<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
____________________ TO ____________________
COMMISSION FILE NUMBER 001-13195
INDUSTRIAL DISTRIBUTION GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 58-2299339
-------- ----------
<S> <C>
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
2500 Royal Place, Tucker, Georgia 30084
---------------------------------------
(Address of principal executive offices and zip code)
(770) 243-9000
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Shares outstanding of the issuer's Common Stock at September 30, 1998:
8,478,180 shares of Common Stock, $0.01 par value share.
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INDEX
INDUSTRIAL DISTRIBUTION GROUP, INC.
<TABLE>
<CAPTION>
PART I. Financial Information
<S> <C>
ITEM 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at September 30, 1998 and December 31, 1997
Consolidated Statements of Operations for the three months ended September 30, 1998 and
1997
Consolidated Statements of Operations for the nine months ended September 30, 1998 and
1997
Consolidated Statements of Cash Flows for the nine months ended September 30, 1998 and
1997
Notes to the Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. Other Information
ITEM 1. Legal Proceedings
ITEM 6. Exhibits and Reports on Form 8-K
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDUSTRIAL DISTRIBUTION GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
(Unaudited)
(Note 1)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
*Restated
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $ 2,464 $ 31,534
Accounts Receivable, net 55,343 36,099
Inventory, net 56,646 42,427
Prepaid and Other Current Assets 10,008 4,018
-------- --------
TOTAL CURRENT ASSETS 124,461 114,078
Property and Equipment, net 15,984 9,910
Intangible Assets, net 42,892 19,584
Other Assets 1,632 2,809
-------- --------
TOTAL ASSETS $184,969 $146,381
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short Term Debt $ 18,661 $ 6,617
Accounts Payable 31,397 22,378
Accrued Compensation 3,647 2,131
Other Accrued Liabilities 2,839 3,307
-------- --------
TOTAL CURRENT LIABILITIES 56,544 34,433
Long-Term Debt 3,871 5,036
Deferred Income Tax 285 --
9,192 7,422
Other Long-Term Liabilities -------- --------
69,892 46,891
TOTAL LIABILITIES
STOCKHOLDERS' EQUITY:
Common Stock, par value $.01 per share, 50,000,000
shares authorized; 8,484,953 shares issued and 8,478,180 85 79
shares outstanding in 1998; 7,880,110 shares issued and outstanding in 1997
100,091 89,298
Additional Paid-In Capital 14,901 10,113
Retained Earnings -------- --------
115,077 99,490
Total Stockholders' Equity -------- --------
$184,969 $146,381
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY ======== ========
</TABLE>
*Restated for acquisitions accounted for under the pooling-of-interests method.
The accompanying notes are an integral part of these financial statements.
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<PAGE> 4
INDUSTRIAL DISTRIBUTION GROUP, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
1998 1997
---------- ----------
* Restated
<S> <C> <C>
NET SALES..................................................... $ 119,888 $ 27,182
COST OF SALES................................................. 92,268 20,901
---------- ----------
Gross profit................................................ 27,620 6,281
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 24,559 5,094
---------- ----------
Income from operations...................................... 3,061 1,187
INTEREST EXPENSE.............................................. 359 266
OTHER INCOME ................................................. (130) (6)
---------- ----------
INCOME BEFORE INCOME TAXES.................................... 2,832 927
PROVISION FOR INCOME TAXES.................................... 1,120 274
---------- ----------
NET INCOME.................................................... $ 1,712 $ 653
========== ==========
BASIC EARNINGS PER SHARE...................................... $ .20 $ .31
========== ==========
DILUTED EARNINGS PER SHARE.................................... $ .20 $ .30
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING (Basic)................... 8,463,802 2,112,864
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING (Diluted)................. 8,490,652 2,158,849
========== ==========
</TABLE>
*Restated for acquisitions accounted for under the pooling-of-interests method.
The accompanying notes are an integral part of these financial statements.
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<PAGE> 5
INDUSTRIAL DISTRIBUTION GROUP, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
1998 1997
----------- -----------
* Restated
<S> <C> <C>
NET SALES ...................................... $ 316,289 $ 67,295
COST OF SALES .................................. 243,828 51,827
----------- -----------
Gross profit ................................... 72,461 15,468
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.... 64,635 12,953
----------- -----------
Income from operations ......................... 7,826 2,515
INTEREST EXPENSE ............................... 846 709
OTHER INCOME ................................... (832) (208)
----------- -----------
INCOME BEFORE INCOME TAXES ..................... 7,812 2,014
PROVISION FOR INCOME TAXES ..................... 3,024 656
----------- -----------
NET INCOME ..................................... $ 4,788 $ 1,358
=========== ===========
BASIC EARNINGS PER SHARE ....................... $ .58 $ .80
=========== ===========
DILUTED EARNINGS PER SHARE ..................... $ .58 $ .78
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING (Basic) .... 8,190,780 1,703,300
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING (Diluted)... 8,226,364 1,750,920
=========== ===========
</TABLE>
*Restated for acquisitions accounted for under the pooling-of-interests method.
The accompanying notes are an integral part of these financial statements.
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<PAGE> 6
INDUSTRIAL DISTRIBUTION GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands) (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1998 1997
-------- --------
*Restated
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................................... $ 4,788 $ 1,314
-------- --------
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization ................................... 2,377 285
Benefit for deferred taxes ...................................... (564) (227)
Loss on disposal of equipment ................................... 31 6
Gain on sale of investments ..................................... (6) --
Changes in operating assets and liabilities:
Accounts receivable, net .................................... (2,693) 1,564
Inventories, net ............................................ (864) 3,251
Prepaid assets .............................................. (3,149) (232)
Other assets ................................................ (19) --
Accounts payable ............................................ (5,470) (2,738)
Accrued compensation ........................................ 895 254
Deferred loan costs ......................................... (15) --
Other accrued liabilities ................................... (1,157) (1,127)
-------- --------
Total adjustments ........................................ (10,634) 1,036
-------- --------
Net cash (used in) provided by operating activities ..... (5,846) 2,350
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment, net ............................ (5,513) (310)
Proceeds from the sale of property and equipment .................... 175 --
Cash paid in acquisitions ........................................... (19,886) --
Purchase of investments ............................................. (4) --
Deposits ............................................................ 112 --
Cash surrender value of life insurance .............................. 1,074 --
Payments received on notes payable .................................. 68 --
Cash from acquired companies ....................................... 855 1,851
Proceeds from sale of investments ................................... (3) --
Change in Short term investments .................................... 13 948
-------- --------
Net cash provided by(used in) investing activities ....... (23,109) 2,489
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long term debt ............................. 2,528 (12)
Proceeds from issuance of common stock ............................... 269 56,599
Purchases of treasury stock ......................................... (91) --
Payments on short term debt .......................................... 6,348 (13,806)
Payments on long-term debt ........................................... (9,037) (11,729)
Payments on Notes Payable to Related Parties ......................... (128) (44)
Adjustments to conform year ends of certain pooled companies ......... (4) (14)
-------- --------
Net cash provided by (used in) financing activities ...... (115) 30,994
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS ............................... (29,070) 35,833
CASH AND CASH EQUIVALENTS, beginning of period ........................ 31,534 1,585
======== ========
CASH AND CASH EQUIVALENTS, end of period .............................. $ 2,464 $ 37,418
======== ========
Supplemental Cash Flow Information:
Cash Paid for Interest ............................................ $ 369 $ 316
======== ========
Cash Paid for Income Taxes ........................................ $ 3,409 $ 55
======== ========
</TABLE>
*Restated for acquisitions accounted for under the pooling-of- interests method.
The accompanying notes are an integral part of these financial statements
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<PAGE> 7
INDUSTRIAL DISTRIBUTION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998
1. BASIS OF PRESENTATION
Industrial Distribution Group, Inc., a Delaware corporation ("IDG" or the
"Company"), was formed on February 12, 1997 to create a nationwide supplier of
cost-effective, flexible procurement solutions for manufacturers and other
users of maintenance, repair, operating and production products. In September
1997, IDG completed an initial public offering (the "offering") of its Common
Stock, and at the same time, acquired the following nine industrial
distribution companies: Associated Suppliers, Inc. ("Associated"), B&J
Industrial Supply Company ("B&J"), Cramer Industrial Supplies ("Cramer"),
Grinding Supplies Company ("Grinding"), J.J. Stangel Company ("J.J. Stangel"),
Shearer Industrial Supply Company ("Shearer"), Slater Industrial Supply Company
("Slater"), The Distribution Group ("TDG") and Tri-Star Industrial Supply, Inc.
("Tri-Star"), collectively referred to as the "Founding Companies". The
consideration for the acquisitions of the Founding Companies consisted of a
total of 3,330,224 shares of Company Common Stock. B&J has been identified as
the acquiror for financial statement presentation purposes pursuant to Staff
Accounting Bulletin 97 ("SAB 97"). The acquisitions were accounted for using
the purchase method of accounting. The allocations of purchase price to the
assets acquired and liabilities assumed of the Founding Companies were recorded
based on fair value.
The closing of the acquisitions and the offering occurred on September 29,
1997. For accounting purposes, however, September 24, 1997 has been established
as the effective date of the acquisitions because management has determined
that effective control of the operations of the Founding Companies transferred
to IDG on that date.
The accompanying unaudited interim financial statements of IDG represent B&J
(as the SAB 97 financial acquiror) for the three and nine months and the other
eight Founding Companies for the seven days ended September 30, 1997. They also
represent B&J, the other eight Founding Companies and acquisitions treated as
purchases from the date of purchase for the three and nine months ended
September 30, 1998. All periods presented give retroactive effect to the
results of companies acquired by IDG in business combinations accounted for
under the pooling-of-interests method (the "Pooled Companies"). See Note 3.
The accompanying unaudited interim financial statements are prepared pursuant
to the rules and regulations for reporting on Form 10-Q. Accordingly, certain
information and footnotes required by generally accepted accounting principles
for complete financial statements are not included herein. The Company believes
all adjustments necessary for a fair presentation of these interim statements
have been included and are of a normal and recurring nature.
The interim statements should be read in conjunction with the Company's
financial statements and notes thereto, included in its annual report on form
10-K, as amended, for the fiscal year ended December 31, 1997, Commission File
Number 001-13195.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There were no significant changes in the accounting policies of the Company
during the periods presented.
3. ACQUISITIONS
During March 1998, the Company acquired three industrial distributors, E.C.
Blackstone Company, Continental Air Tools, Inc. d/b/a/ Continental-McLaughlin,
and Northern Tool & Supply, Inc. Blackstone was accounted for using the
purchase method of accounting while Continental and Northern Tool were
accounted for using the pooling-of-interests method of accounting.
During the second quarter of 1998, the Company acquired seven industrial supply
distributors, REFCO, Inc., Hawley Industrial Supplies, Inc., New England Group
Industrial Distributors, Inc. d/b/a Industrial Suppliers of New England,
Industrial and Tool Suppliers, L.L.C., Buford Brothers, Inc., Knox Industrial
Supplies, Inc., and L.D. Supply, Inc.
REFCO, Inc., Hawley Industrial Supplies, Inc., New England Group Industrial
Distributors, Inc. and Industrial and Tool Suppliers, L.L.C. were acquired in
May, 1998. REFCO, Inc., and New England Group Industrial Distributors, Inc.,
were each acquired for cash and stock. Hawley Industrial Supplies, Inc. and
Industrial and Tool Suppliers, L.L.C. were acquired for stock. These
acquisitions, except for Hawley, were accounted for using the purchase method
of accounting. Under the purchase method of accounting, the
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<PAGE> 8
Company's financial statements include their operating results from the date of
acquisition. Likewise, goodwill recorded in connection with their acquisition
is being amortized on a straight-line basis over 40 years. Hawley was accounted
for using the pooling-of-interests method of accounting. The Company's
financial statements give retroactive effect to the acquisition of Hawley for
all periods presented.
Buford Brothers, Inc. was acquired in May, 1998. This acquisition was accounted
for using the purchase method of accounting.
Knox Industrial Supplies acquired in May, 1998, was accounted for using the
purchase method of accounting.
L.D. Supply, Inc. was acquired in June, 1998. L.D. Supply was accounted for
using the purchase method of accounting.
During the third quarter of 1998, the Company acquired five industrial supply
distributors, Cardinal Machinery, Inc., Petry and Morrow, Inc., JM Tool and
Supply, Inc., Austin Ford Logan, Inc., and Atlantic Supply, Inc.
Cardinal Machinery, Inc. was acquired in August, 1998. This acquisition was
accounted for using the purchase method of accounting.
Petry and Morrow, Inc. was acquired in August, 1998. This acquisition was
accounted for using the purchase method of accounting.
JM Tool and Supply, Inc. was acquired in September, 1998. This acquisition was
accounted for using the purchase method of accounting.
Austin Ford Logan, Inc. and Atlantic Industrial Supply Co., Inc. were also
acquired, effective September 30, 1998, under the purchase method of accounting.
4. CREDIT FACILITY
In December 1997, the Company entered into a $75,000,000 revolving credit
facility with a five-bank syndicate. The facility has a three-year term, bears
interest at either the bank's corporate base rate or a Eurodollar rate plus
applicable margins, and is secured by a first security interest in the capital
stock of the Company's business units. The agreement provides that the facility
be used for operations and acquisitions and provides $5,000,000 each for
swinglines and letters of credit. There is an annual commitment fee on the
unused portion of the facility equal to between 20 and 30 basis points of the
average daily unused portion of the aggregate commitment, depending on the
indebtedness to adjusted EBITDA ratio, as defined. At September 30, 1998,
$17,000,000 was outstanding under this facility at an effective interest rate
of 6.35%. The revolving credit facility contains various covenants pertaining
to maintenance of certain financial relationships. The Company was in
compliance with these covenants as of September 30, 1998.
5. CAPITAL STOCK
During the third quarter of 1998, the Company redeemed 6,773 shares of its
Common Stock from a former shareholder of an acquired company through its
employee stock ownership plan.
6. COMMITMENTS AND CONTINGENCIES
On November 18, 1996, Milliken & Company, a textile manufacturer and customer
of TDG, filed suit against a manufacturer of an industrial product and TDG.
Milliken claims that a product sold to it by TDG as a distributor of the
defendant-manufacturer was defective and caused fire, severely damaging
Milliken's textile manufacturing plant in LaGrange, Georgia. Milliken alleges
damages of $500 million against the defendants. TDG has denied any liability,
and its insurance carrier is vigorously defending the lawsuit on its behalf.
The inclusion of the distributor of a product, along with its manufacturer, as
a defendant in an action for alleged product defectiveness is unexceptional.
The litigation is in discovery, and while it is not possible to predict with
accuracy the outcome of any such litigation matter, the Company believes that
its insurance, which provides for $12 million of coverage, will be adequate to
cover any loss to TDG that might result from the lawsuit.
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<PAGE> 9
On December 22, 1997, TDG brought an action in DeKalb County Superior Court,
Georgia, File No. 97-14388-4, against a former stockholder, under the Georgia
dissenters' rights provisions of the Georgia Business Corporation Code (the
"GBCC). On July 24, 1998, the Dekalb County Superior Court issued an order
transferring the case to the Superior Court of Fulton County. The former
stockholder of TDG had exercised his rights pursuant to the GBCC to dissent
from the merger of TDG with the Company. In accordance with the GBCC, TDG
offered to pay the former stockholder $4.2 million for his interest in TDG. The
former stockholder rejected that offer and demanded payment of $9 million. TDG
brought this action to seek a judicial determination of the value of his
interest in TDG as of the time of the merger. The proceedings are still in
discovery, and it is not possible to predict the outcome at this time.
The Company is subject to various claims and legal actions which arise in the
ordinary course of business. The Company believes that the ultimate resolution
of such matters, including those identified above, will not have a material
adverse effect on the Company's financial position or results of operations.
7. NEW PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No.130 establishes standards for the
reporting of comprehensive income in a company's financial statements.
Comprehensive income includes all changes in a company's equity during the
period that result from transactions and other economic events other than
transactions with its stockholders. For the Company, SFAS No.130 is effective
for the year beginning January 1, 1998. Implementation of SFAS No. 130 did not
have a significant effect on its current financial reporting.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." SFAS No.
131 requires that an enterprise disclose certain information about operating
segments. SFAS No. 131 is effective for financial statements for the Company's
fiscal year ending December 31, 1998. The Company does not expect that SFAS No.
131 will have a significant impact on its current financial statements nor will
it require significant revision of prior disclosures.
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<PAGE> 10
8. PRO FORMA COMBINED FINANCIAL INFORMATION
The following pro forma combined financial information for the nine months
ended September 30, 1998 and 1997 includes the historical results of B&J, the
Pooled Companies, the other eight Founding Companies, and all of the acquired
companies as if the transactions had occurred on January 1. This pro forma
combined financial information includes the effects of (a) the acquisitions;
(b) the offering; (c) amortization of goodwill resulting from the acquisitions;
(d) elimination of interest expense for the debt that was paid from the
offering proceeds; and (e) provision for income taxes at 40%, even though
several of the acquired companies had a Chapter S corporate tax status.
The earnings per share amounts are based on 8,478,180 and 8,478,180 common
shares deemed to be outstanding for the periods ended September 30, 1998 and
1997 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 the period. The underlying tax rates differ from
statutory federal and state rates primarily because amortization of goodwill
related to the acquisitions is not deductible for tax purposes.
The pro forma combined financial information does not purport to represent what
the Company's financial position or results of operations would actually have
been if such transactions and events in fact had occurred on those dates or to
project the Company's results of operations for any future period. (Amounts are
in thousands, except for per share amounts.)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1998 1997
---------------------------
<S> <C> <C>
Net Sales $ 390,370 $ 362,057
------------ -----------
Net Income $ 5,579 $ 3,804
============ ===========
Earnings per Share $ .66 $ .45
============ ===========
</TABLE>
ITEM. 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Under SAB 97, B&J was designated as the financial acquiror in the Company's
acquisition and combination of the nine Founding Companies (the "Combination").
The consolidated financial statements of B&J are deemed to be the historical
financial statements of the Company for purposes of all SEC reporting.
Accordingly, the Company must include in this management's discussion and
analysis a discussion that is based on those financial statements. As discussed
in Note 1 of the Company's unaudited interim financial statements, such
financial statements reflect the results of the Company for the three and nine
months ended September 30, 1998, while reflecting the results of only B&J and
the Pooled Companies for the three and nine months and the other eight Founding
companies for the seven days ended September 30, 1997. Accordingly, management
has also included herein its discussion and analysis of certain information on
a combined basis that includes the Company, all nine Founding Companies, and
the Pooled Companies, as a whole, in order to provide other important
information with respect to the Company in light of certain effects of the
Combination and these acquisitions.
The following discussion has been organized on that basis.
In this discussion, most percentages and dollar amounts have been rounded
to aid presentation; as a result, all such figures are approximations.
References to such approximations have generally been omitted.
This discussion may contain certain forward-looking statements concerning
the Company's operations, performance, and financial condition, including, in
particular, the likelihood of the Company's success in developing and expanding
its business. These statements are based upon a number of assumptions and
estimates that are inherently subject to significant uncertainties and
contingencies, many of which are beyond the control of the Company. Actual
results may differ materially from those expressed or implied by such
forward-looking statements. Factors that could cause actual results to differ
include, but are not limited to, the availability of attractive acquisition
opportunities, the successful integration and profitable management of acquired
businesses, improvement of operating efficiencies, the availability of working
capital and financing for future acquisitions, the Company's ability to grow
internally through expansion of services and customer bases, its ability to
reduce overhead, seasonality, the continuation of key supplier relationships,
the ability of the Company to compete successfully in the highly competitive
and diverse MROP market, the Company's ability to maintain key personnel, the
availability of key personnel for employment by the Company, the effects of the
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<PAGE> 11
Year 2000 issue, and other factors discussed in more detail under "Item
1-Business" of the Company's Annual Report on Form 10-K for fiscal 1997.
The timing and magnitude of acquisitions and assimilation costs may also
materially affect quarterly results. Accordingly, the operating results for any
interim period are not necessarily indicative of the results that may be
achieved for any subsequent interim period or for a full year.
RESULTS OF OPERATIONS - COMBINED
The combined financial information for the three and nine months ended
September 30, 1998 and 1997 discussed in this subsection includes the operating
results of (i) the Company for the three and nine months ended September 30,
1998 and (ii) B&J together with the results of the other eight Founding
Companies and the Pooled Companies on a combined basis for the three and nine
months ended September 30, 1997. These combined operating results may not be
indicative of the Company's post-Combination results of operations for several
reasons. The Founding Companies and the Pooled Companies operated as separate
privately owned entities until the closing of the Combination or the Pooled
Companies' acquisitions, as appropriate. Until that time, their results of
operations reflect varying tax structures, which in turn have influenced other
matters such as owners' compensation. Accordingly, selling, general, and
administrative expenses may not be comparable among the companies. In addition,
as a result of the Combination, the Company has new senior management, has
incurred implementation costs of the Combination, and is incurring amortization
expenses from the goodwill associated with the Combination. Moreover, for 1997
the combined operating results do not represent combined results of operations
presented in accordance with generally accepted accounting principles, but are
only summations of the respective line items from historical information of the
individual Founding Companies and the Pooled Companies.
The Company anticipates that, in the future, it will realize savings from
several sources as a result of the Combination, including (i) increased volume
discounts and rebates from vendors, (ii) consolidation of certain
administrative functions, and (iii) the reduction in interest payments related
to the repayment of certain former Founding Company and acquired company debt;
and (iv) its ability to borrow at lower interest rates than the Founding
Companies and acquired companies. These savings will be offset, to some extent,
by costs related to the Company's new senior management and costs associated
with being a public company. No such anticipated effect is reflected in the
following information or discussion for the three and nine months ended
September 30, 1997. Any such effect that has been realized as of September 30,
1998 is reflected in the following information and discussion.
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
The following table sets forth certain selected financial data and shows
such data as a percentage of net sales for the periods indicated (dollars in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------
1998 1997
-------- --------
<S> <C> <C> <C> <C>
Net Sales $119,888 100.0% $ 85,586 100.0%
Cost of Sales 92,268 77.0 66,199 77.3
-------- ----- -------- -----
Gross Profit 27,620 23.0 19,387 22.7
Selling, General and Administrative 24,555 20.5 16,703 19.5
-------- ----- -------- -----
Operating Income $ 3,061 2.6% $ 2,684 3.1%
======== ===== ======== =====
</TABLE>
Net sales increased $34.3 million or 40.1% from $85.6 million for the three
months ended September 30, 1997 to $119.9 million for the three months ended
September 30, 1998. Acquisitions accounted for $32.7 million of the increase.
In addition, the nine Founding Companies experienced a 2.2% internal growth
rate over 1997. This increase was a result of increased integrated supply and
other specialized services contract sales. The Company was adversely effected
by the General Motors strike but that has been concluded and there should not
be a continuing effect. The Asian monetary crisis and the slowing in the rate
of growth of the manufacturing segment of the economy continue to affect the
Company. The Company experienced delays and slowing of orders from certain
customers whose operations were impacted more directly and severly by these
events. The Company will continue to monitor these trends carefully.
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<PAGE> 12
Cost of sales increased $26.1 million or 39.4% from $66.2 million for the three
months ended September 30, 1997 to $92.3 million for the three months ended
September 30, 1998. As a percentage of net sales, cost of sales decreased from
77.3% in 1997 to 77.0% in 1998. The decrease in cost of sales as a percentage
of net sales is due to a change in product mix resulting primarily from
acquisitions.
Selling, general, and administrative expenses increased $7.9 million or 47.0%
for the three months ended September 30, 1997 from $16.7 million in 1997 to
$24.6 million in 1998. As a percentage of net sales, selling, general, and
administrative expenses increased from 19.5% in 1997 to 20.5% in 1998. During
1998, the Company incurred increased professional fees and expenses related to
staffing a corporate office and incurred costs related to being a public
company. Excluding corporate expenses, selling, general, and administrative
expenses were 19.1% of net revenues for the quarter ended September 30, 1998.
Part of the decrease in expenses is a result of the companies using the
existing infrastructure to support increased sales during the three months
ended September 30, 1998 as compared to the same period in 1997. Also, the
decrease in expenses as a percent of net sales is a result of the acquired
companies have lower selling, general, and administrative expenses as a
percentage of net revenues.
Operating income increased $377,000 or 14.0% from $2.7 million for the three
months ended September 30, 1997 to $3.1 million for the three months ended
September 30, 1998. As a percentage of net sales, operating income decreased
from 3.1% in 1997 to 2.6% in 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
The following table sets forth certain selected financial data and shows
such data as a percentage of net sales for the periods indicated (dollars in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------
1998 1997
-------- --------
<S> <C> <C> <C> <C>
Net Sales $316,289 100.0% $246,246 100.0%
Cost of Sales 243,828 77.1 189,878 77.1
-------- ----- -------- -----
Gross Profit 72,461 22.9 56,368 22.9
Selling, General and Administrative 64,635 20.4 48,705 19.8
-------- ----- -------- -----
Operating Income $ 7,826 2.5% $ 7,663 3.1%
======== ===== ======== =====
</TABLE>
Net sales increased $70.0 million or 28.4% from $246.2 million for the nine
months ended September 30, 1997 to $316.3 million for the nine months ended
September 30, 1998. Acquisitions contributed $53.8 million in revenues for the
period. The nine Founding Companies experienced a 7.7% internal growth rate
over 1997.
Cost of sales increased $54.0 million or 28.4% from $189.9 million for the nine
months ended September 30, 1997 to $243.9 million for the nine months ended
September 30, 1998. The cost of sales increase is due to the increase in net
sales. As a percentage of net sales, however, cost of sales remained at 77.1%
for the nine months ended September 30, 1998.
Selling, general, and administrative expenses increased $15.9 million or 32.7%
for the nine months ended September 30, 1997 from $48.7 million in 1997 to
$64.6 million in 1998. As a percentage of net sales, selling, general, and
administrative expenses increased from 19.8% in 1997 to 20.4% in 1998. The
increase included $317,000 of non-recurring expenses related to acquisitions.
Excluding these non-recurring expenses, selling, general, and administrative
expenses for the nine months ended September 30, 1998 were $64.3 million or
20.3% of net revenues. In addition, during 1998, the Company incurred increased
professional fees and expenses related to staffing a corporate office and
incurred costs related to being a public company. Excluding non-recurring
expenses and corporate expenses, selling, general, and administrative expenses
were 19.2% of net revenues for the nine months ended September 30, 1998. Part
of the decrease in selling, general, and administrative expenses is a result of
the companies using the existing infrastructure to support increased sales
during the nine months ended September 30, 1998 as compared to the same period
in 1997. The acquired companies have lower selling, general, and administrative
expenses as a percentage of net revenues.
Operating income increased $163,000 or 2.1% from $7.7 million for the nine
months ended September 30, 1997 to $7.8 million for the nine months ended
September 30, 1998. As a percentage of net sales, operating income decreased
from 3.1% in 1997 to 2.5% in 1998.
-12-
<PAGE> 13
RESULTS OF OPERATIONS -- HISTORICAL
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
The following table sets forth certain historical financial data for IDG
and shows such data as a percentage of net sales for the periods indicated
(dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30
-----------------------------------
1998 1997
-------- --------
<S> <C> <C> <C> <C>
Net Sales $119,888 100.0% $ 27,182 100.0%
Cost of Sales 92,268 77.0 20,901 76.9
-------- ----- -------- -----
Gross Profit 27,620 23.0 6,281 23.1
Selling, General and Administrative 24,559 20.5 5,094 18.7
-------- ----- -------- -----
Operating Income $ 3,061 2.6% $ 1,187 4.4%
======== ===== ======== =====
</TABLE>
Net sales increased $92.7 million or 341.1% from $27.1 million for the three
months ended September 30, 1997 to $119.9 million for the three months ended
September 30, 1998. This was primarily due to the contributed revenue of the
other eight Founding Companies following the Combination on September 24, 1997.
In addition, acquisitions accounted for $32.7 million in revenue.
Cost of sales increased $71.4 million from $20.9 million for the three months
ended September 30, 1997 to $92.3 million for the three months ended September
30, 1998. As a percentage of net sales, cost of sales increased from 76.9% in
1997 to 77.0% in 1998. This reflects the effect of the Founding Companies and
the acquired companies, which have a higher cost of sales percentage than B&J
and the Pooled Companies.
Selling, general, and administrative expenses increased $19.5 million for the
three months ended September 30, 1997 from $5.1 million in 1997 to $24.6
million in 1998, primarily attributable to the effect of the SAB 97 accounting
for the Combination and acquisitions. As a percentage of net sales, selling,
general, and administrative expenses increased from 18.7% in 1997 to 20.5% in
1998. In addition, during 1998, the Company incurred increased professional
fees and expenses related to staffing a corporate office and incurred costs
related to being a public company. Excluding corporate expenses, selling,
general, and administrative expenses were 19.1% of revenues.
Operating income increased $1.9 million from $1.2 million for the three months
ended September 30, 1997 to $3.1 million for the three months ended September
30, 1998. The increase reflects income of the Founding Companies and the
acquired companies. As a percentage of net sales, however, operating income
decreased from 4.4% in 1997 to 2.6% in 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
The following table sets forth certain historical financial data for IDG
and shows such data as a percentage of net sales for the periods indicated
(dollars in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
---------------------------------
1998 1997
-------- --------
<S> <C> <C> <C> <C>
Net Sales $316,289 100.0% $ 67,295 100.0%
Cost of Sales 243,828 77.1 51,827 77.0
-------- ----- -------- -----
Gross Profit 72,461 22.9 15,468 23.0
Selling, General and Administrative 64,635 20.4 12,953 19.2
-------- ----- -------- -----
Operating Income $ 7,826 2.5% $ 2,515 3.7%
======== ===== ======== =====
</TABLE>
Net sales increased $249.0 million from $67.3 million for the nine months ended
September 30, 1997 to $316.3 million for the nine months ended September 30,
1998. This was primarily due to the contributed revenue of the other eight
Founding Companies and the $53.8 million in acquisition revenue during the
first three quarters of 1998.
-13-
<PAGE> 14
Cost of sales increased $192.0 million from $51.8 million for the nine months
ended September 30, 1997 to $243.8 million for the nine months ended September
30, 1998. As a percentage of net sales, cost of sales increased from 77.0% in
1997 to 77.1% in 1998. Selling, general, and administrative expenses increased
$51.6 million for the nine months ended September 30, 1997 from $13.0 million
in 1997 to $64.6 million in 1998, again primarily attributable to the effect of
the SAB 97 accounting for the Combination and acquisitions. As a percentage of
net sales, selling, general, and administrative expenses increased from 19.2%
in 1997 to 20.4% in 1998. Expenses included $317,000 of non-recurring expenses
related to acquisitions. Excluding these non-recurring expenses, selling,
general, and administrative expenses for the nine months ended September 30,
1998 were $64.3 million or 20.3% of net revenues. In addition, during 1998, the
Company incurred increased professional fees and expenses related to staffing a
corporate office and incurred costs related to being a public company.
Excluding such corporate expenses, selling, general, and administrative
expenses were 19.2% of revenues. The decrease in selling, general, and
administrative expenses as a percentage of net revenues is primarily due to
these costs being lower as a percentage of net sales for the acquired
companies.
Operating income increased $5.3 million from $2.5 million for the nine months
ended September 30, 1997 to $7.8 million for the nine months ended September
30, 1998, reflecting the effects of the Combination and acquisitions. As a
percentage of net sales, however, operating income decreased from 3.7% in 1997
to 2.5% in 1998.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had $2.5 million in cash, $67.9 million
of working capital, and $58 million available under its $75 million revolving
credit facility with a five-bank syndicate.
The Company's liquidity position continues to be sufficient to enable the
Company to fund its current operations and to fund anticipated internal
expansion and acquisitions for at least the current year.
On an historical basis, net cash (used in) provided by operating activities
for the nine months ended September 30, 1998 and 1997 was ($5.8 million) and
$2.4 million respectively. The change was principally due to acquired working
capital. This was partially offset by the amortization, depreciation and net
income from the acquired companies.
On an historical basis, net cash (used in) provided by investing activities
for the nine months ended September 30, 1998 and 1997 was ($23.1 million) and
$2.5 million, respectively. The change was primarily attributable to cash used
for acquisitions.
On an historical basis, net cash (used in) provided by financing activities
for the nine months ended September 30, 1998 and 1997 was ($115 thousand) and
$31 million, respectively. These changes were principally due to repayment of
lines of credit of certain acquired companies and the borrowing of fund for
acquisitions.
YEAR 2000
The Company has hired outside consultants to asses the impact of Year 2000
on its information technology ("IT") systems and its non-systems IT functions
and process involving embedded chip technology. In addition, the Company hired
in August 1998 a Chief Information Officer to direct its IT functions and
activities, including spearheading its Year 2000 inventory and correction
efforts.
All inventories of IT systems of the Company as of September 30, 1998 are
substantially complete and in process of being validated. The Company found
date deficiencies in the IT systems of several of its subsidiaries, and has
replaced one system and is in the process of replacing the other deficient
systems. The Company is conducting an inventory of its non-systems IT functions
and processes. Overall, project plans call for the completion of the correction
of Year 2000 problems in both IT systems and non-systems IT functions and
processes of the Company during 1999. The Company has surveyed its banks,
payroll, and benefits vendors and administrators to determine the status of
their Year 2000 compliance programs and has received (or reasonably expects to
receive) written representations from those vendors that their systems will be
Year 2000 compliant. In addition, the Company is in the process of surveying
customers with whom it engages in electronic commerce ("e-commerce") to
determine the status of their Year 2000 compliance programs.
The Company currently believes that its most reasonably likely worst case
Year 2000 scenario is the inability of its IT system to interface with the IT
systems of its subsidiaries or its customers with whom it engages in
e-commerce. In the first scenario, the Company's ability to effectively
consolidate the affected subsidiary's financial condition and results of
operations with the
-14-
<PAGE> 15
Company's other subsidiaries could result in incomplete financial reporting. In
the second scenario, the Company's manner of receiving orders from customers
that order electronically would be adversely affected.
The Company is developing contingency plans to ensure that it can address
aspects of these and other of its operations systems that could be affected by
Year 2000 issues. For example, should the Company's customers' e-commerce
systems fail to integrate with the Company's systems due to date deficiencies
or should the Company's IT links to its subsidiaries be disrupted, the Company
will utilize telephone or facsimile communication.
Based on the Company's Year 2000 work to date, the Company's total costs
(historical plus estimated future costs) of addressing Year 2000 issues are
currently estimated to be in the range of $250 thousand to $500 thousand, of
which less than $100 thousand has been incurred. Such amounts do not include
the purchase and implementation by the Company of an enterprise-wide IT system,
expected to be complete in 1999, which the Company expects to be Year 2000
compliant. The Company's purchase of the enterprise-wide systems is part of its
continuing effort to implement system-wide controls and efficiencies and
standardize processes, rather that being a result of Year 2000 issues.
For further discussion regarding the Year 2000, see disclosure under "Risk
Factors" in the Company's Form 10-k as amended for the year ended December 31,
1997.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
-15-
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See the Company's Annual Report on Form 10-K as amended for the fiscal year
ended December 31, 1997, Commission File No. 001-13195, previously filed with
the Commission, regarding certain legal proceedings in which the Company is
involved.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibits
Exhibit 11 -- Computation of Earnings Per Share
Exhibit 27A -- Financial Data Schedule (for SEC use only)
Reports on Form 8-K
The Company filed a Current Report on Form 8-K on June 19, 1998, reporting an
Item 2, Acquisition or Disposition of Assets, relating to the acquisition of
L.D. Supply, Inc. Subsequently, the Company filed a Form 8-K/A with the
historical financial statements of L.D. Supply, Inc. and proforma financial
statements of the Company, as required by Item 7 of Form 8-K, on August 18,
1998. In addition, the Company filed Form 8-K with restated financial
statements, reporting under Item 5 dated September 16, 1998.
-16-
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INDUSTRIAL DISTRIBUTION GROUP, INC.
(Registrant)
<TABLE>
<S> <C>
Date: November 13, 1998 By: /s/ Jack P. Healey
---------------------------------------------------
Jack P. Healey
Senior Vice President and Chief Financial Officer
Date: November 13, 1998 /s/ Jack P. Healey
---------------------------------------------------
Jack P. Healey
Senior Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
</TABLE>
-17-
<PAGE> 1
EXHIBIT 11
INDUSTRIAL DISTRIBUTION GROUP, INC.
COMPUTATION OF EARNINGS PER SHARE
FOR THE THREE MONTHS AND NINE MONTHS PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
(In Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $ 1,712 $ 653 $ 4,788 $ 1,358
======= ======= ======= =======
Weighted average common
shares outstanding 8,464 2,112 8,191 1,703
Add - Dilutive effect of outstanding options
(as determined by the application of the
treasury stock method) 27 46 35 48
------- ------- ------- -------
Weighted average common and
common equivalent
shares outstanding 8,491 2,158 8,226 1,751
======= ======= ======= =======
Primary earnings per share: $ .20 $ .31 $ .58 $ .80
======= ======= ======= =======
Diluted earnings per share: $ .20 $ .30 $ .58 $ .78
======= ======= ======= =======
</TABLE>
-18-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF INDUSTRIAL DISTRIBUTION GROUP, INC. FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,464
<SECURITIES> 0
<RECEIVABLES> 56,736
<ALLOWANCES> (1,393)
<INVENTORY> 56,646
<CURRENT-ASSETS> 124,462
<PP&E> 22,200
<DEPRECIATION> (6,216)
<TOTAL-ASSETS> 184,970
<CURRENT-LIABILITIES> 56,544
<BONDS> 0
0
0
<COMMON> 85
<OTHER-SE> 114,992
<TOTAL-LIABILITY-AND-EQUITY> 184,969
<SALES> 316,289
<TOTAL-REVENUES> 316,289
<CGS> 243,828
<TOTAL-COSTS> 308,463
<OTHER-EXPENSES> (832)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 846
<INCOME-PRETAX> 7,812
<INCOME-TAX> 3,024
<INCOME-CONTINUING> 4,788
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
