- 27,000 --
Chief Operating Officer (2)
Jack P. Healey 1997 87,500 40,000 -- 20,800 --
Chief Financial Officer (1)
</TABLE>
(1) Mr. Pinson's and Mr. Healey's employment by the Company commenced June 1,
1997 and their respective salary amounts above reflect their contractual
annual base salaries of $250,000 and $150,000, respectively, from such
commencement date.
(2) Mr. Smith's compensated employment by the Company commenced on September
29, 1997. Prior to that time, he served as an officer of the Company
without compensation from it, and he was employed as an executive officer
of TDG, which became a subsidiary of the Company pursuant to the Company's
consummation of its acquisition of the nine founding companies, on
September 29, 1997. Mr. Smith's compensation includes all amounts paid by
TDG to him during 1997 and reflects his contractual annual base salary from
the Company of $250,000 from the September 29, 1997 commencement date.
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<PAGE> 13
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NO. OF % OF TOTAL POTENTIAL REALIZABLE
SECURITIES OPTIONS/SARS VALUE AT ASSUMED
UNDERLYING GRANTED TO ANNUAL RATES OF STOCK
OPTION/SARS EMPLOYEES IN EXERCISE OR EXPIRATION PRICE APPRECIATION
GRANTED(1) FISCAL YEAR BASE PRICE DATE FOR OPTION TERMS(2)
----------- ------------ ----------- ---------- ------------------------
5% 10%
-------- ----------
<S> <C> <C> <C> <C> <C> <C>
Martin S. Pinson........... 103,800 25.33% $17.00 9/23/07 $887,490 $2,459,125
Douglass C. Smith.......... 27,000 6.59% $17.00 9/23/07 $230,850 $ 639,657
Jack P. Healey............. 20,800 5.08% $17.00 9/23/07 $177,840 $ 492,772
</TABLE>
- -----------------------------
(1) Mr. Pinson's and Mr. Healey's options vest beginning one year from the
date of grant in 33 1/3% increments on the anniversary of the date of
grant. Mr. Smith's options vest beginning one year from the date of
grant in 25% increments on the anniversary of the date of grant.
(2) Based on assumed rates of stock price appreciations, as required by the
Commission.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NO. OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
FISCAL YEAR END AT FISCAL YEAR END(1)
----------------------------------- ---------------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Martin S. Pinson........... 0 103,800 -- $0
Douglass C. Smith.......... 0 27,000 -- $0
Jack P. Healey............. 0 20,800 -- $0
</TABLE>
(1) As required by the rules of the Securities and Exchange Commission, the
value of unexercised in-the-money options is calculated based on the
closing sale price of the Company's Common Stock on the New York Stock
Exchange ("NYSE") as of the last business day of its fiscal year,
December 31, 1997, which was $15 11/16 per share. Because the closing
sale price of the Company's Common Stock on December 31, 1997 was less
than the exercise price of the options, no unexercised options were
in-the-money.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs. Pinson,
Smith, and Healey. 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 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
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 September
29, 1997. All of the agreements contain customary proscriptions against misuse
of Company information, competition with the Company, and solicitation of
employees of the Company.
-11-
<PAGE> 14
CERTAIN TRANSACTIONS
FORMATION OR COMBINATION RELATED MATTERS
In February 1997, the Company entered into agreements with nine
companies (the "Founding Companies") that the Company acquired in September 1997
(the "Combination") 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 Company's initial public offering
("Offering") and (ii) commit to pay their pro rata share of the expenses
thereof, whether or not the transactions were consummated. The Founding
Companies advanced $1,496,950 to the Company pursuant to those agreements.
In 1997, one of the Founding Companies paid $7,500 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 a dissenting stockholder of
TDG in connection with the Combination.
In February 1997, Mr. Barth purchased 11,533 shares of Common Stock 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.
During 1997, TDG paid approximately $157,000 in fees to Miller Ray
Healey & Houser, certified public accountants, in connection with accounting
services performed on behalf of TDG. Jack P. Healey was a partner in Miller Ray
Healey & Houser through May 1997.
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, received 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.
Upon consummation of the Combination, the Company succeeded to certain
real property leases as lessee with respect to which stockholders of the Company
(former stockholders 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 leases property in (i) Spokane, Washington from a company in which the
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;
and (vi) 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 directors of the Company, and Mr. Shearer is also a principal stockholder of
the Company.
In connection with the consummation of the Combination, the Company
caused 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 or directors of the Company. The aggregate amount
of such guarantees for each of these individuals is as follows: Douglass C.
Smith - $31,000 and George L. Sachs, Jr. - $1,929,670.
Prior to the Combination, B&J had agreed to pay Charles T. Burkland, a
former president and a significant stockholder of B&J, a non-qualified, unfunded
pension in the amount of $10,000 per month during his lifetime and
-12-
<PAGE> 15
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. Mr. Burkland is the father of William J. Burkland, a director of the
Company.
OTHER RELATED PARTY MATTERS
The Company has entered into an agreement with Barth Smith Company
pursuant to which that company will assist IDG in the implementation of its
acquisition program through December 1998. Pursuant to the agreement, the
Company is paying Barth Smith Company a monthly retainer of $12,500 plus
expenses, a transaction fee for each acquisition, and a cash bonus if the
Company meets certain increases in revenues due to the acquisitions and meets
earnings per share targets for fiscal 1998. The Company has paid $91,774 to the
Barth Smith Company under this agreement for the period from August 1997 through
February 1998.
Since January 1997, TDG and the Company have paid approximately
$284,000 in insurance premiums to J. Smith Lanier & Co., an independent
insurance agency, in connection with business and health insurance purchased by
TDG and the Company. William T. Parr, a director of the Company, is the Vice
Chairman of, and has a 12% ownership interest in, J. Smith Lanier & Co.
POLICY RESPECTING RELATED PARTY TRANSACTIONS
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 is responsible for
reviewing all related party transactions on a continuing basis and potential
conflict of interest situations where appropriate.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Pinson, Parr, and Seigel served as members of the Company's
Compensation Committee during the 1997 fiscal year. Mr. Fenoglio was appointed
on March 5, 1998 to serve on the Compensation Committee. While Mr. Pinson is the
Chairman of the Board and Chief Executive Officer of the Company, none of Mr.
Parr, Mr. Fenoglio, or Mr. Seigel is an officer or former officer of the
Company.
REPORT OF COMPENSATION COMMITTEE
This report sets forth the current components of the Company's
compensation programs for its executive officers and describes the basis on
which fiscal 1997 compensation determinations were made with respect to the
executive officers of the Company, including Mr. Pinson, the Chief Executive
Officer, and the other Named Executive Officers of the Company. Because the
Company, in its current configuration, was formed in February 1997, did not have
any compensated executive officers until June 1997, and did not commence
operations until the consummation of the Combination in September 1997, the
Company's compensation programs were not fully implemented in fiscal 1997.
The Board of Directors made fiscal 1997 compensation decisions with
respect to base salaries and stock option grants through direct negotiations of
employment contract terms with the individual executive officers prior to the
establishment of the Compensation Committee of the Board of Directors (the
"Committee"). The Committee made decisions with respect to bonus payments
approved for executive officers for fiscal 1997.
-13-
<PAGE> 16
GENERAL COMPENSATION PHILOSOPHY
Although the Committee is still developing the programs and policies
for the compensation of the Company's executive officers, the Committee is
designing the programs and policies to link the compensation of executive
officers to the performance of the Company and its business units. The Committee
intends that such a link will align the financial interests of the Company's
executive officers with those of its stockholders.
The Committee has identified several objectives that it expects to
reflect in the Company's compensation programs and policies, and it has
determined that the Company will use a combination of base salary, short-term
and long-term incentive plans, and performance bonus criteria in order to tie
executive compensation to increases in the Company's earnings and return on
stockholders' equity. While specific amounts and parameters will be established
after further review and analysis, the Committee expects that the Company's
compensation programs will consist of the following basic components:
- Competitive base salaries;
- The issuance of performance-based stock options;
- Potentially significant annual incentive bonuses under the
Company's Management Incentive Program; and
- Customary benefits.
The Committee expects to complete its formulation of the Company's
compensation programs and policies for executive officers during 1998, and
thereafter it will review and determine the appropriateness of the compensation
paid to each of the executive officers of the Company from time to time (and at
least annually), with the philosophy described above as its basis. While
promoting initiative and providing incentives for superior performance by
executives on behalf of the Company for the benefit of its stockholders, the
Committee also will seek to assure that the Company is able to compete for and
retain talented personnel who will lead the Company in achieving levels of
financial performance that will enhance stockholder value over the long-term as
well as the short-term.
BASE SALARIES
The Company has established the current base salaries of its executive
officers without reference to specific Company performance criteria. As
discussed above, the base salaries for all three executive officers during
fiscal 1997 were determined by negotiations conducted prior to the constitution
of the Committee. Such base salaries were intended to be set at a level slightly
below the competitive amounts paid to executive officers of similar businesses
in structure, size, and market orientation. The Committee reviews salaries of
the Company's executive officers on an annual basis.
STOCK INCENTIVE PLAN
During fiscal 1997, the Company granted options to purchase shares of
Company Common Stock to 324 employees, including the Company's executive
officers, pursuant to its Stock Incentive Plan. Under the Stock Incentive Plan,
the Company is permitted to issue stock options that are qualified as incentive
stock options under the IRC, options that are not so qualified, direct awards of
shares of stock, stock appreciation rights and other forms of awards that use
(or are based on) shares of Common Stock. To date, the Company has issued only
non-qualified stock options under the Stock Incentive Plan.
Stock options are awarded to executive officers and other persons both
to recognize outstanding contributions that they have made to the Company's
financial performance, and to encourage and provide incentives to continue to
make such contributions. While the Company has the flexibility to grant
below-market options, its
-14-
<PAGE> 17
policy has been to grant options at fair market value, with vesting over a
period of several years, in order to better align the personal interests of
optionees with those of the stockholders of the Company.
ANNUAL INCENTIVE COMPENSATION
Beginning with fiscal 1998, the Company will provide annual incentive
compensation to executive officers of the Company through its Management
Incentive Program, subject to approval of the program by the stockholders of the
Company at the 1998 Annual Meeting of Stockholders. The Management Incentive
Program, which is described in detail elsewhere in this Proxy Statement, is
designed to offer compensation opportunities that are tied directly to Company
performance. In addition, the Management Incentive Program is designed to foster
equity ownership in the Company by executive officers and all other
participants. The Management Incentive Program, at least as it relates to the
Designated Executive Officers of the Company, will be administered by a
subcommittee of the Committee that will include only those members who qualify
as "outside" directors under Section 162(m) of the IRC. Pursuant to the
Management Incentive Program, that subcommittee will establish the specific
criteria and performance measures each year that will be applicable to the
Company's Designated Executive Officers for the purpose of earning incentive
compensation or bonuses for such year under the Management Incentive Program.
BENEFITS
Executives also participate in the Company's regular employee benefit
programs, including a 401(k) retirement savings plan, group medical and dental
coverage, group life insurance, group long-term disability insurance, and other
group benefit plans. Substantially all decisions with respect to such benefits
are made on a group basis, and no individual decisions were made with respect to
the executive officers during fiscal 1997.
CEO EMPLOYMENT AGREEMENT
Effective June 1, 1997, the Company entered into an employment
agreement with Mr. Pinson to provide for his service as Chairman and Chief
Executive Officer for a three-year period. Under the terms of his employment
agreement, Mr. Pinson receives an annual base salary of $250,000, subject to an
annual adjustment at the discretion of the Board of Directors. Additionally, Mr.
Pinson is eligible for an annual bonus determined by the Board of Directors. The
Board of Directors has delegated to the Committee its authority to make such
determinations pursuant to the agreement with Mr. Pinson. Mr. Pinson is also
eligible to participate in employee benefit plans as generally made available to
senior management of the Company, including the Stock Incentive Plan and the
Management Incentive Program. Mr. Pinson's employment is terminable by the
Company without cause only by paying Mr. Pinson his base salary under the
agreement for the greater of 12 months or the unexpired portion of the term of
the agreement, and also any performance bonus to which he would be entitled for
the fiscal year in which any such termination occurs. In such an event, the
vesting of Mr. Pinson's outstanding stock options would be accelerated.
Under the terms negotiated with Mr. Pinson for his employment prior to
the consummation of the Combination by the Company, Mr. Pinson was granted the
right to purchase 69,200 shares of Common Stock for an aggregate of $600 and was
granted stock options under the Stock Incentive Plan, which vest one-third on
each of September 23, 1998, 1999, and 2000, to purchase 103,800 shares at a
price of $17.00 per share.
The Committee believes that the compensation terms of Mr. Pinson's
employment agreement (as well as the terms for the initial purchase of shares
and the grant of options, in the circumstances in which they were granted) are
consistent with and reflect the fundamental elements that it expects will
comprise Company's executive compensation philosophy. The base salary to Mr.
Pinson is somewhat less than what the Committee believes exists in the Company's
industry, and the opportunities for bonus compensation are tied to the Company's
performance in terms of value to its stockholders.
William T. Parr -- Martin S. Pinson -- Richard M. Seigel
(Members of Committee during fiscal 1997)
-15-
<PAGE> 18
STOCK PERFORMANCE GRAPH
Set forth below is a line graph comparing the percentage change in the
cumulative total shareholder return of the Company's Common Stock against the
cumulative total return of the Russell 2000 Index and the Media General SIC Code
508 - machinery, equipment and supplies - Index for the period commencing on
September 24, 1997 and ended on December 31, 1997.
<TABLE>
<CAPTION>
9/24/97 9/30/97 10/31/97 11/30/97 12/31/97
Company
<S> <C> <C> <C> <C> <C>
INDUSTRIAL DISTR GRP INC 100.00 100.00 92.26 92.56 74.70
MEDIA GENERAL SIC CODE 508 INDEX 100.00 100.00 96.34 90.85 91.24
RUSSELL 2000 INDEX 100.00 100.00 95.61 94.99 96.65
</TABLE>
-16-
<PAGE> 19
INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors, upon recommendation of the Audit Committee,
appoints each year the firm that will serve as the Company's independent public
accountants. The Board has appointed Arthur Andersen LLP, which firm served as
independent public accountants for the Company during the past fiscal year, to
serve as such accountants for the current fiscal year. Such appointment is not
subject to ratification or other vote by the stockholders.
A representative of Arthur Andersen, LLP is expected to be present at
the Annual Meeting, with the opportunity to make a statement if he or she
desires to do so, and is expected to be available to respond to appropriate
questions.
STOCKHOLDERS' PROPOSALS FOR 1999 ANNUAL MEETING
Any stockholder who wishes to present a proposal appropriate for
consideration at the Company's 1999 Annual Meeting of Stockholders must submit
the proposal in proper form to the Company at its address set forth on the first
page of this Proxy Statement no later than November 30, 1998 for the proposal to
be considered for inclusion in the Company's proxy statement and form of proxy
relating to such Annual Meeting.
OTHER MATTERS
All of the expenses involved in preparing, assembling, and mailing this
Proxy Statement and the materials enclosed herewith and soliciting proxies will
be paid by the Company. It is estimated that such costs will be nominal. The
Company may reimburse banks, brokerage firms and other custodians, nominees, and
fiduciaries for expenses reasonably incurred by them in sending proxy materials
to beneficial owners of stock. The solicitation of proxies will be conducted
primarily by mail but may include telephone, telegraph, or oral communications
by directors, officers, or regular employees of the Company, acting without
special compensation.
The Board of Directors is aware of no other matters, except for those
incidental to the conduct of the Annual Meeting, that are to be presented to
stockholders for formal action at the Annual Meeting. If, however, any other
matters properly come before the Annual Meeting or any postponement,
adjournment, or adjournments thereof, it is the intention of the persons named
in the proxy to vote the proxy in accordance with their judgment.
Stockholders are urged to fill in, date, and sign the accompanying form
of proxy and return it to the Company as soon as possible.
BY ORDER OF THE BOARD OF DIRECTORS,
Jack P. Healey
Secretary
-17-
<PAGE> 20
COMMON STOCK
OF INDUSTRIAL DISTRIBUTION GROUP, INC.
THIS PROXY IS SOLICITED BY THE BOARD OF
DIRECTORS FOR THE MAY 7, 1998
ANNUAL MEETING OF STOCKHOLDERS.
The undersigned hereby appoints Martin S. Pinson and Douglass C. Smith,
and each of them, the proxy of the undersigned to vote the Common Stock of the
undersigned at the Annual Meeting of Stockholders of INDUSTRIAL DISTRIBUTION
GROUP, INC. (the "Company") to be held on May 7, 1998, and any adjournment or
postponement thereof.
1. Election of directors
David K. Barth, William J. Burkland, William R. Fenoglio, William T.
Parr, Martin S. Pinson, George L. Sachs, Jr., Richard M. Seigel, Andrew
B. Shearer, and Douglass C. Smith
_____ FOR all nominees for director listed above (except as marked to the
contrary).
_____ WITHHOLD AUTHORITY to vote for all nominees listed above.
_____ WITHHOLD AUTHORITY to vote for an individual nominee. Write name(s)
below.
-------------------------------------------
2. Approval of Stock Incentive Plan
_____ FOR approval of the Stock Incentive Plan.
_____ WITHHOLD AUTHORITY to vote for approval of the Stock Incentive Plan.
3. Approval of Management Incentive Program
_____ FOR approval of the Management Incentive Program.
_____ WITHHOLD AUTHORITY to vote for approval of the Management Incentive
Program.
4. In accordance with their best judgment with respect to any other
matters that may properly come before the meeting.
THE BOARD OF DIRECTORS FAVORS A VOTE "FOR" THE ELECTION AS DIRECTORS OF THE
PERSONS NAMED IN THE PROXY AND ACCOMPANYING PROXY STATEMENT, "FOR" APPROVAL OF
THE STOCK INCENTIVE PLAN, AND "FOR" APPROVAL OF THE
<PAGE> 21
MANAGEMENT PLAN, AND UNLESS INSTRUCTIONS TO THE CONTRARY ARE INDICATED IN THE
SPACE PROVIDED, THIS PROXY WILL BE SO VOTED.
-----------------------------------
Please sign this Proxy exactly as name
appears on the Proxy.
Note: When signing as attorney, trustee,
administrator, or guardian, please give your
title as such. In the case of joint tenants,
each joint owner must sign.
Date:_____________________, 1998
