INDUSTRIAL DISTRIBUTION GROUP INC - 10-Q Quarterly Report

FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

		OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 001-13195

INDUSTRIAL DISTRIBUTION GROUP, INC.
(Exact name of registrant as specified in its charter)


Delaware		58-2299339

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

950 East Paces Ferry Road, Suite 1575 Atlanta, Georgia 30326

(Address of principal executive offices and zip code)

(404) 949-2100

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:


Class		Outstanding at October 31, 2002

Common Stock, $.01 par value		8,928,462

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF OPERATIONS
		CONSOLIDATED STATEMENTS OF OPERATIONS
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — SEPTEMBER 30, 2002 (Unaudited)
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 5. OTHER INFORMATION
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

INDUSTRIAL DISTRIBUTION GROUP, INC.
INDEX


PART I. Financial Information
	ITEM 1. Financial Statements
		Consolidated Balance Sheets at September 30, 2002 (Unaudited) and December 31, 2001
		Consolidated Statements of Operations for the three months ended September 30, 2002 and 2001 (Unaudited)
		Consolidated Statements of Operations for the nine months ended September 30, 2002 and 2001 (Unaudited)
		Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001 (Unaudited)
		Notes to the Consolidated Financial Statements — September 30, 2002 (Unaudited)
	ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
	ITEM 4. Controls and Procedures
PART II. Other Information
	ITEM 1. Legal Proceedings
	ITEM 5. Other Information
	ITEM 6. Exhibits and Reports on Form 8-K

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INDUSTRIAL DISTRIBUTION GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)


			SEPTEMBER 30,			DECEMBER 31,
			2002			2001

			(Unaudited)
ASSETS
CURRENT ASSETS:
	Cash and Cash Equivalents		$	1,592		$	476
	Accounts Receivable, net			60,950			59,747
	Inventory, net			57,736			61,907
	Deferred Tax Assets			6,655			6,786
	Prepaid and Other Current Assets			4,925			6,042

TOTAL CURRENT ASSETS				131,858			134,958
	Property and Equipment, net			11,705			13,077
	Intangible Assets, net			372			50,766
	Deferred Tax Assets			452			701
	Other Assets			1,209			1,542

TOTAL ASSETS			$	145,596		$	201,044

LIABILITIES & STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
	Current Maturities of Long-term Debt		$	779		$	747
	Book Overdraft			1,730			4,873
	Accounts Payable			38,876			37,644
	Accrued Compensation			1,679			1,572
	Current Portion of Management Liability Insurance			1,859			3,718
	Other Accrued Liabilities			6,532			6,497

TOTAL CURRENT LIABILITIES				51,455			55,051
	Long-Term Debt			41,511			42,015
	Other Long-Term Liabilities			581			2,843

TOTAL LIABILITIES				93,547			99,909

STOCKHOLDERS’ EQUITY:
	Common Stock, par value $.01 per share, 50,000,000 shares authorized; 8,905,207 shares issued and outstanding in 2002; 8,724,184 shares issued and outstanding in 2001			89			87
	Additional Paid-In Capital			97,962			97,579
	Unearned Compensation			(191	)		—
	Retained (Deficit) Earnings			(45,811	)		3,469

TOTAL STOCKHOLDERS’ EQUITY				52,049			101,135

		TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY	$	145,596		$	201,044

The accompanying notes are an integral part of these consolidated financial statements.

INDUSTRIAL DISTRIBUTION GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)


		THREE MONTHS ENDED
		SEPTEMBER 30,

		2002		2001

NET SALES		$	123,950	$	123,883
COST OF SALES			96,191		96,420

	Gross profit		27,759		27,463
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES			26,167		26,225

	Income from operations		1,592		1,238
INTEREST EXPENSE			746		1,042
OTHER EXPENSE (INCOME)			9		(31	)

INCOME BEFORE INCOME TAXES			837		227
PROVISION FOR INCOME TAXES			353		340

NET INCOME (LOSS)		$	484	$	(113	)

BASIC AND DILUTED EARNINGS (LOSS) PER SHARE		$	.05	$	(.01	)

BASIC WEIGHTED AVERAGE SHARES OUTSTANDING			8,834,936		8,686,521

DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING			9,071,853		8,686,521

The accompanying notes are an integral part of these consolidated financial statements.

INDUSTRIAL DISTRIBUTION GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)


			NINE MONTHS ENDED
			SEPTEMBER 30,

			2002			2001

NET SALES			$	371,343		$	391,416
COST OF SALES				289,149			303,969

		Gross profit		82,194			87,447
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES				78,033			85,354

		Income from operations		4,161			2,093
INTEREST EXPENSE				2,209			3,566
OTHER EXPENSE (INCOME)				16			(82	)

INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE				1,936			(1,391	)
PROVISION FOR INCOME TAXES				869			43

INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE				1,067			(1,434	)

CUMULATIVE EFFECT OF ACCOUNTING CHANGE				(50,347	)		—

NET LOSS			$	(49,280	)	$	(1,434	)

EARNINGS (LOSS) PER COMMON SHARE:
BASIC:
	NET EARNINGS (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE, PER COMMON SHARE		$	0.12		$	(0.17	)
	CUMULATIVE EFFECT OF ACCOUNTING CHANGE, PER COMMON SHARE			(5.72	)		—

	LOSS PER COMMON SHARE		$	(5.60	)	$	(0.17	)

DILUTED:
	NET EARNINGS (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE, PER COMMON SHARE		$	0.12		$	(0.17	)
	CUMULATIVE EFFECT OF ACCOUNTING CHANGE, PER COMMON SHARE			(5.62	)		—

	LOSS PER COMMON SHARE		$	(5.50	)	$	(0.17	)

BASIC WEIGHTED AVERAGE SHARES OUTSTANDING				8,805,052			8,621,818

DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING				8,964,058			8,621,818

The accompanying notes are an integral part of these consolidated financial statements.

INDUSTRIAL DISTRIBUTION GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)


				NINE MONTHS ENDED
				SEPTEMBER 30,

				2002			2001

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss				$	(49,280	)	$	(1,434	)
Adjustments to reconcile net loss to net cash provided by operating activities:
	Depreciation and amortization				2,134			3,641
	Deferred taxes				380			1,294
	Gain on disposal of equipment				(4	)		(43	)
	Impairment of goodwill				50,347			—
	Changes in operating assets and liabilities:
		Accounts receivable, net			(1,203	)		(63	)
		Inventories, net			4,171			3,692
		Prepaid assets and other assets			1,201			(2,471	)
		Book overdraft			(3,143	)		(2,329	)
		Accounts payable			1,232			1,952
		Accrued compensation			107			(367	)
		Other accrued liabilities			(1,281	)		(663	)

			Total adjustments		53,941			4,643

			Net cash provided by operating activities		4,661			3,209

CASH FLOWS FROM INVESTING ACTIVITIES:
	Additions to property and equipment, net				(452	)		(694	)
	Proceeds from the sale of property and equipment				39			283
	Deposits				(22	)		54

			Net cash used in investing activities		(435	)		(357	)

CASH FLOWS FROM FINANCING ACTIVITIES:
	Proceeds from issuance of common stock				167			282
	Net borrowings (repayments) on credit facilities and other lines				50			(2,429	)
	Long-term debt repayments				(522	)		(547	)
	Premium payments on management liability insurance				(2,790	)		(2,807	)
	Deferred loan costs and other				(15	)		(65	)

			Net cash used in financing activities		(3,110	)		(5,566	)

NET CHANGE IN CASH AND CASH EQUIVALENTS					1,116			(2,714	)
CASH AND CASH EQUIVALENTS, beginning of period					476			3,690

CASH AND CASH EQUIVALENTS, end of period				$	1,592		$	976

Supplemental Cash Flow Information:
	Interest paid			$	1,706		$	2,788

	Net income taxes (refunded) paid			$	(731	)	$	642

Noncash Transactions:
	Issuance of restricted stock			$	218		$	—

The accompanying notes are an integral part of these consolidated financial statements.

INDUSTRIAL DISTRIBUTION GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — SEPTEMBER 30, 2002 (Unaudited)

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 34 states and two foreign countries, providing product expertise in the procurement and application of MROP products to a wide range of industries.

1. BASIS OF PRESENTATION

The accompanying unaudited interim consolidated financial statements are prepared pursuant to the Securities and Exchange Commission’s rules and regulations for reporting on Form 10-Q. Accordingly, certain information and footnotes required by accounting principles generally accepted in the United States for complete financial statements are not included herein. The Company believes all adjustments necessary for a fair presentation of these interim statements have been included and are of a normal and recurring nature.

These interim statements should be read in conjunction with the Company’s financial statements and notes thereto, included in its Annual Report on Form 10-K, for the fiscal year ended December 31, 2001.

2. NEWLY ADOPTED ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Intangible Assets,” effective for fiscal years beginning after December 15, 2001. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. SFAS No. 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. Under the new rules, goodwill (and intangible assets deemed to have indefinite lives) will no longer be amortized but will be subject to annual impairment tests in accordance with the Statement. Other intangible assets will continue to be amortized over their remaining useful lives.

The Company adopted SFAS No. 142 on January 1, 2002. The Company tested goodwill for impairment using the two-step process prescribed in SFAS No. 142. The first step was a screen for potential impairment, while the second step measured the amount of the impairment, if any. Based on an independent appraisal firm’s valuation of the enterprise fair value using a combination of discounted cash flows, market multiples, and comparable transactions, which reflect changes in certain assumptions since the date of the acquisitions, and the identification of qualifying intangibles, the Company recorded a non-cash charge of $50,347,000 as a cumulative effect of accounting change in the first quarter of 2002 associated with the adoption of this Statement. The Company recorded a full valuation reserve of $3,148,000 against the tax benefit resulting from this charge. The application of the nonamortization provisions of SFAS No. 142 resulted in an increase to net income of approximately $322,000 or $0.04 per fully diluted share for the three months ended September 30, 2002 and a reduction of the net loss of approximately $966,000 or $0.11 per fully diluted share for the nine months ended September 30, 2002.

The write-off of goodwill results from the use of a combination of fair value methods in assessment of fair value as required by SFAS No. 142. According to SFAS No. 142, the goodwill impairment loss is measured as the excess of the carrying amount of goodwill over the implied fair value of goodwill.

A reconciliation of net income (loss) and earnings (loss) per common share, adjusted to exclude goodwill amortization expense, net of tax, for the period prior to adoption and the cumulative effect of accounting change recognized in the current period, is as follows (in thousands, except share data):


			Three Months Ended					Nine Months Ended
			September 30,					September 30,

			2002		2001			2002			2001

Net income (loss)			$	484	$	(113	)	$	(49,280	)	$	(1,434	)
Amortization of goodwill, net of tax				—		322			—			966
Cumulative effect of accounting change				—		—			50,347			—

Adjusted net income (loss)			$	484	$	209		$	1,067		$	(468	)

Basic:
	Net income (loss) per common share		$	0.05	$	(0.01	)	$	(5.60	)	$	(0.17	)
	Amortization of goodwill, net of tax, per common share			—		0.04			—			0.11
	Cumulative effect of accounting change, per common share			—		—			5.72			—

		Adjusted earnings (loss) per common share	$	0.05	$	0.02	*	$	0.12		$	(0.05	)**

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