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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 No. 001-13195
INDUSTRIAL DISTRIBUTION GROUP, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 58-2299339
-------------------------------- ------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
950 EAST PACES FERRY ROAD, SUITE 1575, ATLANTA, GEORGIA 30326
--------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (404) 949-2100
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<S> <C>
Title of Each Class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, Par Value $0.01 Per Share New York Stock Exchange
- --------------------------------------- -----------------------------------
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10K. [X]
The aggregate market value of the voting stock held by nonaffiliates
(which for purposes hereof are all holders other than executive officers and
directors) of the Registrant as of March 1, 2000 is
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$24,061,903 (based on 7,856,948 shares held by nonaffiliates at $3 1/16 per
share, the last sales price on the NYSE on March 1, 2000).
At March 1, 2000, there were issued and outstanding 8,770,341 shares of
Common Stock, par value $0.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the 2000
Annual Meeting of Stockholders, to be filed with the Commission, are
incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS.
BACKGROUND AND GENERAL
Industrial Distribution Group, Inc. was formed in February 1997 to
create a leading, nationwide supplier of cost-effective, flexible procurement
solutions for manufacturers and other users of industrial maintenance, repair,
operating, and production (MROP) products. We distribute a full line of these
products, emphasizing our specialized expertise in product applications. Our
principal product categories include abrasives, cutting tools, hand and power
tools, coolants, lubricants, and adhesives.
Our application and product specialists are able to analyze a
customer's acquisition, possession, and application processes for the supplies
we distribute in order to design programs to streamline the processes and reduce
their associated costs. These programs may include improving a customer's
production and procurement processes, standardizing the products they use,
reducing the number of suppliers from which they purchase supplies, or
developing integrated supply arrangements that outsource to us some or all of
their maintenance, repair, operating, and production procurement and management
functions.
In September 1997, we completed our initial public offering of common
stock and, at the same time, acquired and combined the businesses of nine
industrial distribution companies. Since that time we have completed the
acquisition of 18 additional companies. We intend to establish a nationwide
presence, with maintenance, repair, operating, and production product and
service capability in all or most of the top 75 U. S. industrial markets.
Currently, we have 64 operating locations in 60 cities, which include 37 of the
top 75 U.S. industrial markets, along with two small facilities abroad. Our more
than 45,000 customers include a diverse group of major national and
international corporations, including AlliedSignal, Black & Decker, Boeing,
Chrysler, General Motors, Hoechst Celanese, PPG Industries, and Shell Oil, as
well as small and large local and regional businesses. On a pro forma combined
basis, we had net sales of approximately $542.1 million for the year ended
December 31, 1999.
INDUSTRY AND BUSINESS STRATEGY OVERVIEW
Manufacturers, processors, and other producers of industrial,
commercial, or consumer products have a continual need for a broad range of
industrial MROP products. Many of these products -- such as drill bits,
sandpaper, and saw blades -- are consumed in production processes and are
essential to maintain at the point of production to avoid unnecessary downtime.
Other MROP products -- such as power tools, scales, hoists, and lathes -- have
relatively longer operational lives and are therefore purchased less frequently,
but still must be available "on time" in order to achieve production
efficiencies.
We estimate that the size of the market for industrial MROP products in
which we participate primarily is approximately $70 billion annually. However,
the entire U.S. MROP market is estimated to be in excess of $175 billion
annually. This broader market includes electrical, PVF (pipes, valves, and
fittings), power transmission, and other product categories in which we
participate to a lesser extent. This market is highly fragmented, with the 50
largest distributors accounting for less than 21% of the market. Based on 1998
sales, IDG is the 20th largest distributor of MROP products in the nation.
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Manufacturers and other users of MROP products are seeking ways to
enhance efficiencies and reduce MROP process and procurement costs in order to
compete more effectively in the global economy. As a result, the industrial
supply industry is experiencing consolidation, as customers focus on the
convenience, cost savings, and economies of scale associated with a reduced
number of suppliers capable of providing superior service and product selection.
Further, as manufacturers focus on their core manufacturing or other production
competencies, they are increasingly outsourcing their MROP procurement,
management, and application processes in search of comprehensive MROP solutions,
such as integrated supply. We believe that we have the size, scale of
operations, and resources necessary to benefit from these industry trends and
compete effectively in the evolving MROP supply industry. The distribution
channel associated with the MROP market place is evolving. The e-commerce and
business to business solutions introduced by technological advancements and the
Internet are changing the distribution channel in the MROP marketplace. The
first distributors to enter this space have been those who primarily use
catalogs to sell their products. IDG with its product expertise and offering of
non-stock inventory will migrate to this supply channel as the IT systems, part
number standardization and product offering standardization develops.
One of our core competencies is our extensive product expertise. With
our understanding of the most appropriate product for specific customer
applications, we help identify the MROP product best suited for a customer's
specific need in order to lower the customer's total MROP costs. Our
comprehensive product line supports our commitment to deliver the most
appropriate product to our customers. In addition to maintaining over 100,000
stock keeping units, as well as special items in stock for regular customers, we
can provide virtually any MROP item, including special-order items.
We believe the key to serving customers in the changing MROP market is
the ability to design and implement customized flexible procurement solutions
for acquiring, possessing, and applying MROP products to satisfy each customer's
particular needs and achieve its cost reduction objectives. The spectrum of
services necessary to deliver such solutions is broad. For customers who are not
yet prepared to outsource their entire MROP procurement and management
functions, we provide a range of options from which customers may select the
appropriate types and level of service. For customers who desire total
procurement solutions designed and implemented through a single distributor, we
offer our "fully integrated supply" programs, which permit customers to
outsource to us the entire MROP procurement and management function, including
our ownership of inventory in the customer's on-site MROP supply room, or tool
crib.
Providing superior quality and a comprehensive range of MROP services
to customers is our hallmark. As part of our commitment to customer service, we
emphasize quality assurance in all phases of our operations. Our sales and
service personnel receive ongoing periodic training in total quality management
and other team management skills to assure such quality performance. We also
will seek certification under the International Standards Organization ("ISO")
9002 standards for distribution with respect to our principal locations and
expect to make such certification a company-wide objective for all future
principal locations. Currently, nine of the Company's 13 operating "hubs" are
ISO 9002 certified.
We believe that significant opportunities exist to increase revenues
and earnings. Through focused marketing both inside and outside the United
States, we are seeking to add revenue by offering additional products and
services to new and existing customers and identifying any unserved facilities
of our larger existing customers. Where necessary to increase our market share,
we will open or expand facilities in the vicinity of existing operations. We
will also consider the desirability of internal expansion into new geographic
markets, focusing primarily on MROP markets in the United States.
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While we are no longer actively seeking acquisition prospects, we may make
selective acquisitions of successful MROP distribution and related businesses
that provide access to a particular strategic market.
FLEXIBLE PROCUREMENT SOLUTIONS; INTEGRATED SUPPLY
One of our fundamental strengths is the ability to deliver customized
flexible procurement solutions that are specially designed to reduce a
particular customer's MROP costs. The spectrum of services necessary to design
and implement such solutions for customers in the changing industrial MROP
market is broad and must encompass all three phases of a customer's MROP cycle
- -- acquisition, possession, and application. We offer the entire spectrum of
services in order to assure our ability to design and implement procurement
solutions that meet each particular customer's MROP requirements.
Some customers may require nearly the entire spectrum of services -- a
so-called "fully integrated supply" relationship, where we essentially form a
strategic alliance with the customer to procure, manage, and apply MROP products
at the customer's site and, in many cases, to share the benefits of the cost
reductions achieved. Our fully integrated supply relationships, which are not
standardized and vary from customer to customer, usually include:
- licensing our proprietary Supply Management System to the customer;
- gaining access to plant floors to re-engineer procurement and
production processes and standardize MROP products;
- coordinating the purchase of multiple MROP product lines;
- providing consolidated invoices and customized management reports via
a direct network link to customers; and
- managing and staffing tool cribs.
In addition, in a fully integrated supply relationship, we, rather than the
customer, generally own the inventory in the tool crib. We believe that the
nature of integrated supply relationships will continue to evolve. We will
therefore seek to maintain our capability to provide whatever level of
integration our customers may require over time.
In a fully integrated supply relationship, we often guarantee a minimum
annual reduction in the customer's total MROP costs. We believe we can achieve
such guaranteed cost reductions through our focused and ongoing analysis and
re-engineering of a customer's production processes to reduce the variety and
number of MROP products that the customer uses. In addition to the contractually
guaranteed cost reductions, we often achieve additional costs savings for the
customer through the reduction of certain tool crib staffing expenses; the
reduction in shrinkage and obsolete stock due to better inventory controls; and
the elimination of certain inventory holding costs. Where we save additional
costs for a customer through process improvements, the customer usually shares
the additional savings with us.
We believe that, for appropriate customers, a fully integrated supply
arrangement also has other benefits. For example, through the use of our
proprietary Supply Management System, the customer experiences a better fill
rate for MROP products; reduces production downtime due to the unavailability
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of key products; and obtains more useful information about inventory needs and
consumption by cost center than previously collected.
For customers that require less comprehensive flexible procurement
solutions, we can design and implement special arrangements to provide those
services needed by the customer. In addition to selections from the services
described for fully integrated supply arrangements, these specialized services
may include any one or more of the following:
- providing consolidated billing for MROP products and computerized
management reports to customers regarding purchases and inventory
levels;
- installing computer software and hardware to implement an electronic
data interchange system to enable the customer to order products from
its own location electronically without contacting the Company by
telephone or facsimile; and
- bar coding products in a customer's tool crib to control inventory and
track consumption by product, employee, or cost center.
Other services, as needed to respond to a particular customer's MROP
requirements, can be designed and implemented to achieve the desired solution.
At December 31, 1999, the Company had in place 31 fully integrated
supply arrangements with customers covering 38 sites, and arrangements for
flexible procurement solution services with over 250 customers.
PRODUCTS
We offer a full line of industrial MROP products, stock specific items
for regular customers, and can satisfy virtually any requirement a customer may
have for an MROP application or service. Our principal categories of products
include abrasives, cutting tools, hand and power tools, coolants, lubricants,
and adhesives, among others. We are able to offer significant depth and breadth
in our core product lines throughout our nationwide operations, which
distinguishes us from most of our present competitors. On an individual hub
basis, our products may be ordered electronically through e-commerce, by
telephone, by mail, or by facsimile. We seek at all times to provide our
customers with the most convenient method of selecting and ordering products,
which in the future may include paper and electronic catalogs, Internet
commerce, and other publications. The Company is presently investing in the IT
systems necessary to successfully compete in the e-commerce and business to
business supply chain.
Our offering of specific products from multiple manufacturers at
different prices and quality levels permits us to offer the product that
provides the best value for the customer. For example, if a customer requires a
drill bit to drill 100 holes, purchasing a top-of-the line product that is
designed for a requirement of drilling 10,000 holes would be inefficient and
costly. Our application and product specialists are trained specifically to
assist customers in making such intelligent cost-saving purchases, with the goal
of lowering the customer's total MROP product costs. We believe these factors
will significantly enhance our volume of repeat business, and they are an
integral part of our overall customer costs reduction and total procurement
solution.
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The following table sets forth the MROP products we offer, based on the
Industrial Distribution Association product categories, describes typical
products in each category, and presents the percentage of our aggregate revenues
from sales of the product category for 1999:
<TABLE>
<CAPTION>
% of
Aggregate
Product Category Typical Products Revenue
- ---------------- ---------------- -------
<S> <C> <C>
Cutting Tools............................... Drills, Taps, Carbide Tools, End Mills 24.2%
Abrasives................................... Grinding Wheels, Sanding Belts, Discs, Sheets or 16.5%
Rolls
Hand Tools.................................. Wrenches, Socket Sets, Screw Drivers, Hammers 7.9%
Power Tools................................. Air and Electric Drills, Air Compressors, Impact 6.7%
Wrenches, Screwdrivers
Machinery................................... Metal Removal Equipment, Metal Forming Equipment 6.5%
Maintenance Equipment & Supplies........... Hydraulic Tools, Paint, Lubrication Equipment 5.4%
Coolants, Lubricants, and Adhesives......... Metal Cutting Coolants, Aerosols, Industrial 5.0%
Adhesives
Safety Products............................. Gloves, Signs, Absorbents, Glasses 4.2%
Material Handling Equipment................. Hosts, Slings, Chain, Shelving, Casters 3.5%
Machine Tools & Accessories................. Milling Machines, Work Holding Vises, Tool Holders 2.7%
Other Products.............................. Special Order Items and Miscellaneous 2.4%
Saw Blades.................................. Band, Hack, Hole, Jig Saw Blades 2.0%
Contractor Supplies......................... Power-Actuated Tools, Ladders, Shovels 1.7%
Tapes....................................... Masking, Filament and Duct Tape 1.6%
Fasteners................................... Socket Screws, Hex Screws, Anchors 1.3%
Fluid Power................................. Hydraulic and Pneumatic Valves, Cylinders 1.3%
Power Transmission Equipment................ Belts, Drives, Bearings, Gears, Pulleys 1.2%
Electrical.................................. Fuses, Electrical Switches, Controls 1.1%
Brushes..................................... Wire Wheel, Floor Brooms 1.1%
Quality Control Products.................... Electronic Calipers, Micrometers 1.0%
Tool & Die Supplies......................... Ground Stock, Drill Rod, Die Sets 0.9%
Industrial Hose............................. Air Hose, Water Hose 0.9%
Welding Equipment & Supplies................ Welders, Weld Rod 0.4%
Industrial Pipes, Valves & Fittings......... Pipes, Valves, Fittings 0.3%
Metal Goods................................. Angle Iron, Conduit 0.2%
-----
Total 100.0%
</TABLE>
In addition to maintaining over 100,000 SKUs in stock, we often
maintain supplies of special items for regular customers. Moreover, we are able
to supply virtually any special order MROP item. In order to achieve costs
savings for us and for our customers, we periodically review our special order
activities to identify items ordered with sufficient frequency to warrant
inclusion in our stock.
We currently obtain products from approximately 24,000 vendors. During
1999, no vendor provided as much as 10% of the products we sold. We believe we
are not materially dependent on any one vendor or small group of vendors.
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We ship products anywhere in the world in the time frame required by
the customer. To facilitate such "on time" delivery of our products, we store
our stock MROP products primarily in warehouses at various locations across the
United States.
CUSTOMERS
Our customers, who number over 45,000, include a broad range of
industrial, commercial, and institutional users of MROP products, from
one-person machine shops to national and multinational corporations such as
AlliedSignal, Black & Decker, Boeing, Chrysler, General Motors, Hoechst
Celanese, PPG Industries, and Shell Oil. For 1999, we sold products to over
1,500 customers who purchased at least $50,000 of products, and no single
customer accounted for as much as 5% of our net sales.
We will continue to serve a large number and wide variety of customers,
as part of our planned growth and nationwide expansion strategy. Management does
expect, however, that we will place special emphasis on marketing and sales of
core product categories to mid- to large-sized users of MROP products who
require the value-added benefits of our flexible procurement solutions.
SALES AND MARKETING
We have approximately 309 outside sales representatives, 327 inside
sales/customer service representatives, and 21 application and product
specialists. Most of the inside sales/customer service representatives support
the outside sales representatives and are responsible for certain types of
customer service contacts and order entry. The application and product
specialists call on designated customers and are responsible for designing and
presenting our flexible procurement solutions to those customers and providing
technical support with respect to certain products. These specialists are highly
trained individuals who build relationships with customers and assist them in
reducing total procurement costs and improving production processes.
The Company has centralized the marketing efforts associated with its
Flexible Procurement Solutions which will allow it to compete more effectively
in local markets as well for contracts which encompass multiple operating unit
locations. Each operating unit has staff dedicated to these efforts who are
supervised by the Director of Flexible Procurement located at the Corporate
office.
We are currently designing one comprehensive digital catalog which will
represent a significant portion of the product offerings of the Company. This
process requires the Company to standardize its part numbering methodology and
descriptions of its inventory which is presently diverse among the operating
units. When this is complete, the Company will use this catalog for its
e-commerce solution in addition to providing both paper and CD ROM copies to
customers. Presently, the Company maintains separate catalogs among the business
units which they use in their local markets.
Each of our operating subsidiaries provides regular training programs
for its sales personnel and special training programs for any products
distributed only in its market area. Each operating subsidiary also maintains a
technical support group, as part of its overall sales and marketing function,
dedicated to answering specific customer inquiries, assisting customers with the
operation of products, and finding low cost solutions to manufacturing problems.
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MANAGEMENT INFORMATION SYSTEMS
We will procure, develop, maintain, and utilize computerized management
and information systems, including the utilization of highly specialized
distributor based software, our proprietary Supply Management System, and
InnoSource System for customer product procurement and management. All of these
systems are important elements of our ability to meet customers' requirements
for increasing levels of individualized total MROP procurement solutions and
also to achieve our desired level of operating efficiencies. We utilize our
proprietary Supply Management System in providing flexible procurement solutions
for customers.
Our IT strategy will allow management of key functions, including
communication links between warehouse and sales offices, inventory and accounts
receivable management, purchasing, pricing, sales and distribution, and the
preparation of periodic operating control reports that provide concise and
timely information regarding key aspects of its business. The Company is in the
process of re-evaluating the use of a comprehensive Enterprise Resource Planning
(ERP) system. The ERP platform is expansive, and it will take a prolonged period
of time to integrate the business units to this system. The modifications
necessary to improve the performance of the ERP system to a "distribution based"
system will also be substantial. In addition, the full benefits of the system
will not be realized until a majority of the businesses have integrated to the
system. The Company is presently evaluating different IT solutions which will
more quickly enable its disparate operating units to share inventory and
customer information in a more cost effective manner.
COMPETITION
The industrial MROP products industry is highly competitive and
features numerous distribution channels, including:
- national, regional, and local distributors;
- direct mail suppliers;
- Internet suppliers;
- large warehouse chains;
- hardware stores; and
- manufacturers' own sales forces.
Many of our competitors are small enterprises who sell to such customers in a
limited geographic area, but we also compete against several large MROP
distributors that have significantly greater resources than IDG. Certain of our
competitors sell identical products for lower prices than we offer.
We believe, however, that our ability to compete effectively is
dependent primarily upon our ability to respond to the needs of our customers
through quality service and product diversity and availability. We believe our
operating and growth strategies will yield operating efficiencies that enhance
our ability to compete successfully for the types of customers we desire.
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PERSONNEL
We had approximately 1,505 full-time and 39 part-time associates as of
December 31, 1999. Twelve of our associates are employed pursuant to a
collective bargaining agreement with local unions affiliated with the
International Brotherhood of Teamsters. We believe that the subsidiary that has
been employing these persons pursuant to that contract enjoys good relations
with these associates, and has not experienced work stoppages.
We believe our business relationships are good with all of our associates.
EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information regarding the executive officers of the Company is
set forth in the following table and paragraphs.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Patrick S. O'Keefe 47 President and Chief Executive Officer
Jack P. Healey 40 Senior Vice President, Chief Financial Officer, and
Secretary
Thomas W. Aldridge, Jr. 52 Senior Vice President
</TABLE>
Mr. O'Keefe joined us in December 1999 as our President, Chief
Executive Officer, and a director. Prior to assuming these responsibilities, Mr.
O'Keefe served as President of the ZEP Chemical Unit of National Service
Industries from December 1997 to October 1999. From July 1996 to July 1997, Mr.
O'Keefe served as the President and Chief Executive Officer of Huttig Building
Products, Inc. (formerly a subsidiary of Crane Co.) and from June 1994 to June
1996 he served as the President and Chief Executive Officer of Crane Canada (a
subsidiary of Crane Co.). Mr. O'Keefe is a member of the Executive Committee of
the Board of Directors. He received his undergraduate degree from Canisius
College and his Masters in Business Administration from the J.L. Kellogg
Graduate School of Management at Northwestern University in 1981.
Mr. Healey joined us in June 1997 as Vice President and Chief Financial
Officer, and became Senior Vice President in 1998. Prior to 1997, Mr. Healey was
the partner in charge of assurance services (since 1983) for Miller Ray Healey &
Houser, a regional accounting firm and member of the SEC practice section of the
AICPA, during which time he served as auditor for The Distribution Group, Inc.,
one of our operating subsidiaries. Prior to joining that firm, Mr. Healey was a
senior auditor with the international accounting firm of Ernst & Young. Mr.
Healey is a certified public accountant and a certified fraud examiner. He
received his undergraduate degree in accounting from Syracuse University.
Mr. Aldridge joined us in August 1998, as Senior Vice President of
Procurement. Prior to that time, Mr. Aldridge served (since 1991) as Senior Vice
President, Vendor Relations, of Affiliated Distributors, a purchasing
organization for industrial distributors. From 1987 to 1990, Mr. Aldridge served
as Vice President -- Sales of Bauer Corporation, a manufacturer of industrial
ladders and personal access equipment. From 1970 to 1987, he held various
management positions with AT&T, a telecommunications company. Mr. Aldridge
received his undergraduate degree from the University of Georgia.
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CERTAIN FACTORS AFFECTING FORWARD LOOKING STATEMENTS
From time to time, information provided by us or statements made by our
directors, officers or employees may constitute "forward-looking" statements
under the Private Securities Litigation Reform Act of 1995 and are subject to
numerous risks and uncertainties. Any statements made in this Annual Report on
Form 10-K, including any statements incorporated by reference, that are not
statements of historical fact are forward-looking statements. These
forward-looking statements and other forward-looking statements made by us or
our representatives are based on a number of assumptions and involve a number of
risks and uncertainties, and, accordingly, actual results could differ
materially. Factors that may cause such differences include, but are not limited
to, the following:
WE HAVE OPERATED AS A SINGLE ENTITY ONLY SINCE SEPTEMBER 1997 AND
CONTINUE TO FACE THE CHALLENGE OF INTEGRATING NEW COMPANIES.
Although each of our founding companies has operated for over 20 years,
we did not commence operations as a combined entity until September 1997. As a
result, we are still engaged in integrating these businesses, along with
subsequently acquired companies, and we cannot be certain that we will be able
to do so with enough success to be as profitable as we expect or desire.
OUR INFORMATION AND OPERATIONS SYSTEMS ARE NOT FULLY INTEGRATED, AND WE
MUST THEREFORE RELY ON THE SYSTEMS OF THE COMPANIES WE ACQUIRE UNTIL WE
CAN IMPLEMENT OUR CENTRALIZED SYSTEM.
Until we can fully implement centralized management systems, we will
utilize and be dependent upon the information and operating systems of the
companies we acquire for many functions. These functions include, among others,
product ordering, financial reporting and analysis, and inventory control.
Although we have put certain control mechanisms in place, we may experience
delays, disruptions, and unanticipated expenses in implementing, integrating,
and operating centralized systems. Any of these problems could have a material
adverse effect on our results of operations and financial condition. In
addition, we will not be able to achieve the full benefit of certain
contemplated operating efficiencies and competitive advantages until we have
fully implemented our centralized management information and operating systems.
WE RELY ON A VARIETY OF DISTRIBUTION RIGHTS GRANTED BY OUR SUPPLIERS TO
OFFER THEIR PRODUCT LINES TO OUR CUSTOMERS.
Until we fully implement more centralized procurement arrangements, we
will depend for a substantial portion of our business on the collection of
varied distribution arrangements with suppliers for certain product lines that
have been established by our several operating subsidiaries in their respective
geographic markets. A significant percentage of these current distribution
arrangements are oral, and many of them can be terminated by the supplier
immediately or upon short notice. The termination or limitation by any key
supplier of its relationship with us could have a material adverse effect on our
results of operations and financial condition.
OUR INDUSTRY IS VERY COMPETITIVE, BOTH AS TO THE NUMBER AND STRENGTH OF
THE DIFFERENT COMPANIES WITH WHICH WE COMPETE AND THE BUSINESS TERMS
OFFERED TO POTENTIAL CUSTOMERS.
The industrial maintenance, repair, operating, and production supplies
industry is highly competitive and features numerous distribution channels,
including:
- national, regional, and local distributors;
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- direct mail suppliers;
- Internet suppliers;
- large warehouse chains;
- hardware stores; and
- manufacturers' own sales forces.
Many of our competitors are small enterprises who sell to customers in a limited
geographic area, but we also compete against several large distributors that
have significantly greater resources than IDG. Competition with all of these
distributors has increased as customers increasingly seek low-cost alternatives
to traditional methods of purchasing and sources of supply by, among other
things, reducing the number of their maintenance, repair, operating, and
production suppliers.
Competition in the maintenance, repair, operating, and production
industry may increase in other ways as well. First, other distributors are
consolidating to achieve economies of scale and increase efficiencies. Second,
new competitors, of which we are not currently aware, may emerge, further
increasing competition.
Other aspects of our industry also make it very competitive. For
example, certain of our competitors sell the same products we sell at lower than
we offer. Moreover, we compete on the basis of responsiveness to the needs of
customers for quality service, product diversity, and availability. We cannot
assure you that we will be able to compete successfully under such conditions.
WE RELY HEAVILY ON OUR SENIOR MANAGEMENT AND THE EXPERTISE OF
MANAGEMENT PERSONNEL OF THE BUSINESSES WE ACQUIRE.
Our operations will depend for the immediate future on the efforts of
our executive officers, the heads of our business units, and the senior
management of the businesses we have acquired, especially as we enter into new
geographic markets. Our business and prospects could be adversely affected if
these persons, in significant numbers, do not perform their key roles as
expected, and we are unable to attract and retain qualified replacements.
THE DELIVERY OF OUR SERVICES REQUIRES HIGHLY SKILLED AND SPECIALIZED
EMPLOYEES WHO ARE NOT EASY TO LOCATE OR REPLACE.
The timely provision of our high-quality service requires an adequate
supply of skilled sales and customer service personnel, including the
application and product specialists whose expertise is an essential element of
our customer-oriented, flexible procurement solutions program. Accordingly, our
ability to implement strategies for our customers depends to a degree on our
ability to employ the skilled personnel necessary to meet our marketing and
servicing requirements. From time to time, we have experienced difficulty in
attracting or retaining sufficient numbers of qualified personnel. As a result,
our operating costs may be adversely affected by turnover in such positions. We
cannot assure you that we will be able to maintain an adequately skilled sales
and customer service force or that our labor expenses will not increase as a
result of a shortage in the supply of such skilled personnel.
OUR ABILITY TO SELL OUR PRODUCTS AND SERVICES IN THE QUANTITY WE DESIRE
DEPENDS HEAVILY UPON THE ECONOMIC CONDITIONS OF OUR CUSTOMERS.
Some of the primary markets for the products and services we sell are
subject to cyclical fluctuations that generally affect demand for industrial and
consumer durable goods produced by the
12
<PAGE> 13
users of maintenance, repair, operating, and production products. Consequently,
the demand for these products and services has been and will continue to be
influenced by many of those same national, regional, or even international
factors. Customers whose businesses are impacted directly by such events affect
our business when they delay or slow orders for maintenance, repair, operating,
and production products or services that they otherwise would have required if
their businesses had not been adversely affected. Changes in economic
conditions, such as the examples identified, resulting in a change in the
current business cycle could therefore have a material adverse effect on our
results of operations and financial condition.
MANAGEMENT AND CERTAIN INDIVIDUALS WHO HELPED FOUND US OWN OVER 41% OF
OUR STOCK AND THUS HAVE A SIGNIFICANT AMOUNT OF CONTROL OF THE COMPANY.
Our directors and officers, as well as former stockholders of our
founding companies, beneficially own an aggregate of approximately 41% of our
outstanding common stock. Accordingly, these persons, if they were to act in
concert, could potentially control the election of directors and other matters
requiring stockholder approval by simple majority vote.
WE CANNOT BE ABSOLUTELY CERTAIN THAT ALL YEAR 2000 PROBLEMS HAVE BEEN
AVOIDED.
The "year 2000 problem" arises from the widespread use of computer
programs that rely on two-digit date codes to perform computations or
decision-making functions. Many of these programs may fail due to an inability
to properly interpret date codes beginning January 1, 2000. For example, such
programs may misinterpret "00" as the year 1900 rather than 2000. In addition,
some equipment, being controlled by microprocessor chips, may not deal
appropriately with the year "00."
Although January 1, 2000 has passed without significant disruptions, the
year 2000 problem could still disrupt our operations and the systems of other
companies upon which our systems rely. If our systems or the systems of our
customers, product vendors, utility vendors, and banks experience unforeseen
year 2000 problems in the future, it may negatively impact our systems or
operations.
ITEM 2. DESCRIPTION OF FACILITIES.
Currently, we own 10 properties and lease 63 properties in 67 cities in
the United States for our warehouse, sales, and administrative offices. We also
lease two properties in two cities in other countries. Certain property
locations contain multiple operations such as a warehouse and a sales office.
The facilities range in size from 100 square feet to 122,000 square feet. Leases
for the facilities expire at various periods between 2000 and 2009. The
aggregate annual lease payments for real properties in 1999 were approximately
$3.9 million.
Our corporate offices are located in approximately 10,000 square feet
of office space at 950 East Paces Ferry Road, Suite 1575, Atlanta, Georgia. This
lease commenced in December 1998 and expires in December 2003. We have subleased
approximately 3,000 square feet of this office space.
We believe that our facilities are adequate for our current needs and
do not anticipate inordinate difficulty in replacing such facilities or opening
additional facilities, if needed.
ITEM 3. LEGAL PROCEEDINGS.
On December 22, 1997, TDG brought an action in DeKalb County Superior
Court, Georgia, File No. 97-14388-4, against a former stockholder, Alvis J.
Waite, under the Georgia dissenters' rights
13
<PAGE> 14
provisions of the Georgia Business Corporation Code (the "GBCC"). (The case was
subsequently transferred to the Superior Court of Fulton County, Georgia.) Mr.
Waite, as a stockholder of TDG, had exercised his rights pursuant to the GBCC to
dissent from the merger of TDG with us in 1997. TDG offered to pay Mr. Waite
$4.2 million for his interest in TDG; Mr. Waite rejected that offer and demanded
payment of $9 million. TDG brought this action to seek a judicial determination
of the value of Mr. Waite's interest in TDG as of the time of the merger. The
court appointed an appraiser to supervise the completion of discovery, to
conduct factual hearings and to render a report on the central valuation issues.
The appraiser rendered his report to the court on November 12, 1999, containing
a recommended value for Mr. Waite's interest of $8.475 million. TDG filed
objections to the report and its recommendations, challenging its conclusions
and analyses on several bases, and argued its objections before the court. On
March 14, 2000, the court entered judgment based on the appraiser's
recommendations. TDG is assessing the merits of appealing the judgment, although
the parties are engaged in discussions about possible settlement.
D. Gray and Clora P. Farley, former shareholders in Continental Air
Tool, Inc., a company that we acquired in March 1998, brought suit against us in
the Superior Court of Orange County on August 16, 1999. In connection with our
acquisition of Continental Air Tool, Mr. and Mrs. Farley received our restricted
common stock in exchange for their shares of stock in Continental Air Tool. The
written purchase agreement between us and the shareholders of Continental Air
Tool provided, among other things, that the restricted common stock received by
Mr. and Mrs. Farley could not be re-sold until we had complied with certain
filing requirements of the Securities and Exchange Commission (the "SEC"), as
required under the Securities Act of 1933. Mr. and Mrs. Farley claim that we
breached our obligation in the written agreement to use our "best efforts" to
cause a Registration Statement to remain in effect, and as a result they have
suffered damages in the approximate amount of $1.175 million. We removed the
case to the United States District Court for Central District of California on
December 2, 1999, and filed our answer on December 9, 1999 denying any and all
liability for the purported damages alleged by plaintiffs. As of March 17, 2000,
the Company had reached an agreement for the dismissal of the lawsuit and
arbitration and Mr. Farley had rejoined one of the Company's business units as
President.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of the fiscal year covered by this Report.
14
<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
Our common stock trades on the New York Stock Exchange ("NYSE") under
the symbol "IDG". The following table sets forth for the periods indicated the
high and low closing market prices of the common stock on the NYSE.
<TABLE>
<CAPTION>
PRICE RANGE
-----------
HIGH LOW
---- ---
<S> <C> <C>
1998
----
First Quarter........................................... $ 20 3/16 $ 15 9/16
Second Quarter.......................................... $ 20 3/4 $ 15
Third Quarter........................................... $ 16 9/16 $ 5 1/2
Fourth Quarter.......................................... $ 7 5/8 $ 5 3/8
1999
----
First Quarter........................................... $ 8 3/8 $ 5 1/4
Second Quarter.......................................... $ 6 3/4 $ 4 7/8
Third Quarter........................................... $ 5 3/16 $ 3 5/16
Fourth Quarter.......................................... $ 4 $ 2 11/16
2000
----
First Quarter (through March 15, 2000)................. $ 3 11/16 $ 2 7/8
</TABLE>
As of March 15, 2000, there were 662 holders of record of our common
stock. Investors who beneficially own our common stock that is held in street
name by brokerage firms or similar holders are not included in this number.
Accordingly, based upon the quantities of periodic reports requested by such
brokerage firms, we believe that the actual number of individual beneficial
owners of our common stock exceeds 1,600.
We have not paid dividends on our common stock. We currently intend to
retain our future earnings, if any, to finance the growth, development, and
expansion of our business and, accordingly, do not currently intend to declare
or pay any dividends on our common stock for the foreseeable future. The
declaration, payment, and amount of future dividends, if any, will be subject to
the discretion of our Board of Directors and will depend upon our future
earnings, results of operations, financial condition, and capital requirements,
among other factors. Under Delaware law, we are prohibited from paying any
dividends unless we have capital surplus or net profits available for this
purpose. In addition, our credit agreement with Bank One, N.A. (f/k/a The First
National Bank of Chicago) and other lenders prohibits the payment of dividends
in the event of a default under that agreement.
15
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA.
The following summary financial data as of and for the years ended
December 31, 1999, 1998, 1997, 1996 and 1995 have been derived from audited
financial statements of the Company. All such financial statements of the
Company reflect the requirements of the Securities and Exchange Commission's
Staff Accounting Bulletin No. 97 ("SAB 97"), which deem the historical financial
statements of B&J Industrial Supply Company ("B&J") -- one of the nine founding
companies we acquired to commence our current operations as a combined entity
(the "Combination") -- to be our historical financial statements for all periods
prior to the September 24, 1997, the accounting effective date of those
acquisitions. As a result, our financial statements, and the following data,
reflect the results of operations and financial condition of B&J combined with
Continental Air Tool, Inc., Northern Tool & Supply, Inc., and Hawley Industrial
Supplies, Inc., which we acquired during 1998 and are accounted for under the
pooling-of-interests accounting treatment (the "Pooled Companies") for the
periods prior to September 24, 1997; and the results of operations and financial
condition of all nine founding companies and the Pooled Companies are reflected
in our financial statements and data for only the period of time from and after
September 24, 1997. Companies acquired during 1998 and 1999 and accounted for
under purchase accounting treatment (which includes all companies acquired
during 1998 and 1999 other than the Pooled Companies) are shown only for the
period of time from and after our acquisition of them. Those facts account for a
substantial difference in these financial data as of and for the years ended
December 31, 1999, 1998 and 1997 as compared to prior years; they make
comparisons of the data among the periods misleading; and they are a further
reason that these historical results are not indicative of the results that we
may achieve in the future.
These selected financial data should be read in conjunction with our
audited consolidated financial statements and notes thereto, and Management's
Discussion and Analysis of Financial Condition and Results of Operations,
included in Item 7 of this Report.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Net sales $ 542,141 $ 437,610 $ 153,218 $ 68,266 $ 59,944
---------- ---------- ---------- ---------- ----------
Gross profit 119,181 100,425 35,492 15,492 14,181
Selling, general and administrative 116,756 89,954 31,595 14,649 13,281
---------- ---------- ---------- ---------- ----------
Operating income 2,425 10,471 3,897 843 900
Net income (loss) $ (1,889) $ 6,215 $ 2,316 $ 364 $ 322
BALANCE SHEET DATA:
Working capital $ 78,148 $ 80,989 $ 81,152 $ 9,551 $ 8,645
Property and equipment, net 31,538 24,619 9,910 2,156 2,082
Total assets 230,804 211,465 147,246 27,252 23,542
Long-term debt, including current portion 47,953 39,699 11,653 7,959 7,180
Stockholders' equity $ 112,072 $ 113,595 $ 99,490 $ 11,223 $ 9,425
</TABLE>
16
<PAGE> 17
ITEM 7. 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 MROP products, distributing a full line of such
products and providing specialized services to a diverse group of more than
45,000 customers. The Company sells MROP supplies directly from stock and
special order (non-stock), using catalogs or similar methods; such sales, on a
combined basis, were $371.6 million, $295.1 million and $225.0 million in 1999,
1998 and 1997, 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 $92.5 million, $93.6 million
and $80.8 million in 1999, 1998 and 1997 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. Revenues from integrated supply contracts,
on a combined basis, were $78.0 million in 1999, $48.9 million in 1998 and $26.3
million in 1997. Total sales for 1999, 1998 and 1997 on a combined basis were
$542.1 million, $437.6 million and $332.1 million respectively.
Management expects the upward trend in its integrated supply business,
and also its other flexible procurement solutions business, to continue for the
foreseeable future. This increase is driven by increasing demand from customers
to outsource their MROP procurement and management functions and for customized
MROP procurement solutions. As an industry trend, integrated supply and other
arrangements for flexible procurement solutions are still in the early stages of
development, but management believes such arrangements are becoming increasingly
attractive to customers. IDG has selected flexible procurement solutions 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 the
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 flexible procurement solutions 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
$842,000 in 1997, $1,132,000 in 1998 and $918,000 in 1999 to develop and upgrade
its information systems, including its proprietary Supply Management System,
InnoSource 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.
Under the provisions of SAB 97, the Company's historical financial
information prior to September 24, 1997 reflects only the operations of B&J
combined with 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
founding companies whose businesses were also acquired by the Company as of
September 24, 1997. Management has also included, therefore, its analysis of
certain combined financial information of the
17
<PAGE> 18
Company that reflect the historical results of all nine founding companies for
1997. For 1999 and 1998, results of the acquisitions accounted for under the
purchase method of accounting have been included.
In these discussions, most percentage 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.
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. For 1999 and 1998, the combined data
includes the results of the acquired companies under the purchase method of
accounting.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net Sales $542,141 100.0% $437,610 100.0% $332,169 100.0%
Cost of Sales 422,960 78.0 337,185 77.1 255,777 77.0
------- ---- ------- ---- ------- ----
Gross Profit 119,181 22.0 100,425 22.9 76,392 23.0
</TABLE>
These combined operating data for the periods prior to the Combination
on September 24, 1997, may not be indicative of the Company's post-Combination
operations for several reasons. The founding companies involved in the
Combination, and the Pooled Companies that were subsequently acquired, had each
operated as separate privately owned entities until their respective acquisition
by the Company. 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.
1999 COMPARED TO 1998
Net sales increased $104.5 million, or 23.9% from $437.6 million in
1998 to $542.1 million in 1999. The increase reflects $28.0 million of
additional flexible procurement solutions and integrated supply sales and the
effect of having a full year of operation for the companies acquired in 1998.
On a same store basis -- that is, reflecting acquired companies on the same
basis in each year -- net sales in 1999 declined by $28.6 million or 5%.
Cost of sales increased $85.8 million, or 25.4%, from $337.2 million in
1998 to $423.0 million in 1999, primarily as a result of including a full year's
cost of sales for the companies acquired in 1998. The cost of sales as a
percentage of net sales increased over the prior year primarily due to a shift
in the product mix of the acquired businesses; and to a lesser extent, the loss
of certain favorable procurement programs which were in place during 1998 and
the time required to re-establish similar or more competitive programs in 1999.
1998 COMPARED TO 1997
Net sales increased $105.4 million, or 31.7%, from $332.2 million in
1997 to $437.6 million in
18
<PAGE> 19
1998. In 1998, acquisitions accounted for under the purchase method of
accounting represented approximately $88.7 million of this increase. The
remainder of the increase was attributable, in major part, to an increase in
flexible procurement solutions and integrated supply sales that accounted for
$35.4 million of additional revenues during 1998. Excluding the effect of the
1998 acquisitions, general sales decreased as compared to 1997 due to the
conversion of certain existing customers who had been purchasing products on a
general sales basis to customers with whom the Company established arrangements
for integrated supply and other specialized services supply. Total sales,
excluding the effect of the 1998 acquisitions, increased by $16.7 million, or
5.8%, in 1998 as compared to 1997.
Cost of sales increased $81.4 million, or 31.8%, from $255.8 million in
1997 to $337.2 million in 1998, primarily as a result of increased sales during
the latter period. While there were variations in the product mix, cost of sales
as a percentage of net sales remained stable year over year.
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 and the Pooled Companies) for the periods prior to
September 24, 1997, and include the other eight founding companies and the
companies acquired after the combination using the purchase method of accounting
from their respective acquisitions dates forward, and shows such data as a
percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net Sales $542,141 100.0% $437,610 100.0% $153,218 100.0%
Cost of Sales 422,960 78.0 337,185 77.0 117,726 76.8
-------- ----- -------- ----- -------- -----
Gross Profit 119,181 22.0 100,425 23.0 35,492 23.2
Selling, General and Administrative 116,756 21.5 89,954 20.6 31,595 20.6
-------- ----- -------- ----- -------- -----
Operating Income $ 2,425 0.5% $ 10,471 2.4% $ 3,897 2.6%
======== ===== ======== ===== ======== =====
</TABLE>
1999 Compared to 1998
Net sales increased $104.5 million, or 23.9% from $437.6 million in
1998 to $542.1 million in 1999. The increase reflects $28.0 million of
additional flexible procurement solutions and integrated supply sales and the
effect of having a full year of operation for the companies acquired in 1998.
On a same store basis -- that is, reflecting acquired companies on the same
basis in each year -- net sales in 1999 declined by $28.6 million or 5%.
Cost of sales increased $85.8 million, or 25.4%, from $337.2 million in
1998 to $423.0 million in 1999, primarily as a result of including a full year's
cost of sales for the companies acquired in 1998. The cost of sales as a
percentage of net sales increased over the prior year, from 77.0% to 78.0%
primarily due to a shift in the product mix of the acquired businesses; and to a
lesser extent, the loss of certain favorable procurement programs which were in
place during 1998 and the time required to re-establish similar or more
competitive programs in 1999.
Selling, general, and administrative expenses increased $26.8 million,
or 29.8%, from $90.0 million in 1998 to $116.8 million in 1999. In 1999, $23.1
million of the increase is attributable to
19
<PAGE> 20
including the full year of operations for the companies acquired in 1998. Also
included in the increase are $4.4 million for the expected resolution of the
dissenting shareholder lawsuit involving one of the companies; $1.3 million for
executive separation and closing of the Chevy Chase, Maryland office; and
$250,000 for the write-off of non-realizable acquisition costs. Total selling,
general and administrative expenses, exclusive of the onetime charges and the
incremental effect of the 1998 acquisitions, decreased $2.2 million. Exclusive
of the onetime charges, selling, general and administrative expenses as a
percent of net sales declined slightly from 20.6% to 20.4%.
Operating income decreased $8.1 million, or 76.8%, from $10.5 million
in 1998 to $2.4 million in 1999, primarily as a result of the one-time charges
discussed above. Operating income as a percentage of net sales decreased,
however, from 2.4% in 1998 to .5% in 1999, also reflecting such effects.
1998 COMPARED TO 1997
Net sales increased $284.4 million, or 185.6%, from $153.2 million in
1997 to $437.6 million in 1998. This substantial increase is primarily the
result of SAB 97 accounting for the Combination, because 1998 includes the
contributed revenue of all nine founding companies for the entire year. Also,
this increase reflects the $88.7 million in revenues from other companies that
were acquired during 1998.
Cost of sales increased $219.5 million, or 186.4%, from $117.7 million
in 1997 to $337.2 million in 1998. The increase is primarily due to the
substantial increase in sales, which is primarily attributable to the effect of
the SAB 97 accounting for the Combination and the 1998 acquisitions as discussed
above. As a percentage of net sales, cost of sales increased slightly from 76.8%
in 1997 to 77.0% in 1998, due to the higher cost of sales percentage, relative
to B&J and the Pooled Companies, of the other founding companies and certain of
the companies acquired in 1998.
Selling, general, and administrative expenses increased $58.4 million,
or 184.7%, from $31.6 million in 1997 to $90.0 million in 1998, again primarily
attributable to the effect of the SAB 97 accounting and the acquisitions
discussed above. As a percentage of net sales, however, selling, general, and
administrative expenses remained steady at 20.6%, even though 1998 expenses
included $0.3 million of non-recurring expenses related to acquisitions.
Excluding these non-recurring expenses, the Company's selling, general, and
administrative expenses for 1998 reflected a slight decline to 20.5% as a
percentage of net sales.
In addition, during 1998 and primarily the fourth quarter of 1997, the
Company incurred substantial expenses relating to staffing a corporate office
and developing the infrastructure for complying with certain obligations related
to being a public company. During 1998, the Company also incurred expenses
associated with the establishment of its Management Incentive Plan. Excluding
such corporate overhead, Management Incentive Plan expenses and one-time
acquisition charges, the selling, general, and administrative expenses were
19.2% of net sales for 1998 as compared to 20.0% for 1997. The resulting
decrease in selling, general, and administrative expenses as a percentage of net
sales, viewed on this basis, is primarily due to these costs being lower as a
percentage of net sales for the acquired companies.
Operating income increased $6.6 million, or 168.8%, from $3.9 million
in 1997 to $10.5 million in 1998, primarily reflecting the effects of SAB 97
accounting and the acquisitions discussed above. Operating income as a
percentage of net sales decreased, however, from 2.6% in 1997 to 2.4% in 1998,
also reflecting such effects.
20
<PAGE> 21
IMPACT OF YEAR 2000 PROBLEM
The Company did not experience any material disruptions in its
operations or activities as a result of the so-called "Y2K Problem". Nor did the
Company incur material expenses in correcting perceived or suspected Y2K
problems. In addition, the Company is not aware that any of its suppliers or
customers has experienced any material disruptions in their operations or
activities. The Company does not expect to encounter any such problems in the
foreseeable future, although it continues to monitor its computer operations for
signs or indications of such a problem.
It is possible, however, that if "Year 2000" problems are incurred by
the customers or suppliers of the Company, such problems could have a negative
impact on future operations and financial performance of the Company, although
the Company has not been able to specifically identify any such problems among
its clients or suppliers. Furthermore, the Year 2000 problem may impact other
entities with which the Company transacts business and the Company cannot
predict the effect of the Year 2000 problem on such entities or the resulting
effect on the Company.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 2000, the Company had $1.2 million of cash and cash
equivalents, an additional $85.3 million of working capital, and an aggregate of
$44.0 million of borrowing capacity under a revolving credit facility for $100
million with a syndicate of commercial banks (the "Credit Facility"). At
December 31, 1999, these amounts were $851,000, $77.3 million, and $53 million,
respectively.
The Credit Facility, has a two-year term from December 31, 1999, may be
used for operations and acquisitions, and provides $5 million for swinglines and
$10 million for 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 certain assets of all the
subsidiaries of the Company.
The principal ongoing capital requirements for the Company at the
present time are for carrying inventory and accounts receivable, and for
purchasing and upgrading property and equipment. The Company will also utilize
cash in connection with the resolution of the dissenting shareholder litigation
involving one of the founding companies. The Company believes that it will have
sufficient cash from working capital, and cash flow from operations, including
use of available capacity under the Credit Facility, to fund both its current
operations and anticipated internal expansion, for the current year, as well as
to resolve the dissenting shareholder litigation. The Company is no longer
pursuing acquisitions on an active basis, although it might consider a
particularly attractive opportunity if presented; in such case, cash financing
would probably be necessary and the Company might need to access other capital
sources, which might not be available.
On an historical basis (consistent with the requirements of SAB 97),
net cash provided by (used in) operating activities for fiscal years 1999, 1998
and 1997 was $2.0 million, $4.1 million and ($1.3 million), respectively. The
change was principally due to positive operating cash flow of companies acquired
in 1998 and improved management of accounts payable.
Net cash provided by (used in) investing activities for fiscal years
1999, 1998 and 1997 was ($11.4 million), ($49.3 million) and $1.8 million,
respectively. The change was principally due to cash
21
<PAGE> 22
used in acquisitions and purchases of property and equipment, in particular a
new building for the largest business unit and a portion of the Company's new
ERP system.
Net cash provided by financing activities for fiscal years 1999, 1998
and 1997 was $9.0 million, $14.9 million and $29.4 million, respectively. The
changes were principally due to the net activity from advances on the Credit
Facility and repayment of lines of credit of the acquired companies. In 1997 the
Company received approximately $56.6 million from its initial public offering.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company believes that its exposures to market risks are immaterial.
The Company holds no market risk sensitive instruments for trading purposes. At
present, the Company does not employ any derivative financial instruments, other
financial instruments or derivative commodity instruments to hedge any market
risk and has no plans to do so in the future. To the extent the Company has
borrowings outstanding under its revolving credit facility, the Company is
exposed to interest rate risk because of the variable interest rate under the
facility. Such exposure, however, is immaterial due to the short-term nature of
such borrowings.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required to be provided by this item is found on pages
F-1 through F-22 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information contained under the heading "Election of Directors" in
the definitive Proxy Statement to be used in connection with the solicitation of
proxies for the Company's 2000 Annual Meeting of Stockholders, to be filed with
the Commission, is incorporated herein by reference. Pursuant to instruction 3
to paragraph (b) of Item 401 of Regulation S-K, information relating to the
executive officers of the Company is included in Item 1 of this Report.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained under the heading "Executive Compensation" in
the definitive Proxy Statement to be used in connection with the solicitation of
proxies for the Company's 2000 Annual Meeting of Stockholders, to be filed with
the Commission, is incorporated herein by reference. In no event shall the
information contained in the Proxy Statement under the heading "Stockholder
Return Performance Graph" be deemed incorporated herein by such reference.
22
<PAGE> 23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contained under the heading "Voting Securities and
Principal Stockholders" in the definitive Proxy Statement to be used in
connection with the solicitation of proxies for the Company's 2000 Annual
Meeting of Stockholders, to be filed with the Commission, is incorporated herein
by reference. For purposes of determining the aggregate market value of the
Company's voting stock held by nonaffiliates, shares held by all directors and
executive officers of the Company have been excluded. The exclusion of such
shares is not intended to, and shall not, constitute a determination as to which
persons or entities may be "affiliates" of the Company as defined by the
Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained under the heading "Certain Transactions" in
the definitive Proxy Statement to be used in connection with the solicitation of
proxies for the Company's 2000 Annual Meeting of Stockholders, to be filed with
the Commission, is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORT ON FORM 8-K.
(a) The following financial statements and notes thereto are filed as part of
this Report:
1. FINANCIAL STATEMENTS
Report of Independent Public Accountants.
Consolidated Balance Sheets as of December 31, 1999 and 1998.
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998, and 1997.
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1999, 1998, and 1997.
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998, and 1997.
Notes to Consolidated Financial Statements and Schedule as
of December 31, 1999 and 1999 and for the years ended
December 31, 1999, 1998, and 1997.
2. FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because the information
required is either included in the financial statements or
notes or is not required.
(b) REPORTS ON FORM 8-K.
The Company filed a report on Form 8-K on December 22, 1999.
23
<PAGE> 24
(c) EXHIBITS
The exhibits set forth below are required to be filed with this Report
pursuant to Item 601 of Regulation S-K:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
<S> <C>
3.1 Certificate of Incorporation, as amended, of the Company (filed as Exhibit 3.1 of the
Company's Registration Statement on Form S-1 (File No. 333-36233) is hereby
incorporated by reference)
3.2 Bylaws of the Company (filed as Exhibit 3.2 of the Company's Registration Statement
on Form S-1 (File No. 333-36233) is hereby incorporated by reference)
4.1 Form of Common Stock Certificate of the Company (filed as Exhibit 3.1 of the
Company's Registration Statement on Form S-1 (File No. 333-36233) is hereby
incorporated by reference)
10.1 Form of Agreement and Plan of Merger and Reorganization (reverse merger) (filed as
Exhibit 10.1 of the Company's Registration Statement on Form S-1 (File No. 333-36233)
is hereby incorporated by reference)
10.2 Agreement and Plan of Merger and Reorganization, dated as of June 27, 1997, among the
Company, Industrial Distribution Group, Inc., a Georgia corporation, IDG Acquisition
Company I, Inc. and the Stockholders named therein (filed as Exhibit 10.2 of
the Company's Registration Statement on Form S-1 (File No. 333-36233) is hereby
incorporated by reference)
10.3 Agreement and Plan of Reorganization, dated as of July 16, 1997, between the Company
and the Stockholders of Associated Suppliers, Inc. named therein (filed as Exhibit 10.3
of the Company's Registration Statement on Form S-1 (File No. 333-36233) is hereby incorporated
by reference)
10.4 Uniform Provisions for the Acquisition of Founding companies (filed as Exhibit 10.4 of
the Company's Registration Statement on Form S-1 (File No. 333-36233) is hereby incorporated
by reference)
*10.5(a) Industrial Distribution Group, Inc. Stock Incentive Plan (filed as Exhibit 10.5 of
the Company's Registration Statement on Form S-1 (File No. 333-36233) is hereby
incorporated by reference)
*10.5(b) Amendment No. 1 to Industrial Distribution Group, Inc. Stock Incentive Plan (filed as
Exhibit 10.5(b) of the Company's Annual Report on Form 10-K (File No. D01-131950) on
March 31, 1999 is hereby incorporated by reference)
</TABLE>
24
<PAGE> 25
<TABLE>
<S> <C>
*10.6 Employment Agreement between the Company and Jack P. Healey (filed as Exhibit 10.8 of
the Company's Registration Statement on Form S-1 (File No. 333-36233) is hereby
incorporated by reference)
*10.7 Form of Indemnification Agreement entered into between the Company and each of the executive
officers and directors of the Company (filed as Exhibit 10.9 of the Company's Registration
Statement on Form S-1 (File No. 333-36233) is hereby incorporated by reference)
10.8 Form of Escrow Agreement among the Company, American Stock Transfer & Trust Company and the
individuals named therein (filed as Exhibit 10.10 of the Company's Registration
Statement on Form S-1 (File No. 333-36233) is hereby incorporated by reference)
10.9(a) Letter Agreement dated October 1, 1997 by and between the Company and Barth Smith
Company (filed as Exhibit 10.11 of the Company's Annual Report on Form 10-K (File No.
001-13195) on March 31, 1998, is hereby incorporated by reference)
10.9(b) Description of Agreement with Barth Smith Company dated December 3, 1998 (filed as
Exhibit 10.11(b) of the Company's Annual Report on Form 10-K (File No. 001-13195) on
March 31, 1999 is hereby incorporated by reference)
10.10 Lease Agreement dated July 30, 1998 by and between Andrew B. and Stephanie A. Shearer
and Shearer Industrial Supply Co. (filed as Exhibit 10.12 of the Company's
Registration Statement on Form S-1 (File No. 333-51851) is hereby incorporated by
reference)
10.11 Agreement and Plan of Merger and Reorganization between the Company, LDS Acquisition
Company, Inc., L.D. Supply, Inc. and the Stockholders named therein (filed as Exhibit
2 of the Company's Current Report on Form 8-K (File No. 001-13195) on June 19, 1998
is hereby incorporated by reference)
*10.12 Industrial Distribution Group, Inc. Management Incentive Program (filed as Exhibit
10.14 of the Company's Annual Report on Form 10-K (File No. 001-13195) on March 31,
1999 is hereby incorporated by reference)
10.13(a) Credit Agreement dated December 11, 1997 by and between the Company, the Lenders listed
therein, and The First National Bank of Chicago (filed as Exhibit 10.15(a) of the Company's
Annual Report on Form 10-K (File No. 001-13195) on March 31, 1999 is hereby incorporated
by reference)
10.13(b) First Amendment to Credit Agreement dated December 11, 1998 by and between the Company,
the Lenders listed therein, and The First National Bank of Chicago (filed as Exhibit
10.15(b) of the Company's Annual Report on Form 10-K (File No. 001-13195) on March 31,
1999 is hereby incorporated by reference)
</TABLE>
25
<PAGE> 26
<TABLE>
<S> <C>
10.13(c) Amendment No. 1 to Credit Agreement dated November 1, 1999 by and between the
Company, the Lenders listed therein, and Bank One, N.A. (formerly known as The First
National Bank of Chicago)
10.13(d) Amendment No. 2 to Credit Agreement dated December 31, 1999 by and between the
Company, the Lenders listed therein, and Bank One, N.A. (formerly known as The First
National Bank of Chicago)
21.1 Subsidiaries of the Company
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule (for SEC use only)
99 Proxy Statement for the 1999 Annual Meeting of Stockholders
</TABLE>
- ------------------------
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit.
26
<PAGE> 27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(a) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Atlanta,
State of Georgia, on the 28th day of March, 2000.
INDUSTRIAL DISTRIBUTION GROUP, INC.
By: /s/ Patrick S. O'Keefe
-----------------------------------------
Patrick S. O'Keefe
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Company in the capacities set forth and on the 28th day of March, 2000.
<TABLE>
<CAPTION>
Signature Position
--------- --------
<S> <C>
/s/ Patrick S. O'Keefe President, Chief Executive Officer, and Director
- ------------------------------------- (Principal Executive Officer)
Patrick S. O'Keefe
/s/ Jack P. Healey Senior Vice President, Chief Financial Officer, and
- ------------------------------------- Secretary (Principal Financial and Accounting Officer)
Jack P. Healey
/s/ Richard M. Seigel Chairman of the Board
- -------------------------------------
Richard M. Seigel
/s/ David K. Barth Director
- -------------------------------------
David K. Barth
/s/ William J. Burkland Director
- -------------------------------------
William J. Burkland
/s/ William R. Fenoglio Director
- -------------------------------------
William R. Fenoglio
/s/ William T. Parr Director
- -------------------------------------
William T. Parr
/s/ George L. Sachs, Jr. Director
- -------------------------------------
George L. Sachs, Jr.
/s/ Andrew B. Shearer Director
- -------------------------------------
Andrew B. Shearer
</TABLE>
27
<PAGE> 28
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Public Accountants.............................................................F-2
Consolidated Balance Sheets at December 31, 1999 and 1998............................................F-3
Consolidated Statements of Operations for the Years Ended December 31, 1999,
1998, and 1997.................................................................................F-4
Consolidated Statements of Stockholders' Equity for the Years Ended December
31, 1999, 1998, and 1997.......................................................................F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999,
1998, and 1997.................................................................................F-6
Notes to Consolidated Financial Statements and Schedule for the Years Ended
December 31, 1999, 1998, and 1997..............................................................F-7
Schedule II - Valuation and Qualifying Accounts......................................................F-22
</TABLE>
F-1
<PAGE> 29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Industrial Distribution Group, Inc.:
We have audited the accompanying consolidated balance sheets of INDUSTRIAL
DISTRIBUTION GROUP, INC. (a Delaware corporation) AND SUBSIDIARIES as of
December 31, 1999 and 1998 and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1999. These consolidated financial statements and
the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and the schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, 1999 and 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted
in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic financial statements
and, in our opinion, fairly states, in all material respects, the financial
data required to be set forth therein in relation to the basic financial
statements taken as a whole.
ARTHUR ANDERSEN, LLP
Atlanta, Georgia
February 18, 2000
F-2
<PAGE> 30
INDUSTRIAL DISTRIBUTION GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
1999 1998
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 851 $ 1,285
Accounts receivable, net 64,029 57,459
Inventories 67,633 60,949
Deferred tax assets 7,094 5,516
Prepaid and other current assets 5,722 7,919
-------- --------
Total current assets 145,329 133,128
PROPERTY AND EQUIPMENT, NET 31,538 24,619
INTANGIBLE ASSETS, NET 53,019 51,880
OTHER ASSETS 918 1,838
-------- --------
Total assets $230,804 $211,465
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 467 $ 2,278
Lines of credit -- 1,761
Accounts payable 48,870 40,342
Accrued compensation 2,782 3,772
Other accrued liabilities 15,062 3,986
-------- --------
Total current liabilities 67,181 52,139
LONG-TERM DEBT 47,486 35,660
DEFERRED TAX LIABILITIES 2,024 884
OTHER LONG-TERM LIABILITIES 2,041 9,187
-------- --------
Total liabilities 118,732 97,870
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
STOCKHOLDERS' EQUITY:
Preferred stock, $.10 par value per share; 10,000,000 shares authorized, no
shares issued or outstanding in 1999 and 1998 -- --
Common stock, $.01 par value per share; 50,000,000 shares authorized,
8,641,831 and 8,484,953 shares issued, of which 8,635,058 and 8,478,180 87 85
are outstanding, in 1999 and 1998, respectively
Additional paid-in capital 97,636 97,272
Retained earnings 14,439 16,328
Treasury stock, at cost (6,773 shares in 1999 and 1998) (90) (90)
-------- --------
Total stockholders' equity 112,072 113,595
-------- --------
Total liabilities and stockholders' equity $230,804 $211,465
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
F-3
<PAGE> 31
INDUSTRIAL DISTRIBUTION GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES $ 542,141 $ 437,610 $ 153,218
COST OF SALES 422,960 337,185 117,726
------------ ------------ ------------
Gross profit 119,181 100,425 35,492
SELLING, GENERAL, AND ADMINISTRATIVE
EXPENSES (NOTE 5) 116,756 89,954 31,595
------------ ------------ ------------
Income from operations 2,425 10,471 3,897
INTEREST EXPENSE 3,514 1,319 966
INTEREST INCOME (78) (847) (461)
OTHER INCOME, NET (80) (147) (178)
------------ ------------ ------------
(LOSS) INCOME BEFORE EXTRAORDINARY ITEM
AND INCOME TAXES (931) 10,146 3,570
PROVISION FOR INCOME TAXES 688 3,931 1,254
------------ ------------ ------------
(LOSS) INCOME BEFORE EXTRAORDINARY ITEM (1,619) 6,215 2,316
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT, NET OF TAX
BENEFIT 270 -- --
------------ ------------ ------------
NET (LOSS) INCOME $ (1,889) $ 6,215 $ 2,316
============ ============ ============
EARNINGS PER COMMON SHARE:
Basic
(Loss) income before extraordinary item $ (0.19) $ 0.75 $ 0.71
Extraordinary item (0.03) 0.00 0.00
------------ ------------ ------------
Net (loss) income $ (0.22) $ 0.75 $ 0.71
============ ============ ============
Diluted
(Loss) income before extraordinary item $ (0.19) $ 0.75 $ 0.71
Extraordinary item (0.03) 0.00 0.00
------------ ------------ ------------
Net (loss) income $ (0.22) $ 0.75 $ 0.71
============ ============ ============
WEIGHTED AVERAGE SHARES:
Basic 8,566,517 8,263,151 3,258,555
============ ============ ============
Diluted 8,566,517 8,294,099 3,282,927
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-4
<PAGE> 32
INDUSTRIAL DISTRIBUTION GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, 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, 1996 1,531,179 $15 $ 3,590 $ 7,797 $(179) $ 11,223
Retired treasury stock (45,628) -- (179) -- 179 --
Issuance of common stock to founding companies and management 2,592,981 26 29,239 -- -- 29,265
Initial public offering 3,795,000 38 56,561 -- -- 56,599
Sale of shares through employee stock purchase plan 6,578 -- 87 -- -- 87
Net income -- -- -- 2,316 -- 2,316
--------- -- ------ ------ --- -------
BALANCE, DECEMBER 31, 1997 7,880,110 79 89,298 10,113 -- 99,490
Issuance of common stock for acquired companies 573,560 6 7,701 -- -- 7,707
Sale of shares through employee stock purchase plan 31,283 -- 273 -- -- 273
Net income -- -- -- 6,215 -- 6,215
Purchase of treasury stock -- -- -- -- (90) (90)
--------- -- ------ ------ --- -------
BALANCE, DECEMBER 31, 1998 8,484,953 85 97,272 16,328 (90) 113,595
Cancellation and retirement of shares held in escrow (19,360) -- (345) -- -- (345)
Sale of shares through employee stock purchase plan 132,592 1 527 -- -- 528
Issuance of shares for management incentive program 43,646 1 182 -- -- 183
Net loss -- -- -- (1,889) -- (1,889)
--------- -- ------ ------ --- -------
BALANCE, DECEMBER 31, 1999 8,641,831 $87 $97,636 $14,439 $ (90) $112,072
========= === ======= ======= ===== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-5
<PAGE> 33
INDUSTRIAL DISTRIBUTION GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (1,889) $ 6,215 $ 2,316
-------- -------- --------
Adjustments to reconcile net (loss) income to net cash provided by
(used in) operating activities:
Depreciation and amortization 4,615 3,430 1,000
Gain (loss) on sale of assets (23) 7 (24)
Deferred taxes (438) (336) (615)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable, net (6,655) 1,206 (1,192)
Inventories, net (6,094) (1,800) 457
Prepaids and other assets 303 (2,145) (636)
Accounts payable 8,797 (1,630) (1,381)
Accrued compensation (831) 579 225
Other accrued liabilities 4,170 (1,406) (1,400)
-------- -------- --------
Total adjustments 3,844 (2,095) (3,566)
-------- -------- --------
Net cash provided by (used in) operating activities 1,955 4,120 (1,250)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions (2,135) (37,407) --
Changes in investments, net 318 -- 948
Cash from acquired companies 382 426 1,851
Additions to property and equipment, net (10,208) (13,845) (1,014)
Cash surrender value of life insurance 76 1,150 (29)
Other 167 410 --
-------- -------- --------
Net cash (used in) provided by investing activities (11,400) (49,266) 1,756
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of issuance costs 527 276 56,599
Short-term (repayments) borrowings (2,630) 23,725 (15,871)
Long-term borrowings (repayments) 10,884 (8,613) (11,286)
Purchase of treasury stock -- (90) --
Deferred loan costs and other 230 (401) --
-------- -------- --------
Net cash provided by financing activities 9,011 14,897 29,442
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (434) (30,249) 29,948
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,285 31,534 1,586
CASH AND CASH EQUIVALENTS, END OF YEAR $ 851 $ 1,285 $ 31,534
======== ======== ========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 3,575 $ 883 $ 964
======== ======== ========
Income taxes paid $ 1,540 $ 7,713 $ 1,031
======== ======== ========
NONCASH TRANSACTIONS:
Common stock issued in acquisitions (Note 3) $ -- $ 7,707 $ 35,312
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-6
<PAGE> 34
INDUSTRIAL DISTRIBUTION GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
DECEMBER 31, 1999, 1998, 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 ("MROP") products. The Company conducts business in 27
states and provides product expertise in the procurement and
application of MROP products to a wide range of industries.
BASIS OF PRESENTATION
In September 1997, IDG completed an initial public offering of its
common stock 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,
Grinding Supplies Company, J.J. Stangel Company, Shearer Industrial
Supply Company, Slater Industrial Supply Company, The Distribution
Group ("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, 1999 and include the
results of operations of the other eight Founding Companies since the
effective date of the acquisitions. IDG merged with three companies in
1998 which were accounted for as poolings of interests. Accordingly,
their results of operations are included for all periods presented.
Acquisitions made in 1999 and 1998 using the purchase method of
accounting were accounted for from their dates of acquisition.
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 accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at
F-7
<PAGE> 35
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
CASH EQUIVALENTS
The Company considers all short-term investments with original
maturities of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE
An allowance for uncollectible accounts has been established based on
the Company's collection experience and an assessment of the
collectibility of specific accounts. The allowance amounted to
$1,480,000 and $1,562,000 as of December 31, 1999 and 1998,
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
a first-in first-out 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 statements of operations.
Depreciation is computed using the straight-line method over the
following estimated useful lives:
Buildings and improvements 40 years
Leasehold improvements Life of related lease
Furniture, fixtures, and equipment 5-10 years
Computer hardware and software 5 years
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 cash flow before interest over the remaining life of the
goodwill.
Additionally, $570,000 of the purchase price related to the Founding
Companies was allocated to the value of integrated supply contracts
which is included in intangible assets on the balance sheets and is
amortized over 13 years.
F-8
<PAGE> 36
Amortization expense related to intangible assets for 1999, 1998, and
1997 was $1,338,000, $833,000, and $134,000, respectively. At December
31, 1999 and 1998, accumulated amortization of intangible assets was
$2,305,000 and $967,000, respectively.
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 and
freight-in.
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. The Company's
international sales represent less than 5% of sales for the periods
presented.
SOFTWARE COSTS
Software costs are capitalized and amortized over the expected useful
life of three to five years. It is the Company's policy to capitalize
all of the internal and external costs associated with developing and
implementing software in accordance with Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use."
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to
conform to the current year presentation.
COMPREHENSIVE INCOME (LOSS)
In 1997, the Financial Accounting Standards Board ("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 (loss) includes all changes in a
company's equity during the period that results from transactions and
other economic events other than transactions with its stockholders.
For the Company, comprehensive income (loss) equals net income (loss).
F-9
<PAGE> 37
SEGMENTS
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 was effective for financial statements for the
Company's year ended December 31, 1998. SFAS No. 131 did not require
additional disclosure or revision of prior disclosures. The Company
considers its entire business as one operating segment for purposes of
SFAS No. 131.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which addresses the accounting
for derivative instruments. SFAS No.133 is effective for financial
statements for the Company's fiscal quarters beginning on January 1,
2001. The Company does not expect SFAS No. 133 will have a significant
effect on its current financial reporting.
3. INITIAL PUBLIC OFFERING AND ACQUISITIONS
On September 24, 1997, the Company sold 3,795,000 shares of common
stock to the public at $17 per share (the "Offering"). The net
proceeds to the Company from the Offering (after deducting
underwriting commissions and offering expenses) were $56.6 million. Of
this amount, $25.1 million was used to reduce the Founding Companies'
indebtedness under their lines of credit.
The consideration for the acquisitions of the Founding Companies
consisted of the Company's common stock. A total of 3,330,224 shares
of company common stock were 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, which
period has now expired. 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 the 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>
F-10
<PAGE> 38
During 1998, IDG merged with three companies, Northern Tool & Supply,
Continental Air Tools, Inc., d/b/a Continental-McLaughlin, and Hawley
Industrial Supplies, Inc. (collectively referred to as the "Pooled
Companies"). These mergers 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.
During 1998, the Company acquired 14 companies from March to December
for a total purchase price of $45.1 million of which $37.4 million was
cash and $7.7 million was common stock. These acquisitions were
accounted for using the purchase method of accounting. The allocation
of purchase price to the assets acquired and liabilities assumed of
those acquisitions has been recorded based on the preliminary
estimates of fair value as follows (in thousands):
<TABLE>
<S> <C>
Working capital, net $15,373
Property and equipment 3,853
Goodwill 33,931
Other assets 817
Liabilities assumed (8,860)
-------
$45,114
=======
</TABLE>
During 1999, the Company acquired one company in June 1999 for $2.1
million of cash that was accounted for using the purchase method of
accounting. The allocation of purchase price to the assets acquired
and liabilities assumed of that acquisition has been recorded based on
the preliminary estimates of fair value as follows (in thousands):
<TABLE>
<S> <C>
Working capital, net $1,302
Property and equipment 11
Goodwill 819
Other assets 3
Liabilities assumed --
------
$2,135
======
</TABLE>
F-11
<PAGE> 39
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1999
and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Land, building, and improvements $ 18,353 $ 13,180
Leasehold improvements 2,406 2,160
Furniture, fixtures, and equipment 7,431 7,376
Computer hardware and software 4,996 3,433
Software development 6,384 4,352
-------- --------
39,570 30,501
Less accumulated depreciation (8,032) (5,882)
-------- --------
Property and equipment, net $ 31,538 $ 24,619
======== ========
</TABLE>
Depreciation expense totaled $3,277,000, $2,597,000, and $866,000 for
the years ended December 31, 1999, 1998, and 1997, respectively.
5. ONETIME CHARGES
Included in selling, general, and administrative expense for 1999 are
$5.9 million of onetime charges. This amount consists primarily of
$4.4 million added to the accrual for the settlement with the
dissenting shareholder (see Note 10). Also included in the amount are
severance packages for four executives who were separated from the
Company, costs incurred with closing the Washington, D.C. office, and
cessation of acquisition activities.
6. REVOLVING CREDIT FACILITIES
In December 1999, the Company entered into a $100,000,000 revolving
credit facility with a six-bank syndicate. The facility has a two-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 assets of the 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 $208,000 and $142,000 in
1999 and 1998, respectively. This agreement amended the December 1998
agreement for $125,000,000. Due to the 1999 amendment of its credit
agreement, the Company recorded an extraordinary loss, net of tax, on
early extinguishment of debt of $270,000. The amounts outstanding
under this facility at December 31, 1999 and 1998 were $45,000,000 and
$34,000,000, respectively, which have been classified as long-term
liabilities.
Additionally, the Company has outstanding an issued letter of credit
for $2,081,000. The revolving credit facility contains various
covenants pertaining to the maintenance of certain financial ratios.
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 December 31, 1999 and 1998.
F-12
<PAGE> 40
During 1998, the Company had available additional lines of credit of
$3,250,000, of which $1,761,000 was drawn on these lines at December
31, 1998. The lines earned interest at rates that were prime to prime
minus 1.25% and were partially secured by floor planned equipment.
These lines of credit were paid and closed during 1999.
7. LONG-TERM DEBT
At December 31, 1999 and 1998, long-term debt consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Revolving credit facility (See Note 6) $ 45,000 $ 34,000
7% mortgage payable, due in monthly installments of $14,963, including
interest, through June 2012, at which time remaining principal and
interest are due; secured by a building with a net book value of
approximately $2.3 million 1,415 1,552
Notes payable due to various parties through 2008, bearing interest
between 7% and 10.4% 791 978
Commercial mortgage note payable to bank, due January 1999, payable in
monthly installments of $4,580, plus interest at 8% -- 323
Commercial mortgage note payable to bank, due February 2000, payable in
monthly installments of $1,525, plus interest at 8.5% -- 144
Other 747 941
-------- --------
Total debt 47,953 37,938
Less current portion (467) (2,278)
-------- --------
Total long-term debt $ 47,486 $ 35,660
======== ========
</TABLE>
Maturities of long-term debt as of December 31, 1999 are as follows
(in thousands):
<TABLE>
<S> <C>
2000 467
2001 45,275
2002 226
2003 214
2004 224
Thereafter 1,547
-------
$47,953
=======
</TABLE>
F-13
<PAGE> 41
8. 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 purpose, 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 are included in the computation of diluted earnings per share
("EPS") where the options' exercise price was less than the average
market price of the common shares during the year. The dilutive effect
of these stock options outstanding during 1999, 1998, and 1997 added
0, 30,948, and 24,372 shares, respectively, to the weighted average
common shares outstanding for purposes of calculating diluted EPS.
During 1999 and 1998, options where the exercise price exceeded the
average market price of the common shares totaled 1,305,900 and
511,095, respectively. The options expire ten years from the date of
grant and vest ratably over a three-to-four year period.
At December 31, 1999, the Company has several stock-based compensation
plans, which are described below. The Company applies Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," 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>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net (loss) income:
As reported $ (1,889) $ 6,215 $ 2,316
Pro forma (3,793) 3,961 2,002
Basic EPS:
As reported $ (0.22) $ 0.75 $ 0.71
Pro forma (0.44) 0.48 0.61
Diluted EPS:
As reported $ (0.22) $ 0.75 $ 0.71
Pro forma (0.44) 0.48 0.61
</TABLE>
F-14
<PAGE> 42
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 4.58% and 6.39%, an
expected life of seven years, volatility of 60%, and dividend yield of
0%. The total value of options granted in 1999, 1998, and 1997 was
$2,074,000, $1,983,000, and $3,696,000, respectively.
STOCK INCENTIVE PLAN
In July 1997, the Company adopted its stock incentive plan to provide
key employees, officers, and directors an opportunity to own common
stock of the Company and to provide incentives for such persons to
promote the financial success of the Company. Awards under the stock
incentive plan may be structured in a variety of ways, including
"incentive and nonqualified stock options," shares of common stock
subject to terms and conditions set by the board of directors
("restricted stock awards"), and stock appreciation rights ("SARs").
Incentive stock options may be granted only to full-time employees
(including officers) of the Company and any subsidiaries. Nonqualified
options, restricted stock awards, SARs, and other permitted forms of
awards may be granted to any person employed by or performing services
for the Company, including directors. The stock incentive plan
provides for the issuance of an aggregate number of shares of common
stock equal to 15% of the Company's diluted shares of common stock
outstanding from time to time, subject to the issuance of a maximum of
1,000,000 shares pursuant to incentive stock options.
In December 1999, the Company issued 400,000 nonqualified stock
options to a senior executive. Under separate provisions of the stock
incentive plan, these options are not subject to the 1,000,000 share
limitation mentioned above.
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,
1999, 1998, and 1997 and changes during the years then ended is
presented below:
F-15
<PAGE> 43
<TABLE>
<CAPTION>
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Fixed options:
Outstanding at January 1, 1997 -- $0.00
Granted 409,825 $17.00
---------
Outstanding at December 31, 1997 409,825 $17.00
Granted 200,694 $7.12-$19.00
Forfeitures (12,090)
---------
Outstanding at December 31,1998 598,429 $7.12-$19.00
Granted 761,899 $5.00-$20.00
Forfeitures (54,428)
---------
Outstanding at December 31,1999 1,305,900 $5.00-$20.00
=========
Options exercisable at end of year 280,371 $7.12-$19.00
=========
Weighted average remaining contractual life 8.9 years
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
In 1997, the Company adopted an employee stock purchase plan (the
"Stock Purchase Plan") under which qualified employees of the Company
and its subsidiaries have the right to purchase shares of common stock
on a quarterly basis through payroll deductions by the employee. The
Stock Purchase Plan is administered by the compensation committee of
the Company's board of directors. The price paid for a share of common
stock under the plan is 85% of the fair market value (as defined in
the Stock Purchase Plan) of a share of common stock at the beginning
or the end of each quarterly purchase period, whichever is lower. The
amount of any participant's payroll deductions or cash contributions
made pursuant to the Stock Purchase Plan may not exceed 10% of such
participant's total annual compensation and may not exceed $25,000 per
year. Shares issued in 1999, 1998, and 1997 were 132,592, 31,283, and
6,578, respectively. 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.
MANAGEMENT INCENTIVE PLAN
In 1999, the Company adopted a management incentive plan whereby
management is awarded shares of restricted stock based on attaining
certain performance goals. The number of shares issued in 1999 for
1998 performance was 43,646 shares. A maximum of 250,000 shares of
common stock may be issued under the plan.
F-16
<PAGE> 44
9. 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, 1999, 1998, and 1997 (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Current $1,126 $4,267 $1,869
Deferred (438) (336) (615)
------ ------ ------
Total provision $ 688 $3,931 $1,254
====== ====== ======
</TABLE>
The provision for income taxes for the years ended December 31, 1999,
1998, and 1997 differs from the amount computed by applying the
statutory rate of 34% due to the following (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Tax at federal statutory rate $(316) $3,450 $1,214
Nondeductible expenses 133 61 35
Tax-exempt interest income -- -- (11)
Goodwill amortization 428 318 47
State income tax, net of federal benefit (37) 426 104
Cash surrender value of life insurance -- -- 3
Change in tax rates -- (119) --
Nondeductible dissenting shareholder expense 465 -- --
Other 15 (205) (138)
----- ------ ------
Provision for income taxes $ 688 $3,931 $1,254
===== ====== ======
</TABLE>
Deferred taxes are recorded based on differences between the financial
statement and tax bases of assets and liabilities. Temporary
differences which give rise to a significant portion of deferred tax
assets and liabilities at December 31, 1999 and 1998 are as follows
(in thousands):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 592 $ 626
Accrued employee benefits 411 443
Capitalized inventory costs 1,096 474
Inventory allowance 3,353 2,958
Accrued liabilities 2,024 1,599
Net operating loss carryforwards 706 239
Other 202 186
------ ------
$8,384 $6,525
------ ------
</TABLE>
F-17
<PAGE> 45
<TABLE>
<S> <C> <C>
Deferred tax liabilities:
Book over tax depreciation $ (208) $ (126)
Prepaid expenses -- (61)
Intangible integrated supply contract (206) (206)
Step-up in asset basis (975) (975)
Section 481 -- last-in first-out (439) (523)
Software cost (1,483) --
Other (3) (2)
------- -------
(3,314) (1,893)
------- -------
Net deferred tax assets $ 5,070 $ 4,632
======= =======
</TABLE>
The Company has net operating loss carryforwards for federal income
tax purposes of approximately $494,000 as of December 31, 1999, which
expire 2008 through 2010. The utilization of the related available
deferred tax asset of $197,000 at December 31, 1999 is subject to
certain limitations of Internal Revenue Code Section 382.
10. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases certain warehouse and office facilities as well as
certain vehicles and office equipment under operating leases.
Management expects that in the normal course of business, leases that
expire will be renewed or replaced by other leases.
The minimum future rental payments, net of sublease revenues, under
all leases as of December 31, 1999 were as follows (in thousands):
<TABLE>
<S> <C>
2000 4,835
2001 3,311
2002 2,710
2003 2,341
2004 1,521
Thereafter 4,385
-------
$19,103
=======
</TABLE>
During the years ended December 31, 1999, 1998, and 1997, rental
expense under operating leases totaled $5,576,000, $3,595,000, and
$1,196,000, respectively.
LITIGATION
In February 1999, TDG settled the previously reported lawsuit that had
been filed in 1996 by Milliken & Company, a textile manufacturer and
customer of TDG, against a manufacturer of an industrial product and
TDG in the Superior Court of Troop County, Georgia, Civil Action
No.96-CV-964. The settlement was achieved within the limits of TDG's
insurance coverage.
F-18
<PAGE> 46
TDG brought an action on December 22, 1997 in DeKalb County Superior
Court, Georgia, File No. 97-14388-4, against a former stockholder,
Alvis J. Waite, under the Georgia dissenter's rights provisions of the
Georgia Business Corporation Code (the "GBCC"). (The case was
subsequently transferred to the Supreme Court of Fulton County,
Georgia.) Mr. Waite, as a stockholder of TDG, had exercised his rights
pursuant to the GBCC to dissent from the merger of TDG with the
Company in 1997. TDG offered to pay Mr. Waite $4.2 million for his
interest in TDG; Mr. Waite rejected that offer and demanded payment of
$9 million. TDG brought this action to seek a judicial determination
of the value of Mr. Waite's interest in TDG as of the time of the
merger. The court appointed an appraiser to supervise the completion
of discovery, to conduct factual hearings, and to render a report on
the central valuation issues. The appraiser rendered his report to the
court on November 12, 1999 containing a recommended value for Mr.
Waite's interest of $8.475 million. TDG filed objections to the report
and its recommendations, challenging its conclusions and analysis on
several bases, and will obtain a hearing with the court before a
judgement is entered. The court may accept, modify, or reject (in
whole or in part) the conclusions and recommendations in the
appraiser's report. If the court were to enter judgement based on the
appraiser's recommendations, the overall costs to TDG, including
accrued interest and legal costs, would be approximately $11.6
million. The Company will incur a onetime charge related to this
judgment of approximately $4.4 million.
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 had a self-insured health insurance plan
during 1999 and 1998. Estimated accruals for reported and unreported
claims are funded through a VEBA trust. The balance of this trust was
approximately $243,000 and $163,000 as of December 31, 1999 and 1998,
respectively, and represents management's best estimate of its
liability as of the end of each year. Revisions to estimated accruals
are recorded in the period in which they become known.
EMPLOYMENT AGREEMENTS
Included in the employment agreements of one of the Company's
executive officers and each of the presidents of its business units is
a change-of-control provision. Upon certain changes in the majority
stockholders or board of directors, the executive officer and the
business unit presidents may elect to receive a cash payment equal to
the present value of their base salary for two years.
11. 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. As a result of the
acquisition of the other Founding Companies, the Company had a total
of eight 401(k) and profit-sharing plans in effect since September 24,
1997. In addition to these eight plans, each of the Pooled Companies
F-19
<PAGE> 47
maintained a 401(k) or savings plan. Total company contributions to
401(k) and savings plans during 1997 were $297,000.
Effective January 1, 1998, all existing 401(k) plans were merged into
one new plan (the "New Plan"). All employees who are age 21 or older
and have completed one year of service are eligible to participate in
the New Plan. Once eligibility requirements are met, employees may
join the New Plan on a quarterly basis. Employees may contribute
between 1% and 15% of their compensation to the New Plan, subject to
tax law limitations. For 1998, the Company matched 25% of the employee
contributions up to a maximum of 1 1/2% of the employees' salary.
Of the companies acquired in 1998, 13 had 401(k) plans at the date of
acquisition. Eleven of these plans were merged into the Company's
401(k) plan during 1999. Total company contributions to 401(k) plans
during 1999 and 1998 were $571,000 and $524,000, respectively.
12. RELATED-PARTY TRANSACTIONS
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
$1,100,000 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.
The Company leases facilities from various related parties. Rental
expense recognized under these leases was $1,415,000 for the year
ended December 31, 1999. Related-party rental expense for the years
ended December 31, 1998, and 1997 were $737,000 and $149,000,
respectively.
13. PRO FORMA COMBINED FINANCIAL INFORMATION (UNAUDITED)
The following pro forma combined financial information for the two
years ended December 31, 1998 includes the results of B&J (deemed to
be the financial acquiror) combined with the other eight Founding
Companies and the companies acquired in 1998, 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 several of the acquired companies had
Chapter S corporate tax status.
The EPS amounts are based on 8,566,211 and 8,536,947 shares deemed to
be outstanding for the periods ended December 31, 1998 and 1997,
respectively. The net income amounts include estimates of the federal
and state taxes that would have been applicable to the Company had the
acquisitions occurred at the beginning of 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
F-20
<PAGE> 48
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>
1998 1997
-------- --------
<S> <C> <C>
Net sales $577,864 $531,386
======== ========
Net income $ 6,899 $ 5,952
======== ========
Diluted earnings per share $ .81 $ .70
======== ========
</TABLE>
14. 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>
1999:
Net sales $135,895 $137,250 $135,300 $133,696
Gross profit 30,112 29,971 29,886 29,212
Net income (loss) 520 653 494 (3,556)
Diluted EPS $ 0.06 $ 0.08 $ 0.06 $ (.41)*
1998:
Net sales $ 89,763 $106,638 $119,888 $121,321
Gross profit 20,925 23,916 27,620 27,964
Net income 1,376 1,700 1,712 1,427
Diluted EPS $ 0.17 $ 0.21 $ 0.20 $ 0.17
</TABLE>
* The sum of the EPS for the quarters does not equal the total for the
year due to rounding.
F-21
<PAGE> 49
INDUSTRIAL DISTRIBUTION GROUP, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Additions
--------------------------
Balance at Charged to Charged to Balance at
Beginning of Costs and Other End of
Description Period Expenses Account(2) Deductions(1) Period
----------- ------------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999:
Allowance for doubtful 1,562 245 14 341 1,480
accounts
Year ended December 31, 1998:
Allowance for doubtful 994 603 284 319 1,562
accounts
Year ended December 31, 1997:
Allowance for doubtful 240 348 441 35 994
accounts
</TABLE>
- ---------
(1) Deductions represent the write off of uncollectable receivables, net
of recoveries.
(2) Reserves acquired in connection with acquisitions in 1999, 1998, and
1997.
F-22
<PAGE> 1
AMENDMENT NO. 1 TO CREDIT AGREEMENT
THIS AMENDMENT NO. 1 TO CREDIT AGREEMENT (this "Amendment") is made and
entered into as of November 1, 1999, among INDUSTRIAL DISTRIBUTION GROUP, INC.,
a Delaware corporation (the "Borrower"), the lending institutions listed on the
signature pages of this Amendment (collectively, the "Lenders"), BANK ONE, N.A.
(formerly The First National Bank of Chicago), in its capacities as agent for
the Lenders (in such capacity, the "Agent") and as issuing bank for the
"Facility LCs" as provided in the Credit Agreement referred to below (in such
capacity, the "LC Issuer"), BANK OF AMERICA, N.A. (formerly Bank of America
National Trust and Savings Association), in its capacity as Co-Agent for the
Lenders, and FIRST UNION NATIONAL BANK, in its capacity as Co-Agent for the
Lenders.
W I T N E S S E T H:
WHEREAS, the Borrower, the Lenders, and the Agent and LC Issuer are
parties to a certain Credit Agreement dated as of December 11, 1997, as amended
and restated by a certain First Amendment and Restatement of Credit Agreement
dated as of December 11, 1998 (as so amended and restated, the "Credit
Agreement");
WHEREAS, the Borrower has requested that the Lenders amend the Credit
Agreement so as to revise one of the financial covenants set forth therein and
in certain other respects;
WHEREAS, the Lenders have agreed to make such amendments, subject to
the terms, conditions and requirements set forth in this Amendment;
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound, agree as
follows:
1. DEFINED TERMS. Except as otherwise expressly defined herein,
capitalized terms used in this Amendment that are defined in the Credit
Agreement are used in this Amendment with the respective meanings assigned to
such capitalized terms in the Credit Agreement.
2. AMENDMENT OF SECTION 6.19 ("FINANCIAL COVENANTS"). Section 6.19 of the
Credit Agreement is hereby amended by deleting subsection 6.19.1 thereof
("Coverage Ratio") and substituting in lieu thereof the following subsection
6.19.1:
6.19.1. COVERAGE RATIO. The Borrower will not permit the
ratio, determined as of the end of each of its fiscal quarters for the
then most-recently ended four fiscal quarters, of (i) Consolidated
EBITDA plus Consolidated Rentals, to (ii) Consolidated Interest Expense
plus Consolidated Rentals, to be less than (x) 2.40 to 1.00 for the
fiscal quarter of the Borrower ending September 30, 1999, or (y) 2.50
to 1.00 for any other fiscal quarter of the Borrower.
<PAGE> 2
3. AMENDMENT OF SCHEDULE 5.8 ("SUBSIDIARIES"). Schedule 5.8 attached to
the Credit Agreement is hereby amended by deleting said Schedule 5.8 in its
entirety and substituting in lieu thereof Schedule 5.8 as attached to this
Amendment.
4. AMENDMENT OF PRICING SCHEDULE. The Pricing Schedule attached to the
Credit Agreement is hereby amended by deleting such Pricing Schedule in its
entirety and substituting in lieu thereof the Pricing Schedule attached to this
Amendment. On and after the Amendment Effective Date (as defined below),
interest on all Loans and Commitment Fees on the daily unused portion of each
Lender's Revolving Commitment shall be calculated on the basis of the applicable
interest rate margins and fee rates as set forth in the Pricing Schedule
attached to this Amendment.
5. PROPERTY INFORMATION. The Borrower agrees to furnish to the Agent (a)
not later than November 15, 1999 (i) descriptions in reasonable detail of all
inventory, accounts receivable and fixed assets of the Borrower and its
Subsidiaries, including without limitation (x) as to inventory and equipment,
the locations where such property is maintained and the existence of lien
waivers from landlords or other third parties having control over such
locations, (y) as to accounts receivable, a current listing and aging report,
and (z) as to real property, the report with respect to such properties prepared
for the Borrower by Trammell Crow and, if requested by the Agent, existing title
insurance policies, surveys, and environmental audit reports in respect of such
properties, (ii) the book and estimated fair market values of the respective
properties described in the preceding clause (i) and the basis for such
estimates, and (iii) copies of all agreements that purport to limit or restrict
in any manner the Borrower's or any such Subsidiary's right or ability to grant
in favor of the Agent for the benefit of the Lenders a first priority security
interest in and lien on such properties (other than leases, conditional sale
agreements, and similar secured financing agreements in respect of specific
equipment or leased property, and license agreements in respect of specific
software and similar intellectual property rights, in each case containing
customary restrictions on the right or ability of the lessee, owner or licensee
thereunder to grant such security interests or liens), and (b) not later than
November 30, 1999, current Uniform Commercial Code and, if requested by the
Agent, real property records examination reports with respect to the Borrower
and such Subsidiaries and their respective properties indicating the status of
title to, and the existence of security interests and liens on, such properties,
together with copies of all documents or instruments creating any such security
interests or liens. The Borrower acknowledges and agrees that failure to comply
with the requirements in the preceding sentence shall constitute a Default for
all purposes of the Credit Agreement and all other Credit Documents.
6. REPRESENTATIONS AND WARRANTIES. In order to induce the Lenders and the
Agent and LC Issuer to enter into this Amendment, the Borrower represents and
warrants to the Lenders and the Agent and LC Issuer as follows:
(a) All representations and warranties set forth in the Credit
Agreement, as amended by this Amendment, are true and correct in all material
respects with the same effect as though such representations and warranties had
been made on and as of the date of this Amendment, except to the extent that
such representations and warranties are expressly made with respect to a
2
<PAGE> 3
specific date, in which case such representations and warranties are true and
correct in all material respects as of such specific date.
(b) No Default or Unmatured Default has occurred and is continuing on
the date hereof. Since June 30, 1999, there has been no change in the business,
property, prospects, condition (financial or otherwise) or results of operations
of the Borrower and its Subsidiaries which could reasonably be expected to have
a Material Adverse Effect.
(c) Each of the Borrower and the other Loan Parties has the
organizational power and authority to make, deliver and perform their respective
obligations under this Amendment and has taken all necessary organizational
action to authorize the execution, delivery and performance of this Amendment.
No consent or authorization of, or filing with, any Person (including, without
limitation, any governmental authority), is required in connection with the
execution, delivery or performance by the Borrower or any such other Loan Party,
or the validity or enforceability against the Borrower or any such other Loan
Party, of this Amendment, other than such consents, authorizations or filings
which have been made or obtained.
(d) This Amendment has been duly executed and delivered by the Borrower
and the other Loan Parties, as applicable, and this Amendment constitutes the
legal, valid and binding obligation of the Borrower and such other Loan Parties,
respectively, enforceable against the Borrower and such other Loan Parties in
accordance with its terms, except as may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, or other similar laws affecting the
enforcement of creditors' rights generally and by general principles of equity.
The execution, delivery and performance by the Borrower and such other Loan
Parties of this Amendment will not violate any applicable legal requirements or
cause a breach or default under any of their respective contractual obligations.
(e) The Borrower acknowledges and agrees that there are no defenses,
claims, counterclaims, or rights of setoff in its favor against any Lender or
the Agent or LC Issuer with regard to any of the obligations and liabilities of
the Borrower or any of its Subsidiaries under the terms of the Credit Agreement,
the other Credit Documents, or this Amendment.
7. REFERENCES TO AGREEMENT. On and after the Amendment Effective Date,
each and every reference in the Credit Documents to the Credit Agreement shall
be deemed to refer to and mean the Credit Agreement as amended by this
Amendment. The parties further confirm and agree that (i) except as expressly
amended herein, the Credit Agreement remains in full force and effect in
accordance with its terms, and (ii) except as expressly amended or supplemented
by this Amendment, all other Credit Documents remain in full force and effect in
accordance with their respective terms.
8. COSTS, EXPENSES AND TAXES. The Borrower agrees to pay on demand all
reasonable costs and expenses of the Agent in connection with the preparation,
execution and delivery of this Amendment and the other Credit Documents,
including, without limitation, the reasonable fees and out-of-pocket expenses of
counsel for the Agent with respect thereto and with respect to advising the
Agent as to its rights and responsibilities hereunder and thereunder. In
addition, the Borrower shall pay any and all stamp and other taxes payable or
determined to be payable in connection with the execution and delivery of this
Amendment and the other Credit Documents,
3
<PAGE> 4
and agrees to save the Agent and each Lender harmless from and against any and
all liabilities with respect to or resulting from any delay in paying such
taxes.
9. GOVERNING LAW. This Amendment shall be governed by, and construed in
accordance with, the laws of the State of Georgia.
10. ENTIRE UNDERSTANDING. This Amendment sets forth the entire
understanding of the parties with respect to the matters set forth herein, and
shall supersede any prior negotiations, commitment letters, or agreements,
whether written or oral, with respect to such matters.
11. COUNTERPARTS. This Amendment may be executed in any number of
counterparts and by different parties hereto in separate counterparts and may be
delivered by telecopier. Each counterpart so executed and delivered shall be
deemed an original and all of which taken together shall constitute but one and
the same instrument.
12. NO WAIVER. The Borrower agrees that nothing herein shall constitute a
waiver by the Lenders of any Default or Unmatured Default, whether known or
unknown, which may exist under the Credit Agreement, except as expressly
provided herein with respect to compliance by the Borrower with the minimum
Coverage Ratio of 2.50 to 1.00 for the four fiscal quarter period ending
September 30, 1999, as required by Section 6.19.1 of the Credit Agreement.
13. AMENDMENT EFFECTIVE DATE. This Amendment shall become effective as of
the date first above written (the "Amendment Effective Date") when this
Amendment shall have been executed and delivered by the Borrower, Lenders
constituting the Required Lenders as provided in the Credit Agreement, and the
Agent.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
through their authorized officers as of the date first above written.
INDUSTRIAL DISTRIBUTION GROUP, INC.
By:
----------------------------------------
Title:
------------------------------------
5
<PAGE> 6
BANK ONE, N.A.
(Formerly The First National Bank of
Chicago) Individually and as Agent
By:
----------------------------------------
Title:
------------------------------------
6
<PAGE> 7
BANK OF AMERICA, N.A.
(Formerly Bank of America National Trust and
Savings Association), Individually and as
Co-Agent
By:
----------------------------------------
Title:
-------------------------------------
7
<PAGE> 8
FIRST UNION NATIONAL BANK,
Individually and as Co-Agent
By:
----------------------------------------
Title:
------------------------------------
8
<PAGE> 9
FLEET NATIONAL BANK
By:
----------------------------------------
Title:
------------------------------------
9
<PAGE> 10
WACHOVIA BANK, N.A.
By:
----------------------------------------
Title:
------------------------------------
10
<PAGE> 11
COMPASS BANK
By:
----------------------------------------
Title:
11
<PAGE> 12
PRICING SCHEDULE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
APPLICABLE MARGIN LEVEL I LEVEL II LEVEL III LEVEL IV LEVEL V
STATUS STATUS STATUS STATUS STATUS
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Eurodollar Rate 1.50% 1.75% 2.00% 2.25% 2.50%
- ----------------------------------------------------------------------------------------------------------------------
Floating Rate 0.50% 0.75% 1.00% 1.25% 1.50%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
APPLICABLE FEE RATE LEVEL I LEVEL II LEVEL III LEVEL IV LEVEL V
STATUS STATUS STATUS STATUS STATUS
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commitment 0.325% 0.35% 0.50% 0.50% 0.50%
Fee
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
For the purposes of this Schedule, the following terms have the
following meanings, subject to the final paragraph of this Schedule:
"FINANCIALS" means the annual or quarterly consolidated financial
statements of the Borrower and its Subsidiaries delivered pursuant to Section
6.1(i) or (ii).
"LEVEL I STATUS" exists at any date if, as of the last day of the
fiscal quarter of the Borrower referred to in the most recent Financials, the
Leverage Ratio is less than or equal to 2.00 to 1.00.
"LEVEL II STATUS" exists at any date if, as of the last day of the
fiscal quarter of the Borrower referred to in the most recent Financials, (i)
the Borrower does not qualify for Level I Status and (ii) the Leverage Ratio is
less than or equal to 2.50 to 1.00.
"LEVEL III STATUS" exists at any date if, as of the last day of the
fiscal quarter of the Borrower referred to in the most recent Financials, (i)
the Borrower does not qualify for Level I Status or Level II Status, and (ii)
the Leverage Ratio is less than or equal to 3.00 to 1.00.
"LEVEL IV STATUS" exists at any date if, as of the last day of the
fiscal quarter of the Borrower referred to in the most recent Financials, (i)
the Borrower does not qualify for Level I Status, Level II Status, or Level III
Status and (ii) the Leverage Ratio is less than or equal to 3.50 to 1.00.
"LEVEL V STATUS" exists at any date if the Borrower does not qualify
for Level I, Level II, Level III or Level IV Status.
"STATUS" means either Level I Status, Level II Status, Level III
Status, or Level IV Status, as the case may be.
12
<PAGE> 13
The Applicable Margin and Applicable Fee Rate shall be determined in
accordance with the foregoing table based on the Borrower's Status as reflected
in the then most recent Financials. Adjustments, if any, to the Applicable
Margin or Applicable Fee Rate shall be effective five Business Days after the
Agent has received the applicable Financials. If the Borrower fails to deliver
the Financials to the Agent at the time required pursuant to Section 6.1, then
the Applicable Margin and Applicable Fee Rate shall be the highest Applicable
Margin and Applicable Fee Rate set forth in the foregoing table until five
Business Days after such Financials are so delivered.
13
<PAGE> 14
ACKNOWLEDGMENT AND REAFFIRMATION OF GUARANTORS
Each of the undersigned (i) acknowledges receipt of the foregoing
Amendment No. 1 to Credit Agreement dated as of November 1, 1999 (the
"Amendment"), (ii) consents to the execution and delivery of the Amendment by
the parties thereto, and (iii) reaffirms all of its obligations and covenants
under the Subsidiary Guaranty and Subsidiary Pledge Agreement (all as defined in
the Credit Agreement and in effect as of the date hereof), and agrees that none
of such obligations and covenants shall be affected by the execution and
delivery of the Amendment, and that all of such obligations and covenants remain
in full force and effect on and after the date hereof. This Acknowledgment and
Reaffirmation may be executed in any number of counterparts and by the different
parties hereto in separate counterparts, each of which when so executed and
delivered shall be deemed to be an original and all of which counterparts, taken
together, shall constitute but one and the same instrument.
Associated Suppliers, Inc.
Atlantic Industrial Supply Co., Inc.
Austin Ford Logan, Inc.
B&J Industrial Supply Company
B&J Industrial Supply Company of Spokane
B&J Industrial Supply Company of Tacoma
Buford Bros., Inc.
Cardinal Machinery, Inc.
Cramer Industrial Supplies, Inc.
The Distribution Group, Inc.
Dynamic Tool & Abrasives, Inc.
E. C. Blackstone Company
Hawley Industrial Supplies, Inc.
IDG Real Properties, Inc.
Industrial & Tool Suppliers Limited Liability
Company
Industrial Distribution Group - California, Inc.
The Innovative Distributor Group, Inc.
J.J. Stangel Co.
Knox Industrial, Inc.
L.D. Supply, Inc.
Mel's Industrial Supplies, Inc.
The New England Group Industrial Distributors, Inc.
Northern Tool & Supply, Inc.
Petry & Morrow, Inc.
Refco, Inc.
Shearer Industrial Supply Co.
Tri-Star Industrial Supply, Inc.
Turner Industries, Inc.
Wm. H. Taylor & Company, Inc.
By:
------------------------------
Name:
Title:
14
<PAGE> 15
SCHEDULE 5.8
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
NAME STATE OF CAPITAL STOCK PERCENTAGE
INCORPORATION HELD BY HELD
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Associated Suppliers, Inc. Oregon IDG 100
- ----------------------------------------------------------------------------------------------------------------------
Atlantic Industrial Supply Co., Inc. Massachusetts IDG 100
- ----------------------------------------------------------------------------------------------------------------------
Austin Ford Logan, Inc. New York IDG 100
- ----------------------------------------------------------------------------------------------------------------------
B&J Industrial Supply Company Washington IDG 100
- ----------------------------------------------------------------------------------------------------------------------
B&J Industrial Supply Company of Washington B&J 100
Spokane
- ----------------------------------------------------------------------------------------------------------------------
B&J Industrial Supply Company of Washington B&J 100
Tacoma
- ----------------------------------------------------------------------------------------------------------------------
Buford Bros., Inc. Tennessee IDG 100
- ----------------------------------------------------------------------------------------------------------------------
Cardinal Machinery, Inc. Tennessee IDG 100
- ----------------------------------------------------------------------------------------------------------------------
Cramer Industrial Supplies, Inc. New York IDG 100
- ----------------------------------------------------------------------------------------------------------------------
The Distribution Group, Inc. Georgia IDG 100
- ----------------------------------------------------------------------------------------------------------------------
Dynamic Tool & Abrasives, Inc. Michigan IDG 100
- ----------------------------------------------------------------------------------------------------------------------
E.C. Blackstone Company Georgia IDG 100
- ----------------------------------------------------------------------------------------------------------------------
Hawley Industrial Supplies, Inc. Connecticut IDG 100
- ----------------------------------------------------------------------------------------------------------------------
IDG Real Properties, Inc. Georgia IDG 100
- ----------------------------------------------------------------------------------------------------------------------
Industrial & Tool Suppliers Maine IDG 50
Limited Liability Company Refco 50
- ----------------------------------------------------------------------------------------------------------------------
Industrial Distribution Group - California IDG 100
California, Inc.
- ----------------------------------------------------------------------------------------------------------------------
The Innovative Distributor Group, Inc. Ohio IDG 100
- ----------------------------------------------------------------------------------------------------------------------
J.J. Stangel Co. Wisconsin IDG 100
- ----------------------------------------------------------------------------------------------------------------------
Knox Industrial, Inc. California IDG-CA 100
- ----------------------------------------------------------------------------------------------------------------------
L.D. Supply, Inc. Georgia IDG 100
- ----------------------------------------------------------------------------------------------------------------------
Mel's Industrial Supplies, Inc. California IDG 100
- ----------------------------------------------------------------------------------------------------------------------
The New England Group New Hampshire IDG 100
Industrial Distributors, Inc.
- ----------------------------------------------------------------------------------------------------------------------
Northern Tool & Supply, Inc. Michigan IDG 100
- ----------------------------------------------------------------------------------------------------------------------
Petry & Morrow, Inc. Pennsylvania IDG 100
- ----------------------------------------------------------------------------------------------------------------------
Refco, Inc. Georgia IDG 100
- ----------------------------------------------------------------------------------------------------------------------
Shearer Industrial Supply Co. Pennsylvania IDG 100
- ----------------------------------------------------------------------------------------------------------------------
Tri-Star Industrial Supply, Inc. Missouri IDG 100
- ----------------------------------------------------------------------------------------------------------------------
Turner Industries, Inc. Pennsylvania Shearer 100
- ----------------------------------------------------------------------------------------------------------------------
Wm. H. Taylor & Company, Inc. Delaware Shearer 100
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
AMENDMENT NO. 2 TO CREDIT AGREEMENT
THIS AMENDMENT NO. 2 TO CREDIT AGREEMENT (this "Amendment") is made
and entered into effective as of December 31, 1999, among INDUSTRIAL
DISTRIBUTION GROUP, INC., a Delaware corporation (the "Borrower"), the lending
institutions listed on the signature pages of this Amendment (collectively, the
"Lenders"), BANK ONE, NA (formerly The First National Bank of Chicago), in its
capacities as agent for the Lenders (in such capacity, the "Agent") and as
issuing bank for the "Facility LCs" as provided in the Credit Agreement
referred to below (in such capacity, the "LC Issuer"), BANK OF AMERICA, N.A.
(formerly Bank of America National Trust and Savings Association), in its
capacity as Co-Agent for the Lenders, and FIRST UNION NATIONAL BANK, in its
capacity as Co-Agent for the Lenders.
W I T N E S S E T H:
WHEREAS, the Borrower, the Lenders, and the Agent and LC Issuer are
parties to a certain Credit Agreement dated as of December 11, 1997, as amended
and restated by a certain First Amendment and Restatement of Credit Agreement
dated as of December 11, 1998, as amended by Amendment No. 1 to Credit
Agreement dated as of November 1, 1999 (as so amended and restated, the "Credit
Agreement");
WHEREAS, the Borrower has requested that the Lenders amend the Credit
Agreement so as to revise certain of the financial covenants set forth therein
and in certain other respects;
WHEREAS, the Lenders have agreed to make such amendments, subject to
the terms, conditions and requirements set forth in this Amendment;
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound, agree as
follows:
1. DEFINED TERMS. Except as otherwise expressly defined herein, capitalized
terms used in this Amendment that are defined in the Credit Agreement are used
in this Amendment with the respective meanings assigned to such capitalized
terms in the Credit Agreement.
2. AMENDMENTS TO ARTICLE I ("DEFINITIONS").
(a) Article I of the Credit Agreement is hereby amended by
deleting the defined terms "Aggregate Revolving Commitment", "Borrower Credit
Documents", "Collateral Documents", "Consolidated EBITDA", "Permitted
Acquisition", and "Subsidiary Credit Documents" and the
<PAGE> 2
accompanying definitions for such defined terms in their entirety, and
substituting in lieu thereof the following defined terms and accompanying
definitions in appropriate alphabetical order:
"AGGREGATE REVOLVING COMMITMENT" means the aggregate of the
Revolving Commitments of all the Lenders, which amount shall be, on
and after the Amendment No. 2 Effective Date, $100,000,000, as such
amount may be reduced from time to time pursuant to the terms hereof.
"BORROWER CREDIT DOCUMENTS" means this Agreement, any and all
Notes, any and all Facility LC Application Agreements, the Borrower
Pledge Agreement, and the Borrower Security Agreement.
"COLLATERAL DOCUMENTS" means, collectively, the Borrower
Pledge Agreement, the Borrower Security Agreement, the Subsidiary
Guaranty, the Contribution Agreement, the Subsidiary Pledge Agreement,
and the Subsidiary Security Agreement.
"CONSOLIDATED EBITDA" means Consolidated Net Income plus, to
the extent deducted from revenues in determining Consolidated Net
Income, (i) Consolidated Interest Expense, (ii) expense for current
federal, state and local income taxes paid or accrued, (iii)
depreciation, amortization and all other non-cash charges, and (iv)
the 1999 Specified Cash Charges, minus, to the extent added in
determining Consolidated Net Income, (A) non-recurring items such as
gains on sale of assets or extraordinary items, which items constitute
positive net income, (B) earnings from discontinued businesses, (C)
any non-cash gains, and (D) the positive income of any Affiliate or
other Person (other than a Subsidiary of the Borrower) in which any
Person (other than the Borrower or any of its Subsidiaries) has a
joint interest, except to the extent of the amount of dividends or
other distributions actually paid to the Borrower or any of its
Subsidiaries by such Affiliate or other Person during such period.
"PERMITTED ACQUISITION" means an Acquisition (i) that was not
preceded by an unsolicited public tender offer for Capital Stock of
the Person being acquired (the "Acquired Entity"), (ii) where the
Acquired Entity is in the same or similar line of business as the
Borrower and its Subsidiaries, (iii) in the case of an Acquisition of
an Acquired Entity organized in the United States of America whose
principal business is conducted in the United States of America, if
the cash consideration to be paid in the Acquisition exceed
$5,000,000, where the Borrower has submitted to the Agent and the
Lenders evidence satisfactory to them that, after giving pro forma
effect to the Acquisition, the Borrower will be in compliance with all
financial and other covenants set forth in this Agreement and the
Required Lenders have given their prior written approval of such
Acquisition, (iv) in the case of an Acquisition of an Acquired Entity
organized outside the United States of America or whose principal
business is conducted outside the United States of America, where the
Required Lenders have given their prior written approval of such
Acquisition, (v) where immediately prior to and after giving effect to
such Acquisition, no Default or Unmatured Default then exists or would
occur as a result thereof, and (vi) where the cash consideration to be
paid in such Acquisition, plus all cash
2
<PAGE> 3
consideration paid in respect of all other Acquisitions on and after
the Amendment No. 2 Effective Date, does not exceed $15,000,000 in the
aggregate.
"SUBSIDIARY CREDIT DOCUMENTS" means, collectively, the
Subsidiary Guaranty, the Subsidiary Pledge Agreement, and the
Subsidiary Security Agreement.
(b) Article I of the Credit Agreement is hereby amended by adding
the following new defined terms and accompanying definitions in appropriate
alphabetical order:
"ACCOUNT DEBTOR" shall mean any Person who is or who may
become obligated to the Borrower or any Subsidiary under or on account
of a Receivable.
"AMENDMENT NO. 2" means Amendment No. 2 to Credit Agreement
dated as of December 31, 1999, among the Borrower, the Lenders, and
the Agent and LC Issuer.
"AMENDMENT NO. 2 CREDIT DOCUMENTS" means, collectively,
Amendment No. 2 and the Notes, the Borrower Security Agreement, and
Subsidiary Security Agreement required to be executed and delivered to
the Agent pursuant to Section 4.4.
"AMENDMENT NO. 2 EFFECTIVE DATE" means the date on which all
conditions and requirements set forth in Section 4.4 have been
satisfied or waived in writing by the Required Lenders.
"AMENDMENT NO. 2 FEES" means, collectively, the fee payable
to each Lender on the amount of such Lender's Revolving Commitment as
in effect immediately after giving effect to Amendment No. 2, in an
amount equal to 0.20% of such Revolving Commitment.
"BORROWER SECURITY AGREEMENT" means the Borrower Security
Agreement executed by the Borrower in favor of the Agent for the
ratable benefit of the Lenders, substantially in the form of Exhibit
L, as the same may be amended, supplemented, and restated from time to
time.
"BORROWING BASE" shall mean, at any date of determination,
(a) the sum of the following amounts as of such date: (i) 85% percent
of the net dollar value of the Eligible Receivables of the Borrower
and those Subsidiaries that are parties to the Subsidiary Security
Agreement, and (ii) 50% of the net dollar value (based on the lower of
market value and actual cost, with cost being determined on a
first-in, first-out basis) of the Eligible Inventory of the Borrower
and those Subsidiaries that are parties to the Subsidiary Security
Agreement, less all amounts owing to any other Persons secured by
Liens granted to such Persons in any such Inventory.
"BORROWING BASE CERTIFICATE" shall mean a certificate of an
authorized officer of the Borrower substantially in the form of
Exhibit N attached hereto.
3
<PAGE> 4
"COLLATERAL" means, collectively, the "Collateral" as defined
in the Borrower Pledge Agreement, the Borrower Security Agreement, the
Subsidiary Pledge Agreement, and the Subsidiary Security Agreement.
"COLLATERAL LOCATIONS" shall mean all locations of Inventory
as described in the Perfection Certificates, as supplemented from time
to time pursuant to written notice provided to the Agent pursuant to
the Borrower Security Agreement or Subsidiary Security Agreement, as
the case may be.
"ELIGIBLE INVENTORY" shall mean and include only such
Inventory of the Borrower and those Subsidiaries that are parties to
the Subsidiary Security Agreement that has been listed on a schedule
delivered to the Agent and the Lenders in accordance with Section
6.1(xi), (a) that consists solely of Inventory not deemed to be a
non-stock item or out of condition, stale, obsolete, slow moving (as
reflected by reserves therefor established by the Borrower or such
Subsidiary in accordance with GAAP), damaged, or otherwise
unmerchantable by the Agent (as determined in its reasonable judgment)
or any governmental agency or any department or division thereof
having regulatory authority over the Borrower or any Subsidiary or any
of their respective agents or activities, (b) located at one or more
of the Collateral Locations within the United States or its
territories and is not in-transit from the vendor or supplier thereof
(except where title to such Inventory is held by the Borrower or such
Subsidiary and such Inventory is being transported by Borrower or such
Subsidiary), (c) that is subject to internal control and management
procedures conducted by the Borrower and its Subsidiaries that are
reasonably satisfactory to the Agent, (d) that is subject to a first
priority (other than tax liens permitted by Section 6.14 and
landlord's, warehousemen's, and similar liens in respect of Inventory
at Collateral Locations where the obligations of the Borrower or any
Subsidiary to pay rent or other storage charges are not more than ten
(10) days past due) perfected security interest in favor of the Agent,
(e) that is not consigned or demonstration Inventory, (f) that is not
work in process or packaging supplies, and (g) that the Agent
otherwise determines in good faith to be Eligible Inventory, based on
such reasonable and customary credit and collateral considerations as
the Agent takes into account generally to determine collateral
eligibility of inventory of such type, condition, and location.
"ELIGIBLE RECEIVABLES" shall mean and include only such
Receivables (i) consisting of accounts receivable arising from bona
fide transactions (excluding sales for cash or paid by credit cards)
in the ordinary course of the business of the Borrower and those
Subsidiaries that are parties to the Subsidiary Security Agreement,
(ii) that are described on a schedule delivered to the Agent and the
Lenders in accordance with Section 6.1(xi) hereof, (iii) that are
adjusted to deduct appropriate amounts for rebates due to Account
Debtors, credit balances in favor of Account Debtors, and unreconciled
differences in the Accounts, and (iv) that the Agent otherwise
determines in good faith to be Eligible Receivables based on such
reasonable and customary credit and collateral considerations as the
Agent takes into account generally to determine the collateral
eligibility of accounts receivables of such type and creditworthiness.
In any event,
4
<PAGE> 5
however, unless the Agent specifically consents otherwise in writing,
no Receivable shall be considered to be an Eligible Receivable if (a)
it arises out of a sale made by the Borrower or any Subsidiary to an
Affiliate of the Borrower or such Subsidiary or to a Person controlled
by an Affiliate of the Borrower or such Subsidiary, (b) it is due more
than 90 days after the original invoice date, (c) unpaid more than 60
days after the due date, (d) 25% or more of the Receivables from the
Account Debtor are unpaid for more than 90 days after the original
invoice date or for more than 60 days after the due date (other than
in circumstances where clause (g) is applicable), (e) any covenant,
representation or warranty contained in this Agreement, the Borrower
Security Agreement, or the Subsidiary Security Agreement with respect
to such Receivable has been breached, (f) the Account Debtor is also
the Borrower's or such Subsidiary's creditor or supplier, or the
Account Debtor has disputed liability, or the Account Debtor has made
any claim with respect to any other Receivable due from such Account
Debtor to the Borrower or such Subsidiary, or the Receivable otherwise
is or may become subject to any right of setoff (actual or potential)
by the Account Debtor, whether by virtue of the terms of the contract
between the Borrower or such Subsidiary and the Account Debtor, or by
virtue of any other defense or claim of the Account Debtor against the
Borrower or such Subsidiary; provided, however, that the Receivables
of such Account Debtor shall only be ineligible to the extent of such
offset or potential offset, (g) the Account Debtor has commenced a
voluntary case under the federal Bankruptcy Code, or made an
assignment for the benefit of creditors, or if a decree or order for
relief has been entered by a court having jurisdiction in the premises
in respect of the Account Debtor in an involuntary case under the
federal Bankruptcy Code, or if any other petition or other application
for relief under the Bankruptcy Code has been filed against the
Account Debtor, or if the Account Debtor has failed, suspended
business, ceased to be solvent, or consented to or suffered a
receiver, trustee, liquidator or custodian to be appointed for it or
for all or a significant portion of its assets or affairs, (h) the
sale is to an Account Debtor outside the United States unless the sale
is on letter of credit, guaranty or acceptance terms, in each case
acceptable to the Agent, (i) the sale to the Account Debtor is on a
bill-and-hold, guaranteed sale, sale-and-return, sale on approval,
consignment or any other repurchase or return basis, (j) the Agent
believes that collection of such Receivable is insecure or that such
Receivable may not be paid by reason of the Account Debtor's financial
inability to pay, (k) the Account Debtor is the United States of
America or any department, agency or instrumentality thereof, unless
the Borrower or such Subsidiary, as the case may be, assigns its right
to payment of such Receivable to the Agent pursuant to the Assignment
of Claims Act of 1940, as amended, (l) the goods giving rise to such
Receivable have not been shipped and delivered to the Account Debtor
(or, if shipped and delivered, the Borrower or any such Subsidiary has
received knowledge or notice of their loss in transit, mis-delivery or
their non-acceptance by the Account Debtor) or the services giving
rise to such Receivable have not been performed by the Borrower or
such Subsidiary with respect thereto (or, if performed, the Borrower
or such Subsidiary has received knowledge or notice of their
non-acceptance by the Account Debtor), or the Receivable otherwise
does not represent a final bona fide sale, (m) the Receivables of any
Account Debtor, together with the Receivables of any Affiliates of
such Account Debtor, exceed at any time 15% of the aggregate amount of
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Eligible Receivables of all Account Debtors, to the extent such
Receivables of such Account Debtor and its Affiliates exceed such
amount, (n) the Agent does not hold a first priority, perfected
security interest in such Receivables, or (o) the Agent otherwise in
good faith determines such Receivables to be ineligible for borrowing
purposes hereunder, based on such reasonable and customary credit and
collateral considerations as the Agent takes into account generally to
determine collateral eligibility of accounts receivables of such type
and creditworthiness.
"ERP SALE-LEASEBACK" means the Sale and Leaseback of the
Borrower's enterprise resource planning system.
"INVENTORY" shall mean and include all of the Borrower's and
each Subsidiary's inventory, wherever located and whether now existing
or hereafter acquired or arising or in which the Borrower or any
Subsidiary now has or hereafter acquires any rights, including without
limitation, all cutting tools, hand and power tools, abrasives,
lubricants, adhesives, electrical products, pipes, valves and
fittings, power transmission equipment, and other maintenance, repair,
operating and production products, and all other inventory,
merchandise, goods and other personal property held by or on behalf of
the Borrower or any Subsidiary for sale or lease or to be furnished
under a contract of service, or that constitute raw materials, work in
process or materials used or consumed or to be used or consumed in the
business of the Borrower or any Subsidiary, or in the processing,
production, packaging, promotion, delivery or shipping of the same,
including other supplies, all returned or repossessed goods now or at
any time hereafter in the possession or under the control of the
Borrower or any Subsidiary or the Agent, and all documents of title or
documents representing the same.
"MANDATORY PREPAYMENT EVENT" shall mean a sale (including any
transaction that has the economic effect of a sale), transfer or other
disposition (by way of merger or otherwise, including sales in
connection with a Sale and Leaseback Transaction, or as a result of a
casualty or condemnation of any property) by the Borrower or any
Subsidiary to any Person (other than to the Borrower or another
Subsidiary) of any real property (including any improvements,
fixtures, and personal property located on or used in connection with
such real property and improvements that are included in such sale,
transfer or other disposition) from and after January 1, 2000, where
(i) the Borrower and its Subsidiaries have failed to use the Net Sale
Proceeds of such sale, transfer, or other disposition to purchase or
otherwise invest in properties and assets used in the business of the
Borrower and its Subsidiaries within 90 days after the date of such
sale, transfer, or other disposition, and (ii) the total aggregate
amount of Net Sale Proceeds received from and after January 1, 2000,
in respect of such sales, transfers, and other dispositions that are
not invested as described in the preceding clause (i) exceed $500,000;
provided, however, that neither the UTF Sale-Leaseback nor the ERP
Sale-Leaseback shall constitute a Mandatory Prepayment Event for
purposes of this Agreement.
"NET SALE PROCEEDS" shall mean, with respect to any
transaction giving rise to a Mandatory Prepayment Event, the proceeds
of such transaction to the Borrower and/or its
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Subsidiaries, including payments in the form of cash or cash
equivalents, deferred payment obligations, casualty loss insurance
proceeds, condemnation awards, and proceeds from the conversion of
other property received, net of (i) brokerage commissions and other
reasonable and customary fees and expenses of such transaction, (ii)
provision of all taxes imposed on such transaction, and (iii) payments
made to repay Indebtedness secured by the assets subject to such
transaction.
"1999 SPECIFIED CASH CHARGES" shall mean, collectively, the
one-time cash charges being taken and reflected on the consolidated
financial statements of the Borrower and its Subsidiaries for the
period ending December 31, 1999, for (i) settlement of pending
litigation with a dissenting shareholder, such charge to be in an
amount not to exceed $4,500,000, (ii) discontinued operations at the
MACS Tucson location, such charge to be in an amount not to exceed
$300,000, (iii) executive severance payments, such charge to be in an
amount not to exceed $450,000, and (iv) costs incurred related to the
abandonment of Project Phoenix, such charge to be in an amount not to
exceed $50,000.
"PERFECTION CERTIFICATES" shall mean the Perfection
Certificates in the form of Exhibit O attached hereto delivered by the
Borrower and the Subsidiaries to the Agent and the Lenders.
"RECEIVABLES" shall mean and include all of the Borrower's
and each Subsidiary's accounts, contract rights, chattel paper and
instruments, whether now existing or hereafter acquired or arising or
in which the Borrower or any Subsidiary now has or hereafter acquires
any rights, including without limitation, all present and future
rights to payments for goods, merchandise or Inventory sold or leased
or for services rendered, whether or not represented by instruments or
chattel paper, and whether or not earned by performance; proceeds of
any letter of credit on which the Borrower or any Subsidiary is a
beneficiary; and all forms of obligations whatsoever owing to the
Borrower or any Subsidiary, together with all instruments and
documents of title representing any of the foregoing, all rights in
any goods, merchandise or Inventory which any of the foregoing may
represent, all rights in any returned or repossessed goods,
merchandise or Inventory, and all rights, security and guaranties with
respect to each of the foregoing, including without limitation, any
rights of stoppage in transit and reclamation.
"REVOLVING COMMITMENT" means for each Lender, the obligation
of such Lender to make Loans (other than Swing Line Loans) not
exceeding its Percentage of the Aggregate Revolving Commitment (with
the maximum amount of each Lender's Revolving Commitment in effect on
and after the Amendment No. 2 Effective Date being set forth on the
signature page for such Lender to Amendment No. 2).
"SUBSIDIARY SECURITY AGREEMENT" means the Subsidiary Security
Agreement executed by the Subsidiaries of the Borrower in favor of the
Agent for the ratable benefit
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of the Lenders, substantially in the form of Exhibit M, as the same
may be amended, supplemented, and restated from time to time.
"UTF SALE-LEASEBACK" means the Sale and Leaseback
Transactions between the Borrower and/or certain of its Subsidiaries
and United Trust Fund Limited Partnership, substantially in accordance
with the terms of the letter agreement dated November 23, 1999,
between the Borrower and United Trust Fund.
3. AMENDMENTS TO ARTICLE II ("THE CREDITS").
(a) Section 2.1 ("Revolving Commitment") of the Credit Agreement
is hereby amended by deleting said Section 2.1 in its entirety and substituting
in lieu thereof the following Section 2.1:
2.1. REVOLVING COMMITMENT. From and including the Closing
Date and prior to the Facility Termination Date, each Lender severally
agrees, on the terms and conditions set forth in this Agreement, to
make Loans to the Borrower from time to time; provided, however, that
upon giving effect to each such Loan, such Lender's Outstanding Credit
Exposure shall not exceed such Lender's Revolving Commitment; and
provided further, that upon giving effect to each Loan, the Aggregate
Outstanding Credit Exposure shall not exceed the lesser of (i) the
Aggregate Revolving Commitment, (ii) the Borrowing Base as calculated
pursuant to the most recent Borrowing Base Certificate delivered by
the Borrower hereunder, and (iii) during the period from the Amendment
No. 2 Effective Date through the date of delivery of the first
Borrowing Base Certificate pursuant to Section 6.1(xi), $70,000,000.
Subject to the terms of this Agreement, the Borrower may borrow, repay
and reborrow at any time prior to the Facility Termination Date. The
Revolving Commitments to lend hereunder shall expire on the Facility
Termination Date.
(b) Section 2.2 ("Required Payments; Termination") of the Credit
Agreement is hereby amended by deleting said Section 2.2 in its entirety and
substituting in lieu thereof the following Section 2.2:
2.2. REQUIRED PAYMENTS; TERMINATION. Any outstanding
Advances and Swing Line Loans and all other unpaid Obligations shall be paid in
full by the Borrower on the Facility Termination Date. If at any time prior to
the Facility Termination Date the aggregate principal amount of the outstanding
Advances and Swing Line Loans plus the Aggregate Outstanding LC Exposure
exceeds the lesser of (i) the Aggregate Revolving Commitment, and (ii) the
Borrowing Base as calculated pursuant to the most recent Borrowing Base
Certificate delivered by the Borrower hereunder, the Borrower agrees to pay at
such time a principal amount of such outstanding Advances and/or Swing Line
Loans (together with interest thereon and any applicable funding
indemnification amounts required by Section 3.4) not less than such excess
amount. In addition, not later than the third Business Day following the
occurrence, consummation or completion of each Mandatory Prepayment Event, the
Borrower shall pay to the Lenders an amount
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<PAGE> 9
equal to the Net Sale Proceeds received in respect of such Mandatory Prepayment
Event in excess of the $500,000 amount described in clause (ii) of the
definition of "Mandatory Prepayment Event" as set forth herein, other than any
portion of such Net Sale Proceeds not to exceed ten percent (10%) thereof that
is received in a form other than cash or cash equivalents, which amount shall
be used to prepay principal amounts outstanding under the Loans. If any portion
of such Net Sale Proceeds is received in a form other than cash or cash
equivalents, then the Borrower shall promptly pay to the Lenders all cash and
cash equivalents subsequently received as payment or satisfaction in respect of
such portion of such Net Sale Proceeds.
(c) Section 2.19 ("Facility LCs") of the Credit Agreement is
hereby amended by deleting clause (ii) contained in the first sentence of
paragraph (a) of Section 2.19 and substituting in lieu thereof the following
clause (ii):
(ii) the Aggregate Outstanding Credit Exposure shall not
exceed the lesser of (x) the Aggregate Revolving Commitment, and (y)
the Borrowing Base as calculated pursuant to the most recent Borrowing
Base Certificate delivered by the Borrower hereunder;
(d) Section 2.21 ("Increase in Commitments") of the Credit
Agreement is hereby amended by deleting said Section 2.21 in its entirety and
substituting in lieu thereof the following Section 2.21:
2.21. DECREASES IN COMMITMENTS.
(a) On the Amendment No. 2 Effective Date, the Aggregate
Revolving Commitment shall be decreased from $125,000,000 to
$100,000,000. After giving effect to the foregoing, the Revolving
Commitments and the Percentages of the Lenders shall be as set forth
on the signature pages for such Lenders attached to Amendment No. 2.
(b) If the Borrower has been required to make a prepayment
to the Lenders in connection with any Mandatory Prepayment Event as
provided in the last sentence of Section 2.2 hereof, the Aggregate
Revolving Commitment as in effect immediately prior to such Mandatory
Prepayment Event shall be automatically and permanently decreased by
an amount equal to the principal amount required to be paid by the
Borrower pursuant to Section 2.2.
(c) In the event the Borrower and its Subsidiaries
consummate a securitization or secured financing facility for accounts
receivable, as approved by all of the Lenders pursuant to the terms
hereof, on the date of consummation of such securitization or secured
financing facility the Aggregate Revolving Commitment shall be
automatically and permanently decreased by an amount equal to the
maximum aggregate principal amount that may initially be paid or
loaned to the Borrower and its Subsidiaries under such securitization
or secured financing facility for all such accounts receivable and
recovered from all such accounts receivable, and on the date of any
subsequent increase
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in the maximum principal amount of accounts receivable that may be so
purchased or pledged as collateral pursuant to such securitization or
secured financing facility, the Aggregate Revolving Commitment shall
be automatically and permanently decreased by the net increase in such
aggregate principal amount that may be paid or loaned against such
accounts receivable at any time outstanding.
(d) The Borrower's obligations to pay the principal of, and
interest on, all Loans shall be evidenced by the records of the Agent
and each Lender and, if such Lender has received a Note executed by
the Borrower pursuant to Section 2.13, 4.1, 4.3, or 4.4, by such Note
payable to such Lender completed in conformity with this Agreement.
(e) From and after the Amendment No. 2 Effective Date, all
references in this Agreement to the Revolving Commitments shall be
deemed to mean the Revolving Commitments as decreased by this Section
2.21 (subject, however, to subsequent decreases from time to time as a
result of any other reductions thereof pursuant to the provisions of
this Agreement).
4. AMENDMENT TO ARTICLE IV "CONDITIONS PRECEDENT"). Article IV of the
Credit Agreement is hereby amended by adding a new Section 4.4 thereto as
follows:
4.4. EFFECTIVENESS OF AMENDMENT NO. 2. Amendment No. 2 shall
not become effective until all of the following conditions and
requirements have been satisfied and performed:
(a) The Borrower shall have furnished to the Agent the
following, all in form and substance satisfactory to the Agent and the
Lenders, with sufficient copies for the Lenders:
(i) Copies of the articles or certificate of
incorporation, certificate of limited
partnership, articles of organization, or
similar organizational documents of each Loan
Party, together with all amendments thereto,
and a certificate of good standing, each
certified by the appropriate governmental
officer in its jurisdiction of organization for
such Loan Party.
(ii) Copies, certified by its Secretary or
Assistant Secretary or similar representative,
of each Loan Party's by-laws, partnership
agreement, operating or management agreement,
or similar organizational documents, and
resolutions of its board of directors,
managers, or similar officials, authorizing the
execution of Amendment No. 2 Credit Documents
to which each such Loan Party is a party.
(iii) An incumbency certificate, executed by the
Secretary or Assistant Secretary or similar
representative of each Loan Party, which shall
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identify by name and title and bear the
signatures of the authorized officers and any
other representative of such Loan Party
authorized to sign the Amendment No. 2 Credit
Documents to which such Loan Party is a party,
upon which certificate the Agent and the
Lenders shall be entitled to rely until
informed of any change in writing by such Loan
Party.
(iv) A certificate, signed by the Chief Financial
Officer of the Borrower, stating that on the
Amendment No. 2 Effective Date (A) no Default
or Unmatured Default has occurred and is
continuing, (B) the representations and
warranties set forth in Amendment No. 2 and the
other Amendment No. 2 Credit Documents are true
and correct in all material respects, and (C)
all conditions and requirements set forth in
this Section 4.4 have been satisfied and
performed or waived in writing by the Required
Lenders.
(v) A written opinion of counsel for the Loan
Parties, addressed to the Lenders in
substantially the form of Exhibit P attached to
Amendment No. 2.
(vi) Any Notes requested by Lenders pursuant to
Section 2.13 payable to the order of such
requesting Lenders.
(vii) The Borrower Security Agreement duly executed
by an Authorized Officer of the Borrower,
Uniform Commercial Code financing statements
naming the Borrower as "debtor" and the Agent,
for the ratable benefit of the Lenders, as the
"secured party" and covering the "Collateral"
(as defined in the Borrower Security
Agreement), evidencing a first priority pledge
of and security interest in such "Collateral."
(viii) The Subsidiary Security Agreement, duly
executed by an authorized officer or other
representative of each Subsidiary, together
with Uniform Commercial Code financing
statements naming each Subsidiary as "debtor"
and the Agent, for the ratable benefit of the
Lenders, as the "secured party" and covering
the "Collateral" (as defined in the Subsidiary
Security Agreement), evidencing a first
priority pledge of and security interest in
such "Collateral", other than any such
financing statements that the Borrower and the
Agent have agreed in writing may be delivered
after the Amendment No. 2 Effective Date
pursuant to Section 6.25.
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(ix) The Perfection Certificates duly executed by
the authorized officers or other
representatives of the Borrower and the
Subsidiaries.
(x) Examination reports from the Uniform
Commercial Code, federal tax lien, and judgment
lien records of each of the jurisdictions
indicated on the Perfection Certificate, in
each case showing no outstanding liens or
security interests granted by any Loan Party,
other than (1) Liens permitted by Section 6.14,
and (2) Liens in favor of the Agent.
(xi) Landlord and customer lien waivers with respect
to any Inventory of the Borrower or any
Subsidiary in the possession or control of a
Person other than the Borrower or such
Subsidiary, and any other documentation
requested by the Agent in order to assure the
perfection of a first priority lien in the
Collateral described in the Borrower Security
Agreement and Subsidiary Security Agreement in
favor of the Agent for the ratable benefit of
the Lenders, other than any such lien waivers
or other documentation that the Borrower and
the Agent have agreed in writing may be
delivered subsequent to the Amendment No. 2
Effective Date pursuant to Section 6.25.
(xii) Copies of all documents and instruments,
including all consents, authorizations and
filings, required or advisable by any material
contractual obligation of any Loan Party in
connection with the execution, delivery,
performance, validity or enforceability of the
Amendment No. 2 Credit Documents, and such
consents, authorizations, and filings shall be
full force and effect.
(xiii) Such other documents, opinions, certificates
and agreements as the Agent may reasonably
request.
(b) The Borrower shall have paid to the Agent for the
benefit of the respective Lenders the full amount of the Amendment No.
2 Fees.
(c) Amendment No. 2 shall have been executed and delivered
by the Borrower, the Required Lenders, the Agent and LC Issuer, and
the Acknowledgment and Agreement of Guarantors attached to Amendment
No. 2 shall have been executed and delivered by all Domestic Active
Subsidiaries.
(d) Since September 30, 1999, there shall have been no
change in the business, Property, prospects, condition (financial or
otherwise) or results of operations of the Borrower and its
Subsidiaries which could reasonably be expected to have a Material
Adverse Effect.
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5. AMENDMENTS TO ARTICLE VI ("COVENANTS").
(a) Section 6.1 ("Financial Reporting") of the Credit Agreement is
hereby amended by adding new clauses (xi) and (xii) to the end of said Section
6.1 as follows:
(xi) Within 30 days after the end of each fiscal month, the
Borrower shall deliver to the Agent and to each Lender,
commencing January 30, 2000, a Borrowing Base
Certificate as of the end of such fiscal month,
specifically setting forth on the schedules attached
thereto (1) the amount of Inventory owned by the
Borrower and the Subsidiaries that are parties to the
Subsidiary Security Agreement, (2) the amount of
Eligible Inventory and the Eligible Receivables of the
Borrower and such Subsidiaries as of the end of such
fiscal month, and (3) the amount, by Collateral
Location, of any rent or other payments for storage of
Inventory that are past due by more than ten (10) days.
(xii) Within 20 days after request of the Agent or any Lender
(which request, in the absence of an Unmatured Default
or Default, shall not be made more than four (4) times
in any one fiscal year), the Borrower shall deliver to
the Agent and to any Lender requesting the same, in
form acceptable to the Agent, a detailed aged trial
balance of all Receivables existing as of the day of
the preceding fiscal month, specifying the names,
addresses, face value, dates of invoices and due dates
for each Account Debtor obligated on a Receivable so
listed and all other information necessary to calculate
Eligible Receivables as of such last day of the
preceding fiscal month and, upon the Agent's request
therefor, copies of proof of delivery and the original
copy of all documents, including without limitation,
repayment histories and present status reports relating
to the Receivables so scheduled and such other matters
and information relating to the status of the then
existing Receivables as the Agent shall reasonably
request.
(b) Section 6.8 ("Maintenance of Properties") of the Credit
Agreement is hereby amended by deleting said Section 6.8 in its entirety and
substituting in lieu thereof the following Section 6.8:
6.8. MAINTENANCE OF PROPERTIES; PAYMENT OF RENTS AND STORAGE
COSTS. The Borrower will, and will cause each Subsidiary to (i) do all
things necessary to maintain, preserve, protect and keep its Property
in good repair, working order and condition, and make all necessary
and proper repairs, renewals and replacements so that its business
carried on in connection therewith may be properly conducted at all
times, and (ii) promptly pay when due all rents and other amounts due
for storage of Inventory at all
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Collateral Locations and any other locations not owned by the Borrower
or any Subsidiary where any of the Inventory may be stored or
maintained.
(c) Section 6.9 ("Inspection") of the Credit Agreement is hereby
amended by deleting said Section 6.9 in its entirety and substituting in lieu
thereof the following Section 6.9:
6.9. INSPECTION. The Borrower will, and will cause each
Subsidiary to, permit the Agent and the Lenders, by their respective
representatives and agents, to conduct field audits and surveys of any
and all Collateral, wherever located, to inspect any and all other
Property of the Borrower and each Subsidiary, to inspect, examine, and
make copies of the books and financial records of the Borrower and
each Subsidiary, and to discuss the affairs, finances and accounts of
the Borrower and each Subsidiary with, and to be advised as to the
same by, their respective officers at such reasonable times and
intervals as the Agent or any Lender may designate. The Borrower shall
pay for each field audit of Collateral performed by the Agent pursuant
to this Section 6.9 at the Agent's customary audit fees and expenses;
provided, however, that the Borrower shall not be obligated to pay for
more than three (3) such audits in any one fiscal year so long as no
Default exists.
(d) Section 6.10 ("Indebtedness") of the Credit Agreement is
hereby amended by deleting clauses (ii), (iii) and (v) thereof in their
entirety, and substituting in lieu thereof the following clauses (ii), (iii)
and (v) respectively:
(ii) Indebtedness existing on the Amendment No. 2
Effective Date and described in Schedule 6.10.
(iii) Indebtedness arising or deemed to arise in respect of
a securitization or secured financing facility for accounts receivable
of the Borrower and its Subsidiaries, provided that such facility is
approved by all of the Lenders.
. . . .
(v) Indebtedness not described in clause (ii) above (A)
incurred or assumed for the purpose of financing or refinancing all or
any part of the cost of acquiring or constructing any specific fixed
asset, or (B) owing by any Subsidiary at the time such Subsidiary is
acquired by the Borrower or merged into or consolidated with the
Borrower or another Subsidiary, so long as such Indebtedness was not
incurred in contemplation of such acquisition, merger or
consolidation; provided that the sum of all Indebtedness described in
this clause (v), together with all Indebtedness secured by Liens
permitted pursuant to Section 6.14(vii) and the amount of the
transactions permitted pursuant to Section 6.17(C) (but without
duplication of such amounts), does not exceed an amount equal to
$10,000,000.
(e) Section 6.12 ("Sale of Assets") of the Credit Agreement is
hereby amended by deleting clause (iv) thereof in its entirety and substituting
in lieu thereof the following clause (iv):
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(iv) The UTF Sales-Leaseback and other sales, leases and
other dispositions of its Property that, together with all other
Property of the Borrower and its Subsidiaries previously leased, sold
or disposed of (other than as provided in clauses (i) through (iii)
above) as permitted by this Section, (x) during any 12-month period
ending on or before December 31, 1999, do not constitute a Substantial
Portion of the Property of the Borrower and its Subsidiaries, or (y)
at any time after December 31, 1999, do not have an aggregate book
value in excess of $5,000,000 (excluding the Property sold in the UTF
Sale-Leaseback and the ERP Sale-Leaseback).
(f) Section 6.14 ("Liens") of the Credit Agreement is hereby
amended by deleting clauses (v) and (vii) in their entirety and substituting in
lieu thereof the following clauses (v) and (vii) as follows:
(v) Liens existing on the Amendment No. 2 Effective Date
and described in Schedule 6.14.
. . . .
(vii) Any Lien not described in clause (v) above and
existing on any specific fixed asset (A) of any Person at the time
such Person becomes a Subsidiary of the Borrower and not created in
contemplation of such event, (B) securing Indebtedness incurred or
assumed for the purpose of financing or refinancing all or any part of
the cost of acquiring or constructing such asset, where such
acquisition is not in connection with the purchase of all or
substantially all of the assets of a Person, (C) of any Person
existing at the time such Person is merged or consolidated with or
into the Borrower or any of its Subsidiaries and not created in
contemplation of such event, and (D) prior to the acquisition of such
asset by the Borrower or any of its Subsidiaries and not created in
contemplation of such acquisition; provided that the Indebtedness
secured by all such Liens described in this clause (vii), (x) is
otherwise permitted by Section 6.10, and (y) when taken together with
all Indebtedness described in Section 6.10(v) and the amount of the
transactions permitted pursuant to Section 6.17(C) (but without
duplication of such amounts), does not exceed $10,000,000.
(g) Section 6.17 ("SALE AND LEASEBACK TRANSACTIONS AND OTHER
OFF-BALANCE SHEET LIABILITIES") of the Credit Agreement is hereby amended by
deleting said Section 6.17 in its entirety and substituting in lieu thereof the
following Section 6.17:
Section 6.17. SALE AND LEASEBACK TRANSACTIONS AND OTHER
OFF-BALANCE SHEET LIABILITIES. The Borrower will not, nor will it
permit any Subsidiary to, enter into or suffer to exist (i) any Sale
and Leaseback Transaction, or (ii) any other transaction pursuant to
which it incurs or has incurred Off-Balance Sheet Liabilities, except
for (A) Rate Hedging Obligations or other interest rate or foreign
currency swap contracts entered into in the ordinary course of
business and not for speculative purposes, (B) the UTF Sale-Leaseback,
and (C) "synthetic lease" transactions entered into by the Borrower
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or any of its Subsidiaries for the acquisition or construction of
office, distribution or other facilities to be used by the Borrower or
its Subsidiaries, provided that the aggregate value (measured at the
higher of book value and fair market value at the time of such
transaction as determined in good faith by the Board of Directors of
the Borrower) of the assets that are the subject of such transactions
described in this clause (C), taken together with the total amount of
Indebtedness permitted pursuant to Section 6.10(v) and Section
6.14(vii) (but without duplication of such amounts), does not exceed
$10,000,000.
(h) Section 6.19 ("Financial Covenants") of the Credit Agreement
is hereby amended by deleting subsection 6.19.1 ("Coverage Ratio") and
subsection 6.19.2 ("Debt to Cash Flow Ratio") and substituting in lieu thereof
the following subsection 6.19.1 and subsection 6.19.2:
6.19.1. COVERAGE RATIO. The Borrower will not permit the
ratio, determined as of the end of each of its fiscal quarters for the
then most-recently ended four fiscal quarters, of (i) Consolidated
EBITDA plus Consolidated Rentals to (ii) Consolidated Interest Expense
plus Consolidated Rentals, to be less than (x) 2.50 to 1,00 for any
fiscal quarter of the Borrower ending on or before June 30, 1999, (y)
2.40 to 1.00 for the fiscal quarter of the Borrower ending September
30, 1999, or (z) 1.70 to 1.00 for any subsequent fiscal quarter of the
Borrower.
6.19.2. DEBT TO CASH FLOW RATIO. The Borrower will not permit
the ratio, determined as of the end of each of its fiscal quarters, of
(i) Consolidated Indebtedness to (ii) Adjusted Consolidated EBITDA for
the then most-recently ended four fiscal quarters, to be greater than
(A) 3.25 to 1.00 for any fiscal quarter of the Borrower ending on or
before September 30, 1999, (B) 4.00 to 1.00 for the fiscal quarters of
the Borrower ending December 31, 1999, March 31, 2000, and June 30,
2000, (C) 3.75 to 1.00 for the fiscal quarters of the Borrower ending
September 30, 2000 and thereafter.
(i) Article VI ("Covenants") of the Credit Agreement is hereby
amended by adding a new Section 6.25 to Article VI as follows:
6.25. AMENDMENT NO. 2 POST-EFFECTIVE DATE REQUIREMENTS. The
Borrower (i) will deliver to the Agent not later than fifteen (15)
days after the Amendment No. 2 Effective Date, the Uniform Commercial
Code financing statements that the Borrower and the Agent, pursuant to
Section 4.4(a)(viii), have agreed may be delivered to the Agent
subsequent to the Amendment No. 2 Effective Date, (ii) will cause to
be delivered to the Agent not later than forty-five (45) days after
the Amendment No. 2 Effective Date a supplemental opinion of counsel
to the Borrower and the Subsidiaries as to the perfection of the
security interests in that portion of the "Collateral" described in
the Security Agreements that may be perfected by filing of UCC
financing statements outside the State of Georgia (which opinion may
be furnished on the basis of such counsel's review of statutory
compilations from such other states, regardless of whether such
counsel is admitted to practice law in such states), and (iii) will
use its best efforts to obtain, and will deliver to the Agent not
later than forty-five (45) days after the Amendment No. 2 Effective
Date all such documents so obtained, the landlord and
16
<PAGE> 17
customer lien waivers and other documentation that the Borrower and
the Agent, pursuant to Section 4.4(a)(xii), have agreed may be
obtained by the Borrower on such a "best efforts" basis and delivered
to the Agent subsequent to the Amendment No. 2 Effective Date.
6. AMENDMENTS TO ARTICLE X ("THE AGENT"). Section 10.16 ("Collateral
Releases") of the Credit Agreement is hereby amended by deleting the
cross-reference in Section 10.16 to "Section 8.2" and substituting in lieu
thereof a cross-reference to "Section 8.3."
7. AMENDMENTS TO SCHEDULES 5.7, 5.8, 6.10, 6.13, AND 6.14. Schedules 5.8,
6.10 and 6.14 attached to the Credit Agreement are hereby amended by deleting
said Schedules in their entirety and substituting in lieu thereof Schedules
5.7, 5.8, 6.10, 6.13, and 6.14 as attached to this Amendment.
8. REPRESENTATIONS AND WARRANTIES. In order to induce the Lenders and the
Agent and LC Issuer to enter into this Amendment, the Borrower represents and
warrants to the Lenders and the Agent and LC Issuer as follows:
(a) All representations and warranties set forth in the Credit
Agreement, as amended by this Amendment, are true and correct in all material
respects with the same effect as though such representations and warranties had
been made on and as of the date of this Amendment, except to the extent that
such representations and warranties are expressly made with respect to a
specific date, in which case such representations and warranties are true and
correct in all material respects as of such specific date.
(b) No Default or Unmatured Default has occurred and is continuing
on the date hereof. Since September 30, 1999, there has been no change in the
business, property, prospects, condition (financial or otherwise) or results of
operations of the Borrower and its Subsidiaries which could reasonably be
expected to have a Material Adverse Effect.
(c) Each of the Borrower and the other Loan Parties has the
organizational power and authority to make, deliver and perform their
respective obligations under this Amendment and has taken all necessary
organizational action to authorize the execution, delivery and performance of
this Amendment. No consent or authorization of, or filing with, any Person
(including, without limitation, any governmental authority), is required in
connection with the execution, delivery or performance by the Borrower or any
such other Loan Party, or the validity or enforceability against the Borrower
or any such other Loan Party, of this Amendment, other than such consents,
authorizations or filings which have been made or obtained.
(d) This Amendment has been duly executed and delivered by the
Borrower and the other Loan Parties, as applicable, and this Amendment
constitutes the legal, valid and binding obligation of the Borrower and such
other Loan Parties, respectively, enforceable against the Borrower and such
other Loan Parties in accordance with its terms, except as may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, or other similar
laws affecting the enforcement of creditors' rights generally and by general
principles of equity. The execution,
17
<PAGE> 18
delivery and performance by the Borrower and such other Loan Parties of this
Amendment will not violate any applicable legal requirements or cause a breach
or default under any of their respective contractual obligations.
(e) The Borrower acknowledges and agrees that there are no
defenses, claims, counterclaims, or rights of setoff in its favor against any
Lender or the Agent or LC Issuer with regard to any of the obligations and
liabilities of the Borrower or any of its Subsidiaries under the terms of the
Credit Agreement, the other Credit Documents, or this Amendment.
9. REFERENCES TO AGREEMENT. On and after the Amendment No. 2 Effective
Date, each and every reference in the Credit Documents to the Credit Agreement
shall be deemed to refer to and mean the Credit Agreement as amended by this
Amendment. The parties further confirm and agree that (i) except as expressly
amended herein, the Credit Agreement remains in full force and effect in
accordance with its terms, and (ii) except as expressly amended or supplemented
by this Amendment, all other Credit Documents remain in full force and effect
in accordance with their respective terms.
10. COSTS, EXPENSES AND TAXES. The Borrower agrees to pay on demand all
reasonable costs and expenses of the Agent in connection with the preparation,
execution and delivery of this Amendment and the other Amendment No. 2 Credit
Documents, including, without limitation, the reasonable fees and out-of-pocket
expenses of counsel for the Agent with respect thereto and with respect to
advising the Agent as to its rights and responsibilities hereunder and
thereunder. In addition, the Borrower shall pay any and all stamp and other
taxes payable or determined to be payable in connection with the execution and
delivery of this Amendment and the other Amendment No. 2 Credit Documents, and
agrees to save the Agent and each Lender harmless from and against any and all
liabilities with respect to or resulting from any delay in paying such taxes.
11. GOVERNING LAW. This Amendment shall be governed by, and construed in
accordance with, the laws of the State of Georgia.
12. ENTIRE UNDERSTANDING. This Amendment sets forth the entire
understanding of the parties with respect to the matters set forth herein, and
shall supersede any prior negotiations, commitment letters, or agreements,
whether written or oral, with respect to such matters.
13. COUNTERPARTS. This Amendment may be executed in any number of
counterparts and by different parties hereto in separate counterparts and may
be delivered by telecopier. Each counterpart so executed and delivered shall be
deemed an original and all of which taken together shall constitute but one and
the same instrument.
14. NO WAIVER. The Borrower agrees that nothing herein shall constitute a
waiver by the Lenders of any Default or Unmatured Default, whether known or
unknown, which may exist under the Credit Agreement.
18
<PAGE> 19
15. AMENDMENT NO. 2 EFFECTIVE DATE. This Amendment shall become effective
as of December 31, 1999 (the "Amendment No. 2 Effective Date") when this
Amendment shall have been executed and delivered by the Borrower, the Required
Lenders, and the Agent, and the other conditions set forth in Section 4.4 have
been satisfied.
19
<PAGE> 20
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
through their authorized officers as of the date first above written.
INDUSTRIAL DISTRIBUTION GROUP, INC.
By:
-----------------------------
Title:
--------------------------
20
<PAGE> 21
BANK ONE, NA
(Formerly The First National Bank of Chicago),
Individually and as Agent
By:
-------------------------------------
Title:
---------------------------------
REVOLVING COMMITMENT: $24,000,000
PERCENTAGE: 24.00%
21
<PAGE> 22
BANK OF AMERICA, N.A.
(Formerly Bank of America National Trust and
Savings Association),
Individually and as Co-Agent
By:
------------------------------------
Title:
------------------------------------
REVOLVING COMMITMENT: $19,000,000
PERCENTAGE: 19.00%
22
<PAGE> 23
FIRST UNION NATIONAL BANK,
Individually and as Co-Agent
By:
-----------------------------------
Title:
-------------------------------
REVOLVING COMMITMENT: $19,000,000
PERCENTAGE: 19.00%
23
<PAGE> 24
FLEET NATIONAL BANK
By:
---------------------------------
Title:
----------------------------
REVOLVING COMMITMENT: $16,000,000
PERCENTAGE: 16.00%
24
<PAGE> 25
WACHOVIA BANK, N.A.
By:
---------------------------------
Title:
---------------------------------
REVOLVING COMMITMENT: $14,000,000
PERCENTAGE: 14.00%
25
<PAGE> 26
COMPASS BANK
By:
--------------------------------
Title:
----------------------------
REVOLVING COMMITMENT: $8,000,000
PERCENTAGE: 8.00%
26
<PAGE> 27
ACKNOWLEDGMENT AND REAFFIRMATION OF GUARANTORS
Each of the undersigned (i) acknowledges receipt of the foregoing
Amendment No. 2 to Credit Agreement dated as of December 31, 1999 (the
"Amendment"), (ii) consents to the execution and delivery of the Amendment by
the parties thereto, and (iii) reaffirms all of its obligations and covenants
under the Subsidiary Guaranty and Subsidiary Pledge Agreement (all as defined
in the Credit Agreement and in effect as of the date hereof), and agrees that
none of such obligations and covenants shall be affected by the execution and
delivery of the Amendment, and that all of such obligations and covenants
remain in full force and effect on and after the date hereof. This
Acknowledgment and Reaffirmation may be executed in any number of counterparts
and by the different parties hereto in separate counterparts, each of which
when so executed and delivered shall be deemed to be an original and all of
which counterparts, taken together, shall constitute but one and the same
instrument.
Associated Suppliers, Inc.
Atlantic Industrial Supply Co., Inc.
Austin Ford Logan, Inc.
B&J Industrial Supply Company
B&J Industrial Supply Company of Spokane
B&J Industrial Supply Company of Tacoma
Buford Bros., Inc.
Cardinal Machinery, Inc.
Cramer Industrial Supplies, Inc.
The Distribution Group, Inc.
Dynamic Tool & Abrasives, Inc.
E. C. Blackstone Company
Hawley Industrial Supplies, Inc.
IDG Real Properties, Inc.
Industrial & Tool Suppliers Limited Liability
Company
Industrial Distribution Group - California, Inc.
The Innovative Distributor Group, Inc.
J.J. Stangel Co.
L.D. Supply, Inc.
Mel's Industrial Supplies, Inc.
The New England Group Industrial Distributors, Inc.
Northern Tool & Supply, Inc.
Petry & Morrow, Inc.
Refco, Inc.
Shearer Industrial Supply Co.
Tri-Star Industrial Supply, Inc.
Turner Industries, Inc.
Wm. H. Taylor & Company, Inc.
By:
------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 21.1
Subsidiaries of the Company
<TABLE>
<CAPTION>
Subsidiary State of Incorporation
- ---------- ----------------------
<S> <C>
Associated Suppliers, Inc. Oregon
Atlantic Industrial Supply Co., Inc. Massachusetts
Austin Ford Logan, Inc. New York
B&J Industrial Supply Company Washington
Buford Bros., Inc. Tennessee
Cardinal Machinery, Inc. Tennessee
Cramer Industrial Supplies, Inc. New York
The Distribution Group, Inc. Georgia
Dynamic Tool & Abrasives, Inc. Michigan
E.C. Blackstone Company Georgia
Hawley Industrial Supplies, Inc. Connecticut
IDG-Mexico, Inc. Georgia
IDG Real Properties, Inc. Georgia
Industrial Distribution Group - California, Inc. California
The Innovative Distributor Group, Inc. Ohio
J.J. Stangel Co. Wisconsin
L.D. Supply, Inc. Georgia
Mel's Industrial Supplies, Inc. California
The New England Group Industrial Distributors, Inc. New Hampshire
Northern Tool & Supply, Inc. Michigan
Petry & Morrow, Inc. Pennsylvania
Refco, Inc. Georgia
Shearer Industrial Supply Co. Pennsylvania
Tri-Star Industrial Supply, Inc. Missouri
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report dated February 18, 2000 included in this Form 10-K,
into the Company's previously filed Registration Statements (File Nos.
333-45323 and 333-41921).
Arthur Andersen LLP
Atlanta, Georgia
March 28, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF INDUSTRIAL DISTRIBUTION GROUP, INC. FOR THE YEAR ENDED
DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 851
<SECURITIES> 0
<RECEIVABLES> 65,509
<ALLOWANCES> (1,480)
<INVENTORY> 67,633
<CURRENT-ASSETS> 145,329
<PP&E> 39,570
<DEPRECIATION> (8,032)
<TOTAL-ASSETS> 230,804
<CURRENT-LIABILITIES> 67,181
<BONDS> 0
0
0
<COMMON> 87
<OTHER-SE> 111,985
<TOTAL-LIABILITY-AND-EQUITY> 230,804
<SALES> 542,141
<TOTAL-REVENUES> 542,141
<CGS> 422,960
<TOTAL-COSTS> 539,716
<OTHER-EXPENSES> (158)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,514
<INCOME-PRETAX> (931)
<INCOME-TAX> 628
<INCOME-CONTINUING> (1,619)
<DISCONTINUED> 0
<EXTRAORDINARY> (270)
<CHANGES> 0
<NET-INCOME> (1,889)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
INDUSTRIAL DISTRIBUTION GROUP, INC.
950 EAST PACES FERRY ROAD
SUITE 1575
ATLANTA, GEORGIA 30326
March 30, 2000
To Our Stockholders:
On behalf of the Board of Directors and management of Industrial
Distribution Group, Inc., I cordially invite you to the Annual Meeting of
Stockholders to be held on Wednesday, May 17, 2000, at 8:30 a.m., Eastern Time,
at 950 East Paces Ferry Road, Suite 1575, Atlanta, Georgia.
At the Annual Meeting, stockholders will be asked to elect eight directors
of the Company, all of the nominees for which are currently directors of the
Company. Information about the nominees and certain other matters is contained
in the accompanying Proxy Statement. A copy of the Company's 1999 Annual Report
to Stockholders, which contains financial statements and other important
information about the Company's business, is also enclosed.
It is important that your shares of stock be represented at the meeting,
regardless of the number of shares you hold. You are encouraged to specify your
voting preferences by marking and dating the enclosed proxy card. However, if
you wish to vote for re-electing the directors, all you need to do is sign and
date the proxy card.
Please complete and return the proxy card in the enclosed envelope, whether
or not you plan to attend the meeting. If you do attend and wish to vote in
person, you may revoke your proxy at that time.
I hope you are able to attend, and look forward to seeing you.
Sincerely,
/s/ PATRICK S. O'KEEFE
Patrick S. O'Keefe
President and Chief Executive Officer
<PAGE> 2
INDUSTRIAL DISTRIBUTION GROUP, INC.
950 EAST PACES FERRY ROAD
SUITE 1575
ATLANTA, GEORGIA 30326
------------------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 17, 2000
------------------------------------
To the Stockholders of
Industrial Distribution Group, Inc.:
Notice is hereby given that the Annual Meeting of Stockholders of
Industrial Distribution Group, Inc. will be held at 8:30 a.m., Eastern Time, on
Wednesday, May 17, 2000, at 950 East Paces Ferry Road, Suite 1575, Atlanta,
Georgia for the following purposes:
1. To elect eight directors to constitute the Board of Directors
to serve until the next annual meeting and until their successors, if there
are to be any, are elected and qualified; and
2. To consider such other matters as may properly come before the
meeting and any adjournment or postponement thereof.
Only stockholders of record on March 21, 2000, are entitled to notice of
and to vote at the Annual Meeting and any adjournment or postponement thereof.
BY ORDER OF THE BOARD OF DIRECTORS,
/S/ JACK P. HEALEY
Jack P. Healey
Secretary
MARCH 30, 2000
WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE ANNUAL MEETING, PLEASE FILL IN,
DATE, SIGN, AND PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED BUSINESS
REPLY ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. THE
PROXY MAY BE REVOKED AT ANY TIME PRIOR TO EXERCISE, AND IF YOU ARE PRESENT AT
THE ANNUAL MEETING, YOU MAY, IF YOU WISH, REVOKE YOUR PROXY AT THAT TIME AND
EXERCISE THE RIGHT TO VOTE YOUR SHARES PERSONALLY.
<PAGE> 3
IDG LOGO
---------------------------------------------------------
PROXY STATEMENT
DATED MARCH 30, 2000
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 17, 2000
---------------------------------------------------------
This Proxy Statement is furnished to stockholders in connection with the
solicitation of proxies by the Board of Directors of Industrial Distribution
Group, Inc. ("IDG" or the "Company") for use at IDG's 2000 Annual Meeting of
Stockholders ("Annual Meeting") to be held on Wednesday, May 17, 2000, including
any postponement, adjournment, or adjournments thereof, for the purposes set
forth in the accompanying Notice of Annual Meeting. Management intends to mail
this Proxy Statement and the accompanying form of proxy to stockholders on or
about March 30, 2000.
Only stockholders of record at the close of business on March 21, 2000 (the
"Record Date"), are entitled to notice of and to vote in person or by proxy at
the Annual Meeting. As of the Record Date, there were 8,770,341 shares of common
stock, $.01 par value per share ("Common Stock"), of IDG outstanding and
entitled to vote at the Annual Meeting. The presence of a majority of such
shares is required, in person or by proxy, to constitute a quorum for the
conduct of business at the Annual Meeting. Each share is entitled to one vote on
any matter submitted for vote by the stockholders. The vote required for
approval of each matter submitted to the stockholders is described with the
discussion of that matter in this Proxy Statement.
Proxies in the accompanying form, duly executed and returned to the
management of the Company, and not revoked, will be voted at the Annual Meeting.
Any proxy given pursuant to this solicitation may be revoked by the stockholder
at any time prior to the voting of the proxy by delivery of a subsequently dated
proxy, by written notification to the Secretary of the Company, or by personally
withdrawing the proxy at the Annual Meeting and voting in person.
Proxies that are executed, but that do not contain any specific
instructions, will be voted for the election of all the nominees for directors
specified herein and in the discretion of the persons appointed as proxies on
any other matter that may properly come before the Annual Meeting or any
postponement, adjournment, or adjournments thereof, including any vote to
postpone or adjourn the Annual Meeting.
A copy of the Company's 1999 Annual Report to Stockholders (including
substantive excerpts from the Company's Annual Report on Form 10-K) is being
furnished herewith to each stockholder of record as of the close of business on
the Record Date. Additional copies of the 1999 Annual Report to Stockholders
will be provided free of charge upon written request to:
INDUSTRIAL DISTRIBUTION GROUP, INC.
950 EAST PACES FERRY ROAD
SUITE 1575
ATLANTA, GEORGIA 30326
ATTN.: INVESTORS RELATIONS DEPARTMENT
If the person requesting the Annual Report was not a stockholder of record
on the Record Date, the request must include a representation that the person
was a beneficial owner of Common Stock on that date. Copies of any exhibits to
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1999 will also be furnished on request and upon payment of the Company's
expenses in furnishing the exhibits.
1
<PAGE> 4
VOTING SECURITIES AND PRINCIPAL STOCKHOLDERS
The following table sets forth the information concerning the beneficial
ownership of Common Stock, which is the only class of voting stock of the
Company, at March 15, 2000, by (i) each person known to the Company to
beneficially own more than 5% of the Common Stock, (ii) each director, nominee
for director, and designated highly compensated executive officer, and (iii) all
directors and executive officers of the Company as a group. Unless otherwise
indicated below, the persons named below had sole voting and investment power
with respect to all shares of the Common Stock shown as beneficially owned by
them.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED PERCENT(1)
- ------------------------ ------------------- ----------
<S> <C> <C>
Edmundson International, Inc.
Consolidated Electrical Distributors, Inc.
Portshire Corp.
Lincolnshire Associates Ltd. 1,232,700 14.1%
Employees' Retirement Plan of
Consolidated Electrical Distributors,
Inc.
Dimensional Fund Advisors, Ind.(3).......................... 613,600 7.0%
Andrew B. Shearer(4)........................................ 522,841 6.0%
William J. Burkland(5)...................................... 153,146 1.7%
George L. Sachs, Jr.(6)..................................... 75,210 *
Patrick S. O'Keefe(7)....................................... 100,000 1.1%
Jack P. Healey(8)........................................... 50,819 *
Thomas W. Aldridge, Jr.(9).................................. 7,764
David K. Barth(10).......................................... 48,066 *
William T. Parr(11)......................................... 17,200 *
William R. Fenoglio(12)..................................... 18,000 *
Richard M. Seigel (13)...................................... 41,333 *
All Directors and Executive Officers as a Group (10
persons)(14).............................................. 1,034,379 11.6%
</TABLE>
- ------------------------
* Denotes less than 1%.
(1) The percentages shown are based on 8,770,341 shares of Common Stock
outstanding on March 15, 2000 plus, as to each person and group listed, the
number of shares of Common Stock deemed owned by such holder pursuant to
Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), assuming the exercise of options held by such holder that
are exercisable within 60 days of March 15, 2000.
(2) The address of Edmundson International, Inc. ("Edmundson") and Consolidated
Electrical Distributors, Inc. ("CED") is 31356 Via Colinas, Westlake
Village, California 91362. The address of Portshire Corp. ("Portshire") and
Lincolnshire Associates, Ltd. ("Lincolnshire") is 2550 Midway Road, Suite
220, Carrollton, Texas 75006. The address of Employees' Retirement Plan of
Consolidated Electrical Distributors, Inc. (the "Retirement Plan") is 700
S. Flower Street (c/o BNY Western Trust Co.), Los Angeles, California
90071. The listed owners are affiliated with each other and therefore the
aggregate number of shares listed above could be voted together.
Specifically, CED is the sponsor of the Retirement Plan and is the sole
shareholder of Edmundson; Edmundson is the sole shareholder of Portshire;
and Portshire is the general partner of Lincolnshire. The listed owners
have filed a Schedule 13D with the Securities and Exchange Commission (the
"Commission") as members of a group.
(3) The address of Dimensional Fund Advisors, Inc. is 1229 Ocean Avenue, 11th
Floor, Santa Monica, California 90401. The listed owner has filed a
Schedule 13G with the Commission and claims voting and investment power
with respect to all 613,600 shares.
(4) Includes 10,458 shares subject to exercisable options. The address for Mr.
Shearer is 3100 Farmtrail Road, York, PA 17402.
(2) .....................
2
<PAGE> 5
(5) Includes an aggregate of 300 shares held by Mr. Burkland as custodian for
his three minor children and 10,458 shares subject to exercisable options.
Does not include an aggregate of 28,966 shares owned by Mr. Burkland's
wife, with respect to which Mr. Burkland disclaims beneficial ownership.
(6) Includes 10,708 shares subject to exercisable options.
(7) Includes 100,000 shares that are restricted and subject to forfeiture
depending on the price levels of the Common Stock at measuring intervals
over a four year period from December 1, 1999.
(8) Includes 17,200 shares subject to exercisable options.
(9) Includes 3,750 shares subject to exercisable options.
(10) Includes 15,000 shares subject to exercisable options.
(11) Includes 15,000 shares subject to exercisable options; does not include an
aggregate of 1,200 shares owned by Mr. Parr's wife, with respect to which
Mr. Parr disclaims beneficial ownership.
(12) Includes 15,000 shares subject to exercisable options.
(13) Includes 23,333 shares subject to exercisable options.
(14) Includes an aggregate of 120,907 shares subject to exercisable options that
are held by the persons in the group.
ELECTION OF DIRECTORS
(ITEM NUMBER 1 ON THE PROXY CARD)
The Bylaws of IDG provide that the Board of Directors shall consist of not
less than three nor more than fifteen directors, with the exact number being set
from time to time by the Board. The Board presently consists of eight directors,
each of whom serves until the next annual meeting of stockholders and until his
successor, if there is to be one, is elected and qualified. Each of the nominees
is listed below and is presently serving as a director of the Company.
Directors are elected by a plurality of the votes cast by the holders of
shares of Common Stock entitled to vote for the election of directors at a
meeting at which a quorum is present. A quorum will be present for the Annual
Meeting when the holders of a majority of the shares outstanding on the Record
Date are present in person or by proxy. An abstention and a broker non-vote are
included in determining whether a quorum is present, but will not affect the
outcome of the vote for the election of directors. Unless otherwise indicated on
a proxy, all duly executed proxies granted by the holders of Common Stock will
be voted individually at the Annual Meeting for the election of each nominee.
Each nominee has indicated that he will serve if elected, but if the situation
should arise that any nominee is no longer able or willing to serve, the proxy
may be voted for the election of such other person as may be designated by the
Board of Directors. Each person elected as a director shall serve a term that
continues until the next annual meeting and until his successor, if there is to
be one, is duly elected and qualified.
PRESIDENT
DAVID K. BARTH BARTH SMITH COMPANY
Mr. Barth, age 56, is the President of Barth Smith Company, an investment and
management consulting firm specializing in strategy, marketing, operating, and
executive staffing issues associated with various distribution channels, which
he founded in 1991 and which assisted the Company with its formation in 1997.
Prior to that time, he served as Vice President, Planning and Development, from
1985 to 1990, and Treasurer, from 1979 to 1984, of W.W. Grainger, Inc., a
national distributor of maintenance, repair, and operating supplies and related
information to commercial, industrial, contractor, and institutional customers.
Mr. Barth also served as Treasurer, Financial Services Group, from 1975 to 1979,
and Manager, Treasury Operations, from 1972 to 1975, of Borg-Warner Corporation,
a multinational diversified manufacturing, finance, and services company. Mr.
Barth is a member of the Executive and Compensation Committees of the Board of
Directors.
VICE PRESIDENT
WILLIAM J. BURKLAND B&J INDUSTRIAL SUPPLY COMPANY
Mr. Burkland, age 38, is a co-founder of the Company. Mr. Burkland has served
since 1994 as a Vice President of B&J Industrial Supply Company ("B&J"), one of
the companies that founded the Company in
3
<PAGE> 6
1997. From 1992 to 1994, Mr. Burkland served as B&J's Director of International
Sales, during which time he initiated, managed, and expanded B&J's international
business.
CHIEF EXECUTIVE OFFICER (RETIRED)
WILLIAM R. FENOGLIO AUGAT, INC.
Mr. Fenoglio, age 60, served as the President and Chief Executive Officer of
Augat, Inc., a manufacturer of connector products, from 1994 to 1996. Prior to
that time, Mr. Fenoglio served as President and Chief Executive Officer (1991 to
1994) and Chief Operating Officer (1985 to 1991) of Barnes Group, Inc., a
diversified manufacturer and distributor which owns Bowman Distribution Company.
From 1961 to 1984, Mr. Fenoglio was employed by General Electric Corporation and
served as the Vice President and General Manager of the Component Motor Division
from 1981 to 1984. Mr. Fenoglio is currently a director of Standex
International, Inc., and he has served as Chairman of the Board of Connecticut
Business & Industry Association. Mr. Fenoglio is a member of the Executive,
Compensation and Audit Committees of the Board of Directors.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PATRICK S. O'KEEFE INDUSTRIAL DISTRIBUTION GROUP, INC.
Mr. O'Keefe, age 47, became President and Chief Executive Officer of the Company
on December 1, 1999. Prior to joining the Company, Mr. O'Keefe served as
President of the ZEP Chemical Unit of National Service Industries from December
1997 to October 1999. From July 1996 to July 1997, Mr. O'Keefe served as the
President and Chief Executive Officer of Huttig Building Products (formerly a
subsidiary of Crane Co.) and from June 1994 to June 1996 he served as the
President and Chief Executive Officer of Crane Canada (a subsidiary of Crane
Co.) Mr. O'Keefe is a member of the Executive Committee of the Board of
Directors.
VICE CHAIRMAN
WILLIAM T. PARR J. SMITH LANIER & CO.
Mr. Parr, age 63, has served as Vice Chairman and a director of J. Smith Lanier
& Co., an insurance placement company, since 1980. Mr. Parr is currently a
director of ITC DeltaCom, Inc., and he also currently serves as a director of
ITC Holding Company, Inc. and several of its subsidiaries. Mr. Parr is a member
of the Executive, Audit and Compensation Committees of the Board of Directors.
PRESIDENT
GEORGE L. SACHS, JR. TRI-STAR INDUSTRIAL SUPPLY, INC.
Mr. Sachs, age 58, is a co-founder of the Company. Mr. Sachs has served since
1985 as the President of Tri-Star Industrial Supply, Inc. ("Tri-Star"), one of
the companies that founded the Company in 1997, and from 1978 to 1985, he served
as Tri-Star's Vice President-Finance. Prior to joining Tri-Star, Mr. Sachs
served as an Audit Manager for Arthur Andersen & Co. from 1968 to 1978.
CHAIRMAN OF THE BOARD
RICHARD M. SEIGEL INDUSTRIAL DISTRIBUTION GROUP, INC.
Mr. Seigel, age 54, became Chairman of the Board on March 4, 1999, and served as
President and Acting Chief Executive Officer of the Company from March 8, 1999
to November 30, 1999. Mr. Seigel is the retired former Chairman and Chief
Executive Officer of SYSCO Food Services of Los Angeles, a subsidiary of SYSCO
Corporation, with which he had held the position of Senior Vice President
Foodservice operations. Prior to that, Mr. Seigel was President of Continental
Foodservice Company, a national distributor of foodservice products. Mr. Seigel
is a member of the Executive, Audit and Compensation Committees of the Board of
Directors.
PRESIDENT
ANDREW B. SHEARER SHEARER INDUSTRIAL SUPPLY CO.
Mr. Shearer, age 36, is a co-founder of the Company. Mr. Shearer has served
since 1991 as the President of Shearer Industrial Supply Co. ("Shearer"), one of
the companies that founded the Company in 1997. Prior to becoming President, Mr.
Shearer was employed by Shearer in various positions from 1985.
4
<PAGE> 7
MEETINGS AND COMMITTEES OF THE BOARD
The Board of Directors of the Company meets on a regular basis to
supervise, review, and direct the business and affairs of the Company. During
the Company's 1999 fiscal year, the Board held four meetings. The Board of
Directors has established an Executive Committee, an Audit Committee, and a
Compensation Committee to which it has assigned certain responsibilities in
connection with the governance and management of the Company's affairs. The
Company has no standing nominating committee or other committee performing
similar functions.
Each of the directors attended at least 75% of the Board meetings and
meetings of committees on which he served.
Executive Committee. The Executive Committee, pursuant to authority
delegated by the Board, from time to time considers certain matters in lieu of
convening a meeting of the full Board, subject to any restrictions in applicable
law related to the delegation of certain powers to a committee of the Board.
Messrs. Barth, Fenoglio, Parr, O'Keefe, and Seigel comprise the members of the
Executive Committee. The Executive Committee held four meetings during fiscal
1999.
Audit Committee. The Audit Committee recommends the appointment of
independent public accountants, reviews the scope of audits proposed by the
independent public accountants, reviews audit reports on various aspects of
corporate operations, and periodically consults with the independent public
accountants on matters relating to internal financial controls and procedures.
Messrs. Fenoglio, Parr, and Seigel comprise the members of the Audit Committee.
The Audit Committee held four meetings during fiscal 1999.
Compensation Committee. The Compensation Committee is responsible for the
review and approval of compensation of employees above a certain salary level,
the review of management recommendations relating to incentive compensation
plans, the administration of the Company's stock option and stock purchase
plans, the review of compensation of directors, and consultation with management
and the Board on senior executive continuity and organizational matters. Messrs.
Barth, Fenoglio, Parr, and Seigel comprise the members of the Compensation
Committee. The Compensation Committee held four meetings during fiscal 1999.
Messrs. Fenoglio and Seigel comprise the members of a subcommittee of the
Compensation Committee to act with respect to certain matters of compensation to
the Company's most highly compensated executive officers in order to comply with
requirements of Section 162(m) of the Internal Revenue Code.
DIRECTORS' COMPENSATION
The Company pays its outside directors an annual fee of $10,000, payable
quarterly, and in 1999 paid the Chairman of the Board an additional $15,000. The
Company reimburses all directors for their travel and other expenses incurred in
connection with attending Board or Committee meetings, and also reimburses its
outside directors for actual expenses otherwise incurred in performing their
duties. The Company also pays health insurance costs for Messrs. Barth and
Seigel; such costs were $7,638 for each in 1999.
On September 23, 1997, the Company granted each outside director (Messrs.
Barth, Fenoglio, Parr, and Seigel) options to purchase 15,000 shares of Common
Stock at a price of $17.00 per share. On March 4, 1999, the Company granted each
outside director options to purchase 15,000 shares of Common Stock at a price of
$6 7/16 per share and granted Mr. Seigel, as the Chairman of the Board, options
to purchase an additional 25,000 shares of Common Stock at $6 7/16 per share. On
March 4, 1999, the Company granted each of Messrs. Burkland, Sachs, Shearer, and
Douglass C. Smith who has since resigned as a director, as members of the
Operations Committee of the Board of Directors, options to purchase 25,000
shares of Common Stock at a price of $6 7/16 per share. All such options vest in
three equal installments on the first three anniversaries of the respective
dates of grant.
5
<PAGE> 8
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued by
the Company for services rendered during the fiscal year ended December 31,
1999, to or for those individuals who served as the Company's chief executive
officer during 1999 and each of the Company's three other executive officers who
were paid or accrued at least $100,000 during fiscal 1999 (the "Named Executive
Officers"). The Company was organized in February 1997, did not have any
executive officers until June 1997, and did not conduct any operations until
September 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION --------------------------------
---------------------------- SECURITIES
FISCAL RESTRICTED UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION(S) YEAR SALARY BONUS STOCK AWARD(S) OPTIONS/SARS(#) COMPENSATION
- ------------------------------ ------ -------- ------- -------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Patrick S. O'Keefe............. 1999 $ 22,916(1) -- $387,500(1) -- $ 272
Chief Executive Officer and
President
Richard M. Seigel.............. 1999 -- -- -- -- --
Chairman of the Board and
Acting Chief Executive
Officer(2)
Martin S. Pinson............... 1999 52,083(3) -- -- -- 817
Former Chairman of the Board 1998 250,000 -- -- -- 1,000
and Chief Executive Officer 1997 145,833 -- -- 103,800 --
Jack P. Healey................. 1999 187,500 $22,000 -- 3,271
Senior Vice President, Chief 1998 175,000 $25,000 -- -- 3,271
Financial Officer and 1997 87,500(4) $40,000 -- 20,800 --
Secretary
Thomas W. Aldridge, Jr. ....... 1999 195,000 -- -- -- 3,271
Senior Vice President 1998 86,250(5) -- -- 15,000 1,362
John L. Crum................... 1999 164,307 -- -- -- 3,271
Vice President(6) 1998 68,750 -- -- 15,000 1,362
</TABLE>
- ------------------------
(1) Mr. O'Keefe's employment by the Company commenced December 1, 1999. In
connection therewith, Mr. O'Keefe received 100,000 shares of the Common
Stock that are restricted and subject to forfeiture if he ceases to be
employed by the Company and if the trading price of the Common Stock for
prescribed measuring periods is less than $6 per share. The forfeiture
provisions lapse as to 25,000 shares on each of the four anniversary dates
of the date of grant. The closing trading price of the Common Stock on the
date of grant was $3.875. Although no dividends are expected to be declared
on the Common Stock, if the Company does declare and pay any dividends on
its Common Stock in the future, such dividends will be paid on the Common
Stock granted to Mr. O'Keefe.
(2) Mr. Seigel served as Acting Chief Executive Officer of the Company from
March 8, 1999 to November 30, 1999, but did not receive compensation for
these services.
(3) Mr. Pinson served as Chief Executive Officer of the Company from June 1,
1997 to March 8, 1999, when he resigned. In connection with his separation
from the Company, the Company paid Mr. Pinson $312,500 as severance and in
consideration of releases from him.
(4) Mr. Healey's employment by the Company commenced June 1, 1997.
(5) Mr. Aldridge's employment by the Company commenced August 1, 1998.
(6) Mr. Crum's employment by the Company commenced on August 1, 1998 and ended
on December 16, 1999. In connection with his separation from the Company,
the Company paid Mr. Crum $38,872 as severance and in consideration of
releases from him.
6
<PAGE> 9
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NO. OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS/SARS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERMS(2)
OPTION/SARS EMPLOYEES IN EXERCISE OR EXPIRATION -----------------------
GRANTED FISCAL YEAR BASE PRICE DATE 5% 10%
----------- ------------ ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Patrick S. O'Keefe.......... 100,000(1) 13.1% $ 5.00 12/01/09 $131,196 $505,076
100,000(1) 13.1 10.00 12/01/09 -- 5,076
100,000(1) 13.1 15.00 12/01/09 -- --
100,000(1) 13.1 20.00 12/01/09 -- --
Richard M. Seigel........... -- -- -- -- -- --
Martin S. Pinson............ -- -- -- -- -- --
Jack P. Healey.............. 10,000(2) 1.3 6.4375 3/04/09 40,456 102,597
Thomas W. Aldridge, Jr. .... -- -- -- -- -- --
John L. Crum................ -- -- -- -- -- --
</TABLE>
- ------------------------
(1) Mr. O'Keefe's options vest beginning one year from the date of grant in 25%
increments on the anniversary of the date of the grant.
(2) Mr. Healey's options vest beginning one year from the date of grant in
33 1/3% increments on the anniversary of the date of grant.
(3) Based on assumed rates of stock price appreciations, as required by the
Commission.
The following table sets forth the fiscal year-end value of unexercised
options held by the Named Executive Officers at the end of fiscal 1999.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NO. OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
FISCAL YEAR END AT FISCAL YEAR END(1)
----------------------------- ---------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------ -------------- ----------- -------------
<S> <C> <C> <C> <C>
Patrick S. O'Keefe.............................. -- 400,000 $-- $--
Richard M. Seigel............................... 10,000 45,000 -- --
Martin S. Pinson................................ 103,800(2) -- -- --
Jack P. Healey.................................. 13,867 16,933 -- --
Thomas W. Aldridge, Jr.......................... 3,750 11,250 -- --
John L. Crum.................................... 3,750 11,250 -- --
</TABLE>
- ------------------------
(1) As required by the rules of the Securities and Exchange Commission, the
value of unexercised in-the-money options is calculated based on the closing
sale price of the Company's Common Stock on the New York Stock Exchange
("NYSE") as of the last business day of its fiscal year, December 31, 1999,
which was $3.25 per share. Because the closing sale price of the Company's
Common Stock on December 31, 1999 was less than the exercise price of the
options, no unexercised options were in-the-money.
(2) In connection with his separation from the Company on March 8, 1999, the
Company accelerated the vesting in full of all options held by Mr. Pinson.
EMPLOYMENT AGREEMENTS
The Company has an employment agreement with Mr. Healey. The agreement
provides for a base salary of $187,500 per year; an annual bonus as determined
by the Company's Board of Directors; and Company benefits of the type generally
provided to key executives. Mr. Healey's employment agreement has a three-year
term from June 1, 1997. While the Company may terminate Mr. Healey's employment
agreement at any time during the term, if the Company terminates the agreement
other than for cause, death, or disability, the Company must pay severance based
on the officer's base salary under the agreement for the greater of 12 months or
the unexpired portion of the term and any performance bonus to which Mr. Healey
would
7
<PAGE> 10
otherwise be entitled for the fiscal year in which such termination occurs. The
agreement contains customary proscriptions against misuse of Company
information, competition with the Company, and solicitation of employees of the
Company.
SEPARATION AGREEMENT WITH FORMER CEO
In connection with the resignation of Martin S. Pinson as Chairman of the
Board and Chief Executive Officer of the Company, the Company entered into a
separation agreement with Mr. Pinson as of March 8, 1999. Pursuant to this
agreement, the Company paid Mr. Pinson $312,500 as severance and consideration
for releases from him and the termination of all obligations by the Company
under its former employment agreement with Mr. Pinson, and it accelerated the
vesting in full of all options for Common Stock that had been granted to Mr.
Pinson. The Company also conveyed some incidental items of personal office
equipment to Mr. Pinson, and permitted Mr. Pinson to use the Company's office
space in Chevy Chase, Maryland through June 30, 1999.
CERTAIN TRANSACTIONS
FORMATION OR COMBINATION RELATED MATTERS
The Company paid Barth Smith Company, a consulting firm in which David K.
Barth, a director of the Company, has a 75% ownership interest, $87,500 in
settlement of an agreement to pay an amount equal to a percentage of the cash
payment ultimately paid to a dissenting stockholder of TDG in connection with
formation of the Company (the "Combination").
Upon consummation of the Combination, the Company succeeded to certain real
property leases as lessee with respect to which stockholders of the Company
(former stockholders of certain of the nine companies that formed the Company
(the "Founding Companies"), or their affiliates, are the lessors. The Company
believes that the monthly rent and other terms of each of these leases are not
less favorable to the Company than could be obtained from unaffiliated parties
for comparable properties in the respective geographic areas. Specifically, the
Company leases property in (i) Spokane, Washington from a company in which the
father of William J. Burkland has a 25% ownership interest; (ii) Whitehall,
Pennsylvania from Andrew B. Shearer; (iii) Reading, Williamsport, and York,
Pennsylvania from a trust of which Andrew B. Shearer's mother is the trustee and
he and his father, brother, and sisters are the beneficiaries; (iv) Hazelton and
Lancaster, Pennsylvania from a trust of which Andrew B. Shearer and his father,
brother, and sisters are the beneficiaries; and (v) St. Louis and Springfield,
Missouri from a company in which George L. Sachs, Jr. has a 15% ownership
interest. Messrs. Burkland, Shearer, and Sachs are directors of the Company, and
Mr. Shearer is also a principal stockholder of the Company.
Prior to the Combination, B&J had agreed to pay Charles T. Burkland, a
former president and a significant stockholder of B&J, a non-qualified, unfunded
pension in the amount of $10,000 per month during his lifetime and thereafter to
his spouse, if she survived him, for her lifetime. As a condition to B&J's
participation in the Combination, B&J made a lump sum payment of $1.11 million
to Charles T. Burkland in exchange for relief from its obligation to make such
monthly pension payments through 2012. As part of that arrangement, the Company
agreed to make such $10,000 monthly payments beginning in January 2013, if
either Mr. Burkland or his spouse is then surviving, and continuing thereafter
until both of them are deceased. In addition, the Company has agreed to pay 75%
of the health and dental insurance costs of Mr. Burkland and his spouse until
their deaths. Mr. Burkland is 73 years old, and his spouse is 69 years old. Mr.
Burkland is the father of William J. Burkland, a director of the Company.
OTHER RELATED PARTY MATTERS
IDG had an agreement with Barth Smith Company during 1999, pursuant to
which that company provided services to assist IDG in the implementation of its
acquisition program. Pursuant to the agreement, IDG paid Barth Smith Company a
monthly retainer of $15,000 per month through April 1999 and $7,500 per
8
<PAGE> 11
month from May through December 1999, plus certain expenses. IDG paid Barth
Smith Company under this agreement an aggregate of $120,000 for 1999.
Since January 1999, the Company has paid approximately $1,001,000 in
insurance premiums, of which $65,000 constituted a servicing fee, to J. Smith
Lanier & Co., an independent insurance agency, in connection with business and
health insurance purchased by the Company. William T. Parr, a director of the
Company, is the Vice Chairman of, and has less than 10% ownership interest in,
J. Smith Lanier & Co.
In July 1998, an operating subsidiary of the Company entered into a real
property lease as lessee with respect to which Andrew B. Shearer is the lessor.
The property is located in York, Pennsylvania and serves as the Company's
primary distribution center in the Mid-Atlantic region. The term of the lease is
for ten years and expires in December 2008 with annual rent under the lease of
$319,215. The Company believes that the annual rent and other terms of this
lease are not less favorable to the Company than could be obtained from
unaffiliated parties for a comparable property in the York, Pennsylvania area.
Mr. Shearer is a principal stockholder and director of the Company.
On August 27, 1998, the Company made an interest-free loan of $218,282 to
John L. Crum, the Company's former Vice President and Chief Information Officer,
in connection with his employment by the Company in order to replace financing
related to his Texas residence that had been provided by his former employer.
The loan was secured by a second mortgage on the personal residence owned by Mr.
Crum in Texas. The loan originally matured on February 28, 1999, but was
extended to mature on February 28, 2000. In connection with the extension of the
loan, it bore interest at the rate of 8% per annum after May 29, 1999. The loan
was paid in full in July 1999.
POLICY RESPECTING RELATED PARTY TRANSACTIONS
On July 10, 1997, the Board of Directors adopted a policy that any
transactions between the Company and any of its officers, directors, or
principal stockholders or affiliates must be on terms no less favorable than
those that could be obtained from unaffiliated parties in comparable situations
and must be approved by a majority of the disinterested members of the Board of
Directors. The Audit Committee of the Board of Directors is responsible for
reviewing all related party transactions on a continuing basis and potential
conflict of interest situations where appropriate.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Fenoglio, Parr, and Seigel served as members of the Company's
Compensation Committee throughout the 1999 fiscal year. Mr. Pinson's resignation
as a director on March 4, 1999 discontinued his membership, and Mr. Barth was
appointed to the Compensation Committee effective March 4, 1999. Mr. Pinson was
the Chairman of the Board and Chief Executive Officer of the Company during his
service on the Compensation Committee, and Mr. Seigel is now Chairman of the
Board and served as Acting Chief Executive Officer from March 8, 1999 to
November 30, 1999. None of the other members of the Committee is an officer or
former officer of the Company.
None of the executive officers of the Company served as either (1) a member
of the Compensation Committee or (2) a director of any entity of which any
member of the Compensation Committee is an executive officer. In addition, none
of the executive officers of the Company served as a member of the compensation
committee of any entity of which any member of the Board of Directors is an
executive officer.
REPORT OF COMPENSATION COMMITTEE
This report sets forth the factors currently being used in the Company's
compensation programs for its executive officers and describes the basis on
which fiscal 1999 compensation determinations were made with respect to the
executive officers of the Company, including the Chief Executive Officer and the
other Named Executive Officers of the Company.
9
<PAGE> 12
GENERAL COMPENSATION PHILOSOPHY
The Compensation Committee (the "Committee") seeks to develop programs and
policies for the compensation of the Company's executive officers that will link
the compensation of executive officers to the performance of the Company and its
business units. The Committee intends that such a link will align the financial
interests of the Company's executive officers with those of its stockholders.
The Committee has identified several objectives for the Company's
compensation programs and policies, and it has determined that, to achieve these
objectives, the Company will use a combination of base salary, short-term and
long-term incentive plans, and performance bonus criteria in order to tie
executive compensation to increases in the Company's earnings and return on
stockholders' equity. While specific amounts and parameters will be established
after further review and analysis, the Committee expects that the Company's
compensation programs will consist of the following basic components:
- Reasonably competitive base salaries, in light of the Company's stage of
development and position within its industry;
- The issuance of performance-based stock options and restricted shares of
stock;
- Potentially significant annual incentive bonuses under the Company's
Management Incentive Program; and
- Customary benefits.
The Committee's formulation of the Company's compensation programs and
policies for executive officers is currently ongoing and, when completed, such
programs and policies will be monitored and reviewed on an ongoing basis in
order for the Committee to determine the appropriateness of the compensation
paid to each of the executive officers of the Company from time to time in light
of its compensation philosophy and developments in the Company's industry and
generally. While promoting initiative and providing incentives for superior
performance by executives on behalf of the Company for the benefit of its
stockholders, the Committee also seeks to assure that the Company is able to
compete for and retain talented personnel who will lead the Company in achieving
levels of financial performance that will enhance stockholder value over the
long-term as well as the short-term.
BASE SALARIES
The Company has established the current base salaries of its executive
officers without reference to specific Company performance criteria. The base
salaries for the Company's former Chief Executive Officer and its Chief
Financial Officer during fiscal 1999 were determined by negotiations conducted
prior to the constitution of the Committee in 1997. However, all increases to
the base salary above those contracted amounts have been approved by the
Committee. The base salaries for the other executive officers, including the new
Chief Executive Officer, during 1999 were established in negotiations with the
approval of the Committee. Such base salaries were intended to be competitive
when compared to amounts paid to executive officers of similar businesses in
structure, size, and market orientation. The Committee reviews salaries of the
Company's executive officers on an annual basis.
STOCK INCENTIVE PLAN
During fiscal 1999, the Company granted options to purchase an aggregate of
361,899 shares of Company Common Stock to 222 employees, of which 10,000 were
granted to one of the Company's executive officers, pursuant to its Stock
Incentive Plan. Under the Stock Incentive Plan, the Company is permitted to
issue stock options that are qualified as incentive stock options under the
Internal Revenue Code (the "IRC"), options that are not so qualified, direct
awards of shares of stock, stock appreciation rights and other forms of awards
that use (or are based on) shares of Common Stock. To date, the Company has
issued only non-qualified stock options under the Stock Incentive Plan.
Stock options are awarded to executive officers and other persons both to
recognize outstanding contributions that they have made to the Company's
financial performance, and to encourage and provide
10
<PAGE> 13
incentives to continue to make such contributions. While the Company has the
flexibility to grant below-market options, its policy has been to grant options
at fair market value, with vesting over a period of several years, in order to
better align the personal interests of optionees with those of the stockholders
of the Company.
ANNUAL INCENTIVE COMPENSATION
The Company provides annual incentive compensation to executive officers of
the Company through its Management Incentive Program. The Management Incentive
Program is designed to offer compensation opportunities that are tied directly
to Company performance. In addition, the Management Incentive Program is
designed to foster equity ownership in the Company by executive officers and all
other participants. The Management Incentive Program, at least as it relates to
designated executive officers of the Company, is administered by a subcommittee
of the Committee that will include only those members who qualify as "outside"
directors under Section 162(m) of the IRC. Pursuant to the Management Incentive
Program, that the subcommittee establishes the specific criteria and performance
measures each year that are applicable to the Company's designated Executive
Officers for the purpose of earning incentive compensation or bonuses for such
year under the Management Incentive Program.
BENEFITS
Executives are also eligible to participate in the Company's regular
employee benefit programs, including a 401(k) retirement savings plan, group
medical and dental coverage, group life insurance, group long-term disability
insurance, and other group benefit plans. Substantially all decisions with
respect to such benefits are made on a group basis, and no individual decisions
were made with respect to the executive officers during fiscal 1999.
COMPENSATION OF CEO
Until Mr. Pinson's separation from the Company on March 8, 1999, the
Company had compensated him from June 1, 1997, for his service as Chairman and
Chief Executive Officer under the terms of his employment agreement, which
required an annual base salary of $250,000, subject to an annual adjustment at
the discretion of the Board of Directors, and eligibility for an annual bonus
determined by the Board of Directors. Mr. Pinson was also eligible to
participate in employee benefit plans as generally made available to senior
management of the Company, including the Stock Incentive Plan and the Management
Incentive Program. The Board of Directors delegated to the Committee its
authority to make such determinations pursuant to the agreement with Mr. Pinson.
The Committee did not approve any base salary increase or any bonus for Mr.
Pinson.
Under the terms negotiated with Mr. Pinson for his employment prior to the
constitution of the Committee, Mr. Pinson was granted the right to purchase
69,200 shares of Common Stock for an aggregate of $600 and was granted stock
options under the Stock Incentive Plan, which were originally scheduled to vest
one-third on each of September 23, 1998, 1999, and 2000, to purchase 103,800
shares at a price of $17.00 per share. In connection with Mr. Pinson's
separation from the Company, all such options were immediately vested. (Other
aspects of the separation agreement with Mr. Pinson are discussed above under
"Executive Compensation -- Separation Agreement with Former CEO".) The Committee
did not grant any other options or rights to purchase shares to Mr. Pinson.
Mr. Seigel, who became the Company's Chairman of the Board in connection
with the separation of Mr. Pinson, also served as Acting Chief Executive Officer
of the Company pending the hiring of a person to fill that position long term.
Mr. Seigel served without compensation for such services.
Mr. O'Keefe, who became the Company's Chief Executive Officer and President
on December 31, 1999, receives an annual base salary of $275,000, which will be
reviewed annually, and is eligible for an annual bonus determined by the Board
of Directors. In connection with his employment, Mr. O'Keefe also received
100,000 shares of Common Stock, which are restricted and subject to forfeiture
depending on the price levels of the Common Stock at measuring intervals over a
four year period from December 1, 1999, and options to
11
<PAGE> 14
purchase 400,000 shares of Common Stock that vest in 25% increments on the
anniversary of the date of grant. The Committee believes that the compensation
terms of Mr. O'Keefe's employment (as well as the terms for the initial purchase
of shares and the grant of options, in the circumstances in which they were
granted) are consistent with the fundamental elements that comprise the
Company's executive compensation philosophy. The Committee believes that the
base salary to Mr. O'Keefe is competitive with the Company's industry, and the
opportunities for value from the shares of restricted stock and stock options
are tied to increases in the price levels of the Company's Common Stock and thus
to enhanced value to the Company's stockholders. Mr. O'Keefe is also eligible to
participate in employee benefit plans as generally made available to senior
management of the Company, including the Stock Incentive Plan and the Management
Incentive Program.
David K. Barth -- William Fenoglio -- William T. Parr -- Richard M. Seigel
(Current Members of Committee)
12
<PAGE> 15
STOCK PERFORMANCE GRAPH
Set forth below is a line graph comparing the percentage change in the
cumulative total shareholder return of the Company's Common Stock against the
cumulative total return of the Russell 2000 Index and the Media General SIC Code
508 -- machinery, equipment and supplies -- Index for the period commencing on
September 24, 1997 and ending on December 31, 1999.
COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG INDUSTRIAL DISTRIBUTION GROUP, INC.
RUSSELL 2000 INDEX AND SIC CODE INDEX
COMPARISON OF CUMULATIVE TOTAL RETURN OF ONE OR MORE
COMPANIES, PEER GROUP, INDUSTRY INDEXES AND/OR BROAD MARKETS
<TABLE>
<CAPTION>
MACHINERY EQUIPMENT,
INDUSTRIAL DISTRIBUTION SUPPLIES RUSSELL 2000 INDEX
----------------------- -------------------- ------------------
<S> <C> <C> <C>
9/24/1997 100.00 100.00 100.00
9/30/1997 100.00 100.00 100.00
12/31/1997 74.70 90.91 96.65
3/31/1998 88.99 99.84 106.37
6/30/1998 73.81 86.66 101.41
9/30/1998 30.06 57.12 80.98
12/31/1998 36.31 56.71 93.94
3/31/1999 25.00 51.73 88.54
6/30/1999 24.11 55.92 101.97
9/30/1999 15.77 50.13 95.20
12/31/1999 15.48 49.04 112.35
</TABLE>
Note: Base price date is 9/24/1997
INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors, upon recommendation of the Audit Committee,
appoints each year the firm that will serve as the Company's independent public
accountants. The Board has appointed Arthur Andersen LLP, which firm served as
independent public accountants for the Company during the past fiscal year, to
serve as such accountants for the current fiscal year. Such appointment is not
subject to ratification or other vote by the stockholders.
A representative of Arthur Andersen LLP is expected to be present at the
Annual Meeting, with the opportunity to make a statement if he or she desires to
do so, and is expected to be available to respond to appropriate questions.
13
<PAGE> 16
STOCKHOLDERS' PROPOSALS FOR 2001 ANNUAL MEETING
Any stockholder who wishes to present a proposal appropriate for
consideration at the Company's 2001 Annual Meeting of Stockholders must submit
the proposal in proper form to the Company at its address set forth on the first
page of this Proxy Statement no later than November 30, 2000 for the proposal to
be considered for inclusion in the Company's proxy statement and form of proxy
relating to such Annual Meeting.
OTHER MATTERS
All of the expenses involved in preparing, assembling, and mailing this
Proxy Statement and the materials enclosed herewith and soliciting proxies will
be paid by the Company. It is estimated that such costs will be nominal. The
Company may reimburse banks, brokerage firms and other custodians, nominees, and
fiduciaries for expenses reasonably incurred by them in sending proxy materials
to beneficial owners of stock. The solicitation of proxies will be conducted
primarily by mail but may include telephone, telegraph, or oral communications
by directors, officers, or regular employees of the Company, acting without
special compensation.
The Board of Directors is aware of no other matters, except for those
incidental to the conduct of the Annual Meeting, that are to be presented to
stockholders for formal action at the Annual Meeting. If, however, any other
matters properly come before the Annual Meeting or any postponement,
adjournment, or adjournments thereof, it is the intention of the persons named
in the proxy to vote the proxy in accordance with their judgment.
Stockholders are urged to fill in, date, and sign the accompanying form of
proxy and return it to the Company as soon as possible.
BY ORDER OF THE BOARD OF DIRECTORS,
/S/ JACK P. HEALEY
Jack P. Healey
Secretary
14
<PAGE> 17
IDG LOGO
<PAGE> 18
COMMON STOCK
OF INDUSTRIAL DISTRIBUTION GROUP, INC.
THIS PROXY IS SOLICITED BY THE BOARD OF
DIRECTORS FOR THE MAY 19, 2000
ANNUAL MEETING OF STOCKHOLDERS.
The undersigned hereby appoints Patrick S. O'Keefe and Jack P. Healey,
and each of them, the proxy of the undersigned to vote the Common Stock of the
undersigned at the Annual Meeting of Stockholders of INDUSTRIAL DISTRIBUTION
GROUP, INC. (the "Company") to be held on May 17, 2000, and any adjournment or
postponement thereof.
1. Election of directors
David K. Barth, William J. Burkland, William R. Fenoglio, Patrick S.
O'Keefe, William T. Parr, George L. Sachs, Jr., Richard M. Seigel, and
Andrew B. Shearer
_____ FOR all nominees for director listed above (except as marked to the
contrary).
_____ WITHHOLD AUTHORITY to vote for all nominees listed above.
_____ WITHHOLD AUTHORITY to vote for an individual nominee. Write name(s)
below.
-------------------------------------------
2. In accordance with their best judgment with respect to any other
matters that may properly come before the meeting.
THE BOARD OF DIRECTORS FAVORS A VOTE "FOR" THE ELECTION AS DIRECTORS OF THE
PERSONS NAMED IN THE PROXY AND ACCOMPANYING PROXY STATEMENT AND UNLESS
INSTRUCTIONS TO THE CONTRARY ARE INDICATED IN THE SPACE PROVIDED, THIS PROXY
WILL BE SO VOTED.
-----------------------------------
Please sign this Proxy exactly as
name appears on the Proxy.
Note: When signing as attorney, trustee,
administrator, or guardian, please give your title
as such. In the case of joint tenants, each joint
owner must sign.
Date: _________________________, 2000
