<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 8-K
--------------
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): September 16, 1998
--------------
INDUSTRIAL DISTRIBUTION GROUP, INC.
-----------------------------------------------------
(Exact name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
Delaware 001-13195 58-2299339
-------- --------- ----------
(State or other Jurisdiction of (Commission File (IRS Employer
Incorporation or Organization) Number) Identification No.)
</TABLE>
<TABLE>
<S> <C>
2500 Royal Place
Tucker, Georgia 30084
--------------- -----
(Address of principal executive offices) (Zip code)
</TABLE>
Registrant's telephone number, including area code: (770) 243-9000
Not Applicable
-----------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
Item 5. Other Events.
This Form 8-K includes restated financial statements of the Registrant
for the years ended December 31, 1997, 1996, and 1995 and the report of
independent public accountants on such financial statements. The restated
financial statements are required because the Registrant has acquired certain
companies using the pooling-of-interests accounting method since December 31,
1997. See the Notes to the Consolidated Financial Statements. This Form 8-K
also includes Management's Discussion and Analysis for the years ended December
31, 1995, 1996 and 1997, as restated to reflect the restated financial
statements.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a)(b) No financial statements of businesses acquired or pro forma
financial information is required to be filed as a part of this report.
(c) Exhibits
<TABLE>
<S> <C>
23.1 Consent of Independent Public Accountants
99.1 Restated financial statements of the Registrant
together with report of independent public
accountants thereon - See the Index to Financial
Statements.
99.2 Management's Discussion and Analysis for Years Ended
December 31, 1995, 1996 and 1997 (restated to reflect
the restated financial statements set forth herein as
Exhibit 99.1)
</TABLE>
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned hereunto duly authorized.
INDUSTRIAL DISTRIBUTION GROUP, INC.
BY: /s/ Jack P. Healey
--------------------------------------------
Jack P. Healey
Senior Vice President and
Chief Financial Officer
Dated: 9/16/98
------------------------
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated July 30, 1998 included in this Form 8-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
September 15, 1998
---
<PAGE> 1
EXHIBIT 99.1
INDEX TO FINANCIAL STATEMENTS
INDUSTRIAL DISTRIBUTION GROUP, INC.
-----------------------------------
<TABLE>
<S> <C>
Report of Independent Public Accountants................................................................. F-2
Consolidated Balance Sheets
at December 31, 1996 and 1997.................................................................. F-3
Consolidated Statements of Operations
for the three years ended December 31, 1997.................................................... F-4
Consolidated Statements of Stockholders' Equity
for the three years ended December 31, 1997.................................................... F-5
Consolidated Statements of Cash flows for the three
years ended December 31, 1997.................................................................. F-6
Notes to Consolidated Financial Statements............................................................... F-7
</TABLE>
F-1
<PAGE> 2
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, 1996 and 1997 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, 1996 and 1997 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.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
July 30, 1998
F-2
<PAGE> 3
INDUSTRIAL DISTRIBUTION GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,586 $ 31,534
Short-term investments 948 0
Accounts receivable, net 9,299 36,099
Inventories, net 10,674 42,427
Deferred tax assets 570 1,550
Prepaid and other current assets 226 2,468
-------- --------
Total current assets 23,303 114,078
PROPERTY AND EQUIPMENT, net 2,156 9,910
DEFERRED TAX ASSETS 1,085 642
INTANGIBLE ASSETS, net 0 19,584
OTHER ASSETS 708 2,167
-------- --------
Total assets $ 27,252 $146,381
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Cash overdraft $ 187 $ 722
Current portion of long-term debt 299 781
Lines of credit 6,566 5,836
Accounts payable 5,438 21,656
Accrued compensation 564 2,131
Other accrued liabilities 698 3,307
-------- --------
Total current liabilities 13,752 34,433
LONG-TERM DEBT 1,094 5,036
OTHER LONG-TERM LIABILITIES 1,183 7,422
-------- --------
Total liabilities 16,029 46,891
-------- --------
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 1996 and 1997 0 0
Common stock, $.01 par value per share; 50,000,000 shares authorized, 1,531,179 and 7,880,110
shares issued in 1996 and 1997, respectively 15 79
Additional paid-in capital 3,590 89,298
Retained earnings 7,797 10,113
Treasury stock, at cost (45,628 and 0 shares in 1996 and 1997, respectively) (179) 0
-------- --------
Total stockholders' equity 11,223 99,490
-------- --------
Total liabilities and stockholders' equity $ 27,252 $146,381
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 4
INDUSTRIAL DISTRIBUTION GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES $ 59,944 $ 68,266 $ 153,218
COST OF SALES 45,763 52,774 117,726
----------- ----------- -----------
Gross profit 14,181 15,492 35,492
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES
13,281 14,649 31,595
----------- ----------- -----------
Income from operations 900 843 3,897
INTEREST EXPENSE 662 740 966
INTEREST INCOME (58) (73) (461)
OTHER INCOME, NET (93) (315) (178)
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 389 491 3,570
PROVISION FOR INCOME TAXES 67 127 1,254
----------- ----------- -----------
NET INCOME $ 322 $ 364 $ 2,316
=========== =========== ===========
EARNINGS PER SHARE:
Basic $ 0.24 $ 0.25 $ 0.71
=========== =========== ===========
Diluted $ 0.24 $ 0.25 $ 0.71
=========== =========== ===========
WEIGHTED AVERAGE SHARES:
Basic 1,367,688 1,446,439 3,258,555
=========== =========== ===========
Diluted 1,367,688 1,446,439 3,282,927
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 5
INDUSTRIAL DISTRIBUTION GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------ PAID-IN RETAINED TREASURY
SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL
---------- ------ ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 1,407,685 $14 $ 2,100 $ 7,120 $(179) $ 9,055
Common stock issued 6,868 0 50 0 0 50
Common stock purchased (3,175) 0 (19) 0 0 (19)
Net income 0 0 0 322 0 322
---------- --- -------- -------- ----- --------
BALANCE, DECEMBER 31, 1995 1,411,378 14 2,131 7,442 (179) 9,408
Common stock issued 119,801 1 1,459 0 0 1,460
Dividends paid 0 0 0 (9) 0 (9)
Net income 0 0 0 364 0 364
---------- --- -------- -------- ----- --------
BALANCE, DECEMBER 31, 1996 1,531,179 15 3,590 7,797 (179) 11,223
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 2,316 0 2,316
---------- --- -------- -------- ----- --------
BALANCE, DECEMBER 31, 1997 7,880,110 $79 $ 89,298 $ 10,113 $ 0 $ 99,490
========== === ======== ======== ===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 6
INDUSTRIAL DISTRIBUTION GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 322 $ 364 $ 2,316
-------- -------- --------
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization 328 311 1,000
Gain on sale of assets (18) (149) (24)
Deferred taxes (242) (499) (615)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (938) (1,154) (1,192)
Inventories, net (598) 528 457
Prepaids and other assets 327 35 (636)
Accounts payable 1,324 362 (1,916)
Accrued compensation 145 (32) 225
Other accrued liabilities (123) 110 (1,400)
-------- -------- --------
Total adjustments 205 (488) (4,101)
-------- -------- --------
Net cash (used in) provided by operating activities 527 (124) (1,785)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Changes in short-term investments (133) (34) 948
Cash from acquired companies 0 205 1,851
Additions to property and equipment, net (334) (75) (1,014)
Cash surrender value of life insurance (100) (70) (29)
-------- -------- --------
Net cash provided by (used in) investing activities (567) 26 1,756
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in cash overdraft (103) 76 535
Proceeds from issuance of common stock, net of issuance costs 50 6 56,599
Short-term (repayments) borrowings 580 663 (15,871)
Payments on long-term debt (25) (318) (11,286)
Purchase of treasury stock (19) 0 0
Dividends paid 0 (9) 0
-------- -------- --------
Net cash provided by financing activities 483 418 29,977
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 443 320 29,948
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 823 1,266 1,586
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,266 $ 1,586 $ 31,534
======== ======== ========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 745 $ 746 $ 964
======== ======== ========
Income taxes paid $ 211 $ 382 $ 1,031
======== ======== ========
NONCASH TRANSACTIONS:
Common stock issued in acquisitions (Note 1) $ 0 $ 1,460 $ 35,312
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 7
INDUSTRIAL DISTRIBUTION GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996, AND 1997
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 19 states and
provides integrated supply, contract supply, stock/nonstock sales, machine
tool 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., B&J Industrial Supply Company ("B&J"), Cramer Industrial Supplies,
Inc., Grinding Supplies Company, J.J. Stangel Co., Shearer Industrial
Supply Co. ("Shearer"), Slater Industrial Supply, Inc., 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"). The accompanying financial statements of IDG
represent B&J (deemed to be the acquiring company under the provisions of
the Securities 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).
During 1998, IDG acquired three companies Northern Tool & Supply Company,
Inc. ("NTS"), Continental Air Tool, Inc., d/b/a Continental-McLaughlin
Equipment & Supply, and Hawley Industrial Supplies, Inc. (collectively
referred to as the "Pooled Companies"). These acquisitions were accounted
for using the pooling-of-interests method of accounting. The Company's
financial statements include the results of operations for the Pooled
Companies for all periods presented. IDG issued 618,559 shares in these
pooling-of-interests transactions.
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.
F-7
<PAGE> 8
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 existing
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 these 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.
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.
F-8
<PAGE> 9
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 $240,000 and $994,000 as of
December 31, 1996 and 1997, 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.
F-9
<PAGE> 10
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 1995, 1996, and 1997
was $0, $0, and $134,000, respectively. At December 31, 1996 and 1997,
accumulated amortization of intangible assets was $0 and $134,000,
respectively.
Other Assets
Other assets as of December 31, 1996 and 1997 included the cash surrender
values of executive life insurance policies totaling $747,000 and
$1,422,000, 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.
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 1995 and 1996 amounts to
conform to the current year presentation.
F-10
<PAGE> 11
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, 1996 and
1997 (in thousands):
<TABLE>
<CAPTION>
1996 1997
------- --------
<S> <C> <C>
Land, building, and improvements $ 1,569 $ 5,345
Leasehold improvements 889 1,846
Furniture, fixtures, and equipment 1,535 4,637
Computer hardware and software 1,062 2,026
------- --------
5,055 13,854
Less accumulated depreciation (2,899) (3,944)
------- --------
Property and equipment, net $ 2,156 $ 9,910
======= ========
</TABLE>
Depreciation expense totaled $328,000, $311,000, and $866,000 for the
years ended December 31, 1995, 1996, and 1997, respectively.
F-11
<PAGE> 12
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. The loan
was repaid and the line closed subsequent to December 31, 1997.
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.
Additionally, the Company had available $7,250,000 through various lines
of credit. As of December 31, 1997, the Company had $4,725,000 drawn
against these lines of credit. Of the amount outstanding, approximately
$1,400,000 bears interest at LIBOR plus 2.125%. The remaining balance
bears interest at rates ranging from prime plus .125% to prime plus 1%. A
portion of these lines contain covenants regarding certain financial
statement amounts, ratios, and activities of one of the Company's business
units. Also, certain advances under the lines are secured by the assets of
one of the Company's business units and are partially guaranteed by that
business unit's president.
F-12
<PAGE> 13
5. LONG-TERM DEBT
At December 31, 1996 and 1997, long-term debt consisted of the following
(in thousands):
<TABLE>
<CAPTION>
1996 1997
------- -------
<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 $ 0 $ 1,573
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 and guaranteed
by the stockholders of the Company
$ 0 $ 1,251
Notes payable due to various parties through 2008, bearing interest between
7% and 10.40% 326 1,148
Note payable to officer, due June 30, 1999, bearing interest at 7% 99 128
Demand note payable to stockholder, renewed annually, bearing interest at 6%
186 169
Commercial mortgage note payable to bank, due July 2022, payable in
monthly installments of $2,500, plus interest at prime plus .75%
652 622
Other 130 926
------- -------
Total long-term debt 1,393 5,817
Less current portion (299) (781)
------- -------
Total long-term debt, less current portion $ 1,094 $ 5,036
======= =======
</TABLE>
Maturities of long-term debt as of December 31, 1997 are as follows (in
thousands):
<TABLE>
<S> <C>
1998 $ 781
1999 3,161
2000 296
2001 195
2002 162
Thereafter 1,222
</TABLE>
F-13
<PAGE> 14
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. The dilution effect of stock options
outstanding during 1997 added 24,372 shares to the weighted average common
shares outstanding for purposes of calculating diluted EPS. The options
granted on September 24, 1997, 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 1995 and 1996.
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>
1995 1996 1997
------ ------- ------
<S> <C> <C> <C>
Net income:
As reported $ 322 $ 364 $2,316
Pro forma 322 364 2,002
Basic EPS:
As reported $0.24 $0.25 $ 0.71
Pro forma 0.24 0.25 0.61
Diluted EPS:
As reported $0.24 $0.25 $ 0.71
Pro forma 0.24 0.25 0.61
</TABLE>
F-14
<PAGE> 15
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 1995, 1996, and 1997 was $0, $0, and
$3,696,000, respectively.
Stock Incentive Plan
In July 1997, the Company adopted its stock incentive plan, which was
approved by stockholders in May 1998. The plan provides 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 0 $ 0.00
Granted 409,825 17.00
------------ --------
Outstanding at end of year 409,825 $ 17.00
============ ========
Options exercisable at end of year 0 0
============ ========
Weighted average remaining contractual life 9.75 years
</TABLE>
F-15
<PAGE> 16
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, 1995, 1996, and 1997 (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- ------
<S> <C> <C> <C>
Current $ 309 $ 628 $1,869
Deferred (242) (501) (615)
----- ----- ------
Total provision $ 67 $ 127 $1,254
===== ===== ======
</TABLE>
The provision for income taxes for the years ended December 31, 1995,
1996, and 1997 differs from the amount computed by applying the statutory
rate of 34% due to the following (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ------
<S> <C> <C> <C>
Tax at federal statutory rate $132 $167 $1,214
Nondeductible expenses 41 29 35
Tax-exempt interest income (10) (10) (11)
Goodwill amortization 0 0 47
State income tax, net of federal benefit 0 0 104
Cash surrender value of life insurance (34) (23) 3
Other (62) (36) (138)
---- ---- ------
Provision for income taxes $ 67 $127 $1,254
==== ==== ======
</TABLE>
F-16
<PAGE> 17
Deferred taxes are recorded based on differences between the financial
statement and tax bases of assets and liabilities. Temporary differences
which give rise to a significant portion of deferred tax assets and
liabilities at December 31, 1996 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 81 $ 351
Accrued employee benefits 200 231
Capitalized inventory costs 83 309
Inventory allowance 1,074 1,927
Accrued liabilities 0 828
Net operating loss carryforward 54 241
Other 209 164
------- -------
1,701 4,051
------- -------
Deferred tax liabilities:
Book over tax depreciation $ (17) $ (50)
Prepaid insurance (29) (5)
Intangible integrated supply contract 0 (206)
Step-up in asset basis 0 (917)
Section 481--LIFO 0 (584)
Other 0 (97)
------- -------
(46) (1,859)
------- -------
Net deferred tax assets $ 1,655 $ 2,192
======= =======
</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.
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.
F-17
<PAGE> 18
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 $2,385
1999 1,692
2000 876
2001 498
2002 365
Thereafter 1,155
------
$6,971
======
</TABLE>
During the years ended December 31, 1995, 1996, and 1997, rental expense
under operating leases totaled $554,000, $665,000, and $1,196,000,
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. 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.
F-18
<PAGE> 19
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.
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. In addition to these seven plans, each of
the Pooled Companies maintained a 401(k) plan. Total company contributions
to 401(k) plans during 1997 were $264,000.
F-19
<PAGE> 20
Effective January 1, 1998, or upon respective acquisition date of the
Pooled Companies, 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 employees' 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. In addition, NTS, one of the
Pooled Companies, had a profit-sharing plan in effect during 1997. Total
employer contributions to this plan were $33,000 in 1997. No company
contributions will be made to NTS's plan going forward. Participants in
this plan are eligible to also participate 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,
1995, 1996, and 1997.
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.
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 and
the three Pooled 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.
F-20
<PAGE> 21
The EPS amounts are based on 7,963,387 and 7,963,405 shares deemed to be
outstanding for the periods ended December 31, 1996 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 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 for per share amounts.)
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Net sales $290,241 $332,169
======== ========
Net income $ 2,748 $ 4,965
======== ========
Diluted earnings per share $ 0.35 $ 0.62
======== ========
</TABLE>
12. INTERIM FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth certain quarterly financial data for the
periods indicated (in thousands, except for per share amounts):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
1997:
Net sales $19,444 $20,669 $27,182 $85,923
Gross profit 4,299 4,888 6,279 20,026
Net income 184 521 653 958
Diluted EPS* $ 0.12 $ 0.35 $ 0.31 $ 0.12
1996:
Net sales $16,378 $16,427 $17,626 $17,835
Gross profit 3,732 3,734 4,160 3,866
Net income 106 36 331 (109)
Diluted EPS $ 0.08 $ 0.02 $ 0.22 $ (0.07)
</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.
F-21
<PAGE> 1
EXHIBIT 99.2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company provides flexible procurement solutions for manufacturers and
other users of industrial maintenance, repair, operating, and production
("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 $225.1 million and
$196.7 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 $332.2 million and $290.5 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 Industrial Supply Company ("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, together with the
operations of the companies acquired since December 31, 1997 that were
accounted for under the pooling-of-interests accounting method (the "Pooled
Companies). 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 Companies whose
businesses were also acquired by the Company as of September 24, 1997 together
with B&J, (the "Founding Companies"). Management has also included, therefore,
its analysis of certain combined financial information of the Company together
with all nine Founding Companies and the Pooled 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.
<PAGE> 2
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 "Risk Factors" elsewhere in
this Prospectus.
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 and the Pooled 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............................... $332,169 100.0% $290,486 100.0% $265,444 100.0%
Cost of Sales........................... 255,777 77.0 222,370 76.6 203,728 76.7
-------- ----- -------- ----- -------- -----
Gross Profit............................ 76,392 23.0 68,116 23.4 61,716 23.3
Selling, General, and Administrative.... 67,347 20.3 61,897 21.3 55,957 21.1
-------- ----- -------- ----- -------- -----
Operating Income........................ $ 9,045 2.7% $ 6,219 2.1% $ 5,759 2.2%
======== ===== ======== ===== ======== =====
</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 and the Pooled 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.
<PAGE> 3
1997 Compared To 1996
Net sales increased $41.7 million, or 14.3%, from $290.5 million in 1996 to
$332.2 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 $33.4 million, or 15.0%, from $222.4 million in
1996 to $255.8 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 76.6% to 77.0%, due to a change in product mix and certain large
sales to a few customers at lower margins.
Selling, general, and administrative expenses increased $5.4 million, or
8.8%, from $61.9 in 1996 to $67.3 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 1.0% from 1996 to 1997.
Operating income increased $2.8 million, or 45.4%, from $6.2 million in
1996 to $9.0 million in 1997. As a percentage of net sales, operating income
increased from 2.1% in 1996 to 3.1% in 1997.
1996 Compared To 1995
Net sales increased $25.1 million, or 9.4%, from $265.4 million in 1995 to
$290.5 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 $18.7 million, or 9.1%, from $203.7 million in 1995
to $222.4 in 1996, primarily as a result of increased sales. As a percentage of
net sales, however, cost of sales decreased from 76.7% in 1995 to 76.6% 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 $5.9 million, or
10.6%, from $56.0 million in 1995 to $61.9 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 21.1% in 1995 to 21.3% 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 $460,000, or 8.0%, from $5.8 million in 1995 to
$6.2 million in 1996. As a percentage of net sales, operating income decreased
from 2.2% in 1995 to 2.1% in 1996.
<PAGE> 4
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......................... $153,218 100.0% $68,266 100.0% $59,944 100.0%
Cost of Sales..................... 117,726 76.8 52,774 77.3 45,763 76.4
-------- ----- ------- ----- ------- -----
Gross Profit...................... 35,492 23.2 15,492 22.7 14,181 23.6
Selling, General, and
Administrative.................. 31,595 20.6 14,649 21.5 13,281 22.2
-------- ----- ------- ----- ------- -----
Operating Income.................. $ 3,897 2.6% $ 843 1.2% $ 900 1.4%
======== ===== ======= ===== ======= =====
</TABLE>
1997 Compared To 1996
Net sales increased $84.9 million, or 124.3%, from $68.3 million in 1996 to
$153.2 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 $64.9 million, or 122.9%, from $52.8 million in
1996 to $117.7 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 decreased from
77.3% in 1996 to 76.8% in 1997. The decrease was primarily due to a higher
margin product mix and increased vendor rebates.
Selling, general, and administrative expenses increased $16.9 million, or
116.4%, from $14.6 million in 1996 to $31.6 million in 1997, which reflected
primarily the effect of the Combination discussed above. Selling, general, and
administrative expenses decreased from 21.5% to 20.6%. 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 $3.1 million, or 157.0%, from $.8 million in
1996 to $3.9 million in 1997. Operating income as a percentage of net sales
increased, however, from 1.2% in 1996 to 2.6% in 1997.
1996 Compared To 1995
Net sales increased $8.4 million, or 14.1%, from $59.9 million in 1995 to
$68.3 million in 1996. This increase was attributable to increased sales to
B&J's aerospace and international customers.
Cost of sales increased $7.0 million, or 15.5%, from $45.8 million in 1995
to $52.8 million in 1996. As a percentage of net sales, cost of sales increased
from 76.4% in 1995 to 77.3% in 1996. The increase was primarily due to a change
in product mix.
Selling, general, and administrative expenses increased $1.3 million or 1%,
from $13.3 million in 1995 to $14.6 million in 1996. As a percentage of net
sales, however, selling, general, and administrative expenses decreased from
21.5% 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 was basically unchanged from 1995 to 1996. Operating
income as a percentage of net sales decreased from 1.4% to 1.2% in 1996.
YEAR 2000
The Company has hired outside consultants to assess the impact of Year
2000 on its information technology ("IT") systems and its non-systems IT
functions and processes 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 1, 1998 are
substantially complete and in the 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 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 operational 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 $250,000 to $500,000, of which less
than $100,000 has been incurred. Such amounts do not include the purchase and
implementation by the Company of an enterprise-wide IT system, expected to be
completed in 1999, which the Company expects to be Year 2000 compliant. The
Company's purchase of the enterprise-wide IT system is part of its continuing
effort to implement system-wide controls and efficiencies and standardize
processes, rather than 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 for the year ended December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 1998, the Company had $3.3 million of cash and cash
equivalents, $69.7 million of working capital, and an aggregate of $71 million
of borrowing capacity under a revolving credit facility for $75 million
<PAGE> 5
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 ($1.8 million), $124,000 and $527,000 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 $1.7 million, ($26,000) and ($567,000),
respectively.
On an historical basis, net cash provided by financing activities for
fiscal years 1997, 1996 and 1995 was $30.0 million, $418,000 and $483,000,
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.
