| INDUSTRIAL DISTRIBUTION GROUP INC Item 1A Risk Factors |
| 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 |
| In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “intends”, “potential”, “continue”, or the negative of such terms or other comparable terminology |
| Forward-looking statements include our expectations with respect to growth of sales, the effect of economic conditions, the impact of operational improvements or cost reduction initiatives, operating margins and overall profitability |
| 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: 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, and we cannot assure you that we will be able to compete successfully against all or most of them |
| The industrial MROP supplies industry is highly competitive and features numerous distribution channels, including: international, national, regional, and local distributors; internet suppliers; large catalog warehouses; and manufacturers’ own sales forces |
| Our General MROP sales force competes against many small enterprises who sell to a limited geographic area |
| In addition, however, they compete against several large MROP distributors that have significantly greater resources than we do, particularly focused on e-commerce solutions for small to mid-sized customers |
| Our FPS sales force competes primarily against mid-sized to large MROP distributors who have the size and scale of operations to provide customers with a broad product line and service to multiple locations |
| Accordingly, several of these competitors also have greater resources than we do |
| 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 MROP suppliers |
| Some of our competitors presently sell some of the same products we sell at lower prices than we offer |
| Moreover, in our FPS sales, we compete on the basis of our ability to design and implement Flexible Procurement Solutions that will enable our customers to achieve productivity improvements and reduce costs overall, rather than seeking simply to offer the lowest price for any particular MROP item |
| We cannot assure you that we will be able to compete successfully |
| 11 _________________________________________________________________ [45]Table of Contents Competition in the MROP supplies industry may increase in other ways as well |
| For example, other distributors are consolidating to achieve economies of scale and increase efficiencies, which may strengthen their competitive position relative to us |
| In addition, new competitors, of which we are not currently aware, may emerge, further increasing competition |
| Storeroom management customers are large in size and generate average annual revenue of approximately dlra2dtta0 million |
| If we are not able to renew contracts at profitable levels, we may not be able to replace the business lost |
| In most cases, our FPS solutions generate significant savings for our customers during the first few years of the contract |
| However, there also comes a point when we have brought the customer to maximum efficiency, and our customers requested lower product pricing |
| In most cases we were not willing to sacrifice our margins of profitability |
| As a result many customers did not renew contracts and hired the competition or brought the outsourced function of inventory management back in house |
| We will be challenged by this situation, however, we believe that we are able to compete effectively because of our ability to address the MROP needs of our customers by providing value-added services and solutions that enable them to improve productivity and reduce costs |
| The delivery of our services requires highly skilled and specialized employees who are not easy to locate or replace, and we could be adversely affected by the loss or unavailability of such persons |
| The timely provision of our high-quality services requires an adequate supply of skilled sales and customer service personnel, including the specialists whose expertise is an essential element of both our customer-oriented FPS program and our General MROP business |
| Accordingly, our ability to implement solutions for our customers depends to a significant degree on our ability to employ and train 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 |
| If this occurs, our operating costs may be adversely affected by turnover in such positions |
| We cannot be assured 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 |
| We rely heavily on our senior management and the expertise of management personnel, and we could be adversely affected by the loss or unavailability of such persons |
| Our operations will depend for the foreseeable future on the efforts of our executive officers, regional presidents, and our other senior management |
| Our business and prospects could be adversely affected if these persons, in significant numbers, do not perform their key roles as expected or leave the company, and we are unable to attract and retain qualified replacements |
| We are in the process of converting to a centralized back-office computer operating system |
| In the interim, we will continue to rely upon our three current management information systems for our internal management information and related functions |
| Our operations could be adversely effected if we were to experience significant errors, delays or unforeseen expenses during the implementation |
| We are currently in the implementation phases of a centralized operating system, which is scheduled to be complete by the end of the third quarter of 2006 |
| Until implementation is complete however, we will continue to utilize and depend upon the information and operating systems of our three regional platforms for many functions, including procurement of products, financial reporting and analysis, and inventory control, among others |
| We will not be able to achieve the benefit of the consolidation of back-office functions and other planned operational efficiencies until we have fully implemented our centralized data management system |
| We may experience delays, disruptions, and unanticipated expenses during the implementation, which could have a material adverse effect on our operations or may prolong our usage of the currently disparate operating systems |
| In addition, our proprietary FPS software programs are not fully integrated with any of our regional platforms, and we will not begin integrating these into our centralized operating system until after we have completed our 12 _________________________________________________________________ [46]Table of Contents system consolidation |
| We will not be able to achieve the full benefit of the platform consolidation until we have effectively integrated our proprietary FPS software programs into that operating system |
| If we experience system failures, the products and services we provide to our customers could be delayed or interrupted, which could harm our business and reputation and result in the loss of customers |
| Our ability to provide reliable service largely depends on the efficient and uninterrupted operations of our computer network systems and data centers |
| As part of the operating system consolidation, we are creating a back up facility with full capabilities at another location |
| However, until that facility is running, our systems and operations could be exposed to damage or interruption from fire, natural disaster, power loss, telecommunications failure, unauthorized entry, and computer viruses |
| We cannot be certain that our measures to avoid or provide back-up support will be successful |
| Further, our property and business interruption insurance may not be adequate to compensate us for all losses or failures that may occur |
| Any significant uninsured interruptions could have a material adverse effect on our business, financial condition, and results of operations |
| Our ability to sell our services and products in the quantity we desire depends heavily upon the operations levels of our customers and the economic factors that affect them |
| 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 that the users of MROP supplies produce |
| Consequently, the demand for our services and products has been and will continue to be influenced by most of the same regional, national, or even international economic factors that affect the demand for and production of such goods |
| When our customers or prospective customers reduce their production levels in response to lower demand for their products, they have less need for MROP supplies and may delay or slow (or even cancel) orders for MROP products or services |
| In addition, because some of our customers are increasingly moving portions of their operations overseas in order to reduce manufacturing costs, our ability to continue to service those customers at acceptable profitability levels may be impaired |
| Our dependence upon outside suppliers and manufacturers of MROP products makes us subject to price increases and delays in receiving such products due to market demand, material shortages, and other factors |
| We generally do not maintain supply agreements with third parties for MROP products, but instead purchase the products we sell pursuant to purchase orders in the ordinary course of business |
| We are and will continue to be subject to price increases charged by our supply sources and to failures or delays by them in delivering the quantities of products we require |
| There can be no assurance that we will be able to pass any price increase on to our customers, and a price increase in excess of the amount we can pass on to our customers could adversely affect our profit margin |
| During this past year, we encountered difficulties updating our pricing, which caused our gross margins to decline until we could fix those problems |
| A failure or delay in our supply of products could adversely affect our sales and our ability to meet our delivery schedules to customers |
| Although we believe that our existing suppliers will continue to meet our requirements, at prices that are acceptable, and that alternative sources of supply would be available, events beyond our control could have an adverse effect on the cost or availability of the products we sell |
| We rely on a variety of informal or short-term distribution rights granted by our suppliers to offer their product lines to our customers, and we could be adversely affected if those rights were discontinued on short notice |
| For a substantial portion of our business, we depend on the collection of varied distribution arrangements with suppliers for certain product lines that have been established by our regional divisions 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 |
| 13 _________________________________________________________________ [47]Table of Contents If we were to experience serious personnel dislocation or low morale issues as a result of our ongoing efficiency improvement strategies, our performance could be adversely affected over the short-term until we address any such issues |
| As we implement current initiatives and develop additional plans to derive efficiencies and improve services as part of our ongoing strategy to enhance our operating results — which will include continuing to centralize certain operational and administrative functions — we may experience near-term personnel dislocation and morale issues |
| Our associates are an integral part of our ability to deliver the high quality services our customers expect, and of our ability to implement successfully our systems of internal controls and procedures to manage our business and report operating results |
| If we were to experience (and not be able to address satisfactorily) any serious personnel dislocation or low morale issues, such a situation could be disruptive over the short-term and our performance could be adversely affected until we address any such issues |