<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
[ ] 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>
<S> <C>
Delaware 58-2299339
- -------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
950 East Paces Ferry Road, Suite 1575 Atlanta,
----------------------------------------------
Georgia 30326 (Address of principal executive
offices and zip code)
(404) 949-2100
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Shares outstanding of the issuer's Common Stock at June 30, 1999: 8,562,628
shares of Common Stock, $0.01 par value share.
<PAGE> 2
INDEX
INDUSTRIAL DISTRIBUTION GROUP, INC.
PART I. Financial Information
ITEM 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at June 30, 1999 and December 31,
1998
Consolidated Statements of Operations for the three months
ended June 30, 1999 and 1998
Consolidated Statements of Operations for the six months ended
June 30, 1999 and 1998
Consolidated Statements of Cash Flows for the six months ended
June 30, 1999 and 1998
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
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDUSTRIAL DISTRIBUTION GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $ 1,709 $ 1,285
Accounts Receivable, net 64,883 57,459
Inventory, net 63,585 60,949
Deferred Tax Assets 5,516 5,516
Prepaid and Other Current Assets 5,968 7,919
-------- --------
TOTAL CURRENT ASSETS 141,661 133,128
Property and Equipment, net 32,289 24,619
Intangible Assets, net 52,865 51,880
Other Assets 1,700 1,838
-------- --------
TOTAL ASSETS $228,515 $211,465
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short Term Debt $ 685 $ 4,039
Accounts Payable 43,896 40,342
Accrued Compensation 2,951 3,772
Other Accrued Liabilities 4,221 3,986
-------- --------
TOTAL CURRENT LIABILITIES 51,753 52,139
Long-Term Debt 51,730 35,660
Deferred Income Tax Liabilities 883 884
Other Long-Term Liabilities 9,091 9,187
-------- --------
TOTAL LIABILITIES 113,457 97,870
STOCKHOLDERS' EQUITY:
Common Stock, par value $.01 per share, 50,000,000
shares authorized; 8,586,619 shares issued and 8,562,628
shares outstanding in 1999; 8,484,953 shares issued and 8,478,180 shares
outstanding in 1998 86 85
Additional Paid-In Capital 97,471 97,182
Retained Earnings 17,501 16,328
-------- --------
Total Stockholders' Equity 115,058 113,595
-------- --------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $228,515 $211,465
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 4
INDUSTRIAL DISTRIBUTION GROUP, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
1999 1998
----------- -----------
<S> <C> <C>
NET SALES ................................... $ 137,250 $ 106,638
COST OF SALES ............................... 107,279 82,722
----------- -----------
Gross profit .............................. 29,971 23,916
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 27,847 21,261
----------- -----------
Income from operations .................... 2,124 2,655
INTEREST EXPENSE ............................ 887 193
OTHER INCOME ................................ (45) (216)
----------- -----------
INCOME BEFORE INCOME TAXES .................. 1,282 2,678
PROVISION FOR INCOME TAXES .................. 629 978
----------- -----------
NET INCOME .................................. $ 653 $ 1,700
=========== ===========
BASIC EARNINGS PER SHARE .................... $ .08 $ .21
=========== ===========
DILUTED EARNINGS PER SHARE .................. $ .08 $ .21
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING (Basic) . 8,540,169 8,199,927
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING (Diluted) 8,540,169 8,258,983
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 5
INDUSTRIAL DISTRIBUTION GROUP, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1999 1998
----------- -----------
<S> <C> <C>
NET SALES ................................... $ 273,145 $ 196,401
COST OF SALES ............................... 213,062 151,560
----------- -----------
Gross profit .............................. 60,083 44,841
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 56,587 40,076
----------- -----------
Income from operations .................... 3,496 4,765
INTEREST EXPENSE ............................ 1,521 487
OTHER INCOME ................................ (181) (702)
----------- -----------
INCOME BEFORE INCOME TAXES .................. 2,156 4,980
PROVISION FOR INCOME TAXES .................. 983 1,904
----------- -----------
NET INCOME .................................. $ 1,173 $ 3,076
=========== ===========
BASIC EARNINGS PER SHARE .................... $ .14 $ .38
=========== ===========
DILUTED EARNINGS PER SHARE .................. $ .14 $ .38
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING (Basic) . 8,518,912 8,052,006
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING (Diluted) 8,518,912 8,110,302
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 6
INDUSTRIAL DISTRIBUTION GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................... $ 1,173 $ 3,076
-------- --------
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization ............................ 2,286 1,369
Benefit for deferred taxes ............................... (1) (483)
Loss (gain) on disposal of equipment ..................... (18) 24
Loss (gain) on sale of investments ....................... 10 (6)
Changes in operating assets and liabilities:
Accounts receivable, net ............................. (7,418) (3,603)
Inventories, net ..................................... (1,877) 672
Prepaid and other assets ............................. 1,524 (460)
Accounts payable ..................................... 3,043 (950)
Accrued compensation ................................. (517) 448
Deferred loan costs .................................. 120 15
Other accrued liabilities ............................ 569 (468)
-------- --------
Total adjustments ................................. (2,279) (3,442)
-------- --------
Net cash used in operating activities ............ (1,106) (366)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment, net ................... (10,132) (3,325)
Proceeds from the sale of property and equipment ........... 656 32
Cash paid in acquisitions .................................. (2,135) (12,086)
Purchase of investments .................................... 2 --
Deposits ................................................... (138) (12)
Cash surrender value of life insurance ..................... 1 914
Cash from acquired companies ............................... 343 839
Proceeds from sale of investments .......................... 80 (3)
-------- --------
Net cash used in investing activities ............. (11,323) (13,641)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ..................... 96 178
Short term debt repayments ................................. (1,495) (7,257)
Long-term debt (repayments) borrowings ..................... 14,252 (4,865)
Adjustments to conform year ends of certain pooled companies -- (4)
-------- --------
Net cash provided by (used in) financing activities 12,853 (11,948)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS ...................... 424 (25,955)
CASH AND CASH EQUIVALENTS, beginning of period ............... 1,285 31,534
======== ========
CASH AND CASH EQUIVALENTS, end of period ..................... $ 1,709 $ 5,579
======== ========
Supplemental Cash Flow Information:
Cash Paid for Interest ..................................... $ 1,762 $ 273
======== ========
Cash Paid for Income Taxes ................................. $ 673 $ 1,709
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 7
INDUSTRIAL DISTRIBUTION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999
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 (MROP) products. The Company
conducts business in 28 states and provides product expertise in the procurement
and application of MROP products to a wide range of industries.
1. BASIS OF PRESENTATION
IDG merged with three companies in 1998 which were accounted for as
poolings-of-interests (Pooled Companies) . Accordingly, their results of
operations are included for all periods presented. Acquisitions made in 1998 and
1999 using the purchase method of accounting are included from their respective
dates of acquisition.
The accompanying unaudited interim financial statements are prepared pursuant to
the rules and regulations for reporting on Form 10-Q. Accordingly, certain
information and footnotes required by generally accepted accounting principles
for complete financial statements are not included herein. The Company believes
all adjustments necessary for a fair presentation of these interim statements
have been included and are of a normal and recurring nature.
The interim statements should be read in conjunction with the Company's
financial statements and notes thereto, included in its annual report on form
10-K, for the fiscal year ended December 31, 1998, 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 the second quarter of 1999, the Company acquired Mel's Industrial
Supplies, Inc. This acquisition was accounted for using the purchase method of
accounting.
4. CREDIT FACILITY
In December 1998, the Company entered into a $125,000,000 revolving credit
facility with a six-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 for swinglines and
$10,000,000 for 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. This fee amounted to $56,426 and $37,250
for the three months ending June 30, 1999 and 1998 respectively. This agreement
amended the December 1997 agreement for $75,000,000. The amounts outstanding
under this facility at June 30, 1999 and 1998 were $49,000,000 and $4,000,000
respectively. Additionally, the Company has outstanding a letter of credit
issued under this facility for $2,081,000 as of June 30, 1999. 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 covenants
also prohibit the payment of dividends. The Company was in compliance with
these covenants as of June 30, 1999.
5. CAPITAL STOCK
During the second quarter of 1999, the Company issued 32,530 shares of its
common stock through its employee stock purchase plan. The Company also
exercised its right of offset and cancelled 17,218 shares of common stock which
had been held in escrow in accordance with the acquisition agreements of the
affected companies.
<PAGE> 8
6. COMMITMENTS AND CONTINGENCIES
On December 22, 1997, The Distribution Group ("TDG")(formally known as
Industrial Distribution Group, Inc), one of the companies acquired concurrent
with the initial public offering of IDG's common stock, 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 matter is currently under advisement of a Court
appointed business appraiser, and a report is expected back to the Court with in
the next 60 days.
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 that identified above, will not have a material
adverse effect on the Company's financial position or results of operations.
7. NEW PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which addresses
the accounting for derivative instruments. SFAS No. 133 was recently amended to
be effective for financial statements for the Company's fiscal quarters
beginning after January 1, 2001. The Company does not expect SFAS No. 133 will
have a significant effect on its current financial reporting.
8. PRO FORMA COMBINED FINANCIAL INFORMATION
The following pro forma combined financial information for the six months ended
June 30, 1999 and 1998, includes the results of the all companies acquired in
1998 and 1999 as if the acquisitions had occurred on January 1, 1998. This pro
forma combined financial information includes the effects of (a) the
acquisitions, (b) amortization of goodwill resulting from the acquisitions, (c)
adjustment of interest expense for the debt incurred related to the
acquisitions, and (d) provision for income taxes at 45%.
The earnings per share amounts are based on 8,518,912 and 8,537,349 common
shares deemed to be outstanding for the periods ended June 30, 1999 and 1998,
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 a portion of the
amortization of goodwill related to the acquisitions is not deductible for tax
purposes.
The pro forma combined financial information does not purport to represent what
the Company's financial position or results of operations would actually have
been if such transactions and events in fact had occurred on those dates or to
project the Company's results of operations for any future period. (Amounts are
in thousands, except for per share amounts.)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1999 1998
-------- --------
<S> <C> <C>
Net Sales $275,117 $296,872
-------- --------
Net Income $ 1,318 $ 3,197
======== ========
Earnings per Share $ .15 $ .37
======== ========
</TABLE>
ITEM. 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion is based upon the historical financial results of
the Company, and companies accounted for under the pooling-of-interests method
of accounting for the periods presented. Results of operations from acquisitions
made using the purchase method of accounting have also been included from their
date of acquisition.
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.
<PAGE> 9
This discussion may contain certain forward-looking statements concerning
the Company's operations, performance, and financial condition, including, in
particular, the likelihood of the Company's success in developing and expanding
its business. These statements are based upon a number of assumptions and
estimates that are inherently subject to significant uncertainties and
contingencies, many of which are beyond the control of the Company. Actual
results may differ materially from those expressed or implied by such
forward-looking statements. Factors that could cause actual results to differ
include, but are not limited to, the availability of attractive acquisition
opportunities, the successful integration and profitable management of acquired
businesses, improvement of operating efficiencies, the availability of working
capital and financing for future acquisitions, the Company's ability to grow
internally through expansion of services and customer bases, its ability to
reduce overhead, seasonality, the continuation of key supplier relationships,
the ability of the Company to compete successfully in the highly competitive and
diverse MROP market, the Company's ability to maintain key personnel, the
availability of key personnel for employment by the Company, the effects of the
Year 2000 issue, and other factors discussed in more detail under "Item
1-Business" of the Company's Annual Report on Form 10-K for fiscal 1998.
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
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
The following table sets forth certain historical financial data for IDG and
shows such data as a percentage of net sales for the periods indicated (dollars
in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30
--------------------------------------
1999 1998
-------- -------
<S> <C> <C> <C> <C>
Net Sales $137,250 100.0% $106,638 100.0%
Cost of Sales 107,279 78.2 82,722 77.6
-------- ----- -------- -----
Gross Profit 29,971 21.8 23,916 22.4
Selling, General and Administrative 27,847 20.3 21,261 19.9
-------- ----- -------- -----
Operating Income $ 2,124 1.5% $ 2,655 2.5%
======== ===== ======== =====
</TABLE>
Net sales increased $30.6 million or 28.7% from $106.6 million for the three
months ended June 30, 1998 to $137.2 million for the three months ended June 30,
1999. This was primarily due to the revenue contributed from acquisitions, which
is somewhat offset by a 8.2% decline in same store revenue due to an industry
slowdown in the manufacturing sector nationwide.
Cost of sales increased $24.6 million from $82.7 million for the three months
ended June 30, 1998 to $107.3 million for the three months ended June 30, 1999.
As a percentage of net sales, cost of sales increased from 77.6% in 1998 to
78.2% in 1999. The increase in cost of sales as a percentage of net sales is
primarily due to a change in total company product mix as a result of
acquisitions and increased competition in the marketplace.
Selling, general, and administrative expenses increased $6.5 million from $21.3
million for the three months ended June 30, 1998 to $27.8 million for the three
months ended June 30, 1999. The increase is primarily attributable to the effect
of acquisitions. As a percentage of net sales, selling, general, and
administrative expenses increased from 19.9% in 1998 to 20.3% in 1999. Expenses
related to establishing a Corporate headquarters increased over the prior year
primarily due to increased staffing levels to fill key strategic positions,
including procurement, information systems, and flexible procurement solutions
in order to continue to build the infrastructure to support the now 27 operating
companies. For 1998, SG&A expenses included $133,000 of non-recurring expenses
related to acquisitions made during the second quarter of 1998. Excluding
Corporate expenses for both years and non-recurring acquisition costs for 1998,
SG&A was 19.4% of net sales for 1999 as compared to 18.9% in 1998. The increase
in SG&A as a percent of sales is the result of fixed costs as a percentage of
sales increasing due to the decline in revenues from the industry slowdown, and
the costs associated with the integration and physical combination of several
operating facilities.
Operating income decreased $531,000 from $2.7 million for the three months ended
June 30, 1998 to $2.1 million for the three months ended June 30, 1999. As a
percentage of net sales, operating income decreased from 2.5% in 1998 to 1.5% in
1999.
<PAGE> 10
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
The following table sets forth certain historical financial data for IDG and
shows such data as a percentage of net sales for the periods indicated (dollars
in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
---------------------------------------
1999 1998
-------- --------
<S> <C> <C> <C> <C>
Net Sales $273,145 100.0% $196,401 100.0%
Cost of Sales 213,062 78.0 151,560 77.2
-------- ----- -------- -----
Gross Profit 60,083 22.0 44,841 22.8
Selling, General and Administrative 56,587 20.7 40,076 20.4
-------- ----- -------- -----
Operating Income $ 3,496 1.3% $ 4,765 2.4%
======== ===== ======== =====
</TABLE>
Net sales increased $76.7 million or 39% from $196.4 million for the six months
ended June 30, 1998 to $273.1 million for the six months ended June 30, 1999.
This was primarily due to the revenue contributed from acquisitions, but was
somewhat offset by a 8.0% decline in same store revenues due to an industry
slowdown in the manufacturing sectors nationwide.
Cost of sales increased $61.5 million from $151.6 million for the six months
ended June 30, 1998 to $213.1 million for the six months ended June 30, 1999. As
a percentage of net sales, cost of sales increased from 77.2% in 1998 to 78.0%
in 1999. The increase in cost of sales is primarily due to a change in total
company product mix as a result of acquisitions and increased competition in the
marketplace.
Selling, general, and administrative expenses increased $16.5 million for the
six months ended June 30, 1998 from $40.1 million in 1998 to $56.6 million in
1999. The increase is primarily attributable to the effect of acquisitions. As a
percentage of net sales, selling, general, and administrative expenses increased
from 20.4% in 1998 to 20.7% in 1999. Expenses for the Corporate office increased
$1.3 million over the prior year primarily due to a new facility lease and
increased staffing levels as discussed above for the three month period.
Included in selling, general and administrative expenses for the six months
ended June 30, 1999 is a charge of $693,000 for expenses associated with the
departure of the former CEO, and the closure of the Chevy Chase, Maryland
office. For 1998, SG&A expenses included $317,000 of non-recurring expenses
related to acquisitions made during the first two quarters of 1998. Excluding
Corporate expenses for both years, non-recurring acquisition costs for 1998 and
the one time charge for the departure of the former CEO for 1999, SG&A was 19.6%
of net sales for 1999 as compared to 19.1% in 1998. The increase in SG&A as a
percent of sales is primarily due to fixed costs as a percentage of sales
increasing due to the decline in revenues from the industry slow down and the
costs associated with the integration and physical combination of several
operating facilities.
Operating income decreased $1.3 million from $4.8 million for the six months
ended June 30, 1998 to $3.5 million for the six months ended June 30, 1999. As a
percentage of net sales, operating income decreased from 2.4% in 1998 to 1.3% in
1999.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had $1.7 million in cash, an additional $88.2
million of working capital, and $74 million available under its $125 million
revolving credit facility with a six-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.
Net cash (used in) operating activities for the six months ended June 30,
1999 and 1998 was ($1.1 million) and ($0.4 million) respectively. The change was
principally due to increased needs for working capital.
Net cash (used in) investing activities for the six months ended June 30,
1999 and 1998 was ($11.3 million) and ($13.6 million), respectively. In 1999,
the cash used was primarily for property additions, in particular a new office
and warehouse
<PAGE> 11
facility for a subsidiary and the funding of the Company's Wide Area Network
(WAN) and Enterprise Resource Planning (ERP) System. In 1998, the cash used was
primarily for acquisitions.
Net cash provided by (used in) financing activities for the three months
ended June 30, 1999 and 1998 was $12.8 million and ($11.9 million),
respectively. The change was principally due to borrowing of funds for
operations, acquisitions and property additions.
YEAR 2000
Impact of the Year 2000 Issue
Generally, the year 2000 risk issue involves computer software and
hardware that are not able to perform without interruption into the year 2000.
The arrival of the year 2000 poses a unique worldwide challenge to the ability
of all systems to correctly recognize the date change from December 31, 1999 to
January 1, 2000. If the Company's systems did not correctly recognize such a
date change, computer applications that rely on the date field could fail or
create erroneous results. Such failures or erroneous results could result in the
temporary inability to process transactions, send invoices or engage in similar
normal business activities. If not adequately addressed by the Company or its
suppliers, customers or other companies with which it does business, the year
2000 issue could result in a material adverse impact on the Company's financial
condition and results of operations.
The Company's State of Readiness
The Company's 13 hub business unit presidents and their IT staff are
responsible for the respective business units' identification and remediation of
date recognition problems in both information technology (IT) and non-systems IT
functions and processes that include microcontrollers and other embedded
computer technology. The Company hired a chief information officer in August
1998 whose responsibilities include coordinating the consolidation of the
business units' IT systems. He has assumed oversight responsibility for the
business units' year 2000 initiatives.
The Company's business units have developed plans to address issues
related to the year 2000 risk. Their plans consist of four phases: (1) assessing
both IT systems and non-systems IT functions and processes; (2) remediating year
2000 problems; (3) testing the remediated systems; and (4) implementing the
remediated systems. The chart below shows the number of the Company's 13
business units that have completed each phase of the year 2000 plans:
<TABLE>
<CAPTION>
STAGES OF THE COMPANY'S
YEAR 2000 PLAN
- --------------------------------------------------------------------------------------------------------------
PHASE IT SYSTEMS NON-SYSTEMS IT FUNCTIONS
----- ---------- ------------------------
<S> <C> <C>
(1) Assessment 13 13
(2) Remediation 13 13
(3) Testing 4 1
(4) Implementation 9 12
</TABLE>
The Company expects the remediation, testing and implementation of its
year 2000 plan to be completed at all of its business units by the end of the
third quarter of 1999. The following is the Year 2000 compliance schedule for
the four business units that are in the Testing Phase.
<TABLE>
<CAPTION>
YEAR 2000 COMPLIANCE SCHEDULE
-----------------------------------------------------------------
Business Unit Names Year 2000 Compliant Date
------------------- ------------------------
<S> <C>
Tri-Star Industrial Supply, Inc. August 1999
The Distribution Group August 1999
IDG New England September 1999
B & J Industrial Supply Co. July 1999
</TABLE>
For operational reasons, the Company is purchasing and implementing an
Enterprise Resource Planing (ERP) IT system. The system will be implemented in
stages beginning the third quarter of 2000, with a targeted completion date of
early 2002. The ERP system, which the Company believes will be year 2000
compliant when installed, will replace the current systems being
<PAGE> 12
remediated at the business units. The Company's purchase of the enterprise-wide
IT system is a part of its continuing effort to implement system-wide
efficiencies.
Costs to Address Year 2000 Issues
The Company does not anticipate that the year 2000 related costs
(excluding the $24.7 million expenditure for the ERP and WAN system mentioned
above that is being installed for operational reasons unrelated to year 2000
issues) will be material to its financial condition or results of operations.
Excluding the expenditures for ERP and WAN, the Company estimates that its total
costs for the evaluation, remediation, testing and implementation of its IT and
non-IT systems in connection with the year 2000 issue will range from $500,000
to $600,000. Approximately $460,000 of such costs have been incurred to date.
The Company is funding such expenditures from available sources of capital. The
Company will spend approximately 35% of the anticipated year 2000 costs for the
remediation of software. The remainder of the expenditures relate to the
replacement of systems and equipment. All of the expected expenditures are
present in the Company's 1999 internal budgets. In accordance with generally
accepted accounting principles, certain year 2000 expenditures will be charged
to income for the year when the expense is incurred.
Risks of Third-Party Year 2000 Issues
The impact of year 2000 non-compliance by outside parties with whom the
Company transacts business cannot be accurately gauged. The Company has
contacted (1) key customers that aggregate approximately 80% of each business
unit's sales during 1998; (2) key trade vendors that supply approximately 80% of
products sold by the Company in 1998; and (3) key utility vendors. The Company
intends to follow-up with parties that fail to respond to its inquiries.
The Company's Contingency Plans
The Company is developing contingency plans to address reasonably
likely worst case year 2000 scenarios. They were reviewed by the Audit
Committee of the Company's Board during the August 5, 1999 Board Meeting. These
scenarios include: (1) an interruption in the supply of goods and services from
the Company's vendors; (2) the inability of a business unit's IT system to
interface with the IT systems of other business units or the Company's corporate
office; and (3) the inability of the Company's e-commerce systems to integrate
with its customers' systems. The Company will be completing its contingency
planning with respect to these and other scenarios during the third quarter of
1999.
A review of the company vendors was conducted to determine a Key Vendor
list. There were sixty-two vendors selected that make up 80% of IDG purchases.
The Company sent year 2000-compliance surveys to these key vendors. At the end
of the second quarter twenty-three vendors had responded; all were compliant or
have plans to be compliant. A follow up letter has been sent to the remaining
thirty-nine vendors and telephonic communication for non-replies or confirmation
of data submitted will be made. Should the Company believe that a key vendor
would not be ready for the year 2000-date change, the Company may purchase
critical inventory from alternate acceptable vendors or stockpile important
product lines.
The Company believes that should the worst case scenarios described in
subparagraphs (2) or (3) above occur, the Company could utilize telephone or
facsimile communications for a short period of time.
See "Item 1. Business--Certain Factors Affecting Forward Looking
Statements--Year 2000 Compliance" in the Company's 1998 Annual Report on Form
10K for a discussion of risks.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No significant changes have occurred since the filing of the Company's Annual
Report on Form 10K.
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on May 6, 1999, at which
only the election of eight nominees for directors was voted on. All eight
nominees were elected, with the following vote totals:
<TABLE>
<CAPTION>
NOMINEE VOTES FOR VOTES WITHHOLD
------- --------- --------------
<S> <C> <C>
David K. Barth 6,330,892 171,891
William J. Burkland 6,408,484 94,299
William R. Fenoglio 6,451,455 51,327
William T. Parr 6,346,466 156,317
George L. Sachs, Jr. 6,340,182 162,600
Richard M. Seigel 6,452,482 50,301
Andrew B. Shearer 6,408,484 94,299
Douglass C. Smith 6,236,283 266,500
</TABLE>
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)
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INDUSTRIAL DISTRIBUTION GROUP, INC.
(Registrant)
Date: August 13, 1999 By: /s/ Jack P. Healey
-------------------------------------------
Jack P. Healey
Senior Vice President and Chief Financial
Officer (Duly Authorized Officer and
Principal Accounting and Financial Officer)
<PAGE> 1
EXHIBIT 11
INDUSTRIAL DISTRIBUTION GROUP, INC.
COMPUTATION OF EARNINGS PER SHARE
FOR THE THREE AND SIX MONTHS PERIODS ENDED JUNE 30, 1999 AND 1998
(In Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income $ 653 $1,700 $1,173 $3,076
====== ====== ====== ======
Weighted average common
shares outstanding 8,540 8,200 8,519 8,052
Add - Dilutive effect of outstanding
options (as determined by the
application of the treasury stock method) -- 59 -- 58
------ ------ ------ ------
Weighted average common and
common equivalent
shares outstanding 8,540 8,259 8,519 8,110
====== ====== ====== ======
Primary earnings per share: $ .08 $ .21 $ .14 $ .38
====== ====== ====== ======
Diluted earnings per share: $ .08 $ .21 $ .14 $ .38
====== ====== ====== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF INDUSTRIAL DISTRIBUTION GROUP, INC. FOR THE SIX MONTHS
ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,709
<SECURITIES> 0
<RECEIVABLES> 66,600
<ALLOWANCES> (1,717)
<INVENTORY> 63,585
<CURRENT-ASSETS> 141,661
<PP&E> 40,168
<DEPRECIATION> (7,879)
<TOTAL-ASSETS> 228,515
<CURRENT-LIABILITIES> 51,753
<BONDS> 0
0
0
<COMMON> 86
<OTHER-SE> 114,972
<TOTAL-LIABILITY-AND-EQUITY> 228,515
<SALES> 273,145
<TOTAL-REVENUES> 273,145
<CGS> 213,062
<TOTAL-COSTS> 269,649
<OTHER-EXPENSES> (181)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,521
<INCOME-PRETAX> 2,156
<INCOME-TAX> 983
<INCOME-CONTINUING> 1,173
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
