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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the Fiscal Year Ended December 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the Transition Period from  to
 Commission File No. 001-13195
 INDUSTRIAL DISTRIBUTION GROUP, INC.
  DELAWARE
(State or other jurisdiction 
of incorporation or organization)
    
    58-2299339
(I.R.S. Employer
Identification No.)
     Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Stock, par value $0.01 per share
    
    NASDAQ
  
 o þ
 o þ
 þ o
 o
  o þ o
 o þ




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##### 



TABLE OF CONTENTS
 PagePART IItem 1. Business
    
    
    3Item 1A. Risk Factors
    
    
    12Item 1B. Unresolved Staff Comments
    
    
    14Item 2. Properties
    
    
    14Item 3. Legal Proceedings
    
    
    14Item 4. Submission of Matters to a Vote of Security Holders
    
    
    14PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    15Item 6. Selected Financial Data
    
    
    17Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 8. Financial Statements and Supplementary Data
    
    
    24Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    24Item 9A. Controls and Procedures
    
    
    24Item 9B. Other Information
    
    
    25PART IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    25Item 11. Executive Compensation
    
    
    25Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    26Item 13. Certain Relationships and Related Transactions
    
    
    25Item 14. Principal Accounting Fees and Services
    
    
    26PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    26SIGNATURES
    
    
    27INDEX TO FINANCIAL STATEMENTSEXHIBIT INDEXEX-21.1 SUBSIDIARIES OF THE COMPANYEX-23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMEX-31.1 SECTION 302, CERTIFICATION OF THE CEOEX-31.2 SECTION 302, CERTIFICATION OF THE CFOEX-32.1 SECTION 906, CERTIFICATION OF THE CEOEX-32.2 SECTION 906, CERTIFICATION OF THE CFO
  2




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CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
  
 PART I
 
 Item 1. Business
 Background and General
     3




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Industry Overview and Trends
     Flexible Procurement Solutions (FPS)
 Services Program and Approach
  4




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Spectrum of Service Offerings
    
    
    providing consolidated billing for MROP products and producing customized management
reports for 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 and in some cases
automatically;
    
    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;
    
    installation of product vending machines and other automated dispensing solutions;
    
    Commodity Management Solutions including Vendor Managed Inventory (VMI) arrangements; and
    
    providing the management and procurement of entire commodity groups utilizing our
proprietary software to enable product rationalization, supplier surveys, supplier requests
for quotes, quotation analysis, supplier selection, and contract awards.
 Storeroom Management Arrangements
  5




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
    
    furnishing the customer with 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.
    General MROP Sales
 Program and Approach
   6




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Products
     7




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% ofAggregateProduct Category
    
    Typical Products
    
    RevenueCutting Tools
    
    Drills, Taps, Carbide Tools, End Mills
    
    
    25.6
    %Abrasives
    
    Grinding Wheels, Sanding Belts, Discs, Sheets or Rolls
    
    
    14.5
    %Maintenance Equipment and Supplies
    
    Hydraulic Tools, Paint, Lubrication Equipment
    
    
    8.0
    %Coolants, Lubricants, and Adhesives
    
    Metal Cutting Coolants, Aerosols, Industrial Adhesives
    
    
    7.5
    %Hand Tools
    
    Wrenches, Socket Sets, Screwdrivers, Hammers
    
    
    6.5
    %Power Tools
    
    Air and Electric Drills, Impact Wrenches, Screwdrivers
    
    
    6.1
    %Safety Products
    
    Gloves, Signs, Absorbents, Glasses
    
    
    6.1
    %Machine Tools and Accessories
    
    Milling Machines, Work Holding Vises, Tool Holders
    
    
    3.8
    %Material Handling Equipment
    
    Hoists, Slings, Chain, Shelving, Casters
    
    
    3.3
    %Machinery
    
    Metal Removal Equipment, Metal Forming Equipment, Air
Compressors
    
    
    2.4
    %Tapes
    
    Masking, Filament and Duct Tape
    
    
    2.1
    %Fasteners
    
    Socket Screws, Hex Screws, Anchors
    
    
    1.5
    %Saw Blades
    
    Band, Hack, Hole, Jig Saw Blades
    
    
    1.3
    %Welding Equipment and Supplies
    
    Welders, Weld Rod
    
    
    1.1
    %Contractor Supplies
    
    Power-Actuated Tools, Ladders, Shovels
    
    
    1.0
    %Electrical
    
    Fuses, Electrical Switches, Controls, Lighting
    
    
    1.0
    %Brushes
    
    Wire Wheel, Floor Brooms
    
    
    1.0
    %Quality Control Products
    
    Electronic Calipers, Micrometers
    
    
    0.9
    %Fluid Power
    
    Hydraulic and Pneumatic Valves, Cylinders, Pumps
    
    
    0.8
    %Industrial Pipes, Valves, Fittings
and Metal Goods
    
    Pipes, Valves, Fittings, Angle Iron, Conduit
    
    
    0.8
    %Power Transmission Equipment
    
    Belts, Drives, Bearings, Gears, Pulleys
    
    
    0.6
    %Tool & Die Supplies
    
    Ground Stock, Drill Rod, Die Sets
    
    
    0.6
    %Industrial Hose
    
    Air Hose, Water Hose
    
    
    0.5
    %Other Products
    
    
    
    
    3.0
    %Total
    
    
    
    
    100.0
    %
 Customers
    8




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Sales and Marketing
         9




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Competition
   Management Information Systems
  ®
  Quality Control Standards
  10




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Personnel
   Leadership and Organizational Structure
  Executive Officers
  Name
    
    Age
    
    PositionCharles A. Lingenfelter
    
    
    56
    
    
    President and Chief Executive OfficerJack P. Healey
    
    
    47
    
    
    Executive Vice President, Chief Financial Officer, and SecretaryMichael W. Brice
    
    
    42
    
    
    Senior Vice President and Chief Information Officer
    11




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Available Information
 www.idglink.com
 
 Item 1A. Risk Factors.
  Our industry is very competitive, both as to the number and strength of the different companies
with which we compete and the business terms offered to potential customers, and we cannot assure
you that we will be able to compete successfully against all or most of them.
    Storeroom management customers are large in size and generate average annual revenue of
approximately $2.4 million per site. If we are not able to provide acceptable customer service or renew
these contracts at profitable levels, we may not be able to replace the business lost.
  The delivery of our services requires highly skilled and specialized employees who are not easy to
locate or replace, and we could be adversely affected by the loss or unavailability of such
persons.
  12




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A change in our pricing model to list less from a cost plus for General MROP customers may
result in lost sales volume.
  We rely heavily on our senior management and the expertise of management personnel, and we could be
adversely affected by the loss or unavailability of such persons.
  If we experience IT system failures, the products and services we provide to our customers could be
delayed or interrupted, which could harm our business and reputation and result in the loss of
customers.
  Our ability to 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.
  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.
  13




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We rely on a variety of informal or short-term distribution rights granted by our suppliers to
offer their product lines to our customers, and we could be adversely affected if those rights were
discontinued on short notice.
  
 Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
    
 Item 3. Legal Proceedings.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  14




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PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities .
  Price RangeHigh
    
    Low2005First Quarter
    
    $
    9.23
    
    
    $
    7.18Second Quarter
    
    $
    9.46
    
    
    $
    8.17Third Quarter
    
    $
    10.62
    
    
    $
    9.00Fourth Quarter
    
    $
    9.26
    
    
    $
    6.582006First Quarter
    
    $
    8.45
    
    
    $
    7.60Second Quarter
    
    $
    9.99
    
    
    $
    8.06Third Quarter
    
    $
    9.06
    
    
    $
    7.92Fourth Quarter
    
    $
    9.89
    
    
    $
    8.15
   Dividends
  15




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Purchases of Equity Securities by the Issuer
  Total Number
    
    Approximateof Shares
    
    Dollar Value ofTotal Number of
    
    
    
    
    
    Purchased as Part
    
    Shares that May YetShares
    
    Average Price
    
    of Publicly
    
    Be Purchased UnderPeriod
    
    Purchased
    
    Paid per Share
    
    Announced Program
    
    the Program12/31/05 Balance
    
    
    135,081
    
    
    $
    8.53
    
    
    



    135,081
    
    
    $
    3,847,820First Quarter Total
    
    
    89,700
    
    
    $
    8.00
    
    
    
    89,700
    
    
    $
    3,130,667Second Quarter Total
    
    
    71,300
    
    
    $
    9.21
    
    
    
    71,300
    
    
    $
    2,473,642Third Quarter Total
    
    
    98,400
    
    
    $
    8.80
    
    
    
    98,400
    
    
    $
    1,604,83410/1/2006  10/31/2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,604,83411/1/2006  11/30/2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,604,83412/1/2006  12/31/2006
    
    
    77,400
    
    
    $
    9.51
    
    
    
    77,400
    
    
    $
    868,889Fourth Quarter Total
    
    
    77,400
    
    
    $
    9.51
    
    
    
    77,400
    
    
    $
    868,8892006 Total
    
    
    336,800
    
    
    $
    8.84
    
    
    
    336,800
    
    
    $
    868,889Since Inception of Plan
    
    
    471,881
    
    
    $
    8.75
    
    
    
    471,881
    
    
    $
    868,889


Five
Year Stock Performance Graph




COMPARE CUMULATIVE TOTAL RETURN
AMONG INDUSTRIAL DISTRIBUTION GROUP,
RUSSELL 2000 INDEX AND SIC CODE INDEX








2001
    
    
    

2002
    
    
    

2003
    
    
    

2004
    
    
    

2005
    
    
    

2006INDUSTRIAL
DISTRIBUTION GROUP
    
    
    100.00
    
    
    
    205.33
    
    
    
    370.67
    
    
    
    553.33
    
    
    
    538.67
    
    
    
    659.33SIC CODE
INDEX
    
    
    100.00
    
    
    
    103.07
    
    
    
    131.97
    
    
    
    178.71
    
    
    
    261.12
    
    
    
    299.53RUSSELL 2000
INDEX
    
    
    100.00
    
    
    
    78.42
    
    
    
    114.00
    
    
    
    133.94
    
    
    
    138.40
    
    
    
    162.02


16




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Item 6. Selected Financial Data.
  Year Ended December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(Dollars in thousands, except per share data)Statements of Income Data:Net sales
    
    $
    547,874
    
    
    $
    538,847
    
    
    $
    529,175
    
    
    $
    483,442
    
    
    $
    492,450Gross profit
    
    
    121,062
    
    
    
    117,571
    
    
    
    115,712
    
    
    
    107,893
    
    
    
    109,406Selling, general, and administrative expenses
    
    
    108,244
    
    
    
    107,033
    
    
    
    105,599
    
    
    
    101,518
    
    
    
    103,298Operating income
    
    
    12,818
    
    
    
    10,538
    
    
    
    10,113
    
    
    
    6,375
    
    
    
    6,108Net earnings (excluding accounting change)*
    
    $
    6,785
    
    
    $
    5,421
    
    
    $
    7,314
    
    
    $
    2,361
    
    
    $
    1,598Accounting
change*
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (50,347
    )Net earnings (loss)*
    
    $
    6,785
    
    
    $
    5,421
    
    
    
    7,314
    
    
    
    2,361
    
    
    
    (48,749
    )Earnings (loss) per common share:Basic (excluding accounting change)*
    
    $
    0.72
    
    
    $
    0.58
    
    
    $
    0.78
    
    
    $
    0.26
    
    
    $
    0.18Basic
    
    
    0.72
    
    
    
    0.58
    
    
    
    0.78
    
    
    
    0.26
    
    
    
    (5.53
    )Diluted (excluding accounting change)*
    
    
    0.70
    
    
    
    0.56
    
    
    
    0.75
    
    
    
    0.26
    
    
    
    0.18Diluted
    
    
    0.70
    
    
    
    0.56
    
    
    
    0.75
    
    
    
    0.26
    
    
    
    (5.44
    )Balance Sheet Data:Working capital
    
    $
    93,643
    
    
    $
    75,640
    
    
    $
    77,222
    
    
    $
    74,708
    
    
    $
    75,974Property and equipment, net
    
    
    4,928
    
    
    
    4,672
    
    
    
    7,277
    
    
    
    7,161
    
    
    
    11,274Total assets
    
    
    160,012
    
    
    
    140,328
    
    
    
    146,062
    
    
    
    133,300
    
    
    
    139,182Total debt
    
    
    24,423
    
    
    
    12,901
    
    
    
    22,281
    
    
    
    26,533
    
    
    
    36,363Stockholders equity
    
    $
    76,324
    
    
    $
    70,311
    
    
    $
    64,783
    
    
    $
    56,398
    
    
    $
    52,660
 
 (*)
    
    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. 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
  Overview and Certain Trends
  Analysis of FPS and General MROP Revenue/Cost Structures
  17




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Summary Comparison of FPS and General MROP Sales Results
   Year Ended December 31,2006
    
    
    2005
    
    
    2004Net Sales
    
    
    %
    
    
    Net Sales
    
    
    %
    
    
    Net Sales
    
    
    %(dollars in millions)FPS Sales, including
storeroom management
    
    $
    325.4
    
    
    
    59.4
    %
    
    $
    301.9
    
    
    
    56.0
    %
    
    $
    289.3
    
    
    
    54.7
    %FPS Gross Profit
    
    $
    66.9
    
    
    
    20.6
    %
    
    $
    60.4
    
    
    
    20.0
    %
    
    $
    57.4
    
    
    
    19.8
    %General MROP Sales
    
    $
    222.5
    
    
    
    40.6
    %
    
    $
    236.9
    
    
    
    44.0
    %
    
    $
    239.9
    
    
    
    45.3
    %General MROP Gross Profit
    
    $
    54.2
    
    
    
    24.4
    %
    
    $
    57.2
    
    
    
    24.1
    %
    
    $
    58.3
    
    
    
    24.3
    %Total Sales
    
    $
    547.9
    
    
    
    100.0
    %
    
    $
    538.8
    
    
    
    100.0
    %
    
    $
    529.2
    
    
    
    100.0
    %Total Gross Profit
    
    $
    121.1
    
    
    
    22.1
    %
    
    $
    117.6
    
    
    
    21.8
    %
    
    $
    115.7
    
    
    
    21.9
    %
  18




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Results of Operations
  Year Ended December 31,2006
    
    
    2005
    
    
    2004(dollars in thousands)Net sales
    
    $
    547,874
    
    
    
    100.0
    %
    
    $
    538,847
    
    
    
    100.0
    %
    
    $
    529,175
    
    
    
    100.0
    %Cost of sales
    
    
    426,812
    
    
    
    77.9
    %
    
    
    421,276
    
    
    
    78.2
    %
    
    
    413,463
    
    
    
    78.1
    %Gross profit
    
    
    121,062
    
    
    
    22.1
    %
    
    
    117,571
    
    
    
    21.8
    %
    
    
    115,712
    
    
    
    21.9
    %Selling, general, and
administrative expenses
    
    
    108,244
    
    
    
    19.8
    %
    
    
    107,033
    
    
    
    19.8
    %
    
    
    105,599
    
    
    
    20.0
    %Operating income
    
    
    12,818
    
    
    
    2.3
    %
    
    
    10,538
    
    
    
    2.0
    %
    
    
    10,113
    
    
    
    1.9
    %Interest expense
    
    
    1,434
    
    
    
    0.2
    %
    
    
    1,493
    
    
    
    0.3
    %
    
    
    1,606
    
    
    
    0.3
    %Other income, net
    
    
    60
    
    
    
    0.0
    %
    
    
    36
    
    
    
    0.0
    %
    
    
    21
    
    
    
    0.0
    %Earnings before taxes
    
    
    11,444
    
    
    
    2.1
    %
    
    
    9,081
    
    
    
    1.7
    %
    
    
    8,528
    
    
    
    1.6
    %Provision for income taxes
    
    
    4,659
    
    
    
    0.9
    %
    
    
    3,660
    
    
    
    0.7
    %
    
    
    1,214
    
    
    
    0.2
    %Net earnings
    
    $
    6,785
    
    
    
    1.2
    %
    
    $
    5,421
    
    
    
    1.0
    %
    
    $
    7,314
    
    
    
    1.4
    %
 2006 Compared to 2005
 Net Sales
   Cost of Sales
  Selling, General and Administrative Expenses
  19




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Operating Income
  Interest Expense
  Provision for Income Taxes
  2005 Compared to 2004
 Net Sales
  Cost of Sales
  Selling, General and Administrative Expenses
  20




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Operating Income
  Interest Expense
  Provision for Income Taxes
  Liquidity and Capital Resources
 Capital Availability and Requirements
     Payments Due by Period (in thousands)Contractual Obligations
    
    Total
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    ThereafterLong Term Debt
    
    $
    24,423
    
    
    $
    30
    
    
    $
    18
    
    
    $
    0
    
    
    $
    24,375
    
    
    $
    0
    
    
    $
    0Operating Leases
    
    $
    26,360
    
    
    $
    5,888
    
    
    $
    4,574
    
    
    $
    3,214
    
    
    $
    1,877
    
    
    $
    1,401
    
    
    $
    9,406Estimated Interest Payments
    
    $
    7,769
    
    
    $
    1,796
    
    
    $
    1,893
    
    
    $
    1,991
    
    
    $
    2,089
    
    
    $
    0
    
    
    $
    0Total Contractual Cash Obligations
    
    $
    58,552
    
    
    $
    7,714
    
    
    $
    6,485
    
    
    $
    5,205
    
    
    $
    28,341
    
    
    $
    1,401
    
    
    $
    9,406
  21




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Analysis of Cash Flows
      Certain Accounting Policies and Estimates
  22




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Allowance for Doubtful Accounts  Methodology
  Allowance for Doubtful Accounts
    
    2006
    
    
    2005
    
    
    2004(dollars in thousands)Balance at January 1
    
    $
    1,369
    
    
    $
    2,055
    
    
    $
    3,719Add: Charges
(recoveries) to expense, net
    
    
    370
    
    
    
    74
    
    
    
    802Deduct: Write-offs
    
    
    357
    
    
    
    760
    
    
    
    2,466Balance at December 31
    
    $
    1,382
    
    
    $
    1,369
    
    
    $
    2,055Percentage of Gross Receivables
    
    
    1.7
    %
    
    
    2.0
    %
    
    
    3.1
    %
 Inventories  Slow Moving and Obsolescence
  Inventory Reserve
    
    2006
    
    
    2005
    
    
    2004(dollars in thousands)Balance at January 1
    
    $
    5,115
    
    
    $
    5,168
    
    
    $
    5,597Add: Charges (recoveries) to expense, net
    
    
    410
    
    
    
    1,208
    
    
    
    (193
    )Deduct:
Write-offs
    
    
    555
    
    
    
    1,261
    
    
    
    236Balance at December 31
    
    $
    4,970
    
    
    $
    5,115
    
    
    $
    5,168Percentage of Gross Inventory
    
    
    7.2
    %
    
    
    8.0
    %
    
    
    8.3
    %
 Impairment of Long-Lived Assets
  23




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##### Table of Contents



Deferred Income Tax Assets
   Self insurance and related reserves
  
 Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
  
 Item 8. Financial Statements and Supplementary Data.
  
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
  
 Item 9A. Controls and Procedures.
 Disclosure Controls and Procedures
  24




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##### Table of Contents



Internal Control Over Financial Reporting
   
 Item 9B. Other Information.
  
 PART III
 
 Item 10. Directors and Executive Officers of the Registrant.
  
 Item 11. Executive Compensation.
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
  25




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##### Table of Contents



Item 13. Certain Relationships and Related Transactions.
  
 Item 14. Independent Auditors Fees and Services.
  
 PART IV
 
 Item 15. Exhibits and Financial Statement Schedules.
  Financial Statements
             (b)
    
    Exhibits.See Item 15(a)(3).(c)
    
    Financial Statements and Schedules.See Item 15(a)(2). The Financial Statements listed in
Item 15(a)(1) are included in this Report beginning on page F-5.
 26




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##### Table of Contents



SIGNATURES
  Date: March 14, 2007
    
    INDUSTRIAL DISTRIBUTION GROUP, INC.By:
    
    /s/ Charles A. LingenfelterCharles A. LingenfelterPresident and Chief Executive Officer
  Date:
March 14, 2007
    
    /s/ Charles A. LingenfelterCharles A. LingenfelterPresident, Chief Executive Officer, and Director(Principal Executive Officer)Date:
March 14, 2007
    
    /s/ Jack P. HealeyJack P. HealeyExecutive Vice President, Chief Financial Officer, and Secretary(Principal Financial and Accounting Officer)Date:
March 14, 2007
    
    /s/ Richard M. SeigelRichard M. SeigelChairman of the BoardDate:
March 14, 2007
    
    /s/ David K. BarthDavid K. BarthDirectorDate:
March 14, 2007
    
    /s/ William R. FenoglioWilliam R. FenoglioDirectorDate:
March 14, 2007
    
    /s/ William T. ParrWilliam T. ParrDirectorDate:
March 14, 2007
    
    /s/ George L. Sachs, Jr.George L. Sachs, Jr.DirectorDate:
March 14, 2007
    
    /s/ Andrew B. ShearerAndrew B. ShearerDirector
 27




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##### Table of Contents



INDEX
 Managements Annual Report on Internal Control over Financial Reporting
    
    
    F-2Reports of Independent Registered Public Accounting Firm
    
    
    F-3Consolidated Balance Sheets at December 31, 2006 and 2005
    
    
    F-5Consolidated Statements of Income for the Years Ended December 31, 2006, 2005, and 2004
    
    
    F-6Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2006, 2005, and 2004
    
    
    F-7Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005, and 2004
    
    
    F-8Notes to Consolidated Financial Statements and Schedule
    
    
    F-9Schedule II  Valuation and Qualifying Accounts for the Years Ended December 31, 2006, 2005, and 2004
    
    
    F-23
 F-1




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##### Table of Contents



Managements Annual Report on Internal Control over Financial Reporting
  (i)
    
    pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company;(ii)
    
    provide reasonable assurance that the transactions are being recorded as necessary to
permit preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America, and that receipts and expenditures of
the Company are being made only in accordance with authorizations of management and
directors of the Company; and(iii)
    
    provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Companys assets that could have a material effect
on the financial statements.
  Internal ControlIntegrated Framework
   F-2




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Report of Independent Registered Public Accounting Firm
 
        
 F-3




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
      /s/ Ernst & Young LLP 
 F-4




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INDUSTRIAL DISTRIBUTION GROUP, INC.
AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2006 AND 2005
  2006
    
    
    2005ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    349
    
    
    $
    721Accounts receivable, net
    
    
    80,949
    
    
    
    65,661Inventories, net
    
    
    63,851
    
    
    
    58,485Deferred tax assets
    
    
    3,645
    
    
    
    3,652Prepaid and other current assets
    
    
    3,734
    
    
    
    3,324Total current assets
    
    
    152,528
    
    
    
    131,843PROPERTY AND EQUIPMENT, NET
    
    
    4,928
    
    
    
    4,672INTANGIBLE ASSETS, NET
    
    
    159
    
    
    
    201DEFERRED TAX ASSETS
    
    
    1,485
    
    
    
    2,158OTHER ASSETS
    
    
    912
    
    
    
    1,454Total assets
    
    $
    160,012
    
    
    $
    140,328LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Current portion of long-term debt
    
    $
    30
    
    
    $
    83Accounts payable
    
    
    51,553
    
    
    
    47,684Accrued compensation
    
    
    2,431
    
    
    
    2,891Other accrued liabilities
    
    
    4,871
    
    
    
    5,545Total current liabilities
    
    
    58,885
    
    
    
    56,203LONG-TERM DEBT, NET OF CURRENT PORTION
    
    
    24,393
    
    
    
    12,818OTHER LONG TERM LIABILITIES
    
    
    410
    
    
    
    996Total liabilities
    
    
    83,688
    
    
    
    70,017COMMITMENTS AND CONTINGENCIES (NOTE 12)STOCKHOLDERS EQUITY (NOTE 9):Preferred stock, $0.10 par value per share;
10,000,000 shares authorized, no shares
issued or outstanding in 2006 and 2005
    
    
    0
    
    
    
    0Common stock, $0.01 par value per share;
50,000,000 shares authorized, 9,343,197
issued and outstanding in 2006 and 9,382,515
issued and outstanding in 2005
    
    
    93
    
    
    
    94Additional paid-in capital
    
    
    99,630
    
    
    
    100,401Accumulated deficit
    
    
    (23,399
    )
    
    
    (30,184
    )Total stockholders equity
    
    
    76,324
    
    
    
    70,311Total liabilities and stockholders equity
    
    $
    160,012
    
    
    $
    140,328
  F-5




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INDUSTRIAL DISTRIBUTION GROUP, INC.
AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF INCOME
 FOR THE YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
  2006
    
    
    2005
    
    
    2004NET SALES
    
    $
    547,874
    
    
    $
    538,847
    
    
    $
    529,175COST OF SALES
    
    
    426,812
    
    
    
    421,276
    
    
    
    413,463Gross profit
    
    
    121,062
    
    
    
    117,571
    
    
    
    115,712SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
    
    
    108,244
    
    
    
    107,033
    
    
    
    105,599Operating income
    
    
    12,818
    
    
    
    10,538
    
    
    
    10,113INTEREST EXPENSE
    
    
    1,434
    
    
    
    1,493
    
    
    
    1,606OTHER INCOME, NET
    
    
    60
    
    
    
    36
    
    
    
    21EARNINGS BEFORE INCOME TAXES
    
    
    11,444
    
    
    
    9,081
    
    
    
    8,528PROVISION FOR INCOME TAXES
    
    
    4,659
    
    
    
    3,660
    
    
    
    1,214NET EARNINGS
    
    $
    6,785
    
    
    $
    5,421
    
    
    $
    7,314EARNINGS PER COMMON SHARE:Basic
    
    $
    0.72
    
    
    $
    0.58
    
    
    $
    0.78Diluted
    
    $
    0.70
    
    
    $
    0.56
    
    
    $
    0.75WEIGHTED AVERAGE SHARES:Basic
    
    
    9,406,011
    
    
    
    9,394,140
    
    
    
    9,339,276Diluted
    
    
    9,666,996
    
    
    
    9,755,287
    
    
    
    9,704,243
  F-6




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##### Table of Contents



INDUSTRIAL DISTRIBUTION GROUP, INC.
AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 FOR THE YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
 ADDITIONAL
    
    
    ACCUMULATEDCOMMON STOCK
    
    
    PAID IN
    
    
    EARNINGSSHARES
    
    
    AMOUNT
    
    
    CAPITAL
    
    
    (DEFICIT)
    
    
    TOTALBALANCE, DECEMBER 31, 2003
    
    
    9,187,735
    
    
    $
    92
    
    
    $
    99,225
    
    
    $
    (42,919
    )
    
    $
    56,398Sale of shares through employee stock
purchase plan
    
    
    59,481
    
    
    
    0
    
    
    
    280
    
    
    
    0
    
    
    
    280Stock options exercised
    
    
    96,634
    
    
    
    1
    
    
    
    313
    
    
    
    0
    
    
    
    314Stock based compensation
    
    
    0
    
    
    
    0
    
    
    
    137
    
    
    
    0
    
    
    
    137Tax benefit from stock options exercised
    
    
    0
    
    
    
    0
    
    
    
    226
    
    
    
    0
    
    
    
    226Amortization of restricted stock
    
    
    0
    
    
    
    0
    
    
    
    114
    
    
    
    0
    
    
    
    114Net earnings
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    7,314
    
    
    
    7,314BALANCE, DECEMBER 31, 2004
    
    
    9,343,850
    
    
    $
    93
    
    
    $
    100,295
    
    
    $
    (35,605
    )
    
    $
    64,783Sale of shares through employee stock
purchase plan
    
    
    48,129
    
    
    
    0
    
    
    
    363
    
    
    
    0
    
    
    
    363Stock options exercised
    
    
    55,617
    
    
    
    1
    
    
    
    184
    
    
    
    0
    
    
    
    185Stock based compensation
    
    
    0
    
    
    
    0
    
    
    
    177
    
    
    
    0
    
    
    
    177Tax benefit from stock options exercised
    
    
    0
    
    
    
    0
    
    
    
    125
    
    
    
    0
    
    
    
    125Issuance of shares pursuant to executive
restricted stock agreement
    
    
    70,000
    
    
    
    1
    
    
    
    (1
    )
    
    
    0
    
    
    
    0Tax benefit from restricted stock issuance
    
    
    0
    
    
    
    0
    
    
    
    137
    
    
    
    0
    
    
    
    137Amortization of restricted stock
    
    
    0
    
    
    
    0
    
    
    
    271
    
    
    
    0
    
    
    
    271Re-purchase of common stock
    
    
    (135,081
    )
    
    
    (1
    )
    
    
    (1,150
    )
    
    
    0
    
    
    
    (1,151
    )Net earnings
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    5,421
    
    
    
    5,421BALANCE, DECEMBER 31, 2005
    
    
    9,382,515
    
    
    $
    94
    
    
    $
    100,401
    
    
    $
    (30,184
    )
    
    $
    70,311Sale of shares through employee stock
purchase plan
    
    
    27,483
    
    
    
    0
    
    
    
    221
    
    
    
    0
    
    
    
    221Stock options exercised
    
    
    269,999
    
    
    
    3
    
    
    
    917
    
    
    
    0
    
    
    
    920Stock based compensation
    
    
    0
    
    
    
    0
    
    
    
    194
    
    
    
    0
    
    
    
    194Tax benefit from stock options exercised
    
    
    0
    
    
    
    0
    
    
    
    431
    
    
    
    0
    
    
    
    431Amortization of restricted stock
    
    
    0
    
    
    
    0
    
    
    
    441
    
    
    
    0
    
    
    
    441Re-purchase of common stock
    
    
    (336,800
    )
    
    
    (4
    )
    
    
    (2,975
    )
    
    
    0
    
    
    
    (2,979
    )Net earnings
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    6,785
    
    
    
    6,785BALANCE, DECEMBER 31, 2006
    
    
    9,343,197
    
    
    $
    93
    
    
    $
    99,630
    
    
    $
    (23,399
    )
    
    $
    76,324
  F-7




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INDUSTRIAL DISTRIBUTION GROUP, INC.
AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR THE YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
 2006
    
    
    2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net earnings
    
    $
    6,785
    
    
    $
    5,421
    
    
    $
    7,314Adjustments to reconcile net earnings to net cash provided by operating activities:Depreciation and amortization
    
    
    1,294
    
    
    
    1,226
    
    
    
    909Gain on sale of assets
    
    
    (111
    )
    
    
    (555
    )
    
    
    (66
    )Deferred income taxes
    
    
    680
    
    
    
    1,016
    
    
    
    (1,023
    )Excess tax benefit from exercise of stock options
    
    
    (360
    )
    
    
    0
    
    
    
    0Stock based compensation expense
    
    
    635
    
    
    
    448
    
    
    
    251Income tax benefit of stock options exercised
    
    
    431
    
    
    
    125
    
    
    
    226Income tax benefit of restricted stock issuance
    
    
    0
    
    
    
    137
    
    
    
    0Changes in operating assets and liabilities, net of business unit sold:Accounts receivable, net
    
    
    (15,288
    )
    
    
    (1,952
    )
    
    
    (7,475
    )Inventories, net
    
    
    (5,366
    )
    
    
    (2,239
    )
    
    
    (824
    )Prepaids and other assets
    
    
    132
    
    
    
    2,950
    
    
    
    (561
    )Accounts payable
    
    
    3,869
    
    
    
    650
    
    
    
    8,291Accrued compensation
    
    
    (460
    )
    
    
    (1,178
    )
    
    
    1,864Other accrued and long-term liabilities
    
    
    (1,260
    )
    
    
    (478
    )
    
    
    (1,513
    )Total adjustments
    
    
    (15,804
    )
    
    
    150
    
    
    
    79Net cash (used in) provided by operating activities
    
    
    (9,019
    )
    
    
    5,571
    
    
    
    7,393CASH FLOWS FROM INVESTING ACTIVITIES:Additions to property and equipment, net
    
    
    (2,138
    )
    
    
    (519
    )
    
    
    (1,040
    )Proceeds from the sale of business unit and other
    
    
    0
    
    
    
    789
    
    
    
    5Proceeds from the sale of property and equipment
    
    
    741
    
    
    
    2,297
    
    
    
    127Net cash (used in) provided by investing activities
    
    
    (1,397
    )
    
    
    2,567
    
    
    
    (908
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of common stock, net of issuance cost
    
    
    1,141
    
    
    
    548
    
    
    
    594Purchase of common stock
    
    
    (2,979
    )
    
    
    (1,151
    )
    
    
    0Excess tax benefit from exercise of stock options
    
    
    360
    
    
    
    0
    
    
    
    0Repayments on revolving credit facility
    
    
    (191,905
    )
    
    
    (156,241
    )
    
    
    (113,160
    )Borrowings on revolving credit facility
    
    
    203,480
    
    
    
    147,341
    
    
    
    109,010Debt repayments
    
    
    (72
    )
    
    
    (480
    )
    
    
    (113
    )Debt borrowings
    
    
    19
    
    
    
    0
    
    
    
    11Deferred loan costs
    
    
    0
    
    
    
    (598
    )
    
    
    0Net cash provided by (used in) financing activities
    
    
    10,044
    
    
    
    (10,581
    )
    
    
    (3,658
    )NET CHANGE IN CASH AND CASH EQUIVALENTS
    
    
    (372
    )
    
    
    (2,443
    )
    
    
    2,827CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    
    
    721
    
    
    
    3,164
    
    
    
    337CASH AND CASH EQUIVALENTS, END OF YEAR
    
    $
    349
    
    
    $
    721
    
    
    $
    3,164SUPPLEMENTAL DISCLOSURES:Interest paid
    
    $
    1,264
    
    
    $
    1,195
    
    
    $
    1,289Income taxes paid, net of refunds
    
    $
    3,085
    
    
    $
    1,584
    
    
    $
    4,478
  F-8




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INDUSTRIAL DISTRIBUTION GROUP, INC.
AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
 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 49 states and China, 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 reclassifications have been made to prior year amounts to conform to the current year
presentation.
 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.
 Accounts Receivable
 Accounts receivable is composed of trade receivables that are credit based and do not require
collateral. At December 31, 2006, no one customer made up more than 7% of total receivables. 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. In accordance with the policy no accounts were required to be
written off for the year ended 2006. At December 31, 2005 and 2004, $44,000 and $1,315,000 in
fully reserved accounts receivable were written off against the allowance for doubtful accounts.
Additional write-offs for the years ended December 31, 2006, 2005, and 2004 were $357,000,
$716,000 and $1,151,000, respectively. During 2006, 2005, and 2004, the Company incurred bad
debt expense related to trade receivables of $370,000, $74,000, and $802,000, respectively. The
allowance for doubtful accounts amounted to $1,382,000 and $1,369,000 as of December 31, 2006 and
2005, respectively.
 Inventories
 Inventories consist primarily of merchandise purchased for resale. Inventory on consignment at
customer locations was 3.2% and 11.0% of the total gross inventory balance as of December 31,
2006 and 2005, respectively. Inventory is stated at
 F-9




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the lower of cost or market value, and market
is considered to be net realizable value. Cost is determined on a weighted-average basis. In
determining the realizable value, the Company identifies slow moving or obsolete inventory that
is 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. The Company
recorded inventory expense or (recoveries) of $410,000, $1,208,000, and ($193,000), in 2006, 2005
and 2004, respectively. The reserve for obsolete and slow moving inventory was $4,970,000 and
$5,115,000 as of December 31, 2006 and 2005, respectively.
 Internal-Use Software
 The Company capitalizes internal direct and incremental costs related to software developed or
obtained for internal use in accordance with AICPA Statement of Position 98-1, Accounting
for Costs of Computer Software Developed or Obtained for Internal Use. Software development
costs incurred during the preliminary or maintenance project stage are expensed as incurred,
while costs incurred during the application development stage are capitalized and are amortized
using the straight-line method over the useful life of the software, not to exceed three years.
Amortization of these capitalized costs begins only when the software becomes ready for its
intended use. General and administrative costs related to developing or obtaining such software
are expensed as incurred.
 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 in
selling, general and administrative expense in the statements of income. 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
 Other Intangible Assets
 The Company has separable intangible assets that are deemed to have definite lives and which are
amortized over those useful lives. The Company has no goodwill or other intangible assets with
indefinite useful lives. The gross carrying value of the intangible assets was $671,000 at
December 31, 2006. The Company recorded amortization expense of $42,000, $42,000, and $44,000, in
2006, 2005 and 2004, respectively. The aggregate estimated amortization expense related to other
identifiable intangible assets for the years 2007 to 2011 is $159,000. Accumulated amortization
was $512,000 and $470,000 as of December 31, 2006 and 2005, 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 Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment of Long-lived assets.
Long-lived assets held for sale are reported at the lower of their carrying amount or fair value
less cost to sell. To analyze recoverability, the Company projects undiscounted net future cash
flows over the remaining life of such assets. If these projected cash flows are less than the
carrying amount, an 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
 F-10




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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, with the exception of certain state tax net operating
loss carryforwards.During 2004, the Company determined that it was more likely than not that future tax benefits
associated with certain state tax net operating loss carryforwards and deductible goodwill
amortization for tax purposes would 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 its 2004 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
$542,000 and $561,000 as of December 31, 2006 and 2005, respectively. The valuation allowance for
deferred tax assets at December 31, 2006 and 2005 was 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. In conjunction with the amendment of its Credit
Facility during 2005, $598,000 of costs were incurred and capitalized. These costs were combined
with $220,000 of deferred loan costs that existed prior to the amendment and will be amortized
over the term of the amended agreement. Amortization expense related to deferred loan costs for
the years ended December 31, 2006, 2005, and 2004 was $164,000, $202,000, and $240,000,
respectively. Such amortization is classified as interest expense in the accompanying statements
of income. As of December 31, 2006 and 2005, the net book value of the Companys deferred loan
costs was $573,000 and $736,000, respectively.
 Revenue Recognition
 Revenue is recognized on sales of product 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.
 Flexible Procurement Solutions or FPS arrangements combine the sale of products with value
added services, including providing customers with expertise in product application and process
improvements. FPS revenues typically include both a product and service component, with the
product sale accounting for substantially all of the revenue and costs. The service component is
billed separately as services are rendered. These revenues are typically associated with site
management, carrying costs associated with inventory, and administrative fees. These service
revenues amounted to $25,905,000 or 4.7% of the Companys total revenue for the year ended
December 31, 2006, and $22,470,000 or 4.2% for the year ended December 31, 2005. All revenues are
recognized when the services have been performed.
 Software Costs
 The Company does not sell or lease software. The Companys proprietary FPS software programs
(including SMS and Innosource) are used to combine the sale of its MROP products with value added
services. The Company does not charge for this software used at customer sites. The FPS software
was acquired through the acquisition of one of its companies in 1997. The Company incurs
maintenance costs which are expensed as incurred.
 F-11




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##### Table of Contents



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 valuation 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 $4,990,000, $4,784,000, and $5,067,000, for the years ended December 31,
2006, 2005, and 2004, respectively.
 Advertising Costs
 Advertising costs are expensed as incurred. Advertising costs were $525,000, $403,000, and
$498,000 for the years ended 2006, 2005, and 2004, 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 7.0% of the Companys accounts receivable or
sales for the periods presented. The Companys international sales represent less than 1.2% of
sales for any of the periods presented.
 Stock-Based Compensation
 The Company has stock-based employee compensation plans, described more fully in Note 10.
Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No.
123R, using the modified prospective transition method. Accordingly, prior year amounts have not
been restated. Under this transition method, compensation expense is recognized for share-based
payments granted after January 1, 2006 in addition to share-based payments granted prior to, and
unvested, as of January 1, 2006 based on the grant-date fair value estimated in accordance with
the original provisions of SFAS No. 123. These fair values are calculated by using the
Black-Scholes-Merton option pricing formula which requires estimates for expected volatility,
expected dividends, the risk-free interest rate and the term of the option. Prior to January 1,
2006, as permitted by SFAS No. 123, the Company accounted for share-based payments using the
prospective method described in SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure. As the fair value recognition provisions of SFAS No.
123 and SFAS No. 123R are materially consistent, the adoption of SFAS No. 123R did not have a
significant impact on the Companys financial position or results of operations.
 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
 In June 2006, the Financial Accounting Standards Board issued Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, an interpretation of FAS 109, Accounting for Income Taxes
(FIN 48), to create a single model to address accounting for uncertainty in tax positions. FIN 48
clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax
position is required to meet before being recognized in the financial statements. FIN 48 also
provides guidance on derecognition, measurement, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company will adopt FIN 48 as of January 1, 2007, as
required. The cumulative effect of adopting FIN 48 will be recorded in accumulated deficit.
 F-12




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##### Table of Contents



The
Company has assessed the impact of the Interpretation on its financial statements and has
determined that the adoption of FIN 48 will not have a material impact on the Companys financial
position, results of operations or cash flows.
 In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157
provides guidance for using fair value to measure assets and liabilities. The standard expands
required disclosures about the extent to which companies measure assets and liabilities at fair
value, the information used to measure fair value, and the effect of fair value measurements on
earnings. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company
is currently evaluating the impact of adopting SFAS 157 on its consolidated financial statements.
 In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159). SFAS 159 permits entities to choose to measure many financial
assets and financial liabilities at fair value. Unrealized gains and losses on items for which
the fair value option has been elected are reported earnings. SFAS 159 is effective for fiscal
years beginning after November 15, 2007. The Company is currently assessing the impact of SFAS 159 on
our consolidated financial position,
results of operations and cash flows.
 3. DIVESTITURES
 During 2005, the Company sold the net assets of one of its operating subsidiaries, Cardinal
Machinery. Assets and liabilities with a net book value of approximately $651,000 were sold for
total consideration of $789,000, resulting in a gain of $138,000. The gain was classified as an
offset to selling, general and administrative expenses in the accompanying 2005 statements of
income.Revenue for Cardinal Machinery was $6.3 million and $9.5 million for years ended December 31,
2005 and 2004, respectively, which represented less than 2% of total revenue in both periods.
 4. NOTE RECEIVABLE
 During 2004, the Company entered into a note receivable in conjunction with the sale of an asset
in the amount of $1,000,000, before discounting. The note had an implicit interest rate of 3.1%
and was unsecured. The note receivable had a $250,000 balance at December 31,
2005, which was collected during 2006 with no remaining balance at December 31,
2006.
 5. PROPERTY AND EQUIPMENT
 Property and equipment consisted of the following at December 31, 2006 and 2005 (in thousands):
 2006
    
    
    2005Land, building, and improvements
    
    $
    1,909
    
    
    $
    2,865Leasehold improvements
    
    
    3,495
    
    
    
    2,160Furniture, fixtures, and equipment
    
    
    6,939
    
    
    
    6,973Computer hardware and software
    
    
    3,743
    
    
    
    3,763Total property and equipment
    
    
    16,086
    
    
    
    15,761Less accumulated depreciation
    
    
    (11,158
    )
    
    
    (11,089
    )Property and equipment, net
    
    $
    4,928
    
    
    $
    4,672
 For the year ended December 31, 2006, amortization of software and internally developed software
was $74,000. There was no software development cost capitalized or amortized in fiscal 2005 or
2004. Depreciation expense for all other property and equipment totaled $1,178,000, $1,184,000,
and $865,000 for the years ended December 31, 2006, 2005, and 2004, respectively. The
unamortized internally developed software balance was $952,000 as of December 31, 2006.
 6. SALE OF PROPERTY
 During 2006, the Company sold real property located in Tonawanda, New York in a continuing effort
to consolidate warehouse facilities, improve logistic efficiencies and reduce assets. The
property sold for $716,000, net of closing costs, resulting in a gain of $281,000. The gain on
the sale of assets is included in the accompanying financial statements as a reduction of
selling, general and administrative expenses. There were no relocation or severance costs
associated with the
 F-13




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##### Table of Contents



7.
    
    LONG-TERM DEBT
  2006
    
    
    2005Revolving credit facility (Note 8)
    
    $
    24,375
    
    
    $
    12,800Other
    
    
    48
    
    
    
    101Total debt
    
    
    24,423
    
    
    
    12,901Less current portion
    
    
    (30
    )
    
    
    (83
    )Total long-term debt
    
    $
    24,393
    
    
    $
    12,818
  2007
    
    $
    302008
    
    
    182009
    
    
    02010
    
    
    24,3752011
    
    
    0Thereafter
    
    
    0$
    24,423
  8.
    
    REVOLVING CREDIT FACILITY
   F-14




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##### Table of Contents



9.
    
    CAPITAL STOCK
 Preferred Stock
   Stockholder Rights Plan
  Common Stock
  Stock Repurchase Program
  10.
    
    STOCK BASED COMPENSATION
  F-15




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##### Table of Contents



2006
    
    2005
    
    2004Expected life (years)
    
    
    7
    
    
    
    7
    
    
    
    7Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected stock price volatility
    
    
    47
    %
    
    
    52
    %
    
    
    56
    %Risk-free interest rate (low-high)
    
    
    4.29% - 5.23
    %
    
    
    3.74% - 4.60
    %
    
    
    3.17% - 4.51
    %
 Stock Incentive Plan
    Employee Stock Purchase Plan
  F-16




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##### Table of Contents



Management Incentive Plan
  Non-Stockholder Approved Equity Arrangements
   2006
    
    
    2005
    
    
    2004WEIGHTED-
    
    
    
    
    
    
    WEIGHTED-
    
    
    
    
    
    
    WEIGHTED-AVERAGE
    
    
    
    
    
    
    AVERAGE
    
    
    
    
    
    
    AVERAGEEXERCISE
    
    
    
    
    
    
    EXERCISE
    
    
    
    
    
    
    EXERCISESHARES
    
    
    PRICE
    
    
    SHARES
    
    
    PRICE
    
    
    SHARES
    
    
    PRICEOutstanding at beginning of year
    
    
    943,847
    
    
    $
    4.86
    
    
    
    974,669
    
    
    $
    4.60
    
    
    
    1,026,336
    
    
    $
    4.45Granted
    
    
    60,050
    
    
    $
    8.04
    
    
    
    45,000
    
    
    $
    8.31
    
    
    
    55,000
    
    
    $
    5.88Forfeited and surrendered
    
    
    (35,702
    )
    
    $
    8.98
    
    
    
    (20,205
    )
    
    $
    4.05
    
    
    
    (10,033
    )
    
    $
    9.04Exercised
    
    
    (269,999
    )
    
    $
    3.41
    
    
    
    (55,617
    )
    
    $
    3.34
    
    
    
    (96,634
    )
    
    $
    3.25Outstanding at end of year
    
    
    698,196
    
    
    $
    5.49
    
    
    
    943,847
    
    
    $
    4.86
    
    
    
    974,669
    
    
    $
    4.60Exercisable at end of year
    
    
    599,813
    
    
    $
    5.09
    
    
    
    853,847
    
    
    $
    4.66
    
    
    
    793,005
    
    
    $
    4.77
  OPTIONS OUTSTANDING
    
    
    OPTIONS EXERCISABLEWEIGHTED
    
    
    WEIGHTED-
    
    
    
    
    
    
    WEIGHTED-REMAINING
    
    
    AVERAGE
    
    
    EXERCISABLE
    
    
    AVERAGERANGE OF EXERCISE
    
    OUTSTANDING
    
    
    CONTRACTUAL
    
    
    EXERCISE
    
    
    AT
    
    
    EXERCISEPRICE
    
    AT 12/31/06
    
    
    LIFE
    
    
    PRICE
    
    
    12/31/06
    
    
    PRICE$1.65  5.00
    
    
    317,265
    
    
    
    5.12
    
    
    $
    2.55
    
    
    
    317,265
    
    
    $
    2.55$5.0110.00
    
    
    342,381
    
    
    
    4.54
    
    
    $
    6.91
    
    
    
    243,998
    
    
    $
    6.50$10.0115.00
    
    
    0
    
    
    
    0.00
    
    
    $
    0.00
    
    
    
    0
    
    
    $
    0.00$15.0120.00
    
    
    38,550
    
    
    
    0.74
    
    
    $
    17.05
    
    
    
    38,550
    
    
    $
    17.05698,196
    
    
    
    4.59
    
    
    $
    5.49
    
    
    
    599,813
    
    
    $
    5.09
 F-17




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##### Table of Contents



2006
    
    
    2005
    
    
    2004WEIGHTED-
    
    
    
    
    
    
    WEIGHTED-
    
    
    
    
    
    
    WEIGHTED-AVERAGE
    
    
    
    
    
    
    AVERAGE
    
    
    
    
    
    
    AVERAGEGRANT DATE
    
    
    
    
    
    
    GRANT DATE
    
    
    
    
    
    
    GRANT DATESHARES
    
    
    PRICE
    
    
    SHARES
    
    
    PRICE
    
    
    SHARES
    
    
    PRICEOutstanding, unvested at
beginning of year
    
    
    112,911
    
    
    $
    8.35
    
    
    
    135,785
    
    
    $
    5.00
    
    
    
    80,000
    
    
    $
    3.09Granted
    
    
    93,883
    
    
    $
    7.92
    
    
    
    88,386
    
    
    $
    8.80
    
    
    
    55,785
    
    
    $
    7.75Forfeited
    
    
    (10,000
    )
    
    $
    6.20
    
    
    
    (41,260
    )
    
    $
    7.22
    
    
    
    0
    
    
    $
    0.00Vested
    
    
    0
    
    
    $
    0.00
    
    
    
    (70,000
    )
    
    $
    3.08
    
    
    
    0
    
    
    $
    0.00Outstanding, unvested at end of year
    
    
    196,794
    
    
    $
    8.26
    
    
    
    112,911
    
    
    $
    8.35
    
    
    
    135,785
    
    
    $
    5.00
  Pro Forma Information under SFAS 123R
  F-18




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##### Table of Contents



2005
    
    
    2004Net earnings as reported
    
    $
    5,421
    
    
    $
    7,314Add: Total stock-based compensation expense
included in the determination of net earnings as
reported, net of tax
    
    
    332
    
    
    
    208Deduct: Total stock-based compensation expense
determined under fair-value based method for all
awards, net of tax
    
    
    410
    
    
    
    429Pro forma net earnings
    
    $
    5,343
    
    
    $
    7,093Basic earnings per common share:As reported
    
    $
    0.58
    
    
    $
    0.78Pro forma
    
    $
    0.57
    
    
    $
    0.76Diluted earnings per common share:As reported
    
    $
    0.56
    
    
    $
    0.75Pro forma
    
    $
    0.55
    
    
    $
    0.73
 11. INCOME TAXES
  2006
    
    
    2005
    
    
    2004Current
    
    $
    3,979
    
    
    $
    2,644
    
    
    $
    2,237Deferred
    
    
    680
    
    
    
    1,016
    
    
    
    (1,023
    )Total provision
    
    $
    4,659
    
    
    $
    3,660
    
    
    $
    1,214
  2006
    
    
    2005
    
    
    2004Tax at federal statutory rate
    
    $
    3,891
    
    
    $
    3,088
    
    
    $
    2,900State income tax, net of federal benefit
    
    
    548
    
    
    
    405
    
    
    
    333Nondeductible expenses
    
    
    244
    
    
    
    245
    
    
    
    269Change in valuation allowance
    
    
    (19
    )
    
    
    0
    
    
    
    (2,595
    )Tax contingency reserve and other
    
    
    (5
    )
    
    
    (78
    )
    
    
    307Provision for income taxes
    
    $
    4,659
    
    
    $
    3,660
    
    
    $
    1,214
 F-19




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##### Table of Contents



2006
    
    
    2005Deferred tax assets:Allowance for doubtful accounts
    
    $
    530
    
    
    $
    527Accrued employee benefits
    
    
    19
    
    
    
    32Capitalized inventory costs
    
    
    530
    
    
    
    495Inventory allowance
    
    
    1,906
    
    
    
    1,607Accrued liabilities
    
    
    682
    
    
    
    841Net operating loss carryforwards
    
    
    682
    
    
    
    788Book in excess of tax depreciation
    
    
    (201
    )
    
    
    247Book in excess of tax amortization
    
    
    1,607
    
    
    
    1,830Valuation allowance
    
    
    (542
    )
    
    
    (561
    )Other
    
    
    (1
    )
    
    
    133Total deferred tax assets
    
    
    5,212
    
    
    
    5,939Deferred tax liabilities:Intangible storeroom management contract
    
    
    (60
    )
    
    
    (76
    )Step-up in asset basis
    
    
    (22
    )
    
    
    (53
    )Total deferred liabilities
    
    
    (82
    )
    
    
    (129
    )Net deferred tax assets
    
    $
    5,130
    
    
    $
    5,810
   12.
    
    COMMITMENTS AND CONTINGENCIES
 Operating Leases
  2007
    
    $
    5,8882008
    
    
    4,5742009
    
    
    3,2142010
    
    
    1,8772011
    
    
    1,401Thereafter
    
    
    9,406$
    26,360
  F-20




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##### Table of Contents



Litigation
  Insurance
  13. SAVINGS PLANS
  14. RELATED-PARTY TRANSACTIONS
  F-21




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##### Table of Contents



15. INTERIM FINANCIAL INFORMATION (UNAUDITED)
  2006FIRST
    
    
    SECOND
    
    
    THIRD
    
    
    FOURTHQUARTER
    
    
    QUARTER
    
    
    QUARTER
    
    
    QUARTERNet sales
    
    $
    140,276
    
    
    $
    137,005
    
    
    $
    138,991
    
    
    $
    131,602Cost of sales
    
    
    110,144
    
    
    
    107,721
    
    
    
    107,633
    
    
    
    101,314Gross profit
    
    
    30,132
    
    
    
    29,284
    
    
    
    31,358
    
    
    
    30,288Selling, general and administrative expenses
    
    
    27,237
    
    
    
    26,374
    
    
    
    27,888
    
    
    
    26,745Operating income
    
    
    2,895
    
    
    
    2,910
    
    
    
    3,470
    
    
    
    3,543Interest expense, net
    
    
    311
    
    
    
    302
    
    
    
    361
    
    
    
    460Other expense (income), net
    
    
    (18
    )
    
    
    (3
    )
    
    
    (2
    )
    
    
    (37
    )Earnings before income taxes
    
    
    2,602
    
    
    
    2,611
    
    
    
    3,111
    
    
    
    3,120Provision for income taxes
    
    
    1,061
    
    
    
    1,091
    
    
    
    1,311
    
    
    
    1,196Net earnings
    
    $
    1,541
    
    
    $
    1,520
    
    
    $
    1,800
    
    
    $
    1,924Earnings per share:Basic earnings per common share (*)
    
    $
    0.16
    
    
    $
    0.16
    
    
    $
    0.19
    
    
    $
    0.20Diluted earnings per common share (*)
    
    $
    0.16
    
    
    $
    0.16
    
    
    $
    0.19
    
    
    $
    0.20
 
 (*)
    
    The sum of the basic and diluted earnings per common share does not equal the total for
the year due to the weighted average shares calculation and rounding. 2005FIRST
    
    
    SECOND
    
    
    THIRD
    
    
    FOURTHQUARTER
    
    
    QUARTER
    
    
    QUARTER
    
    
    QUARTERNet sales
    
    $
    137,948
    
    
    $
    135,618
    
    
    $
    135,212
    
    
    $
    130,069Cost of sales
    
    
    108,997
    
    
    
    105,823
    
    
    
    105,502
    
    
    
    100,954Gross profit
    
    
    28,951
    
    
    
    29,795
    
    
    
    29,710
    
    
    
    29,115Selling, general and administrative expenses
    
    
    26,553
    
    
    
    26,791
    
    
    
    27,310
    
    
    
    26,379Operating income
    
    
    2,398
    
    
    
    3,004
    
    
    
    2,400
    
    
    
    2,736Interest expense, net
    
    
    425
    
    
    
    425
    
    
    
    367
    
    
    
    276Other expense (income), net
    
    
    1
    
    
    
    0
    
    
    
    (39
    )
    
    
    2Earnings before income taxes
    
    
    1,972
    
    
    
    2,579
    
    
    
    2,072
    
    
    
    2,458Provision (benefit) for income taxes
    
    
    747
    
    
    
    1,013
    
    
    
    920
    
    
    
    980Net earnings
    
    $
    1,225
    
    
    $
    1,566
    
    
    $
    1,152
    
    
    $
    1,478Earnings per share:Basic earnings per common share
    
    $
    0.13
    
    
    $
    0.17
    
    
    $
    0.12
    
    
    $
    0.16Diluted earnings per common share
    
    $
    0.13
    
    
    $
    0.16
    
    
    $
    0.12
    
    
    $
    0.15
 F-22




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##### Table of Contents



INDUSTRIAL DISTRIBUTION GROUP, INC.
 
 SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
 ALLOWANCE FOR DOUBTFUL ACCOUNTS
 ADDITIONSCHARGEDBALANCE
    
    TO COSTSAT
    
    AND
    
    
    
    
    
    BALANCE ATBEGINNING
    
    EXPENSES
    
    
    
    
    
    END OFDESCRIPTION
    
    OF PERIOD
    
    NET (1)
    
    DEDUCTIONS
    
    PERIODYear ended December 31, 2006:Allowance for doubtful accounts
    
    $
    1,369
    
    
    
    370
    
    
    
    357
    
    
    $
    1,382Year ended December 31, 2005:Allowance for doubtful accounts
    
    $
    2,055
    
    
    
    74
    
    
    
    760
    
    
    $
    1,369Year ended December 31, 2004:Allowance for doubtful accounts
    
    $
    3,719
    
    
    
    802
    
    
    
    2,466
    
    
    $
    2,055
 
 (1)
    
    Amounts charged to costs and expenses are net of adjustments and recoveries to state the
allowance based on the Companys historical collections experience and managements assessment
of the collectability of specific accounts. INVENTORY RESERVE
 ADDITIONSCHARGEDTO COSTSBALANCE AT
    
    AND
    
    
    
    
    
    BALANCE ATBEGINNING
    
    EXPENSES
    
    
    
    
    
    END OFDESCRIPTION
    
    OF PERIOD
    
    NET (1)
    
    DEDUCTIONS(2)
    
    PERIODYear ended December 31, 2006:Inventory reserve
    
    $
    5,115
    
    
    
    410
    
    
    
    555
    
    
    $
    4,970Year ended December 31, 2005:Inventory reserve
    
    $
    5,168
    
    
    
    1,208
    
    
    
    1,261
    
    
    $
    5,115Year ended December 31, 2004:Inventory reserve
    
    $
    5,597
    
    
    
    (193
    )
    
    
    236
    
    
    $
    5,168
 
 (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 items.(2)
    
    Deductions represent the write off of obsolete inventory. F-23




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##### Table of Contents



VALUATION ALLOWANCE
 ADDITIONSCHARGEDTO COSTSBALANCE AT
    
    AND
    
    
    
    
    
    BALANCE ATBEGINNING
    
    EXPENSES
    
    
    
    
    
    END OFDESCRIPTION
    
    OF PERIOD
    
    NET(1)
    
    DEDUCTIONS (2)
    
    PERIODYear ended December 31, 2006:Valuation allowance
    
    $
    561
    
    
    
    0
    
    
    
    19
    
    
    $
    542Year ended December 31, 2005:Valuation allowance
    
    $
    561
    
    
    
    0
    
    
    
    0
    
    
    $
    561Year ended December 31, 2004:Valuation allowance
    
    $
    3,156
    
    
    
    0
    
    
    
    2,595
    
    
    $
    561
 
 (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-24




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##### Table of Contents



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, 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 18, 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)10.5(d)
    
    Third Amendment to Credit Agreement dated July 18, 2005 by and between the Company,
Bank of America, N.A. as a lender and administrative agent, and certain other
lenders listed therein (filed as Exhibit 10 on the Companys Current Report on
Form 8-K filed (File No. 001-13195) on July 19, 2005 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)10.8(a)
    
    Industrial Distribution Group, Inc. Amended and Restated Employee Stock Purchase
Plan (filed as Exhibit 4 of Post-Effective Amendment No. 1 to the Companys
Registration Statement on Form S-8 (File No. 333-41921) on January 26, 1998 is
hereby incorporated by reference)10.8(b)
    
    First Amendment to Industrial Distribution Group, Inc. Amended and Restated
Employee Stock Purchase Plan (filed as Exhibit 4 of the Companys Registration
Statement on Form S-8 (File No. 333-58072) on April 2, 2001 is hereby incorporated
by reference)10.8(c)
    
    Second Amendment to Industrial Distribution Group, Inc. Amended and Restated
Employee Stock Purchase Plan (filed as Exhibit 4(c) of Post-Effective Amendment No.
1 to the Companys Registration Statement on Form S-8 (File




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##### Table of Contents



ExhibitNumber
    
    Description of ExhibitNo. 333-58072) on March
3, 2006 is hereby incorporated by reference)(**)21.1
    
    Subsidiaries of the Company(**)23.1
    
    Consent of Independent Registered Public Accounting Firm(**)31.1
    
    Certification of Chief Executive Officer with respect to the
Companys Annual Report on Form 10-K for the fiscal year ended
December 31, 2006.(**)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, 2006.(**)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, 2006.(**)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, 2006.
 
 (*)
    
    Management contract or compensatory plan or arrangement required to be filed as an exhibit.(**)
    
    Filed electronically herewith.