##### Table of Contents



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)þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934For the Fiscal Year Ended December 31, 2004o
    
    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.  DELAWARE
    
    58-2299339(State or other jurisdiction
    
    (I.R.S. Employerof 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: Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Stock, Par Value
$0.01 Per Share
    
    NASDAQ
 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
þ No o 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 10-K. o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). Yes o No þ The aggregate market value of the voting stock held by non-affiliates (which for
purposes hereof are all holders other than executive officers and directors) of the Registrant as
of June 30, 2004 was $67,643,290 (based on 8,149,794 shares held by non-affiliates at $8.30 per
share, the last sales price on the NASDAQ on June 30, 2004). The number of shares outstanding of the registrants common stock as of February 25, 2005 was
9,399,500. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrants definitive Proxy Statement for the 2005 Annual Meeting of
Stockholders, to be filed with the Commission, are incorporated by reference into Part III.




---



##### Table of Contents



TABLE OF CONTENTS PagePART IItem 1. Business
    
    
    2Item 2. Description of Facilities
    
    
    12Item 3. Legal Proceedings
    
    
    12Item 4. Submission of Matters to a Vote of Security Holders
    
    
    12PART IIItem 5. Market for Registrants Common Equity and Related Stockholder Matters
    
    
    13Item 6. Selected Financial Data
    
    
    14Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 7A. Quantitative and Qualitative Disclosures about Market Risk
    
    
    22Item 8. Financial Statements and Supplementary Data
    
    
    22Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Procedures
    
    
    22Item 9A. Controls and Procedures
    
    
    23PART IIIItem 10. Directors and
Executive Officers of the Registrant
    
    
    23Item 11. Executive Compensation
    
    
    23Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder
Matters
    
    
    23Item 13. Certain Relationships and Related Transactions
    
    
    23Item 14. Principal Accountants Fees and Services
    
    
    23PART IVItem 15. Exhibits and Financial Statement Schedule
    
    
    24SIGNATURESEX-21.1 SUBSIDIARIES OF THE COMPANYEX-23.1 CONSENT OF ERNST & YOUNG, LLPEX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-32.1 SECTION 906 CERTIFICATION OF CEOEX-32.2 SECTION 906 CERTIFICATION OF CFO
 1




---



##### Table of Contents



PART I 
 Item 1.Business. Background and General Industrial Distribution Group, Inc. (IDG) was formed in 1997 through a combination of
industrial distribution companies. We are a nationwide supplier of maintenance, repair, operating,
and production (MROP) products and services to manufacturers and other industrial users, with a
principal focus on providing an array of value-added business process outsourcing services and
other arrangements through our Flexible Procurement Solutions (FPS) model. Our FPS services
include storeroom management (commonly referred to as integrated supply) and other offerings that
emphasize and utilize our specialized expertise in product applications and production process
improvements. In providing FPS services and traditional direct sales of MROP products, which we
refer to as General MROP sales, we distribute a full line of MROP products, specializing in cutting
tools, abrasives, hand and power tools, coolants, lubricants, adhesives, safety products, and
machine tools. We can supply at a competitive price virtually any other MROP product that a
customer may require. Our FPS customers, which account for approximately 55% of our business, range from mid-market
(i.e., greater than $50,000 but less than $500,000 in potential annual revenues) to large market
(i.e., greater than $500,000 in potential annual revenues) accounts which remains our focus for
continuous growth. We believe as we widen our FPS services and product selection, we will continue
to position IDG to address proactively the increasing demands of customers for ways to reduce their
overall MROP costs and enhance their operating efficiencies. In many of our FPS arrangements, we
seek to answer these demands by guaranteeing a minimum annual reduction in our customers total
MROP procurement costs through our Documented Cost Savings Program.
We are able to guarantee these cost
reductions by leveraging our expertise and our ability to analyze a customers acquisition,
possession, and application processes for MROP products to design and implement a customized
program and streamline these processes in order to reduce their associated costs. The specific
programs we design may include improving the customers production and procurement processes,
standardizing the products they use, reducing the number of suppliers from which they purchase
products, or developing storeroom management arrangements that outsource to us some or all of their
MROP procurement and management functions. Our General MROP customers tend to be small to
mid-market customers whose purchase levels are not large enough to warrant a services-based
solution but that still have a need to benefit from our procurement and product application
expertise. Our operations are organized into four regional divisions. Each regional division is headed by
a President who reports directly to our Chief Executive Officer. We currently have sales coverage
in 43 of the top 75 manufacturing markets in the United States as well as Mexico and China. We have
approximately 20,000 active customers (customers that purchased at least one item in the last 12
months), which include a diverse group of large and mid-sized national and international
corporations, including General Electric Company, The Boeing Company, Arvin Meritor, Borg-Warner
Inc., and Pentair, Inc. as well as many local and regional businesses. We had net sales of $529.2 million for the year ended December 31, 2004. Based on 2004 sales,
we believe IDG is among the top 16 MROP providers and the top five operators of storeroom
management sites in the nation. Industry Overview and Trends Manufacturers, processors, and other producers of industrial, commercial, or consumer products
have a continual need for a broad range of MROP products. We estimate that the size of the market
for industrial MROP products in which we primarily participate 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 than the
industrial MROP product market. Manufacturers and other users of MROP products continue to seek 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 2




---



##### Table of Contents



industrial supply industry continues to experience consolidation, as customers focus on the
convenience, cost savings, and economies of scale associated with a reduced number of suppliers who
are capable of providing superior service and product selection. In recent years, technological advancements have enhanced the business-to-business solutions
provided by the MROP industry. Business-to-business solutions are needed in todays marketplace to
provide customers with the option to outsource the commodity management aspects of MROP. As
manufacturers have focused on their core manufacturing or other production competencies, they have
increasingly outsourced their MROP procurement, management, and application processes in search of
more comprehensive MROP solutions that include technology solutions that we provide. We have moved
with the trend of the industry by using technological advancements and the development of
Internet-based platforms to create procurement solution strategies. We believe that we have the size, scale of operations, technology, and skilled personnel
resources necessary to benefit from these industry trends and compete effectively in the MROP
supply industry. Flexible Procurement Solutions (FPS) Services Program and Approach FPS is a broad program of value-added service offerings to our customers and reflects our
principal approach to addressing the MROP needs of our customers. We approach our customers and
their needs proactively, not simply to sell MROP products, but to help design an overall MROP
strategy that improves our customers supply chain and asset management and increases their
operational efficiencies. We offer our customers our expertise in process improvement, inventory
management, product application, productivity improvements, cost savings, software solutions, and
logistics. Through FPS, we can provide any or all of these areas of expertise, depending on the
size and the specific needs of the customer. As a result of our services, we believe that our
customers can increase their profits and their return on assets. We believe that the ability and flexibility to provide the ideal combination of MROP services
required by each customer is the key to capturing market share for our business. The prerequisites
for doing so will continue to evolve, and we will remain vigilant in assessing the needs of and
developing solutions for our existing and prospective new customers. At December 31, 2004, we had
arrangements in place to provide FPS services to approximately 262 customers covering 341 sites,
including 97 storeroom management sites covering 58 customers. Spectrum of Service Offerings The spectrum of services we offer in designing and implementing Flexible Procurement Solutions
for customers is broad and encompasses all phases of a customers MROP cycle  that is, the
acquisition, possession, and application of MROP products. Our extensive process knowledge and the
product expertise of our associates are key elements that allow us to present cost saving solutions
to our customers in all of these phases. For example, our comprehensive product line supports our
commitment to acquire and deliver the most appropriate product to our customers. In addition to
maintaining more than 300,000 stock-keeping units (SKUs), as well as special items in stock for
regular customers, we can provide virtually any MROP item a customer may require. Our proprietary
software programs provide a sophisticated system for our customers to accurately track their
possession and use of these products. Moreover, our industry-specific experience and extensive
product knowledge enable us to assist in the application of MROP products by evaluating
manufacturing processes and the MROP products they use. Our understanding of the most appropriate
product for specific customer applications helps us to identify the MROP product best suited for a
customers specific need, or we may suggest process re-engineering in order to lower the customers
total MROP costs. The proper management of the acquisition, possession and application functions is important to
customers because they must balance the need for immediate access to inventory with the cost of
carrying the inventory. Many MROP products  such as machine tool inserts, drill bits, abrasives,
saw blades, and gloves  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 3




---



##### Table of Contents



therefore purchased less frequently, but still must be available on time in order to achieve
production efficiencies. In all cases, the management of all phases of our customers MROP cycle is
a fundamental part of our FPS services for our customers. In addition to identifying and supplying the particular products a customer requires (in the
proper quantities and at the proper times), our specialized services may include any one or more of
the following to assist the customer in the acquisition, possession and application phases of the
MROP cycle:  
    providing consolidated billing for MROP products and producing 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 electronically, without contacting us, by
telephone or facsimile;
    providing storeroom design and reorganization services to reduce inefficiencies,
redundancies, obsolescence, and shrinkage;
    bar coding products in a customers tool crib to control inventory and track
consumption by product, employee, and/or cost center; and
    providing the management and procurement of entire commodity groups utilizing our
proprietary software to enable commodity rationalization, supplier surveys, supplier
requests for quotes, quotation analysis, supplier selection, and contract awards. Storeroom Management Arrangements Our business process outsourcing model is the most complete offering of services in our FPS
program. This model is considered a storeroom management relationship (commonly referred to in our
industry as integrated supply), where we essentially form a strategic alliance with the customer to
procure, manage, and apply MROP products at the customers site and, in some cases, to share the
benefits of the cost reductions achieved. In addition to all or most of the other FPS services we
provide, our storeroom management relationships  which are not standardized and vary from customer
to customer  usually include:  
    licensing to the customer our proprietary software that helps provide our customers
with business intelligence to manage the acquisition, receipt, issuance, and application of
MROP products and other key commodity supplies;
    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 storeroom management relationship, we, rather than the customer, may own the
inventory in the tool crib. In such a relationship, we often achieve a minimum annual reduction in the customers total
MROP costs in relation to its production levels. We achieve these 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, we often achieve
additional cost savings and improved cash flows for our customer 4




---



##### Table of Contents



through the reduction of tool crib staffing expenses, the reduction in shrinkage and obsolete
stock due to better inventory controls, and the elimination of certain inventory holding costs. We show our customers how we achieve savings for them through our Documented Cost Savings
Program. Our customers agree with us on the savings criteria and measurements at the beginning of
the relationship. Our service performance is measured to these pre-determined expectations. Where
we save additional costs for a customer through these process improvements, and exceed their
expectations in certain arrangements, the customer may share the additional savings with us. We believe that, for appropriate customers, a storeroom management arrangement also has other
benefits. For example, through the use of our proprietary Storeroom Management System, key products
are readily available to our customers, which reduces their production downtime. We can also
provide more useful information than our customers had previously collected about their inventory
needs and consumption by cost center. Quality Control Standards Providing superior quality throughout the comprehensive range of MROP services we provide to
customers is our hallmark. As part of our commitment to providing solutions-oriented customer
service, we emphasize quality assurance in all phases of our operations. Our sales and service
personnel receive ongoing periodic training in our services solutions, our products, total quality
management and other team management skills to assure quality performance. As a result, all of our
significant operating locations are ISO 9001 compliant. Products In tandem with our FPS program and its approach to serving our customers, we remain focused on
satisfying the fundamental requirement of our distribution business  getting customers the MROP
products they need, when they need them. In order to do so, we offer a full line of industrial MROP
products, with more than 300,000 SKUs in stock. In addition, we often maintain supplies of special
items for regular customers, and we are able to supply virtually any special order MROP item at a
competitive price. In order to achieve cost 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. Our principal product categories include cutting tools, abrasives, hand and power tools,
maintenance equipment, coolants, lubricants, adhesives, machine tools and safety products. We are
able to offer significant depth and breadth in our core product lines throughout our nationwide
operations. 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 associates are trained specifically to assist customers in making such intelligent
cost-saving purchases, with the goal of lowering the customers total MROP procurement costs. We
believe these factors significantly enhance our volume of repeat business, and they are an integral
part of our overall customer costs reduction program and total procurement solutions. On an individual location basis, our products may be ordered electronically through business
interchange services, e-commerce, by telephone, 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 and other electronic commerce. To
facilitate on time delivery of our products, we store our stock MROP products primarily in
distribution centers and smaller warehouses at various locations across the United States and
Shanghai, China. We currently obtain products from approximately 35,000 vendors. During 2004, no vendor
provided as much as 7% of the products we sold. We believe we are not materially dependent on any
one vendor or small group of vendors. 5




---



##### Table of Contents



The following table sets forth illustrative examples of the myriad products we supply,
organized by principal categories of MROP products, and also shows our sales of such products as a
percentage of our aggregate revenue for 2004: % ofAggregateProduct Category
    
    Typical Products
    
    RevenueCutting Tools
    
    Drills, Taps, Carbide Tools, End Mills
    
    
    22.5
    %Abrasives
    
    Grinding Wheels, Sanding Belts, Discs, Sheets or Rolls
    
    
    11.0
    %Power Tools
    
    Air and Electric Drills, Air Compressors, Impact
Wrenches, Screwdrivers
    
    
    8.4
    %Maintenance Equipment and Supplies
    
    Hydraulic Tools, Paint, Lubrication Equipment
    
    
    7.9
    %Hand Tools
    
    Wrenches, Socket Sets, Screw Drivers, Hammers
    
    
    7.6
    %Coolants, Lubricants, and Adhesives
    
    Metal Cutting Coolants, Aerosols, Industrial Adhesives
    
    
    6.6
    %Machine Tools and Accessories
    
    Milling Machines, Work Holding Vises, Tool Holders
    
    
    5.2
    %Safety Products
    
    Gloves, Signs, Absorbents, Glasses
    
    
    5.1
    %Tapes
    
    Masking, Filament and Duct Tape
    
    
    4.2
    %Material Handling Equipment
    
    Hoists, Slings, Chain, Shelving, Casters
    
    
    2.8
    %Machinery
    
    Metal Removal Equipment, Metal Forming Equipment
    
    
    2.1
    %Fluid Power
    
    Hydraulic and Pneumatic Values, Cylinders
    
    
    1.6
    %Saw Blades
    
    Band, Hack, Hole, Jig Saw Blades
    
    
    1.6
    %Contractor Supplies
    
    Power-Actuated Tools, Ladders, Shovels
    
    
    1.5
    %Electrical
    
    Fuses, Electrical Switches, Controls
    
    
    1.4
    %Fasteners
    
    Socket Screws, Hex Screws, Anchors
    
    
    1.3
    %Tool & Die Supplies
    
    Ground Stock, Drill Rod, Die Sets
    
    
    1.2
    %Brushes
    
    Wire Wheel, Floor Brooms
    
    
    0.9
    %Power Transmission Equipment
    
    Belts, Drives, Bearings, Gears, Pulleys
    
    
    0.9
    %Quality Control Products
    
    Electronic Calipers, Micrometers
    
    
    0.9
    %Industrial Hose
    
    Air Hose, Water Hose
    
    
    0.7
    %Industrial Pipes, Valves, Fittings
and Metal Goods
    
    Pipes, Valves, Fittings, Angle Iron, Conduit
    
    
    0.7
    %Welding Equipment and Supplies
    
    Welders, Weld Rod
    
    
    0.6
    %OEM Assembly Parts
    
    Gaskets, Springs, Assembly Plates
    
    
    0.5
    %Other Products
    
    
    
    
    2.8
    %Total
    
    
    
    
    100.0
    %
 Customers Our active customers, who number approximately 20,000, include a broad range of industrial,
commercial, and institutional users of MROP products, from small local machine shops to regional,
national, and multi-national corporations such as General Electric Company, The Boeing Company,
Arvin Meritor, Borg-Warner Inc., and Pentair, Inc. For 2004, we sold products to over 1,000
customers who purchased at least $50,000 of products, and no single customer accounted for more
than 5% of our net sales. We will continue to serve a large number and wide variety of customers. Our principal
customers (in terms of the amount of services and products acquired from or through us) will likely
continue to be divisions of large international, national, and middle-market corporations, and we
will focus on increasing our business with such customers. We also place special emphasis, through
our FPS program, on marketing and selling our services and products to middle-market industrial
consumers. We believe these manufacturers may benefit from many of our value-added service
offerings. Sales and Marketing Each of our four regional divisions has personnel dedicated to FPS sales and marketing efforts
focused on the regional and local markets. We have approximately 180 outside sales representatives
and product specialists and 180 inside sales/customer service representatives. The majority of our
outside sales representatives and product specialists call on designated customers and are
responsible for providing technical support to those customers with respect to certain products.
Our outside sales representatives and product specialists play an integral part in our marketing
strategy for FPS services by focusing on the broader spectrum of MROP services and then developing
and marketing customized value-added solutions to new and existing customers. These solutions go
beyond the sale of our products and help to improve our customers production processes and as a
result, reduce their total 6




---



##### Table of Contents



procurement costs. They support our 17 regional FPS sales experts who focus solely on this
aspect of our business. Our inside sales/customer service representatives are responsible for
certain types of direct customer service and order entry, but primarily focus on supporting the
outside sales representatives with respect to their respective customers. Our Vice President of Flexible Procurement Solutions is responsible for the development of
large national accounts that require cross-regional coordination and assisting our regional efforts
when necessary. We believe this approach allows us to compete effectively both in local markets and
for multi-location contracts. We continue to assess, train, and augment our sales force as necessary to assure that it has
the appropriate sales tools to achieve the objectives of our strategy to focus on FPS. We will also
continue to ensure that we have adequate personnel to provide our customers with any dedicated or
specialized product selection and applications expertise they require for their MROP solutions. We provide regular training programs for our sales personnel and special training programs for
various product lines on both a national and regional basis. Each region 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. Management Information Systems We continue to work company-wide to improve our back office information technology systems on
a cost-effective basis. Currently, we operate on three nationally recognized distribution systems
through which we manage key functions on a regional basis, such as communication between warehouse
and sales offices, inventory and accounts receivable management, purchasing, pricing, sales and
distribution, and the preparation of periodic operating control reports. At our customer locations, we utilize computerized management and information systems,
including our highly specialized distributor based software programs such as our proprietary
Storeroom Management System, InnoSource®, and Innoanalysis System for customer product procurement
and management. These systems assist us in our business-to-business product offerings, and are
important elements of our overall ability to meet customers requirements for increasing levels of
individualized MROP procurement solutions, as well as to achieve our desired level of internal
operating efficiencies. Our proprietary Storeroom Management System, InnoSource®, and Innoanalysis
System are also key components in our FPS program. In early 2005 we hired our CIO who will lead our IT strategy. We have a comprehensive IT
strategy that includes ongoing strategic initiatives, that are focused on centralization,
e-commerce capabilities, FPS operations integration and standardized part numbering and
descriptions. We have begun an analysis which will culminate in our selection of one integrated IT
platform. This one platform will provide IT solutions that will help our customers place and track
their orders more easily, which will enable us to more effectively implement our business strategy.
This phase includes a plan to implement a centralized data management system which will reduce the
number of regional platforms. We expect an implementation in early 2006. Competition The industrial MROP products industry is highly competitive and features numerous distribution
channels, including: international, national, regional, and local distributors; direct mail
suppliers; internet suppliers; large catalog warehouses; 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 we do. Certain of our competitors sell identical
products for both lower and higher prices than we
offer. We believe,
however, 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 (as well as
MROP products) that enable them to improve productivity and reduce costs. 7




---



##### Table of Contents



Personnel We had 1,325 full-time associates as of December 31, 2004. Of these, approximately 350
associates reside at our customers storeroom management facilities. Eight of our associates are
employed pursuant to collective bargaining agreements with local unions affiliated with the
International Brotherhood of Teamsters and the International Brotherhood of Electrical Workers. We
believe that the regions that have been employing persons pursuant to those contracts enjoy good
relations with these associates, and we have not experienced work stoppages. We believe our
business relationships are good with all of our associates. Executive Officers Certain information regarding our executive officers is set forth in the following table and
paragraphs. Name
    
    Age
    
    PositionAndrew B. Shearer
    
    41
    
    President and Chief Executive OfficerJack P. Healey
    
    45
    
    Senior Vice President, Chief Financial Officer, and SecretaryThomas W. Aldridge, Jr.
    
    57
    
    Senior Vice PresidentMichael W. Brice
    
    40
    
    Senior Vice President and Chief Information OfficerMartin C. Burkland
    
    53
    
    President (Northwest region)John R. Kramer
    
    41
    
    President (Midwest region)Charles A. Lingenfelter
    
    54
    
    President (Southern region)Robert E. Vanderhoff
    
    49
    
    President (Northeast region)
 Mr. Shearer is one of our co-founders, and became our President and Chief Executive Officer in
August 2001. Prior to that time, Mr. Shearer served as the President of our IDG-York business unit
(from 1991), formerly Shearer Industrial Supply Co., one of the companies that combined to form us
in 1997. Mr. Shearer received his undergraduate degree in Business Management from New Hampshire
College. Mr. Healey joined us in June 1997 as Vice President and Chief Financial Officer, and became
Senior Vice President in 1997. Prior to 1997, Mr. Healey was the partner in charge of assurance
services for a regional accounting firm and member of the SEC practice section of the AICPA, during
which time he served as auditor for one of our founding companies. 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 (from 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. Mr. Aldridge received his undergraduate degree in Psychology
from the University of Georgia. Mr. Brice joined us in January 2005 as Senior Vice President and Chief Information Officer.
Prior to that time, Mr. Brice served (from 2001) as Partner of Unisys, a worldwide information
technology services and solutions company. From 2000 to 2001, Mr. Brice served as Vice President
of Collaborex, a business-to-business consulting company. Prior to that time, Mr. Brice was a
Principal at Booz-Allen & Hamilton, a strategy and technology consulting firm. Mr. Brice received
his undergraduate degree in Computer Science from Clemson University. Mr. Burkland was named Regional President of our Northwest region in January 2002. Prior to
that time, Mr. Burkland served (from 1995) as President of our IDG-Seattle business unit, formerly
B&J Industrial Supply Co., one of the companies that combined to form us in 1997. Mr. Burkland
received his undergraduate degree in Biology from Central Washington University. Mr. Kramer joined us as the Regional President of our Midwest region in November 2002. From
1988 to 2002, Mr. Kramer was employed in several capacities with General Electric Company, most
recently as U.S. Business 8




---



##### Table of Contents



Sales Leader for GE Polymershapes. Mr. Kramer received his undergraduate degree in Business
Administration and Spanish from St. Johns University. Mr. Lingenfelter was named Regional President of our Southern region in January 2002. Prior to
that time, Mr. Lingenfelter served as President of our IDG-Charlotte business unit (from January
2001) and as President of The Distribution Group, Inc. (from 1997), one of the companies that
combined to form us in 1997 and with whom he had been an executive since 1988. Prior to 1988, Mr.
Lingenfelter was employed in several capacities with Ingersoll-Rand Company, including as Vice
President of Sales and Marketing for its Tools Group. Mr. Lingenfelter received his undergraduate
degree in Mechanical Engineering from the Indiana Institute of Technology. Mr. Vanderhoff joined us as Regional President of our Northeast region in February 2004. From
2000 to 2003, Mr. Vanderhoff served in management positions with Coleman Cable, Inc., most recently
as Corporate Senior Vice-President. From 1990 to 2000, Mr. Vanderhoff was employed in several
capacities with Wesco Distribution including as Vice President of Manufactured Structures. Mr.
Vanderhoff received his undergraduate degree in Behavioral Sciences from Messiah College. 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. The industrial MROP supplies industry is highly competitive and features numerous distribution
channels, including: international, national, regional, and local distributors; direct mail
suppliers; internet suppliers; large catalog warehouses; 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 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. 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. Some of our competitors presently sell some of the same products we sell at lower prices than
we offer. Moreover, 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. While we believe such FPS services are increasingly attractive to more customers, we cannot
assure you that we will be able to compete successfully if such low unit-cost suppliers become
predominant in our target markets. 9




---



##### Table of Contents



Based on our perception of industry trends among MROP customers, we have dedicated significant
resources to our FPS program, but we cannot be certain that these initiatives will generate the
growth and profitability we anticipate and desire. We have dedicated significant resources to promote our FPS program as a strategic area for
future growth and profitability. In particular, we have redirected our sales and marketing efforts towards sales of
broad-based services and products through this program, rather than towards sales of particular
products. This focus is based on our perception of industry trends among users of MROP products for
more comprehensive solutions to their MROP requirements. If the trends that we perceive do not
continue to develop, FPS sales may not grow at the levels we anticipate and desire, and our results
of operations could be affected. We expect that our continued focus on FPS will require a substantial amount of time and effort
in the retraining of our sales and marketing personnel. We may encounter unanticipated difficulties
in retraining our sales and marketing personnel to focus more broadly on the sale of FPS services
to our customers, rather than focusing exclusively or primarily on direct sales of MROP products. 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 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. As a result, 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. 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 continue to rely upon our three regional management information systems for our internal
management information and related functions, which could adversely affect our operations until we
can implement our centralized data management system. We utilize and are dependent 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. In addition, our proprietary FPS software programs are not
fully integrated with any of our regional platforms. Although we have put control mechanisms in
place to avoid delays, disruptions, and unanticipated expenses until we implement, integrate, and
operate centralized systems, these problems may occur and could have a material adverse effect on
our operations. In addition, we will not be able to achieve the full benefit of certain
contemplated operating efficiencies until we have fully implemented our centralized data management
information and operating systems and integrated our proprietary FPS software programs into those
systems. 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 10




---



##### Table of Contents



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, as happened in the recent economic downturn,
they have less need for MROP supplies and may delay or slow (or even cancel) orders for MROP
products or services. 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. 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. Because some of our customers are increasingly moving portions of their operations overseas in
order to reduce manufacturing costs, we are increasingly exposed to risks such as foreign currency
fluctuations, different business cultures, and international laws and regulations, and we cannot
guarantee that we will retain customers that relocate their operations overseas. During fiscal 2004, we derived less than 1% of our revenue from international customers, but
we expect our volume of international business to increase. Some arrangements with our
international customers have payment terms that are denominated in foreign currencies, and thus
contain inherent risks such as foreign currency exchange risks and the risk associated with
expatriating funds from foreign countries. If our revenue or expenses denominated in foreign
currencies increases, our exposure to such risks would also increase. The different business cultures associated with international operations may not be fully
appreciated before we sign an agreement, and thus may expose us to risk. Likewise, international
laws and regulations, such as foreign tax and labor laws, need to be understood prior to signing a
contract to provide products or services for a customers international operations. For these
reasons, pricing and executing international contracts is more difficult and carries more risk than
pricing and executing domestic contracts. It may also be more difficult to collect on international
work that has been performed and billed. We rely on a variety of distribution rights granted by our suppliers to offer their product lines
to our customers. 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. Compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 relating to
internal controls over financial reporting may identify breakdowns in our internal control
procedures, which might prevent or delay our compliance of those requirements when they become
applicable to us. When section 404 of the Sarbanes-Oxley Act of 2002 and related rules become applicable to us,
they will require that our management document and test internal controls over financial reporting
and assert whether our procedures for such matters are effective. In addition, our independent
auditors will be required to report on managements assessment and the effectiveness of our
internal controls procedures. We expect to become subject to compliance with those requirements at the
end of our December 31, 2005 fiscal year, and we will be required to provide managements
assessment and our auditors report in our annual report for that year and thereafter. Any
material 11




---



##### Table of Contents



weakness in our internal controls over financial reporting that exists at December 31, 2005 would
preclude our management and our independent auditors from making a positive assessment and report.
We are in the process of documenting and testing our internal controls over financial reporting in
order to provide the basis for that assessment and report. At this time, we cannot provide
assurance that we will not discover instances of weakness or breakdowns in our internal controls
procedures and, if so, that our efforts to remediate any such matter will be successful in time to
provide a basis for a positive assessment and report by our management and auditors, respectively. 
 Item 2.Description of Facilities. Currently, we own five and lease 36 operating properties in the United States for our
warehouse, sales, and administrative offices. We also lease two properties in a foreign country.
Certain property locations contain multiple operations such as a warehouse and a sales office. The
facilities range in size from less than 1,000 square feet to over 120,000 square feet. Leases for
the facilities expire at various periods between 2005 and 2020. The aggregate annual lease payments
for real properties in 2004 was approximately $6.5 million. Our corporate offices are located in approximately 9,500 square feet of office space at 950
East Paces Ferry Road, Suite 1575, Atlanta, Georgia. This lease, which we entered into in December
1998, was amended in February 2004, extending the expiration date of the lease to August 31, 2009. 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. We are, from time to time, a party to litigation arising in the normal course of business. We
do not believe that any of these actions, individually or in the aggregate, will have a material
adverse affect on our financial position or results of operations. 
 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. 12




---



##### Table of Contents



PART II 
 Item 5.Market for Registrants Common Equity and Related Stockholder Matters. Our common stock trades on the NASDAQ under the symbol IDGR and prior to June 2, 2004,
traded on the New York Stock Exchange, NYSE. The following table sets forth for the periods
indicated the high and low closing market prices of the common stock on the NASDAQ and NYSE. Price RangeHigh
    
    
    Low2003First Quarter
    
    $
    3.20
    
    
    $
    2.80Second Quarter
    
    $
    3.04
    
    
    $
    2.76Third Quarter
    
    $
    3.66
    
    
    $
    2.90Fourth Quarter
    
    $
    6.55
    
    
    $
    3.312004First Quarter
    
    $
    8.39
    
    
    $
    5.37Second Quarter
    
    $
    8.55
    
    
    $
    6.95Third Quarter
    
    $
    9.72
    
    
    $
    7.75Fourth Quarter
    
    $
    9.80
    
    
    $
    8.302005First Quarter (through February 25)
    
    $
    9.10
    
    
    $
    7.18
 As of February 25, 2005, there were 145 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 in the past, we believe that the actual number of individual
beneficial owners of our common stock exceeds 2,700. 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 prohibits the payment of
dividends. 13




---



##### Table of Contents



Item 6.Selected Financial Data. These selected financial data have been derived from our audited consolidated financial
statements and should be read in conjunction with such financial statements and the notes thereto,
and Managements Discussion and Analysis of Financial Condition and Results of Operations, included
in Item 7 of this Report. Year Ended December 31,2004
    
    
    2003(*)
    
    
    2002
    
    
    2001
    
    
    2000(As Restated)(in thousands, except per share data)Statements of Income Data:Net sales
    
    $
    529,175
    
    
    $
    483,442
    
    
    $
    492,450
    
    
    $
    514,385
    
    
    $
    546,681Gross profit
    
    
    115,712
    
    
    
    107,893
    
    
    
    109,406
    
    
    
    114,521
    
    
    
    123,142Selling, general, and administrative expenses(**)
    
    
    105,599
    
    
    
    101,518
    
    
    
    103,298
    
    
    
    110,811
    
    
    
    115,862Impairment, severance, and litigation settlement
expense
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    15,050Operating income (loss)
    
    
    10,113
    
    
    
    6,375
    
    
    
    6,108
    
    
    
    3,710
    
    
    
    (7,770
    )Accounting change
    
    
    0
    
    
    
    0
    
    
    
    (50,347
    )
    
    
    0
    
    
    
    0Extraordinary item
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (200
    )Net earnings (loss) (excluding accounting change
and extraordinary item)***
    
    $
    7,314
    
    
    $
    2,361
    
    
    $
    1,598
    
    
    $
    (1,358
    )
    
    $
    (9,412
    )Net earnings (loss) (including accounting change
but excluding extraordinary item)**
    
    
    7,314
    
    
    
    2,361
    
    
    
    (48,749
    )
    
    
    (1,358
    )
    
    
    (9,412
    )Net earnings (loss)***
    
    
    7,314
    
    
    
    2,361
    
    
    
    (48,749
    )
    
    
    (1,358
    )
    
    
    (9,612
    )Earnings (loss) per common share:Basic (excluding extraordinary item)***
    
    $
    0.78
    
    
    $
    0.26
    
    
    $
    0.18
    
    
    $
    (0.16
    )
    
    $
    (1.09
    )Diluted (excluding extraordinary item)***
    
    
    0.75
    
    
    
    0.26
    
    
    
    0.18
    
    
    
    (0.16
    )
    
    
    (1.09
    )Basic (including accounting change but excluding
extraordinary item)
    
    
    0.78
    
    
    
    0.26
    
    
    
    (5.53
    )
    
    
    (0.16
    )
    
    
    (1.09
    )Basic
    
    
    0.78
    
    
    
    0.26
    
    
    
    (5.53
    )
    
    
    (0.16
    )
    
    
    (1.11
    )Diluted (including accounting change but
excluding extraordinary item)**
    
    
    0.75
    
    
    
    0.26
    
    
    
    (5.44
    )
    
    
    (0.16
    )
    
    
    (1.09
    )Diluted**
    
    
    0.75
    
    
    
    0.26
    
    
    
    (5.44
    )
    
    
    (0.16
    )
    
    
    (1.11
    )Balance Sheet Data:Working capital
    
    $
    77,222
    
    
    $
    74,708
    
    
    $
    75,974
    
    
    $
    79,907
    
    
    $
    94,265Property and equipment, net
    
    
    7,277
    
    
    
    7,161
    
    
    
    11,274
    
    
    
    13,077
    
    
    
    15,446Total assets
    
    
    146,062
    
    
    
    133,300
    
    
    
    139,182
    
    
    
    201,044
    
    
    
    223,958Long-term debt, including current portion
    
    
    22,281
    
    
    
    26,533
    
    
    
    36,363
    
    
    
    42,762
    
    
    
    53,305Stockholders equity
    
    $
    64,783
    
    
    $
    56,398
    
    
    $
    52,660
    
    
    $
    101,135
    
    
    $
    102,115
   (*)
    
    As of December 31, 2004, we restated our financial results for the year ended December 31,
2003 to correct an error related to the recording of certain accounts payable. The correction
increased the Companys accounts payable and cost of sales for 2003 by $496. We also made
correcting adjustments to depreciation expense in order for such amounts in 2003 to be
consistent with the Companys property and equipment accounting policies, which resulted in a
reduction of depreciation expense in 2003 by $155. These corrections resulted in a reduction
of taxes payable of $148. These corrections in the aggregate reduce our previously reported
net income for 2003 by $195, or $0.02 per diluted share.(**)
    
    Beginning in 2003, we reclassified amortization of deferred loan costs from selling, general,
and administrative expenses to interest expense. For the years ended December 31, 2002, 2001,
and 2000, the amounts reclassified were $360, $317, and $139, respectively.(***)
    
    On January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets and recorded a charge of $50,347 for impairment of
goodwill. If we had applied the non-amortization provisions of SFAS No. 142 prior to January
1, 2002, net earnings and diluted earnings per share would have increased by approximately
$1,289 ($0.15 per share) for the years ended December 31, 2001
and 2000, respectively. 14




---



##### Table of Contents



Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations. In the following discussions, most percentage and dollar amounts have been rounded to aid
presentation; as a result, all such figures are approximations. References to approximations have
generally been omitted. Restatement of Certain 2003 Results As of December 31, 2004 we restated our financial results for the year ended December 31, 2003
to correct an error related to the recording of certain accounts payable. The correction increased
our accounts payable and cost of sales for 2003 by $0.5 million. We also made correcting
adjustments to depreciation expense in order for such amounts in 2003 to be consistent with our
property and equipment accounting policies, which resulted in a reduction of depreciation expense in
2003 of $0.2 million. These corrections in the aggregate reduce previously reported net income for
2003 by $0.2 million, or $0.02 per diluted share. All amounts presented and discussed below
reflect the restatement. General Trends Affecting our Operations In the last several years, MROP requirements of large and middle-market companies have moved
towards a need for services that are customized for each company. In many cases, our customers
needs are centered upon reducing overall MROP costs and increasing operating efficiencies. As a
result, we have targeted sales through our FPS program as the principal growth area of our
business, and our resulting services for many customers extend well beyond the traditional business
of supplying MROP products on a timely basis at a favorable price. In connection with distributing a full line of MROP products to meet the needs of
manufacturers and other industrial users, we offer our customers a wide range of specialized
business process outsourcing services through our FPS programs that relate to product selection and
application and the customers production processes that affect the utilization and costs of MROP
supplies. These service offerings include storeroom management (commonly referred to as integrated
supply), commodity management, bar code inventory replenishment, vending machines, e-business
solutions and consulting services, among others. We were among the first MROP suppliers to offer
these types of storeroom management arrangements to customers who desired to outsource all (or a
substantial portion) of their MROP procurement and management functions. Drawing upon our
experiences with storeroom management and specialized procurement and fulfillment services and our
product knowledge, we have expanded our FPS program to meet the growing demand for a wide variety
of MROP service offerings. As a result of the increased demand for FPS, we have positioned our
sales and marketing efforts to focus on FPS as our major business strategy. We believe the success
of our FPS-focused strategy depends in major part on continued training of our sales and marketing
personnel as well as our successful design and implementation of MROP procurement solutions that
customers desire. As discussed elsewhere in this report, FPS is both a program comprising services that we offer
to our customers as well as our approach to providing those services and MROP products. In the FPS
program, we design and implement solutions individually tailored to accommodate each customers
particular MROP needs. While FPS sales and marketing is our major strategic focus, we continue to
focus substantial attention on general sales of MROP products from stock or on a special order
(non-stock) basis especially to the mid-market customer segment. General MROP sales have
historically been our principal source of revenue, and we expect that they will remain a source of
substantial revenue, even as we increase our FPS sales. A summary review of our sales results for the past three years reflects the trend we see with
respect to the demand for FPS services among our MROP customers, which we believe supports our
recognition of a similar trend within the industry in general. Our total sales for 2004, 2003, and 2002 were $529.2 million, $483.4 million, and $492.5
million, respectively. Of these amounts, FPS sales (including sales pursuant to storeroom
management arrangements) have increased steadily, both in dollar value (even as total sales have
declined) and as a percentage of total sales, as reflected in the following table. We expect the
upward trend in FPS sales to continue for the foreseeable future. 15




---



##### Table of Contents



Year Ended December 31,2004
    
    
    2003
    
    
    2002Net Sales
    
    
    % of Total
    
    
    Net Sales
    
    
    % of Total
    
    
    Net Sales
    
    
    % of Total(dollars in millions)FPS Sales, including storeroom management
    
    $
    289.3
    
    
    
    54.7
    %
    
    $
    250.6
    
    
    
    51.8
    %
    
    $
    219.7
    
    
    
    44.6
    %General MROP Sales
    
    
    239.9
    
    
    
    45.3
    %
    
    
    232.8
    
    
    
    48.2
    %
    
    
    272.8
    
    
    
    55.4
    %Total Net Sales
    
    $
    529.2
    
    
    
    100.0
    %
    
    $
    483.4
    
    
    
    100.0
    %
    
    $
    492.5
    
    
    
    100.0
    %
 Certain Effects of our Increasing FPS Sales We expect that our FPS sales will continue to increase, especially as a percentage of
aggregate sales relative to General MROP sales. We expect this will occur in large part from the
addition of new FPS customers. We also expect the purchasing patterns of our FPS customers to
evolve and change as economic conditions change. As a result of these expected changes in our FPS
sales, we may experience changes relative to prior years in measures such as (i) our cost of sales
as a percentage of net sales and (ii) our selling, general and administrative expenses as a
percentage of net sales. These measures may change because of the nature of the revenue and cost components associated
with FPS sales and General MROP sales. Specifically, in FPS arrangements in which we become the
exclusive or primary supplier of a large volume of MROP products to a customer (as occurs with a
storeroom management contract), we may include management fee revenues designed to cover our
administrative and overhead costs and performance based revenues where we share a portion of the
cost savings we obtain for our customer, commonly referred to as gain sharing. In addition, we
often offer volume discounts on products to the customer as part of the overall arrangement to
achieve mutually beneficial results for the customer and us. In FPS arrangements where we derive a
portion of our revenues from management fees, the mix of product sales versus management fee and
gain sharing revenues can cause our gross margin as a percentage of net sales to be higher even if
our product sales are lower. Conversely, product discounts will yield a slightly lower gross margin
from FPS sales as product volume increases relative to service and gain sharing revenues. The
additional revenue sources from FPS arrangements will tend to increase gross margins if product
volume under these arrangements remains the same relative to General MROP sales. As a result, our
gross margins will most likely decline as this business grows. Currently, our FPS arrangements typically yield a lower gross margin as a percentage of sales
(due to increased product volume) than General MROP sales; however, these arrangements yield a
higher operating margin than General MROP sales because our selling, general and administrative
expenses are lower and more variable in FPS arrangements. At our storeroom management sites, many
of our procurement support functions are performed at the customers facility. We therefore incur
relatively low fixed costs as a percentage of total costs at storeroom management sites in
comparison to our General MROP business, which has a higher fixed cost structure. In addition, the
costs of our associates are billed to our customers at most of our storeroom management sites.
Because our selling, general and administrative expenses at storeroom management arrangements are
variable, we can control them relative to the volume and activity of the site. This control over
expenses leads to higher operating margins in storeroom management arrangements. To a lesser extent
than with storeroom management arrangements, we may experience similar effects in connection with
other FPS services arrangements. 16




---



##### Table of Contents



Results of Operations The following table sets forth a summary of our operating data and shows this data as a
percentage of net sales for the periods indicated: Year Ended December 31,2004
    
    
    2003
    
    
    2002(As Restated)(dollars in thousands)Net sales
    
    $
    529,175
    
    
    
    100.0
    %
    
    $
    483,442
    
    
    
    100.0
    %
    
    $
    492,450
    
    
    
    100.0
    %Cost of sales
    
    
    413,463
    
    
    
    78.1
    %
    
    
    375,549
    
    
    
    77.7
    %
    
    
    383,044
    
    
    
    77.8
    %Gross profit
    
    
    115,712
    
    
    
    21.9
    %
    
    
    107,893
    
    
    
    22.3
    %
    
    
    109,406
    
    
    
    22.2
    %Selling, general, and administrative expenses
    
    
    105,599
    
    
    
    20.0
    %
    
    
    101,518
    
    
    
    21.0
    %
    
    
    103,298
    
    
    
    21.0
    %Operating income
    
    
    10,113
    
    
    
    1.9
    %
    
    
    6,375
    
    
    
    1.3
    %
    
    
    6,108
    
    
    
    1.2
    %Interest expense
    
    
    1,630
    
    
    
    0.3
    %
    
    
    2,278
    
    
    
    0.5
    %
    
    
    3,270
    
    
    
    0.6
    %Interest income
    
    
    (24
    )
    
    
    0.0
    %
    
    
    (21
    )
    
    
    0.0
    %
    
    
    (3
    )
    
    
    0.0
    %Other (income) loss, net
    
    
    (21
    )
    
    
    0.0
    %
    
    
    (30
    )
    
    
    0.0
    %
    
    
    (23
    )
    
    
    0.0
    %Earnings before taxes and cumulative effect
of accounting change
    
    
    8,528
    
    
    
    1.6
    %
    
    
    4,148
    
    
    
    0.8
    %
    
    
    2,864
    
    
    
    0.6
    %Provision for income taxes
    
    
    1,214
    
    
    
    0.2
    %
    
    
    1,787
    
    
    
    0.4
    %
    
    
    1,266
    
    
    
    0.3
    %Earnings before cumulative effect of
accounting change
    
    
    7,314
    
    
    
    1.4
    %
    
    
    2,361
    
    
    
    0.4
    %
    
    
    1,598
    
    
    
    0.3
    %Cumulative effect of accounting change
    
    
    0
    
    
    
    0.0
    %
    
    
    0
    
    
    
    0.0
    %
    
    
    (50,347
    )
    
    
    (10.2
    %)Net earnings (loss)
    
    $
    7,314
    
    
    
    1.4
    %
    
    $
    2,361
    
    
    
    0.4
    %
    
    $
    (48,749
    )
    
    
    (9.9
    %)
 2004 Compared to 2003 Net sales increased $45.7 million, or 9.5%, from $483.4 million in 2003 to $529.2 million in
2004. On a daily sales basis, revenues increased $0.2 million, or 9.9%, over the prior year. Total
FPS sales grew $38.7 million, or 15.4%, to $289.3 million in 2004 as compared to 2003. As a
percentage of total sales, FPS sales increased to 54.7% as compared to 51.8% in the prior year. The
increase in FPS revenues was due to the net increase of 26 FPS sites since December 31, 2003. At
December 31, 2004, we had 341 total FPS sites, including 97 full storeroom management arrangements.
In addition, increased production levels and our efforts to increase market share resulted in
improved sales at existing sites. We also experienced an increase in production levels at many of
our General MROP customers, resulting in an increase in General MROP sales of $7.0 million, or
3.0%, from $232.8 million in 2003 to $239.9 million in 2004. Most of the latter such increase
occurred primarily as a result of increased volume at existing accounts. Cost of sales increased by $37.9 million, or 10.1%, from $375.5 million in 2003 to $413.5
million in 2004. As a percentage of net sales, cost of sales increased from 77.7% in 2003 to 78.1%
in 2004. The greater percentage increase of cost of sales relative to net sales from 2003 to 2004
was primarily the result of lower gross margins on our General MROP sales, which reflects the
results of intense competitive pricing in the market for business. This amount was partially
offset by an incremental $0.3 million in year end rebates, and a
$0.2 decrease in inventory reserves
as compared to the prior year. In addition, approximately 0.1% of the overall decrease in gross
margins was due to the shift in sales mix from General MROP sales towards FPS sales as discussed
above. This is because, as a general matter, our FPS arrangements typically yield a lower gross
margin than do our General MROP sales, due to lower prices in exchange for the exclusive
relationship in these arrangements. On the other hand, our FPS arrangements typically yield a
higher operating margin than General MROP sales because our FPS sales generally have lower fixed
costs. Selling, general and administrative expenses increased $4.1 million, or 4.0%, from $101.5
million in 2003 to $105.6 million in 2004. The increase in selling, general and administrative
expenses in 2004 was primarily the result of an increase of $5.4 million in variable selling
expenses associated with the higher sales volume, including (i) salaries, commissions, and
additional incentives of $4.3 million due to improved operating performance, (ii) 17




---



##### Table of Contents



increased freight and delivery expense of $0.6 million, and (iii) increased travel expenses of
$0.5 million. These additional expenses were partially offset by a decrease in occupancy expense
of $1.3 million due to our facility rationalization program. We now have 41 facilities as compared
to 46 a year ago. Operating income increased $3.7 million, or 58.6%, from $6.4 million in 2003 to $10.1 million
in 2004. This increase was primarily due to the increase in sales volume, which was only partially
offset by a decrease in gross margin and an increase in selling, general, and administrative
expenses as noted above. Interest expense decreased by $0.6 million, or 28.4%, from $2.3 million in 2003 to $1.6
million in 2004. The savings in interest expense was attributable to a 0.5% decrease in the average
monthly interest rate on our Credit Facility since December 31, 2003, as a result of lower LIBOR
rates and favorable pricing due to improved operating results; and to a reduction in the average
amount of long-term debt outstanding during 2004 relative to 2003, to $31.8 million from $37.7
million. The provision for income taxes decreased by $0.6 million from $1.8 million in 2003 to $1.2
million in 2004, or from 43.1% to 14.2%, respectively. The decrease
reflects a $2.6 million reduction of our valuation allowance for our
deferred tax asset associated with future deductible goodwill
amortization and state net operating loss carryforwards, both of
which we believe it is more likely than not we will realize in the
future, as explained in
Note 2 to our financial statements (F-9). That adjustment to our
deferred tax asset was a
non-recurring benefit. Our effective tax rate for 2004 decreased to
14.2% as compared to 43.1% due primarily to the reduction in the
valuation allowance which reduced the tax rate by 30.4% effect of
reduction in our 2004 rate. 2003 Compared to 2002 Net sales decreased $9.0 million, or 1.8%, from $492.5 million in 2002 to $483.4 million in
2003. The decline in sales was directly related to the prolonged downturn in the economy that
affected most of our customer base, but especially our customers in the energy, aerospace and
automotive industries. Many customers in manufacturing sectors reduced production levels further
and experienced more extended plant shutdowns in 2003 as compared to the prior year. In addition,
many local competitors offered discounted prices that appeared more favorable to some customers
than ours, resulting in our loss of market share. As a result of these factors, our General MROP
revenues decreased $40.0 million, or 14.7%, from $272.8 million in 2002 to $232.8 million in 2003.
Partially offsetting the decline in General MROP sales, our total FPS sales increased by $30.9
million, or 14.1%, from $219.7 million in 2002 to $250.6 million in 2003. FPS sales as a percentage
of total sales increased to 51.8%, as compared to 44.6% in the prior year. Specifically, storeroom
management sales accounted for $192.1 million, or 39.7%, of total sales in 2003. During 2003, we
added 13 new storeroom management sites at six new customers, and increased our total to 105
storeroom management sites for 59 customers. Cost of sales decreased by $7.5 million, or 2.0%, from $383.0 million in 2002 to $375.5
million in 2003. As a percentage of net sales, cost of sales decreased slightly from 77.8% in 2002
to 77.7% in 2003. Inventory reserve expense decreased by $1.0 million primarily due to our success
in return-to-vendor programs, which was the driver of the decrease in cost of goods sold as a
percentage of net sales. Although gross margins improved since the prior year, it is important to
note that due to a shift in sales mix from General MROP sales towards FPS sales, there was some
downward pressure on gross margin which we expect will continue as FPS sales grow. This is because
our FPS arrangements typically yield a lower gross margin than do our General MROP sales, due to
lower prices in exchange for the exclusive relationship in these arrangements. On the other hand,
our FPS arrangements typically yield a higher operating margin than General MROP sales because our
FPS sales generally have lower fixed costs. There was also negative impact from competitive
pricing pressure, which made up $0.5 million of the variance. The overall impact of the shift in
mix and pricing pressures was approximately 0.4%, which was more than offset by reduced inventory
expense as mentioned above. Selling, general and administrative expenses decreased $1.8 million, or 1.7%, from $103.3
million in 2002 to $101.5 million in 2003; but as a percentage of net sales, such expenses remained
constant due to lower sales volume. In 2003, we decreased selling, general and administrative
expenses despite the cessation of our company-wide furloughs program, which generated $1.3 million
in temporary savings in 2002. Excluding the effect of furloughs in 2002, selling, general and
administrative expenses decreased by $3.1 million, or 3.0%, as compared to 2002. Salaries and
benefits, excluding the effect of furloughs, were stable in 2003 as compared to the prior year, as
we 18




---



##### Table of Contents



were able to maintain the savings realized in 2002 resulting from headcount reductions made.
Overall, the reduction in selling, general and administrative expenses in 2003 was the combined
result of lower bad debt expense of $1.1 million, lower information technology and
telecommunications expense of $0.7 million due to contract renegotiations, and a $0.7 million
reduction in delivery and freight expense. Additionally, in 2003 we realized savings of $0.3
million in occupancy costs associated with our facility rationalization program and a savings in
depreciation expense of $0.2 million for the year. Operating income increased $0.3 million, or 4.4%, from $6.1 million in 2002 to $6.4 million in
2003. This result was primarily attributable to the reduction of selling, general and
administrative expenses from 2002 to 2003, which was partially offset by the reduction in our sales
volume. Interest expense decreased by $1.0 million, or 30.3%, from $3.3 million in 2002 to $2.3
million in 2003. The significant savings in interest expense was attributable to a 0.9% decrease in
the average monthly interest rate on our credit facility since December 31, 2002, as a result of
lower LIBOR rates; favorable pricing associated with our debt agreement renewal in May 2003; and a
reduction in the average amount of long-term debt outstanding during 2003 relative to 2002, to
$37.7 million from $40.9 million. We also realized $0.1 million of additional savings due to the
pay-off of our premium financing agreement. The provision for income taxes increased by $0.5 million from $1.3 million in 2002 to $1.8
million in 2003, as a result of more profitable operations in 2003. Our tax rate decreased from
44.2% in 2002 to 43.1% in 2003. On
January 1, 2002 we adopted SFAS No. 142, which resulted in a non-cash charge to write-off
goodwill net of accumulated amortization of $50.3 million, which was recorded as a cumulative
effect of accounting change. Liquidity and Capital Resources Capital Availability and Requirements At
January 31, 2005, our total working capital was
$84.2 million, which included
$3.9 million
in cash and cash equivalents. We had $30.5 million outstanding under our $100 million revolving
credit facility with a syndicate of commercial banks (the Credit Facility) and an aggregate of
$69.5 million of borrowing capacity under that facility. Based upon our asset base and outstanding
borrowings under the Credit Facility, we had borrowing capacity of
$28.0 million. Our Credit Facility was amended in 2004 to extend its term to May 28, 2006. The Credit
Facility 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 we may select from time
to time. We incur a fee between 25 and 37.5 basis points on the average daily-unused capacity
during the term. Assets of all our subsidiaries secure the Credit Facility. We are also subject to
certain financial covenants regarding fixed charges coverage, capital expenditures, and tangible
net worth, which could affect our borrowing base under the Credit Facility. Our average borrowing
rate is currently 4.4%. The principal financial covenants under our Credit Facility require a fixed charge coverage
ratio of 1.1:1.0 and capital expenditures of no more than $6.5 million in any twelve-month period.
Our fixed charge coverage ratio was 1.6:1.0 at December 31, 2004, and our capital expenditures were
$1.0 million for the twelve month period ended December 31, 2004. Our covenants require a minimum
tangible net worth of $48.0 million; at December 31, 2004, our tangible net worth was $64.5
million. We are presently in compliance with all covenants under the Credit Facility and anticipate
that we will remain in compliance with the covenants. 19




---



##### Table of Contents



The table below outlines our contractual cash obligations, excluding interest, as they come
due. Payments Due by Period (in thousands)Contractual Obligations
    
    Total
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    ThereafterLong Term Debt
    
    $
    22,281
    
    
    $
    196
    
    
    $
    21,784
    
    
    $
    60
    
    
    $
    52
    
    
    $
    38
    
    
    $
    151Operating Leases
    
    $
    28,677
    
    
    $
    5,545
    
    
    $
    4,863
    
    
    $
    3,864
    
    
    $
    3,209
    
    
    $
    1,799
    
    
    $
    9,397Total Contractual Cash Obligations
    
    $
    50,958
    
    
    $
    5,741
    
    
    $
    26,647
    
    
    $
    3,924
    
    
    $
    3,261
    
    
    $
    1,837
    
    
    $
    9,548
 Our principal ongoing capital requirements at the present time are for servicing our
outstanding debt as reflected in the above table, carrying inventory and accounts receivable, and
purchasing and upgrading information technology and equipment. We believe that cash flow from
operations and the use of available capacity under our Credit Facility will be adequate to meet our
obligations set forth above and to fund both our current operations and anticipated internal
expansion for at least the current year. We may consider a strategic acquisition opportunity if
presented; in such case, cash financing would probably be necessary, and we would need approval
from our current lenders or access to other capital sources in order to do so. Purchase orders or contracts for the purchase of inventory and other goods and services are
not included in the table above. We are not able to determine the aggregate amount of such purchase
orders that represent contractual obligations, as purchase orders may represent authorizations to
purchase rather than binding agreements. Our purchase orders are based on our current distribution
needs and are fulfilled by our vendors within short time horizons. We do not have significant
agreements for the purchase of inventory or other goods specifying minimum quantities or set prices
that exceed our expected requirements for three months. Analysis of Cash Flows On a historical basis, net cash provided by operating activities for fiscal years 2004, 2003,
and 2002 was $7.3 million, $7.4 million, and $10.4 million, respectively. In 2004, cash provided
by operations was primarily the result of the increase in business activity and profitability that
increased net income. Our increase in sales volume in 2004 resulted in more cash used by accounts
receivable; however, this was primarily offset by cash provided by accounts payable due to
increased purchases to service the increased volume. When compared to 2003, overall cash flow from
operations decreased slightly in 2004, but cash flow from operations in 2004 was primarily due to
increased net income from increased sales volume and expansion of our business in 2004. The
comparatively stronger performance in 2003 on this measure, while our sales volume and level of
business activity were lower in 2003 than in 2004, is primarily the result of (i) our improved
working capital management procedures instituted in 2003 that affected both accounts receivable and
inventory and (ii) our facilities rationalization and product management programs. Also in 2003,
cash was used by accounts payable because we lowered purchases to adjust to current sales levels.
From 2003 to 2002, cash flow from operating activities decreased due to the decline in business
activity and corresponding working capital needs. Net cash (used in) provided by investing activities for fiscal years 2004, 2003, and 2002 was
($0.9 million), $2.6 million, and ($0.5 million), respectively. During 2004, we used cash
primarily for the purchase of computers and related IT equipment. During 2003, we received cash of
$3.0 million, net of closing costs, as a result of the sale of three facilities. Cash used for
capital expenditures in 2003 was $0.5 million as compared to $0.6 million in 2002. During 2002, we
used cash in investing activities primarily for capital expenditures. Net cash used in financing activities for fiscal years 2004, 2003, and 2002 was $3.5 million,
$10.1 million, and $9.9 million, respectively. Our primary use of cash in financing activities in
2004 was for repayment of borrowings under our Credit Facility. During 2003, our primary use of
cash in financing activities was for repayment of borrowings under our Credit Facility and payments
under our management liability insurance. Additionally, in 2003 we used $1.2 million of cash to
retire a mortgage associated with the sale of a facility. As compared to 2002, there was a
reduction in 2003 in cash used to pay for the management liability insurance, which was retired in
March 2003. During 2002, we used cash in financing activities primarily for repayment of borrowings
under our Credit facility, and other long-term debt repayments. 20




---



##### Table of Contents



Certain Accounting Policies and Estimates Our consolidated financial statements
have been prepared in accordance with U.S. generally accepted accounting
principles. The preparation of these financial statements
requires our management to make estimates and assumptions that affect: the reported amounts of
assets and liabilities at the date of the financial statements; the disclosure of contingent assets
and liabilities at the date of the financial statements; and the reported amounts of revenues and
expenses during the reporting period. Our management regularly evaluates its estimates and
assumptions. These estimates and assumptions are based on historical experience and on various
other factors that are believed to be reasonable under the circumstances, and form the basis for
making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under different assumptions or
conditions. While our significant accounting policies are described in Note 2 of Notes to Consolidated
Financial Statements, we believe that the following accounting policies and estimates involve a
higher degree of complexity and warrant specific description. Allowance for Doubtful Accounts  Methodology We have established an allowance for uncollectible accounts based on our collection experience
and an assessment of the collectibility of specific accounts. We evaluate the collectibility of
accounts receivable based on a combination of factors. Initially, we estimate an allowance for
doubtful accounts as a percentage of accounts receivable based on historical collections
experience. This initial estimate is periodically adjusted when we become aware of a specific
customers inability to meet its financial obligations (e.g., a bankruptcy filing or announced
insolvency) or as a result of changes in the overall aging of accounts receivable. We do not
believe our estimate of the allowance for doubtful accounts is likely to be adversely affected by
any individual customer, since our customers are geographically disbursed and we have no
individually significant customers. We recorded bad debt expense of $0.8 million, $0.8 million, and
$2.1 million in 2004, 2003, and 2002, respectively. During 2004, 2003, and 2002, we wrote off $2.5
million, $0.3 million, and $0.5 million, respectively, against our reserves for accounts
receivable. The write offs recorded in 2004 reflect a revision in our policy, adopted October 1,
2004, that uncollectible accounts over two years old should be removed from our accounts receivable
balance. This change in policy had no effect on either our results from operations or cash flows.
Our reserve for accounts receivable was approximately $2.1 million and $3.7 million at December 31,
2004 and 2003, or 3.1% and 6.1% of gross receivables, respectively. Inventories  Slow Moving and Obsolescence In connection with certain contracts, we maintain certain special inventories for specific
customers needs. In certain contracts, the customers are required to purchase the special
inventory at the time that the inventory reaches a certain age. However, for other customer
relationships and inventories, we are not protected from the risk of inventory loss. In such cases,
we rely on available return privileges with vendors, if any. Therefore, in determining the net
realizable value of inventories, we identify slow moving or obsolete inventories that (i) are not
protected by our customer agreements from risk of loss, and (ii) are not eligible for return under
various vendor return programs. Based upon these factors, we estimate the net realizable value of
inventories and record any necessary adjustments as a charge to cost of sales. If our inventory
return privileges were discontinued in the future, or if customers were unable to honor the
provisions of certain contracts that protect us from inventory losses, our risk of loss associated
with obsolete or slowing moving inventories would increase. We recorded inventory (recoveries) or
expense for ($0.2 million), ($0.1 million), and $1.0 million, in 2004, 2003 and 2002, respectively.
We wrote off $0.2 million, $1.1 million, and $1.7 million against our reserves for excess and
obsolete inventories during 2004, 2003, and 2002, respectively. Our reserve for obsolete and
slowing moving inventories was approximately $5.2 million and $5.6 million at December 31, 2004 and
2003, or 8.3% and 9.1% of gross inventories, respectively. Impairment of Long-Lived Assets We periodically evaluate property and equipment for potential impairment indicators. Our
judgments regarding the existence of impairment indicators are based on legal factors, market
conditions and operational performance. 21




---



##### Table of Contents



Future events could cause us to conclude that impairment indicators exist and that assets
associated with a particular operation are impaired. Evaluating the impairment also requires us to
estimate future operating results and cash flows, which also require judgment by management. Any
resulting impairment loss could have a material adverse impact on our financial condition and
results of operations. Deferred Income Tax Assets We have net deferred tax assets, which are subject to periodic recoverability assessments. The
factors used to assess the likelihood of realization of these net deferred tax assets are the
reversal of taxable temporary differences, our forecast of future taxable income (which is based
upon estimates and assumptions), and available tax planning strategies that could be implemented to
realize the net deferred tax assets. On the basis of the improved operating results and projections
for future taxable income, we believe it is more likely than not that our future operations will
generate sufficient taxable income to realize our net deferred tax assets. If these estimates and
related assumptions change in the future, we may be required to record an additional valuation
allowance against our deferred tax assets, resulting in additional income tax expense in our
consolidated statements of income. We evaluate the realizability and appropriateness of our
deferred tax assets and liabilities quarterly and assess the need for any valuation allowance
against deferred tax assets. During 2004 we determined that the future tax benefits associated with
deductible goodwill amortization for tax purposes became fully realizable. Due to the extended
reversal period and the uncertainty of projecting future taxable income over this period, the
deferred tax asset associated with the goodwill amortization had been fully reserved for with a
valuation allowance. We made this determination primarily based on our projections of the future
taxable income over the reversal period. This resulted in a $2.0 million (or $0.20 per diluted
share for the year) reduction of the valuation allowance and an associated reduction of income tax
expense for the year. We also reduced the valuation allowance by an additional $0.6 million (or $0.07 per diluted share for the year) for state net operating losses which became fully realizable during the year.
In the future, if it becomes more likely than not that we will be able to
utilize certain deferred tax benefits that are presently reserved with a valuation allowance, or
that there may be certain deferred tax liabilities that arise, we may adjust the valuation
allowance accordingly. In addition, if we experience a decline in earnings in the future, we may have to increase the valuation allowance. The remaining $0.6 million balance in the valuation allowance is for
certain state net operating loss carryforwards. Self insurance and related reserves We are self-insured for certain losses relating to group health, workers compensation, and
casualty losses, subject to stop loss limits. We utilize third party administrators to process and
administer all related claims. We accrue an estimate for incurred but not reported claims and
related expenses based upon historical experience. The accrual for incurred but not reported claims
relating to group health, workers compensation, and casualty losses totaled approximately $1.5
million at December 31, 2004 and December 31, 2003. The accuracy of our accrual for incurred but
not reported claims is entirely dependent on future events that are subject to change. Because we
are self-insured, an increase in the volume or severity of claims in the future may cause us to
record additional expense that was not estimable at December 31, 2004. We are not aware of any
increasing volume or severity of individual claims. 
 Item 7A.Quantitative and Qualitative Disclosures about Market Risk. We believe that our exposures to market risks are immaterial. We hold no market risk sensitive
instruments for trading purposes. At present, we do not employ any derivative financial
instruments, other financial instruments, or derivative commodity instruments to hedge any market
risk, and we have no plans to do so in the future. To the extent we have borrowings outstanding
under our Credit Facility, we are exposed to interest rate risk because of the variable interest
rate under the facility. 
 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 Procedures. None. 22




---



##### Table of Contents



Item 9A.Controls and Procedures. An
evaluation was performed under the supervision and with the
participation of our management, including our President and Chief
Executive Officer and our Senior Vice President and Chief Financial
Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rule 13a-14(c)
under the Securities Exchange Act of 1934 (the Act) as of
the end of the period covered by this report. Based on that
evaluation, our President and Chief Executive Officer and our Senior
Vice President and Chief Financial Officer concluded that our
disclosure controls and procedures were effective as of the end of
the period covered by this report in accumulating and communicating
information to our management, including our President and Chief
Executive Officer and our Senior Vice President and Chief Financial
Officer, as appropriate to allow timely decisions regarding required
disclosures of that information under the Securities and Exchange
Commissions rules and forms and that our disclosure controls
and procedures are designed to ensure that the information we are
required to disclose in reports that we file or submit under the Act
is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commissions
rules and forms. We
point out, however, that the errors we discovered in how one of our
four regional divisions was recording account payable  which
led to the restatement of certain aspects of our 2003 financial
results (and correcting adjustments to our quarterly results for the
first three quarters of 2004) that are reflected and discussed in
Items 6 and 7  were not discovered by our disclosure
controls and procedures as they operated at such earlier times prior
to the end of the period covered by this report. 
 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 2005 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 2005 Annual
Meeting of Stockholders, to be filed with the Commission, is incorporated herein by reference. 
 Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters. The information contained under the headings Voting Securities and Principal Stockholders
and Equity Compensation Awards in the definitive Proxy Statement to be used in connection with
the solicitation of proxies for the Companys 2005 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 2005 Annual
Meeting of Stockholders, to be filed with the Commission, is incorporated herein by reference. 
 Item 14.Principal Accountants Fees and Services The information contained under the heading Independent Auditors in the definitive Proxy
Statement to be used in connection with the solicitation of proxies for the Companys 2005 Annual
Meeting of Stockholders, to be filed with the Commission, is incorporated herein by reference. 23




---



##### Table of Contents



PART IV 
 Item 15.Exhibits and Financial Statement Schedule  The following financial statements and notes thereto and financial statement schedules are filed
as part of this Report: 1. Financial Statements Report of Independent Registered Public
Accounting Firm
    Consolidated Balance Sheets as of
December 31, 2004 and 2003 (as restated).
    Consolidated Statements of Operations for the
years ended December 31, 2004, 2003 (as restated), and 2002.
    Consolidated Statements of Stockholders Equity for the years ended December 
31, 2004, 2003 (as restated), and
 2002.
    Consolidated Statements of Cash Flows for the
years ended December 31, 2004, 2003 (as restated), and 2002.
    Notes to Consolidated Financial Statements and Schedule for the years ended December 31, 2004,
 2003, and 2002. 2. Financial Statement Schedule Schedule II  Valuation and Qualifying Accounts All other schedules have been omitted because any information required is included in the
financial statements or notes. Exhibits The exhibits set forth below are required to be filed with this Report pursuant to Item 601 of
Regulation S-K: ExhibitNumber
    
    Description of Exhibit3.1
    
    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 4.1 of the Companys
Registration Statement on Form 8-A (File No. 001-13195) on
August 31, 2000 is hereby
incorporated by reference)4.2
    
    Certificate of Designation (filed as Exhibit 4.2 of the Companys Current Report on Form
8-K (File No. 001-13195) is hereby incorporated by reference)(*)10.1(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)(*)10.1(b)
    
    Amendment No. 1 to Industrial Distribution Group, Inc. Stock Incentive Plan (filed as
Exhibit 10.5b) of the Companys Annual Report on Form 10-K (File No. D01-131950) on March
31, 1999 is hereby incorporated by reference)(*)10.2
    
    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)10.3
    
    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)(*)10.4
    
    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
 24




---



##### Table of Contents



ExhibitNumber
    
    Description of Exhibitincorporated by reference)10.5(a)
    
    Credit Agreement dated
December 22, 2000 by and between the Company, the lenders listed
therein, and First Union National Bank (filed as Exhibit 10.6 of the Companys Annual
Report on Form
10-K (File No. 001-13195) on March 28, 2001 is hereby incorporated by reference)10.5(b)
    
    Credit Agreement Amendment dated
August 1, 2001 by and between the Company, the lenders
listed therein, and First Union National Bank (filed as Exhibit 10.5(b) of the Companys
Annual Report on Form 10-K (File No. 001-13195) on
March 29, 2002 is hereby incorporated by
reference)10.5(c)
    
    Second Amendment to Credit
Agreement dated May 28, 2003 by and between the Company,
Wachovia Bank, National Association (formerly First Union National Bank) and the lenders
listed therein (filed as Exhibit 10.1 of the Companys Quarterly Report on Form 10-Q (File
No. 001-13195) on July 31, 2003 is hereby incorporated by reference)10.6
    
    Rights Agreement dated as of
August 28, 2000 by and between the Company and American Stock
Transfer & Trust Company (filed as Exhibit 10.1 of the Companys Registration Statement on
Form 8-A (File No. 001-13195) on August 31, 2000 is hereby incorporated by reference)(*)10.7
    
    Form of Restricted Stock Agreements (filed as Exhibit 10.7 of the Companys Annual Report
on Form 10-K (File No. 001-13195) on March 21, 2003 is hereby incorporated by reference)21.1
    
    Subsidiaries of the Company23.1
    
    Consent of Independent Registered Public Accounting Firm31.1
    
    Certification of Chief Executive Officer with respect to the Companys Annual Report on Form
10-K for the fiscal year ended December 31, 2004.31.2
    
    Certification of Chief Financial Officer with respect to the Companys Annual Report on
Form 10-K for the fiscal year ended December 31, 2004.32.1
    
    Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of United States Code by
Chief Executive Officer with respect to the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 2004.32.2
    
    Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of United States Code by
Chief Financial Officer with respect to the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 2004.
   (*)
    
    Management contract or compensatory plan or arrangement required to be filed as an exhibit. 25




---



##### Table of Contents



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 11th
day of March 2005. INDUSTRIAL DISTRIBUTION GROUP, INC.By:
    
    /s/ Andrew B. ShearerAndrew B. Shearer
President and Chief Executive Officer
 Signature
    
    Position/s/ Andrew B. Shearer
    
    President, Chief Executive Officer, and Director
(Principal Executive Officer)Andrew B. Shearer/s/ Jack P. Healey
    
    Senior Vice President, Chief Financial Officer,
and Secretary (Principal Financial and
Accounting Officer)Jack P. Healey/s/ Richard M. SeigelRichard M. Seigel
    
    Chairman of the Board/s/ David K. BarthDavid K. Barth
    
    Director/s/ William J. BurklandWilliam J. Burkland
    
    Director/s/ William R. FenoglioWilliam R. Fenoglio
    
    Director/s/ William T. ParrWilliam T. Parr
    
    Director/s/ George L. Sachs, Jr.George L. Sachs, Jr.
    
    Director
 26




---



##### Table of Contents



INDEX TO FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm
    
    F2Consolidated
Balance Sheets at December 31, 2004 and 2003 (as restated)
    
    F3Consolidated
Statements of Operations for the Years Ended December 31, 2004,
2003 (as restated), and 2002
    
    F4Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2004, 2003 (as restated),
and 2002
    
    F5Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 (as restated), and 2002
    
    F6Notes to Consolidated Financial Statements and Schedule for the Years Ended December 31,
2004, 2003, and 2002
    
    F7Schedule II  Valuation and Qualifying Accounts for the Years Ended December 31, 2004, 2003,
and 2002
    
    F21
 F-1




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors of  We have audited the accompanying consolidated balance sheets of Industrial Distribution Group, Inc.
and Subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of
operations, stockholders equity and cash flows for each of the three years in the period ended
December 31, 2004. Our audits also included the financial statement schedule listed in the Index at
Item 15(a). These consolidated financial statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements and
schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (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 consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and 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 consolidated financial position of Industrial Distribution Group, Inc. and
Subsidiaries at December 31, 2004 and 2003, and the consolidated results of their operations and
their cash flows for each of the three years in the period ending December 31, 2004, in conformity
with U.S. generally accepted accounting principles. Also, in our opinion, the related financial
statement schedule for the three years ended December 31, 2004, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material respects the
information set forth therein. As discussed in Note 1, the Company restated its 2003 financial statements to correct errors
related to the recording of accounts payable, cost of sales, property
and equipment, and depreciation expense. As discussed in Note 2, on
January 1, 2003 the Company changed its method of accounting for
stock-based compensation. In addition, as discussed in Note 2, on January 1, 2002, the Company changed its
method of accounting for goodwill. /s/ Ernst & Young LLP Atlanta, Georgia
March 10, 2005 F-2




---



##### Table of Contents



INDUSTRIAL DISTRIBUTION GROUP, INC.
AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
 DECEMBER 31, 2004 AND 2003
(in thousands, except share data) 2004
    
    
    2003(As Restated-SeeNote 1)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    3,164
    
    
    $
    337Accounts receivable, net
    
    
    64,582
    
    
    
    57,107Inventories, net
    
    
    56,835
    
    
    
    56,011Deferred tax assets
    
    
    4,363
    
    
    
    5,019Prepaid and other current assets
    
    
    6,144
    
    
    
    5,598Total current assets
    
    
    135,088
    
    
    
    124,072PROPERTY AND EQUIPMENT, NET
    
    
    7,277
    
    
    
    7,161INTANGIBLE ASSETS, NET
    
    
    243
    
    
    
    287DEFERRED TAX ASSETS
    
    
    2,463
    
    
    
    784OTHER ASSETS
    
    
    991
    
    
    
    996Total assets
    
    $
    146,062
    
    
    $
    133,300LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Current portion of long-term debt
    
    $
    196
    
    
    $
    185Accounts payable
    
    
    47,960
    
    
    
    39,669Accrued compensation
    
    
    4,095
    
    
    
    2,231Other accrued liabilities
    
    
    5,615
    
    
    
    7,279Total current liabilities
    
    
    57,866
    
    
    
    49,364LONG-TERM DEBT, NET OF CURRENT PORTION
    
    
    22,085
    
    
    
    26,348OTHER LONG TERM LIABILITIES
    
    
    1,328
    
    
    
    1,190Total liabilities
    
    
    81,279
    
    
    
    76,902COMMITMENTS AND CONTINGENCIES (NOTE 10)STOCKHOLDERS EQUITY (NOTE 13):Preferred stock, $0.10 par value per share;
10,000,000 shares authorized, no shares issued
or outstanding in 2004 and 2003
    
    
    0
    
    
    
    0Common stock, $0.01 par value per share;
50,000,000 shares authorized, 9,343,850 issued
and outstanding in 2004, 9,187,735 shares
issued and outstanding in 2003
    
    
    93
    
    
    
    92Additional paid-in capital
    
    
    100,700
    
    
    
    99,342Unearned compensation
    
    
    (405
    )
    
    
    (117
    )Accumulated deficit
    
    
    (35,605
    )
    
    
    (42,919
    )Total stockholders equity
    
    
    64,783
    
    
    
    56,398Total liabilities and stockholders equity
    
    $
    146,062
    
    
    $
    133,300
 The accompanying notes are an integral part of these consolidated balance sheets. F-3




---



##### Table of Contents



INDUSTRIAL DISTRIBUTION GROUP, INC.
AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
(in thousands, except share data) 2004
    
    
    2003
    
    
    2002(As Restated-SeeNote 1)NET SALES
    
    $
    529,175
    
    
    $
    483,442
    
    
    $
    492,450COST OF SALES
    
    
    413,463
    
    
    
    375,549
    
    
    
    383,044Gross profit
    
    
    115,712
    
    
    
    107,893
    
    
    
    109,406SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
    
    
    105,599
    
    
    
    101,518
    
    
    
    103,298Operating income
    
    
    10,113
    
    
    
    6,375
    
    
    
    6,108INTEREST EXPENSE
    
    
    1,630
    
    
    
    2,278
    
    
    
    3,270INTEREST INCOME
    
    
    (24
    )
    
    
    (21
    )
    
    
    (3
    )OTHER INCOME, NET
    
    
    (21
    )
    
    
    (30
    )
    
    
    (23
    )EARNINGS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE,
AND INCOME TAXES
    
    
    8,528
    
    
    
    4,148
    
    
    
    2,864PROVISION FOR INCOME TAXES
    
    
    1,214
    
    
    
    1,787
    
    
    
    1,266EARNINGS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE
    
    
    7,314
    
    
    
    2,361
    
    
    
    1,598CUMULATIVE EFFECT OF ACCOUNTING CHANGE
    
    
    0
    
    
    
    0
    
    
    
    (50,347
    )NET EARNINGS (LOSS)
    
    $
    7,314
    
    
    $
    2,361
    
    
    $
    (48,749
    )EARNINGS (LOSS) PER COMMON SHARE:BasicEarnings before cumulative effect of accounting change
    
    $
    0.78
    
    
    $
    0.26
    
    
    $
    0.18Cumulative effect of accounting change
    
    
    0.00
    
    
    
    0.00
    
    
    
    (5.71
    )Net earnings (loss)
    
    $
    0.78
    
    
    $
    0.26
    
    
    $
    (5.53
    )DilutedEarnings before cumulative effect of accounting change
    
    $
    0.75
    
    
    $
    0.26
    
    
    $
    0.18Cumulative effect of accounting change
    
    
    0.00
    
    
    
    0.00
    
    
    
    (5.62
    )Net earnings (loss)
    
    $
    0.75
    
    
    $
    0.26
    
    
    $
    (5.44
    )WEIGHTED AVERAGE SHARES:Basic
    
    
    9,339,276
    
    
    
    8,991,822
    
    
    
    8,823,982Diluted
    
    
    9,704,243
    
    
    
    9,141,049
    
    
    
    8,962,003
 The accompanying notes are an integral part of these consolidated statements of operations. F-4




---



##### Table of Contents



INDUSTRIAL DISTRIBUTION GROUP, INC.
AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
(in thousands, except share data) ADDITIONAL
    
    
    
    
    
    
    ACCUMULATEDCOMMON STOCK
    
    
    PAID-IN
    
    
    UNEARNED
    
    
    EARNINGSSHARES
    
    
    AMOUNT
    
    
    CAPITAL
    
    
    COMPENSATION
    
    
    (DEFICIT)
    
    
    TOTALBALANCE, DECEMBER 31, 2001
    
    
    8,724,184
    
    
    $
    87
    
    
    $
    97,579
    
    
    $
    0
    
    
    $
    3,469
    
    
    $
    101,135Issuance of shares pursuant to
executive restricted stock
agreement
    
    
    0
    
    
    
    0
    
    
    
    246
    
    
    
    (246
    )
    
    
    0
    
    
    
    0Sale of shares through employee
stock purchase plan
    
    
    133,638
    
    
    
    1
    
    
    
    224
    
    
    
    0
    
    
    
    0
    
    
    
    225Stock options exercised
    
    
    2,251
    
    
    
    0
    
    
    
    4
    
    
    
    0
    
    
    
    0
    
    
    
    4Amortization of unearned
compensation
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    45
    
    
    
    0
    
    
    
    45Net loss
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (48,749
    )
    
    
    (48,749
    )BALANCE, DECEMBER 31, 2002
    
    
    8,860,073
    
    
    
    88
    
    
    
    98,053
    
    
    
    (201
    )
    
    
    (45,280
    )
    
    
    52,660Sale of shares through employee
stock purchase plan
    
    
    93,719
    
    
    
    1
    
    
    
    233
    
    
    
    0
    
    
    
    0
    
    
    
    234Stock options exercised
    
    
    233,943
    
    
    
    3
    
    
    
    836
    
    
    
    0
    
    
    
    0
    
    
    
    839Stock based
compensation
    
    
    0
    
    
    
    0
    
    
    
    40
    
    
    
    0
    
    
    
    0
    
    
    
    40Tax benefit from stock options
exercised
    
    
    0
    
    
    
    0
    
    
    
    180
    
    
    
    0
    
    
    
    0
    
    
    
    180Amortization of unearned
compensation
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    84
    
    
    
    0
    
    
    
    84Net earnings
(As Restated-See Note 1)
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    2,361
    
    
    
    2,361BALANCE, DECEMBER 31, 2003 (As
Restated-See Note 1)
    
    
    9,187,735
    
    
    
    92
    
    
    
    99,342
    
    
    
    (117
    )
    
    
    (42,919
    )
    
    
    56,398Issuance of shares pursuant to
executive restricted stock
agreement
    
    
    0
    
    
    
    0
    
    
    
    433
    
    
    
    (433
    )
    
    
    0
    
    
    
    0Sale of shares through employee
stock purchase plan
    
    
    59,481
    
    
    
    0
    
    
    
    280
    
    
    
    0
    
    
    
    0
    
    
    
    280Stock options exercised
    
    
    96,634
    
    
    
    1
    
    
    
    314
    
    
    
    0
    
    
    
    0
    
    
    
    315Stock based
compensation
    
    
    0
    
    
    
    0
    
    
    
    137
    
    
    
    0
    
    
    
    0
    
    
    
    137Tax benefit from stock options
exercised
    
    
    0
    
    
    
    0
    
    
    
    225
    
    
    
    0
    
    
    
    0
    
    
    
    225Adjustment to deferred
compensation for cancellations
    
    
    0
    
    
    
    0
    
    
    
    (31
    )
    
    
    31
    
    
    
    0
    
    
    
    0Amortization of unearned
compensation
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    114
    
    
    
    0
    
    
    
    114Net earnings
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    7,314
    
    
    
    7,314BALANCE, DECEMBER 31, 2004
    
    
    9,343,850
    
    
    $
    93
    
    
    $
    100,700
    
    
    $
    (405
    )
    
    $
    (35,605
    )
    
    $
    64,783
 The accompanying notes are an integral part of these consolidated statements. F-5




---



##### Table of Contents



INDUSTRIAL DISTRIBUTION GROUP, INC.
AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
(in thousands) 2004
    
    
    2003
    
    
    2002(As Restated-SeeNote 1)CASH FLOWS FROM OPERATING ACTIVITIES:Net earnings (loss)
    
    $
    7,314
    
    
    $
    2,361
    
    
    $
    (48,749
    )Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:Depreciation and amortization
    
    
    909
    
    
    
    2,305
    
    
    
    2,810Amortization of unearned compensation
    
    
    114
    
    
    
    84
    
    
    
    45Gain on sale of assets
    
    
    (66
    )
    
    
    (404
    )
    
    
    (43
    )Deferred income taxes
    
    
    (1,023
    )
    
    
    597
    
    
    
    1,087Income tax benefit of stock options exercised
    
    
    225
    
    
    
    180
    
    
    
    0Impairment of goodwill
    
    
    0
    
    
    
    0
    
    
    
    50,347Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (7,475
    )
    
    
    523
    
    
    
    2,117Inventories, net
    
    
    (824
    )
    
    
    1,554
    
    
    
    4,342Prepaids and other assets
    
    
    (561
    )
    
    
    (959
    )
    
    
    1,722Accounts payable
    
    
    8,291
    
    
    
    (582
    )
    
    
    (2,266
    )Accrued compensation
    
    
    1,864
    
    
    
    352
    
    
    
    307Other accrued liabilities
    
    
    (1,513
    )
    
    
    1,373
    
    
    
    (1,297
    )Total adjustments
    
    
    (59
    )
    
    
    5,023
    
    
    
    59,171Net cash provided by operating activities
    
    
    7,255
    
    
    
    7,384
    
    
    
    10,422CASH FLOWS FROM INVESTING ACTIVITIES:Additions to property and equipment, net
    
    
    (1,040
    )
    
    
    (495
    )
    
    
    (613
    )Proceeds on sale of investments
    
    
    5
    
    
    
    0
    
    
    
    0Proceeds from the sale of property and equipment
    
    
    127
    
    
    
    3,055
    
    
    
    72Net cash (used in) provided by investing activities
    
    
    (908
    )
    
    
    2,560
    
    
    
    (541
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of common stock, net of issuance cost
    
    
    732
    
    
    
    1,113
    
    
    
    229Repayments on revolving credit facility
    
    
    (113,160
    )
    
    
    (125,350
    )
    
    
    (151,665
    )Borrowings on revolving credit facility
    
    
    109,010
    
    
    
    117,300
    
    
    
    145,965Short-term debt borrowings
    
    
    11
    
    
    
    0
    
    
    
    0Long-term debt repayments
    
    
    (113
    )
    
    
    (1,780
    )
    
    
    (699
    )Premium payments on management liability insurance
    
    
    0
    
    
    
    (930
    )
    
    
    (3,720
    )Deferred loan costs and other
    
    
    0
    
    
    
    (412
    )
    
    
    (15
    )Net cash used in financing activities
    
    
    (3,520
    )
    
    
    (10,059
    )
    
    
    (9,905
    )NET CHANGE IN CASH AND CASH EQUIVALENTS
    
    
    2,827
    
    
    
    (115
    )
    
    
    (24
    )CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    
    
    337
    
    
    
    452
    
    
    
    476CASH AND CASH EQUIVALENTS, END OF YEAR
    
    $
    3,164
    
    
    $
    337
    
    
    $
    452SUPPLEMENTAL DISCLOSURES:Interest paid
    
    $
    1,289
    
    
    $
    1,588
    
    
    $
    2,048Income taxes paid (refunded)
    
    $
    4,478
    
    
    $
    (550
    )
    
    $
    (744
    )
 The accompanying notes are in integral part of these consolidated statements. F-6




---



##### Table of Contents



INDUSTRIAL DISTRIBUTION GROUP, INC.
AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE DECEMBER 31, 2004, 2003, AND 2002
 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 all 50 states and two foreign countries,
providing expertise in the procurement, management, and application of MROP products to a wide
range of industries. Basis of Presentation The consolidated financial statements include the accounts of the Company and its subsidiaries,
all of which are wholly-owned. All significant intercompany accounts and transactions have been
eliminated in consolidation. Certain amounts in the 2002 financial statements were reclassified to conform to the 2003
presentation. The effects of the reclassifications on the overall financial statement
presentation are not significant, except for the items discussed below. In the 2002 statement of
operations, the Company reclassified the amortization of deferred loan costs of approximately
$360,000 from selling, general and administrative expenses to interest expense. Restatement of Fiscal Year 2003 The Company restated its financial results for the year ended December 31, 2003 due to the
correction of an error related to the recording of certain accounts payable. The correction
increased the Companys accounts payable and cost of sales for 2003 by $496,000. The Company
also made correcting adjustments to its depreciation expense in order for prior periods to be
consistent with the Companys property and equipment accounting policies, which resulted in a reduction of
depreciation expense and an increase of net property and equipment in 2003 of $155,000. For fiscal year
2003, these corrections in the aggregate reduced the Companys previously reported net income by
$195,000, or $0.02 per diluted share. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates, and the differences could be
material. Cash Equivalents The Company considers all short-term investments with original maturities of three months or
less to be cash equivalents. F-7




---



##### Table of Contents



Accounts Receivable Accounts receivable is composed of trade receivables that are credit based and do not require
collateral. An allowance for doubtful accounts has been established based on the Companys
collection experience and an assessment of the collectibility of specific accounts. The Company
evaluates the collectibility of accounts receivable based on a combination of factors.
Initially, the Company estimates an allowance for doubtful accounts as a percentage of accounts
receivable based on historical collections experience. This initial estimate is periodically
adjusted when the Company becomes aware of a specific customers inability to meet its financial
obligations (e.g., bankruptcy filing) or as a result of changes in the overall aging of accounts
receivable. On October 1, 2004 the company implemented a policy to write-off all uncollectible
accounts past due for more than a two-year period. As a result of the policy, $1,315,000 in
fully reserved accounts receivable was written off against the
allowance for doubtful accounts. During 2004, 2003, and 2002, the Company
incurred bad debt expense related to trade receivables of $799,000, $843,000, and $2,117,000,
respectively. The allowance for doubtful accounts amounted to $2,055,000 and $3,719,000 as of
December 31, 2004 and 2003, 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. In determining the net realizable value, the Company identifies slow
moving or obsolete inventories that are not eligible for return under various vendor return
programs and estimates appropriate loss provisions related thereto. Management evaluates the
adequacy of the loss provisions regularly, with any adjustments charged to cost of sales. We
recorded inventory (recoveries) or expense for ($217,000), ($55,000), and $1,029,000, in 2004,
2003 and 2002, respectively. The reserve for obsolete and slow moving inventories was $5,168,000
and $5,597,000 as of December 31, 2004 and 2003, respectively. Property and Equipment Property and equipment are recorded at cost. Expenditures for repairs and maintenance are
expensed 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 statement of operations. Depreciation is computed using the straight-line
method over the following estimated useful lives: Buildings and improvements
    
    40 yearsLeasehold improvements
    
    Lesser of useful life or the lease termFurniture, fixtures, and equipment
    
    5-10 yearsComputer hardware and software
    
    3-5 years
 Goodwill and Other Intangible Assets The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, 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 on January 1, 2002 associated with the
adoption of SFAS No. 142. 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. F-8




---



##### Table of Contents



At December 31, 2004 and 2003, accumulated amortization of intangible assets was $428,000 and
$384,000, respectively. The aggregate estimated amortization expense related to other
identifiable intangible assets for the years 2005 to 2009 is $213,000. The net carrying value of
the intangible assets was $243,000 and $287,000 as of December 31, 2004 and 2003, respectively. Long-Lived Assets The Company assesses its long-lived assets for impairment whenever facts and circumstances
indicate that the carrying amount may not be fully recoverable in accordance with SFAS No. 144,
Accounting for the Impairment of Long-Lived Assets. To analyze recoverability, the Company
projects undiscounted net future cash flows over the remaining life of such assets. If these
projected cash flows were less than the carrying amount, impairment would be recognized,
resulting in a write-down of assets with a corresponding charge to earnings. Impairment losses,
if any, are measured based upon the difference between the carrying amount and the fair value of
the assets. Management believes the long-lived assets in the accompanying consolidated balance
sheets are fairly valued. Income Taxes The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income
Taxes which requires that deferred tax assets and liabilities be recognized using currently
enacted tax rates for the effect of temporary differences between the book and tax bases of
recorded assets and liabilities. SFAS No. 109 also requires that deferred tax assets be reduced
by a valuation allowance if it is more likely than not that some portion or all of the deferred
tax asset will not be realized. The Company currently has significant deferred tax assets, which
are subject to periodic recoverability assessments. The realization of the Companys deferred tax
assets is principally dependent upon the Company being able to generate sufficient future taxable
income in certain tax jurisdictions. Factors used to assess the likelihood of realization are
the Companys forecast of future taxable income (which is based upon estimates and assumptions)
and available tax planning strategies that could be implemented to realize the net deferred tax
assets. On the basis of the Companys operating results and projections for future taxable
income, management believes it is more likely than not that future operations will generate
sufficient taxable income to realize the deferred tax assets. During 2004, the Company
determined that it is more likely than not that future tax benefits associated with certain state
tax net operating loss carryforwards and deductible goodwill amortization for tax purposes will
be realizable. The deferred tax assets associated with certain state net operating loss
carryforwards and future goodwill amortization had been fully reserved with a valuation allowance
primarily due to the assets extended reversal period and the uncertainty of future taxable income
over this period. The Company made the determination to reverse the valuation allowance
primarily based on our current taxable income and projections of future taxable income over the
reversal period. This resulted in a $2,595,000 ($0.27 per diluted share for the year) reduction
of the valuation allowance and an associated reduction of the provision for income tax expense.
The valuation allowance for net deferred tax assets was $561,000 and $3,156,000 as of December
31, 2004 and 2003, respectively. The valuation allowance for deferred tax assets at December 31,
2004 is primarily for state net operating loss carryforwards for which the Company believes
sufficient taxable income will not be realized prior to expiration. Deferred Loan Costs The Company capitalizes incremental and direct costs associated with the issuance of debt. These
costs include legal fees, due diligence fees, and similar items. Deferred loan costs are
amortized over the life of the related debt instrument and are classified as a non-current asset
on the accompanying consolidated balance sheets. Amortization expense related to deferred loan
costs for the years ended December 31, 2004, 2003, and 2002 was $240,000, $288,000, and $360,000,
respectively. Such amortization is classified as interest expense in the accompanying statements
of operations. As of December 31, 2004 and 2003, the net book value of
the Companys deferred loan costs was $340,000, and $579,000, respectively. F-9




---



##### Table of Contents



Revenue Recognition Revenue is recognized on sales of products at the time title and risk of loss pass to the buyer.
Title and risk of loss pass to the buyer in three ways. In the majority of circumstances, title
and risk of loss pass to the buyer at the time of shipment. In other circumstances, such as
consignment inventory agreements, title and risk of loss pass to the buyer at time of requisition
of the good for use. For goods that are shipped direct from the supplier, title and risk pass to
the buyer based on the suppliers shipping terms. Volume Rebates In circumstances where the Company offers volume rebates to customers, those volume rebates are
estimated at the time of sale and netted against revenues earned. Volume rebates received from
vendors are recorded as a reduction of cost of sales at the time the rebate is estimated to be
earned and appropriate provisions are made in the pricing of inventory to account for the
reduction in cost. Shipping and Handling Costs The Companys freight-in is recorded in cost of sales and freight-out is included in selling,
general, and administrative expenses. Freight-out totaled $5,067,000, $4,425,000, and $4,421,000,
for the years ended December 31, 2004, 2003, and 2002, respectively. Financial Instruments The Companys carrying value of financial instruments approximates fair value due to the short
maturity of those instruments (cash, trade receivables, accounts payable, and accrued
liabilities), or, in the case of debt, due to the instrument having a variable interest rate.
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 5% of the Companys accounts receivable or
sales for the periods presented. The Companys international sales represent less than 1% of
sales for the periods presented. Insurance Reserves The Company is self-insured for certain losses relating to group health, workers compensation,
and casualty losses, subject to specific aggregate stop loss limits. Third-party administrators
are used to process and administer all related claims. The Company accrues an estimate for
insurance expense on a monthly basis based upon the claim estimates. The Companys insurance
liability for incurred but not reported or unpaid claims is estimated based on the Companys
historical actual claims experience rate. Stock-Based Compensation The Company has stock-based employee compensation plans, described more fully in Note 8. Prior to
2003, the Company accounted for these plans under Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee
compensation cost was reflected in 2002 net earnings, as all options granted under those plans
had an intrinsic value of zero on the date of grant. Effective January 1, 2003, the Company
adopted the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based
Compensation. Under the prospective method of adoption selected by the Company under the
provisions of SFAS No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure, the recognition provisions has been applied to all employee awards granted,
modified, or settled after January 1, 2003. The expense related to stock-based compensation included in the determination of net earnings for
2004 will be less than that which would have been recognized if the fair value method had been
applied to all awards granted after the original effective date of SFAS No. 123. If the Company
had elected to adopt the fair value of F-10




---



##### Table of Contents



recognition provisions of SFAS No. 123 as of its original
effective date, pro forma net earnings and diluted net earnings per share would be as follows (in
thousands, except per share data): 2004
    
    
    2003
    
    
    2002(As Restated-SeeNote 1)Net earnings (loss) as reported
    
    $
    7,314
    
    
    $
    2,361
    
    
    $
    (48,749
    )Add: Total stock-based compensation
expense included in the determination of
net earnings as reported, net of tax
    
    
    208
    
    
    
    88
    
    
    
    25Deduct: Total stock-based compensation
expense determined under fair-value
based method for all awards, net of tax
    
    
    429
    
    
    
    413
    
    
    
    380Pro forma net earnings (loss)
    
    $
    7,093
    
    
    $
    2,036
    
    
    $
    (49,104
    )Basic earnings (loss) per common share:As reported
    
    $
    0.78
    
    
    $
    0.26
    
    
    $
    (5.53
    )Pro forma
    
    $
    0.76
    
    
    $
    0.23
    
    
    $
    (5.56
    )Diluted earnings (loss) per common share:As reported
    
    $
    0.75
    
    
    $
    0.26
    
    
    $
    (5.44
    )Pro forma
    
    $
    0.73
    
    
    $
    0.22
    
    
    $
    (5.54
    )
 Segments SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, requires
that an enterprise disclose certain information about operating segments. The Company considers
its entire business as one operating segment for purposes of SFAS No. 131. New Accounting Pronouncements The Company adopted the fair-value-based method of accounting for share-based payments effective
January 1, 2003 using the prospective method described in SFAS No. 148.Currently, the Company
uses the Black-Scholes-Merton formula to estimate the value of stock options granted to employees
and expects to continue to use this acceptable option valuation model upon the required adoption
Statement 123(R ) on July 1, 2005. Because Statement 123(R ) must be applied not only to new
awards but to previously granted awards that are not fully vested on the effective date, and
because the Company adopted Statement 123 using the prospective transition method (which applied
only to awards granted, modified or settled after the adoption date), compensation cost for some
previously granted awards that were not recognized under Statement 123 will be recognized under
Statement 123(R ). However, had we adopted Statement 123(R ) in prior periods, the impact of
that standard would have approximated the impact of Statement 123 as described in the disclosure
of pro forma net earnings (loss) per common share in Note 2 to the Companys consolidating
financial statements. Statement 123(R ) also requires the benefits of tax deductions in excess
of recognized compensation cost to be reported as a financing cash flow, rather than as an
operating cash flow as required under current literature. This requirement will reduce net
operating cash flows and increase net financing cash flows in periods after adoption. While the
Company cannot estimate what those amounts will be in the future (because they depend on, among
other things, when employees exercise stock options), the amount of operating cash flows
recognized for such excess tax deductions were $225,000, $180,000, and $0 in 2004, 2003, and
2002, respectively. In January 2003, the FASB issued Interpretation 46 (FIN 46), Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51. In December 2003, the FASB issued a revised
Interpretation of FIN 46 (Revised Interpretation). FIN 46 requires certain variable interest
entities to be consolidated by the primary beneficiary of the entity if the equity investors in
the entity do not have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities
created or acquired after January 31, 2003. For variable interest entities created or acquired
prior to February 1, 2003, the provisions of the Revised Interpretation must be applied for the
Companys first interim period ending after March 15, 2004. The Companys adoption of FIN 46 had
no impact on the Companys financial position or consolidated F-11




---



##### Table of Contents



statements of operations as a
result of the adoption. The Company currently does not have relationships that require
consolidation or disclosure about variable interest entities. 3. DIVESTITURES During 2000, the Company divested of an operating subsidiary for a total consideration of
$1,580,000 in the form of a note receivable. During 2002, the purchaser defaulted on the note.
In 2004, the Company recovered collateral with a value of approximately $150,000 from the
purchaser. In addition, in 2004, the Company assigned the remainder of the note to a third party
in return for a note receivable in the amount of $1,000,000, before discounting. The Company received a payment in the amount of $300,000 in 2004 and of the remaining $700,000 of the note
receivable, $450,000 is classified as an other current asset and $250,000 is classified as an
other asset on the accompanying balance sheet as of December 31, 2004 at fair value. In 2004,
the Company wrote off the uncollectible portion of the original note receivable of approximately
$430,000 against reserves established in prior years. 4. PROPERTY AND EQUIPMENT Property and equipment consisted of the following at December 31, 2004 and 2003 (in
thousands): 2004
    
    
    2003(As Restated-SeeNote 1)Land, building, and improvements
    
    $
    4,639
    
    
    $
    3,872Leasehold improvements
    
    
    2,733
    
    
    
    2,445Furniture, fixtures, and equipment
    
    
    6,974
    
    
    
    7,467Computer hardware and software
    
    
    3,899
    
    
    
    3,993Total property and equipment
    
    
    18,245
    
    
    
    17,777Less accumulated depreciation
    
    
    (10,968
    )
    
    
    (10,616
    )Property and equipment, net
    
    $
    7,277
    
    
    $
    7,161
 Depreciation expense totaled $865,000, $1,957,000 (As Restated -See Note 1), and $2,385,000 for
the years ended December 31, 2004, 2003, and 2002, respectively. 5. SALE OF PROPERTY During 2003, the Company sold properties located in Bridgeport, Connecticut, Tucker, Georgia,
and Tacoma, Washington, in a continued effort to consolidate warehouse facilities and reduce
assets. Collectively, these properties sold for $3,019,000, net of closing costs. Costs
associated with these closings were expensed as incurred. The cumulative gain of $568,000 and
associated relocation and severance costs of $353,000 related to these transactions are reported
in selling, general, and administrative expenses in the December 31, 2003 consolidated statement
of operations. 6. LONG-TERM DEBT At December 31, 2004 and 2003, long-term debt consisted of the following (in thousands): 2004
    
    
    2003Revolving credit facility (Note 7)
    
    $
    21,700
    
    
    $
    25,850Other
    
    
    581
    
    
    
    683Total debt
    
    
    22,281
    
    
    
    26,533Less current portion
    
    
    (196
    )
    
    
    (185
    )Total long-term debt
    
    $
    22,085
    
    
    $
    26,348
 F-12




---



##### Table of Contents



Maturities of long-term debt as of December 31, 2004 are as follows (in thousands): 2005
    
    $
    1962006
    
    
    21,7842007
    
    
    602008
    
    
    522009
    
    
    38Thereafter
    
    
    151$
    22,281
 For the years ended December 31, 2004, 2003, and 2002, the Company incurred interest expense of
$1,630,000, $2,278,000, and $3,270,000, respectively. 7. REVOLVING CREDIT FACILITY In December 2000, the Company entered into a $100,000,000 revolving credit facility with a five
financial institution syndicate. On May 28, 2004, the Company amended this agreement to extend
it to May 28, 2006. The agreement contains a first security interest in the assets of the
Company. The agreement provides that the facility may be used for operations and acquisitions,
and provides $5,000,000 for swinglines and $10,000,000 for letters of credit. Amounts
outstanding under the credit facility bear interest at either the lead banks corporate rate or
LIBOR, as selected by the Company from time to time, plus applicable margins. This rate was 4.7%
and 3.8% at December 31, 2004 and 2003, respectively. There is an annual commitment fee on the
unused portion of the facility equal to between 25 and 37.5 basis points of the average daily
unused portion of the aggregate commitment depending on the indebtedness to adjusted EBITDA
ratio, as defined. Commitment fees totaled $173,000 and $227,000 in 2004 and 2003, respectively. The amounts
outstanding under the facility at December 31, 2004 and 2003 were $21,700,000 and $25,850,000,
respectively, which have been classified as long-term liabilities in the consolidated balance
sheets. Additionally, the Company had outstanding letters of credit of $2,050,000 and $2,199,000
under the facility at December 31, 2004 and 2003, respectively. The revolving credit facility
contains various covenants pertaining to the maintenance of certain financial ratios. These
covenants include requirements for interest coverage, net worth, and capital expenditures, among
other restrictions. The covenants also prohibit the payment of cash dividends. The Company was
in compliance with these covenants as of December 31, 2004 and 2003. 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. In August 2000, the Board of Directors designated 1,000,000 shares of the Companys previously
authorized 10,000,000 shares of preferred stock as Series A Participating Cumulative Preferred
Stock, as required for the Stockholder Rights Plan. There was no preferred stock issued or
outstanding at December 31, 2004 and 2003. F-13




---



##### Table of Contents



Stockholder Rights Plan In August 2000, the Company adopted a stockholder rights plan. The plan entailed a dividend on
August 30, 2000 of one right for each outstanding share of the Companys common stock. Each right
entitles the holder to buy one one-hundredth of a share of the new Series A Participating
Cumulative Preferred Stock at an exercise price of $12.00 per right, or, in certain
circumstances, to acquire common stock of an acquirer. Each one one-hundredth of a share of such
preferred stock would be essentially the economic equivalent of a share of the Companys common
stock. The rights will trade with the Companys common stock until exercisable. The rights will
not be exercisable until ten calendar days following a public announcement that a person or group
has acquired 20% of the Companys common stock, or, if any person or group has acquired such an
interest, the acquisition by that person or group of an additional 2% of the Companys common
stock. The Company will generally be entitled to redeem the rights at $.001 per right at any time
until the date of public announcement that shares resulting in a 20% stock position have been
acquired, and in certain other circumstances. The rights have no voting power, and until
exercised, no dilutive effect on net earnings per common share. Common Stock Options are included in the computation of diluted earnings per share (EPS) where the options
exercise price is less than the average market price of the common shares during the period.
Common equivalent shares from stock options and restricted stock awards during the years ended
December 31, 2004, 2003, and 2002 had a dilutive effect of 364,967, 149,227, and 138,021 shares,
respectively, to the weighted average common shares outstanding using the treasury stock method.
During 2004, 2003, and 2002, options where the exercise price exceeded the average market price
of the common shares totaled 57,295, 376,861, and 812,932, respectively. The options expire ten
years from the date of grant and vest ratably over three-to-four year periods. At December 31,
2004, the Company has several stock-based compensation plans, which are described below. The total fair value of options granted in 2004, 2003, and 2002 was $181,000, $43,000, and
$589,000, respectively. The weighted average fair value of the options on the date of grant in
2004, 2003, and 2002 was $3.61, $1.87, and $1.90, respectively. The fair value of each option
grant was estimated on the date of grant using the
Black-Scholes-Merton
option-pricing model with the following weighted average assumptions: 2004
    
    
    2003
    
    
    2002Expected life (years)
    
    
    7
    
    
    
    7
    
    
    
    7Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected stock price volatility
    
    
    56
    %
    
    
    58
    %
    
    
    59
    %Risk-free interest rate (low-high)
    
    
    3.17% - 4.51
    %
    
    
    3.62
    %
    
    
    3.40% - 4.90
    %
 The Black-Scholes-Merton option-pricing model was developed for use in estimating the fair value of
traded options, which have no vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective assumptions including the expected
stock price volatility. Because the Companys employee stock options have characteristics
significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect the fair value estimate, in
managements opinion, the existing models do not necessarily provide a reliable single measure of
the fair value of its employee stock options. 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 F-14




---



##### Table of Contents



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. The
Company currently has 254,081 shares available for issue under the stock incentive plan. Incentive stock options are subject to certain limitations prescribed by the Internal Revenue
Code and generally may not be exercised more than ten 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, 2004, 2003, and 2002 and
changes during the years then ended is presented in the table below: 2004
    
    
    2003
    
    
    2002WEIGHTED-
    
    
    
    
    
    
    WEIGHTED-
    
    
    
    
    
    
    WEIGHTED-AVERAGE
    
    
    
    
    
    
    AVERAGE
    
    
    
    
    
    
    AVERAGEEXERCISE
    
    
    
    
    
    
    EXERCISE
    
    
    
    
    
    
    EXERCISESHARES
    
    
    PRICE
    
    
    SHARES
    
    
    PRICE
    
    
    SHARES
    
    
    PRICEOutstanding at beginning of year
    
    
    1,026,336
    
    
    $
    4.45
    
    
    
    1,263,959
    
    
    $
    4.34
    
    
    
    1,063,165
    
    
    $
    6.07Granted
    
    
    25,000
    
    
    $
    4.61
    
    
    
    25,000
    
    
    $
    3.06
    
    
    
    340,000
    
    
    $
    2.99Forfeited and surrendered
    
    
    (40,033
    )
    
    $
    2.26
    
    
    
    (28,680
    )
    
    $
    5.53
    
    
    
    (136,955
    )
    
    $
    14.47Exercised
    
    
    (96,634
    )
    
    $
    3.25
    
    
    
    (233,943
    )
    
    $
    3.56
    
    
    
    (2,251
    )
    
    $
    1.80Outstanding at end of year
    
    
    914,669
    
    
    $
    4.61
    
    
    
    1,026,336
    
    
    $
    4.45
    
    
    
    1,263,959
    
    
    $
    4.34Exercisable at end of year
    
    
    773,005
    
    
    $
    4.82
    
    
    
    677,661
    
    
    $
    5.38
    
    
    
    695,485
    
    
    $
    5.83
 The following table summarizes information about all stock options outstanding at December
31, 2004: OPTIONS OUTSTANDING
    
    
    OPTIONS EXERCISABLEWEIGHTED
    
    
    WEIGHTED-
    
    
    
    
    
    
    WEIGHTED-REMAINING
    
    
    AVERAGE
    
    
    EXERCISABLE
    
    
    AVERAGERANGE OF EXERCISE
    
    OUTSTANDING
    
    
    CONTRACTUAL
    
    
    EXERCISE
    
    
    AT
    
    
    EXERCISEPRICE
    
    AT 12/31/04
    
    
    LIFE
    
    
    PRICE
    
    
    12/31/04
    
    
    PRICE$1.65  5.00
    
    
    541,663
    
    
    
    6.9
    
    
    $
    2.40
    
    
    
    424,999
    
    
    $
    2.24$5.0110.00
    
    
    315,711
    
    
    
    4.5
    
    
    $
    6.46
    
    
    
    290,711
    
    
    $
    6.46$10.01  15.00
    
    
    15,000
    
    
    
    3.7
    
    
    $
    11.44
    
    
    
    15,000
    
    
    $
    11.44$15.01  20.00
    
    
    42,295
    
    
    
    2.7
    
    
    $
    17.07
    
    
    
    42,295
    
    
    $
    17.07914,669
    
    
    
    5.9
    
    
    $
    4.61
    
    
    
    773,005
    
    
    $
    4.82
 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 Stock
Purchase Plan was amended at the Shareholders meeting on May 16, 2002 to increase the available
 shares under the plan from 500,000 to 1,000,000. 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 2004, 2003, and 2002 were 59,481, 93,719, and
133,638, respectively. The Company has issued 887,739 shares under the Stock Purchase Plan as of
December 31, 2004. F-15




---



##### Table of Contents



Management Incentive Plan In 1998, the Company adopted a management incentive plan, whereby management may be awarded
 shares of restricted stock based on attaining certain performance goals. The Company issued
45,785 shares in 2004 for 2003 performance. The Company did not issue any shares in 2003 or 2002
for the prior years performance under the plan. The Company may issue shares in 2005 for 2004
performance based on the terms of the stock incentive plan. A maximum of 250,000 shares of common
stock may be issued at fair market value under this fixed plan. The Company has issued 89,431
shares under the management incentive plan as of December 31, 2004. The Company currently has
160,569 shares available for issue under the management incentive plan. Non-Stockholder Approved Equity Arrangements In February 2004, the Company issued 10,000 shares, with a fair value of $62,000, of restricted
common stock as inducement for employment. In May 2002, the Company issued 70,000 shares, with a
fair value of $218,000, of restricted common stock to several executives. In December 2004, a
former executive forfeited 10,000 of the 70,000 shares issued in May 2002, with a fair value of
$31,000. In November 2002, the Company issued 10,000 shares, with a fair value of $28,000, of
restricted common stock as an inducement to employment. These shares vest three years from the
date of issuance. The value of such stock was established by the market price on the date of
grant and was recorded as unearned compensation. The unearned compensation is shown as a
reduction of stockholders equity in the accompanying consolidated balance sheets and is being
amortized ratably over the applicable restricted stock vesting period. 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, 2004, 2003, and 2002 (in thousands): 2004
    
    
    2003
    
    
    2002(As Restated-See Note 1)Current
    
    $
    2,237
    
    
    $
    1,190
    
    
    $
    179Deferred
    
    
    (1,023
    )
    
    
    597
    
    
    
    1,087Total provision
    
    $
    1,214
    
    
    $
    1,787
    
    
    $
    1,266
 The provision for income taxes for the years ended December 31, 2004, 2003, and 2002 differs from
the amount computed by applying the statutory rate of 34% due to the following (in thousands): 2004
    
    
    2003
    
    
    2002(As Restated-SeeNote 1)Tax at federal statutory rate
    
    $
    2,900
    
    
    $
    1,526
    
    
    $
    974Nondeductible expenses
    
    
    269
    
    
    
    214
    
    
    
    169Change in valuation allowance
    
    
    (2,595
    )
    
    
    0
    
    
    
    0State income tax, net of federal benefit
    
    
    333
    
    
    
    193
    
    
    
    123Tax
contingency reserve and other
    
    
    307
    
    
    
    (146
    )
    
    
    0Provision for income taxes
    
    $
    1,214
    
    
    $
    1,787
    
    
    $
    1,266
 F-16




---



##### Table of Contents



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, 2004 and 2003, are as follows (in thousands): 2004
    
    
    2003(As Restated- SeeNote 1)Deferred tax assets:Allowance for doubtful accounts
    
    $
    779
    
    
    $
    1,424Accrued employee benefits
    
    
    47
    
    
    
    38Capitalized inventory costs
    
    
    603
    
    
    
    420Inventory allowance
    
    
    1,959
    
    
    
    2,144Accrued liabilities
    
    
    933
    
    
    
    950Net operating loss carryforwards
    
    
    835
    
    
    
    1,344Book in excess of tax depreciation
    
    
    492
    
    
    
    663Book in excess of tax amortization
    
    
    2,027
    
    
    
    2,275Valuation allowance
    
    
    (561
    )
    
    
    (3,156
    )Other
    
    
    159
    
    
    
    169Total deferred tax assets
    
    
    7,273
    
    
    
    6,271Deferred tax liabilities:Intangible storeroom management contract
    
    
    (91
    )
    
    
    (108
    )Step-up in asset basis
    
    
    (356
    )
    
    
    (360
    )Total deferred liabilities
    
    
    (447
    )
    
    
    (468
    )Net deferred tax assets
    
    $
    6,826
    
    
    $
    5,803
 The Company has net operating loss carryforwards for state income tax purposes of approximately
$20,700,000 as of December 31, 2004, which expire in various years through 2023. The related
deferred tax asset for these state net operating loss carryforwards is approximately $835,000 as
of December 31, 2004. 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, 2004 were as
follows (in thousands): 2005
    
    $
    5,5452006
    
    
    4,8632007
    
    
    3,8642008
    
    
    3,2092009
    
    
    1,799Thereafter
    
    
    9,397$
    28,677
 During the years ended December 31, 2004, 2003, and 2002, gross rental expense under operating
leases totaled $6,480,000, $7,833,000, and $8,296,000, respectively, with related sub-lease
rental income of $212,000, $251,000, and $234,000, respectively. F-17




---



##### Table of Contents



Litigation 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 will not have a
material adverse effect on the Companys financial position or results of operations. Insurance The Company initiated a self-insured group health insurance plan for all employees on January 1,
2000 and a self-insured workers compensation, property, and casualty plan on September 1, 2003,
whereby the Company is self-insured for the majority of claims, subject to specific aggregate
stop loss limits. The Company estimates its liability for unasserted or unpaid claims. The
Company believes that the ultimate liability for payment of claims has been adequately reserved
for, and any additional claims will not have a material adverse effect on the Companys financial
position or results of operations. 11. SAVINGS PLANS All employees who are age 21 or older and have completed 30 days of service are eligible to
participate in the Companys 401(k) plan (the Plan). Employees are eligible to receive
matching contributions from the Company after they have completed one year of service. Once
eligibility requirements are met, employees may contribute between 1% and 75% of their
compensation to the Plan, subject to tax law limitations. For 2004, 2003, and 2002, the Company
matched, at its sole discretion, 25% of employee contributions up to a maximum of 1 1/2% of the
employees salary. Total company contributions to the Plan during 2004, 2003, and 2002 were
$440,000, $419,000, and $454,000, respectively. 12. RELATED-PARTY TRANSACTIONS The Company leases facilities from related parties including directors and officers of the
Company. The Company believes that the monthly rent and other terms 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. Renewal of these leases, if applicable, is based
on managements best estimate of market value. Rental expense recognized under leases from
directors and officers of the Company was $436,000, $655,000, and $708,000 for the years ended
December 31, 2004, 2003, and 2002, respectively. Rental expense recognized under leases from
other related parties was $313,000, $46,000, and $118,000 for the years ended December 31, 2004,
2003, and 2002, respectively. 13. SUBSEQUENT EVENTS (UNAUDITED) The Companys board of directors approved, on February 23, 2005, a program for the Company to
repurchase up to $5.0 million of its outstanding common shares over the next 24 months. The
Company presently has 9.4 million shares of common stock outstanding. The closing price of its
common stock on February 22, 2005, was $7.92 per share, at which price the repurchase program
would permit the company to purchase up to 631,313 shares, or 6.7% of the currently outstanding shares. F-18




---



##### Table of Contents



14. INTERIM FINANCIAL INFORMATION (UNAUDITED) On
December 31, 2004, the Company restated its financial results for each of the three previously
recorded quarters in 2004 in addition to the year ended December 31, 2003 due to the correction
of an error related to the recording of certain accounts payable. The correction increased the
Companys accounts payable and cost of sales by $240,000, $241,000, and $241,000 for the three
quarters ended March 31, 2004, June 30, 2004 and September 30, 2004, respectively. The Company
restated each quarter of 2003 by $124,000 resulting in a total adjustment of $496,000 for the
year. The Company also made correcting adjustments to its depreciation expense in order for
prior periods to be consistent with the Companys property and equipment accounting policies, which
resulted in a reduction of depreciation expense by $35,000 for each of the three quarters ended
September 30, 2004. Depreciation expense for 2003 was decreased by $39,000, $39,000, $39,000,
and $38,000 for each of the quarters ended March 31, 2003, June 30, 2003, September 30, 2003,
and December 31, 2003, respectively. For 2004, these corrections reduce the
Companys previously reported net income by $128,000, or $0.01
per diluted share, $128,000, or $0.02 per diluted share, and $128,000,
or $0.01 per diluted share, for each
respective quarter. For fiscal year 2003, they reduce the Companys previously reported net income by
$195,000, or $0.02 per diluted share. The Companys unaudited quarterly results of operations
for the fiscal years ended December 31, 2004 and 2003 are as follows (in thousands, except for
per share amounts): 2004FIRST QUARTER
    SECOND QUARTER
    THIRD QUARTERAs Previously
    
    
    
    
    
    
    As Previously
    
    
    
    
    
    
    As PreviouslyReported
    

    
    As Restated
    
    
    Reported
    
    
    As Restated
    
    
    Reported
    
    
    As Restated
    
    
    FOURTH QUARTERNet sales
    
    $
    126,141
    
    
    $
    126,141
    
    
    $
    133,92`6
    
    
    $
    133,926
    
    
    $
    134,539
    
    
    $
    134,539
    
    
    $
    134,569Cost of sales
    
    
    97,999
    
    
    
    98,239
    
    
    
    104,667
    
    
    
    104,908
    
    
    
    105,499
    
    
    
    105,740
    
    
    
    104,576Gross profit
    
    
    28,142
    
    
    
    27,902
    
    
    
    29,259
    
    
    
    29,018
    
    
    
    29,040
    
    
    
    28,799
    
    
    
    29,993Selling, general and
administrative expenses
    
    
    25,928
    
    
    
    25,893
    
    
    
    26,350
    
    
    
    26,315
    
    
    
    26,158
    
    
    
    26,123
    
    
    
    27,268Operating income
    
    
    2,214
    
    
    
    2,009
    
    
    
    2,909
    
    
    
    2,703
    
    
    
    2,882
    
    
    
    2,676
    
    
    
    2,725Interest expense
    
    
    404
    
    
    
    404
    
    
    
    418
    
    
    
    418
    
    
    
    397
    
    
    
    397
    
    
    
    411Interest income
    
    
    (15
    )
    
    
    (15
    )
    
    
    (3
    )
    
    
    (3
    )
    
    
    (3
    )
    
    
    (3
    )
    
    
    (3
    )Other (income) expense
    
    
    (24
    )
    
    
    (24
    )
    
    
    23
    
    
    
    23
    
    
    
    2
    
    
    
    2
    
    
    
    (22
    )Earnings before income taxes
    
    
    1,849
    
    
    
    1,644
    
    
    
    2,471
    
    
    
    2,265
    
    
    
    2,486
    
    
    
    2,280
    
    
    
    2,339Provision (benefit) for
income taxes
    
    
    708
    
    
    
    631
    
    
    
    947
    
    
    
    869
    
    
    
    (1,117
    )
    
    
    (1,195
    )
    
    
    909Net earnings
    
    $
    1,141
    
    
    $
    1,013
    
    
    $
    1,524
    
    
    $
    1,396
    
    
    $
    3,603
    
    
    $
    3,475
    
    
    $
    1,430Earnings per share:Basic earnings
per common share
    
    $
    0.12
    
    
    $
    0.11
    
    
    $
    0.16
    
    
    $
    0.15
    
    
    $
    0.38
    
    
    $
    0.37
    
    
    $
    0.15Diluted
earnings
per common share
    
    $
    0.12
    
    
    $
    0.11
    
    
    $
    0.16
    
    
    $
    0.14
    
    
    $
    0.37
    
    
    $
    0.36
    
    
    $
    0.15
 F-19




---



##### Table of Contents



2003FIRST QUARTER
    SECOND QUARTER
    THIRD QUARTER
    FOURTH QUARTERAs Previously
    
    
    
    
    
    
    As Previously
    
    
    
    
    
    
    As Previously
    
    
    
    
    
    
    As PreviouslyReported
    
    
    As Restated
    
    
    Reported
    
    
    As Restated
    
    
    Reported
    
    
    As Restated
    
    
    Reported
    
    
    As RestatedNet sales
    
    $
    123,077
    
    
    $
    123,077
    
    
    $
    121,071
    
    
    $
    121,071
    
    
    $
    119,200
    
    
    $
    119,200
    
    
    $
    120,094
    
    
    $
    120,094Cost of sales
    
    
    95,760
    
    
    
    95,884
    
    
    
    94,161
    
    
    
    94,285
    
    
    
    92,512
    
    
    
    92,636
    
    
    
    92,620
    
    
    
    92,744Gross profit
    
    
    27,317
    
    
    
    27,193
    
    
    
    26,910
    
    
    
    26,786
    
    
    
    26,688
    
    
    
    26,564
    
    
    
    27,474
    
    
    
    27,350Selling, general and
administrative expenses
    
    
    26,066
    
    
    
    26,027
    
    
    
    25,383
    
    
    
    25,344
    
    
    
    25,130
    
    
    
    25,091
    
    
    
    25,094
    
    
    
    25,056Operating income
    
    
    1,251
    
    
    
    1,166
    
    
    
    1,527
    
    
    
    1,442
    
    
    
    1,558
    
    
    
    1,473
    
    
    
    2,380
    
    
    
    2,294Interest expense
    
    
    763
    
    
    
    763
    
    
    
    596
    
    
    
    596
    
    
    
    492
    
    
    
    492
    
    
    
    427
    
    
    
    427Interest income
    
    
    (6
    )
    
    
    (6
    )
    
    
    (6
    )
    
    
    (6
    )
    
    
    (6
    )
    
    
    (6
    )
    
    
    (3
    )
    
    
    (3
    )Other (income) expense
    
    
    2
    
    
    
    2
    
    
    
    (12
    )
    
    
    (12
    )
    
    
    (15
    )
    
    
    (15
    )
    
    
    (5
    )
    
    
    (5
    )Earnings before income taxes
    
    
    492
    
    
    
    407
    
    
    
    949
    
    
    
    864
    
    
    
    1,087
    
    
    
    1,002
    
    
    
    1,961
    
    
    
    1,875Provision for income taxes
    
    
    232
    
    
    
    196
    
    
    
    406
    
    
    
    370
    
    
    
    456
    
    
    
    419
    
    
    
    839
    
    
    
    802Net earnings
    
    $
    260
    
    
    $
    211
    
    
    $
    543
    
    
    $
    494
    
    
    $
    631
    
    
    $
    583
    
    
    $
    1,122
    
    
    $
    1,073Earnings per share:Basic earnings
per common share
    
    $
    0.03
    
    
    $
    0.02
    
    
    $
    0.06
    
    
    $
    0.06
    
    
    $
    0.07
    
    
    $
    0.07
    
    
    $
    0.12
    
    
    $
    0.12Diluted
earnings per common share
    
    $
    0.03
    
    
    $
    0.02
    
    
    $
    0.06
    
    
    $
    0.05
    
    
    $
    0.07
    
    
    $
    0.06
    
    
    $
    0.12
    
    
    $
    0.11
 F-20




---



##### Table of Contents



INDUSTRIAL DISTRIBUTION GROUP, INC. 
 SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
 FOR THE YEARS ENDED
DECEMBER 31, 2004, 2003, AND 2002  (in thousands)
 ALLOWANCE FOR DOUBTFUL ACCOUNTS ADDITIONSCHARGEDBALANCE
    
    
    TO COSTSAT
    
    
    AND
    
    
    
    
    
    
    BALANCE ATBEGINNING
    
    
    EXPENSES
    
    
    
    
    
    
    END OFDESCRIPTION
    
    OF PERIOD
    
    
    NET(1)
    
    
    DEDUCTIONS(2)
    
    
    PERIODYear ended December 31, 2004:Allowance for doubtful accounts
    
    $
    3,719
    
    
    
    799
    
    
    
    2,463
    
    
    $
    2,055Year ended December 31, 2003:Allowance for doubtful accounts
    
    $
    3,183
    
    
    
    843
    
    
    
    307
    
    
    $
    3,719Year ended December 31, 2002:Allowance for doubtful accounts
    
    $
    1,522
    
    
    
    2,117
    
    
    
    456
    
    
    $
    3,183
   (1)
    
    Amounts charged to costs and expenses are net of adjustments to state the allowance based on
the Companys historical collections experience and managements assessment of the
collectibility of specific accounts.(2)
    
    Deductions represent the write off of uncollectible receivables, net of recoveries. INVENTORY RESERVE ADDITIONSCHARGEDTO COSTSBALANCE AT
    
    
    AND
    
    
    CHARGED TO
    
    
    
    
    
    
    BALANCE ATBEGINNING
    
    
    EXPENSES
    
    
    OTHER
    
    
    
    
    
    
    END OFDESCRIPTION
    
    OF PERIOD
    
    
    NET(1)
    
    
    ACCOUNT(2)
    
    
    DEDUCTIONS(3)
    
    
    PERIODYear ended December 31, 2004:Inventory reserve
    
    $
    5,597
    
    
    
    (217
    )
    
    
    0
    
    
    
    212
    
    
    $
    5,168Year ended December 31, 2003:Inventory reserve
    
    $
    6,702
    
    
    
    (55
    )
    
    
    0
    
    
    
    1,050
    
    
    $
    5,597Year ended December 31, 2002:Inventory reserve
    
    $
    7,365
    
    
    
    1,029
    
    
    
    0
    
    
    
    1,692
    
    
    $
    6,702
   (1)
    
    Amounts charged to costs and expenses are net of adjustments to state the reserve based on
the Companys experience and managements assessment of the net realizable value of specific
inventory accounts.(2)
    
    These amounts represent balance sheet re-classifications.(3)
    
    Deductions represent the write off of obsolete inventory. F-21




---



##### Table of Contents



VALUATION ALLOWANCE ADDITIONSCHARGEDTO COSTSBALANCE AT
    
    
    AND
    
    
    
    
    
    
    BALANCE ATBEGINNING
    
    
    EXPENSES
    
    
    
    
    
    
    END OFDESCRIPTION
    
    OF PERIOD
    
    
    NET(1)
    
    
    DEDUCTIONS (2)
    
    
    PERIODYear ended December 31, 2004:Valuation allowance
    
    $
    3,156
    
    
    
    0
    
    
    
    2,595
    
    
    $
    561Year ended December 31, 2003:Valuation allowance
    
    $
    3,156
    
    
    
    0
    
    
    
    0
    
    
    $
    3,156Year ended December 31, 2002:Valuation allowance
    
    $
    0
    
    
    
    3,156
    
    
    
    0
    
    
    $
    3,156
   (1)
    
    These amounts represent the recording of the valuation allowance for deferred tax assets.(2)
    
    These amounts represent the reduction of the valuation allowance for deferred tax associated
with certain state tax net operating loss carryforwards and future goodwill amortization. F-22




---



##### Table of Contents



EXHIBIT INDEX ExhibitNumber
    
    Description of Exhibit3.1
    
    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 4.1 of the Companys
Registration Statement on Form 8-A (File No. 001-13195) on August 31, 2000 is hereby
incorporated by reference)4.2
    
    Certificate of Designation (filed as Exhibit 4.2 of the Companys Current Report on Form
8-K (File No. 001-13195) is hereby incorporated by reference)(*)10.1(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)(*)10.1(b)
    
    Amendment No. 1 to Industrial Distribution Group, Inc. Stock Incentive Plan (filed as
Exhibit 10.5b) of the Companys Annual Report on Form 10-K (File No. D01-131950) on March
31, 1999 is hereby incorporated by reference)(*)10.2
    
    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)10.3
    
    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)(*)10.4
    
    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)10.5(a)
    
    Credit Agreement dated December 22, 2000 by and between the Company, the lenders listed
therein, and First Union National Bank (filed as Exhibit 10.6 of the Companys Annual
Report on Form
10-K (File No. 001-13195) on March 28, 2002 is hereby incorporated by reference)10.5(b)
    
    Credit Agreement Amendment dated
August 1, 2001 by and between the Company, the lenders
listed therein, and First Union National Bank (filed as Exhibit 10.5(b) of the Companys
Annual Report on Form 10-K (File No. 001-13195) on
March 29, 2002 is hereby incorporated by
reference)10.5(c)
    
    Second Amendment to Credit
Agreement dated May 28, 2003 by and between the Company,
Wachovia Bank, National Association (formerly First Union National Bank) and the lenders
listed therein (filed as Exhibit 10.1 of the Companys Quarterly Report on Form 10-Q (File
No. 001-13195) on July 31, 2003 is hereby incorporated by reference)10.6
    
    Rights Agreement dated as of August 28, 2000 by and between the Company and American Stock
Transfer & Trust Company (filed as Exhibit 10.1 of the Companys Registration Statement on
Form 8-A (File No. 001-13195) on August 31, 2000 is hereby incorporated by reference)(*)10.7
    
    Form of Restricted Stock Agreements (filed as Exhibit 10.7 of the Companys Annual Report
on Form 10-K (File No. 001-13195) on March 21, 2003 is hereby incorporated by reference)21.1
    
    Subsidiaries of the Company23.1
    
    Consent of Independent Registered Public Accounting Firm31.1
    
    Certification of Chief Executive Officer with respect to the Companys Annual Report on Form
10-K for the fiscal year ended December 31, 2004.




---



##### Table of Contents



ExhibitNumber
    
    Description of Exhibit31.2
    
    Certification of Chief Financial Officer with respect to the Companys Annual Report on
Form 10-K for the fiscal year ended December 31, 2004.32.1
    
    Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of United States Code by
Chief Executive Officer with respect to the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 2004.32.2
    
    Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of United States Code by
Chief Financial Officer with respect to the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 2004.
   (*)
    
    Management contract or compensatory plan or arrangement required to be filed as an exhibit.