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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, 2005
 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 RegisteredNone
    
    None
  
 o þ
 o þ
 þ o
 þ
 o þ o
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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##### 



TABLE OF CONTENTS
 PagePART IItem 1. Business
    
    
    2Item 1A. Risk Factors
    
    
    11Item 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
    
    
    25Item 8. Financial Statements and Supplementary Data
    
    
    25Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    25Item 9A. Controls and Procedures
    
    
    26Item 9B. Other Information
    
    
    26PART IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    26Item 11. Executive Compensation
    
    
    27Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
    
    
    27Item 13. Certain Relationships and Related Transactions
    
    
    27Item 14. Principal Accounting Fees and Services
    
    
    27PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    27SIGNATURES
    
    
    29INDEX
TO FINANCIAL STATEMENTS
    
    
    F-1EXHIBIT
INDEX
    
    
    EI-1EX-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
  1




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PART I
 
 Item 1. Business
 Background and General
     2




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Industry Overview and Trends
     Flexible Procurement Solutions (FPS)
 Services Program and Approach
   3




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Spectrum of Service Offerings
    
    
    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 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; 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
  4




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
    
    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.
    General MROP Sales
 Program and Approach
   5




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Quality Control Standards
  Products
     6




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% ofAggregateProduct Category
    
    Typical Products
    
    RevenueCutting Tools
    
    Drills, Taps, Carbide Tools, End Mills
    
    
    22.9
    %Abrasives
    
    Grinding Wheels, Sanding Belts, Discs, Sheets or Rolls
    
    
    12.4
    %Maintenance Equipment and Supplies
    
    Hydraulic Tools, Paint, Lubrication Equipment
    
    
    9.1
    %Power Tools
    
    Air and Electric Drills, Air Compressors, Impact
Wrenches,
     Screwdrivers
    
    
    8.1
    %Hand Tools
    
    Wrenches, Socket Sets, Screw Drivers, Hammers
    
    
    7.8
    %Coolants, Lubricants, and Adhesives
    
    Metal Cutting Coolants, Aerosols, Industrial Adhesives
    
    
    7.8
    %Safety Products
    
    Gloves, Signs, Absorbents, Glasses
    
    
    5.9
    %Machine Tools and Accessories
    
    Milling Machines, Work Holding Vises, Tool Holders
    
    
    3.6
    %Material Handling Equipment
    
    Hoists, Slings, Chain, Shelving, Casters
    
    
    3.0
    %Tapes
    
    Masking, Filament and Duct Tape
    
    
    2.3
    %Machinery
    
    Metal Removal Equipment, Metal Forming Equipment
    
    
    1.9
    %Fluid Power
    
    Hydraulic and Pneumatic Values, Cylinders
    
    
    1.4
    %Fasteners
    
    Socket Screws, Hex Screws, Anchors
    
    
    1.6
    %Electrical
    
    Fuses, Electrical Switches, Controls
    
    
    1.5
    %Saw Blades
    
    Band, Hack, Hole, Jig Saw Blades
    
    
    1.5
    %Contractor Supplies
    
    Power-Actuated Tools, Ladders, Shovels
    
    
    1.2
    %Tool & Die Supplies
    
    Ground Stock, Drill Rod, Die Sets
    
    
    0.9
    %Brushes
    
    Wire Wheel, Floor Brooms
    
    
    0.9
    %Quality Control Products
    
    Electronic Calipers, Micrometers
    
    
    0.9
    %Welding Equipment and Supplies
    
    Welders, Weld Rod
    
    
    0.9
    %Power Transmission Equipment
    
    Belts, Drives, Bearings, Gears, Pulleys
    
    
    0.8
    %Industrial Hose
    
    Air Hose, Water Hose
    
    
    0.7
    %Industrial Pipes, Valves, Fittings
and
     Metal Goods
    
    Pipes, Valves, Fittings, Angle Iron, Conduit
    
    
    0.6
    %OEM Assembly Parts
    
    Gaskets, Springs, Assembly Plates
    
    
    0.3
    %Other Products
    
    
    
    
    2.0
    %Total
    
    
    
    
    100.0
    %
 Customers
    7




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Sales and Marketing
      Management Information Systems
  8




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Competition
     Personnel
  9




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Executive Officers
  Name
    
    Age
    
    PositionCharles A. Lingenfelter
    
    
    55
    
    
    President and Chief Executive OfficerJack P. Healey
    
    
    46
    
    
    Executive Vice President, Chief Financial Officer,
and SecretaryThomas W. Aldridge, Jr.
    
    
    58
    
    
    Senior Vice PresidentMichael W. Brice
    
    
    41
    
    
    Senior Vice President and Chief Information OfficerJohn R. Kramer
    
    
    42
    
    
    Regional PresidentRobert E. Vanderhoff
    
    
    50
    
    
    Regional President
      10




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Available Information
 www.idglink.com
 
 Item 1A. Risk Factors.
 Certain Factors Affecting Forward Looking Statements
   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.
   11




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Storeroom management customers are large in size and generate average annual revenue of
approximately $2.0 million. If we are not able to renew 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.
  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.
  We are in the process of converting to a centralized back-office computer operating system. In the
interim, we will continue to rely upon our three current management information systems for our
internal management information and related functions. Our operations could be adversely effected
if we were to experience significant errors, delays or unforeseen expenses during the
implementation.
   12




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If we experience system failures, the products and services we provide to our customers could be
delayed or interrupted, which could harm our business and reputation and result in the loss of
customers.
  Our ability to 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.
  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.
  13




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If we were to experience serious personnel dislocation or low morale issues as a result of our
ongoing efficiency improvement strategies, our performance could be adversely affected over the
short-term until we address any such issues.
  
 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 .
 Market Price of Registrants Common Equity and Related Stockholder Matters
  Price RangeHigh
    
    Low2004First Quarter
    
    $
    8.39
    
    
    $
    5.37Second Quarter
    
    $
    8.55
    
    
    $
    6.95Third Quarter
    
    $
    9.72
    
    
    $
    7.75Fourth Quarter
    
    $
    9.80
    
    
    $
    8.302005First Quarter
    
    $
    9.23
    
    
    $
    7.18Second Quarter
    
    $
    9.46
    
    
    $
    8.17Third Quarter
    
    $
    10.62
    
    
    $
    9.00Fourth Quarter
    
    $
    9.26
    
    
    $
    6.582006First Quarter (through February 15)
    
    $
    8.00
    
    
    $
    7.60
   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 Program02/23/05  02/28/05
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5,000,00003/01/05
 03/31/05
    
    
    13,300
    
    
    $
    8.88
    
    
    
    13,300
    
    
    $
    4,881,896First
Quarter Total
    
    
    13,300
    
    
    $
    8.88
    
    
    
    13,300
    
    
    $
    4,881,89604/01/05
 04/30/05
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,881,89605/01/05
 05/31/05
    
    
    41,000
    
    
    $
    8.28
    
    
    
    41,000
    
    
    $
    4,542,41606/01/05
 06/30/05
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,542,416Second
Quarter Total
    
    
    41,000
    
    
    $
    8.28
    
    
    
    41,000
    
    
    $
    4,542,41607/01/05
 07/31/05
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,542,41608/01/05
 08/31/05
    
    
    1,000
    
    
    $
    9.29
    
    
    
    1,000
    
    
    $
    4,533,12609/01/05
 09/31/05
    
    
    46,100
    
    
    $
    9.36
    
    
    
    46,100
    
    
    $
    4,101,630Third
Quarter Total
    
    
    47,100
    
    
    $
    9.36
    
    
    
    47,100
    
    
    $
    4,101,63010/01/05  10/31/05
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,101,63011/01/05  11/30/05
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,101,63012/01/05  12/31/05
    
    
    33,681
    
    
    $
    7.53
    
    
    
    33,681
    
    
    $
    3,848,012Fourth
Quarter Total
    
    
    33,681
    
    
    $
    7.53
    
    
    
    33,681
    
    
    $
    3,848,0122005 Total
    
    
    135,081
    
    
    $
    8.53
    
    
    
    135,081
    
    
    $
    3,848,012
 16




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Item 6. Selected Financial Data.
  Year Ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Dollars in thousands, except per share data)Statements of Income Data:Net sales
    
    $
    538,847
    
    
    $
    529,175
    
    
    $
    483,442
    
    
    $
    492,450
    
    
    $
    514,385Gross profit
    
    
    117,571
    
    
    
    115,712
    
    
    
    107,893
    
    
    
    109,406
    
    
    
    114,521Selling, general, and administrative expenses
    
    
    107,033
    
    
    
    105,599
    
    
    
    101,518
    
    
    
    103,298
    
    
    
    110,811Operating income
    
    
    10,538
    
    
    
    10,113
    
    
    
    6,375
    
    
    
    6,108
    
    
    
    3,710Net earnings (loss) (excluding accounting
change)*
    
    $
    5,421
    
    
    $
    7,314
    
    
    $
    2,361
    
    
    $
    1,598
    
    
    $
    (1,358
    )Accounting change
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (50,347
    )
    
    
    0Net earnings (loss)*
    
    $
    5,421
    
    
    
    7,314
    
    
    
    2,361
    
    
    
    (48,749
    )
    
    
    (1,358
    )Earnings (loss) per common share:Basic (excluding accounting change)*
    
    $
    0.58
    
    
    $
    0.78
    
    
    $
    0.26
    
    
    $
    0.18
    
    
    $
    (0.16
    )Basic
    
    
    0.58
    
    
    
    0.78
    
    
    
    0.26
    
    
    
    (5.53
    )
    
    
    (0.16
    )Diluted (excluding accounting change)*
    
    
    0.56
    
    
    
    0.75
    
    
    
    0.26
    
    
    
    0.18
    
    
    
    (0.16
    )Diluted
    
    
    0.56
    
    
    
    0.75
    
    
    
    0.26
    
    
    
    (5.44
    )
    
    
    (0.16
    )Balance Sheet Data:Working capital
    
    $
    75,640
    
    
    $
    77,222
    
    
    $
    74,708
    
    
    $
    75,974
    
    
    $
    79,907Property and equipment, net
    
    
    4,672
    
    
    
    7,277
    
    
    
    7,161
    
    
    
    11,274
    
    
    
    13,077Total assets
    
    
    140,328
    
    
    
    146,062
    
    
    
    133,300
    
    
    
    139,182
    
    
    
    201,044Long-term debt, including current portion
    
    
    12,901
    
    
    
    22,281
    
    
    
    26,533
    
    
    
    36,363
    
    
    
    42,762Stockholders equity
    
    $
    70,311
    
    
    $
    64,783
    
    
    $
    56,398
    
    
    $
    52,660
    
    
    $
    101,135
 
 (*)
    
    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 year ended December 31, 2001. 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
  Overview and Certain Trends
  17




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Analysis of FPS and General MROP Revenue/Cost Structures
    Summary Comparison of FPS and General MROP Sales Results
   18




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Year Ended December 31,2005
    
    
    2004
    
    
    2003Net Sales
    
    
    %
    
    
    Net Sales
    
    
    %
    
    
    Net Sales
    
    
    %(dollars in millions)FPS Sales, including
storeroom management
    
    $
    301.9
    
    
    
    56.0
    %
    
    $
    289.3
    
    
    
    54.7
    %
    
    $
    250.6
    
    
    
    51.8
    %FPS Gross Profit
    
    
    60.4
    
    
    
    20.0
    %
    
    
    57.4
    
    
    
    19.8
    %
    
    
    50.3
    
    
    
    20.1
    %General MROP Sales
    
    $
    236.9
    
    
    
    44.0
    %
    
    $
    239.9
    
    
    
    45.3
    %
    
    $
    232.8
    
    
    
    48.2
    %General MROP Gross Profit
    
    
    57.2
    
    
    
    24.1
    %
    
    
    58.3
    
    
    
    24.3
    %
    
    
    57.6
    
    
    
    24.7
    %Total Sales
    
    $
    538.8
    
    
    
    100.0
    %
    
    $
    529.2
    
    
    
    100.0
    %
    
    $
    483.4
    
    
    
    100.0
    %Total Gross Profit
    
    $
    117.6
    
    
    
    21.8
    %
    
    $
    115.7
    
    
    
    21.9
    %
    
    $
    107.9
    
    
    
    22.3
    %
  Results of Operations
  Year Ended December 31,2005
    
    
    2004
    
    
    2003(dollars in thousands)Net sales
    
    $
    538,847
    
    
    
    100.0
    %
    
    $
    529,175
    
    
    
    100.0
    %
    
    $
    483,442
    
    
    
    100.0
    %Cost of sales
    
    
    421,276
    
    
    
    78.2
    %
    
    
    413,463
    
    
    
    78.1
    %
    
    
    375,549
    
    
    
    77.7
    %Gross profit
    
    
    117,571
    
    
    
    21.8
    %
    
    
    115,712
    
    
    
    21.9
    %
    
    
    107,893
    
    
    
    22.3
    %Selling, general, and
administrative expenses
    
    
    107,033
    
    
    
    19.8
    %
    
    
    105,599
    
    
    
    20.0
    %
    
    
    101,518
    
    
    
    21.0
    %Operating income
    
    
    10,538
    
    
    
    2.0
    %
    
    
    10,113
    
    
    
    1.9
    %
    
    
    6,375
    
    
    
    1.3
    %Interest expense, net
    
    
    1,493
    
    
    
    0.3
    %
    
    
    1,606
    
    
    
    0.3
    %
    
    
    2,257
    
    
    
    0.5
    %Other income, net
    
    
    36
    
    
    
    0.0
    %
    
    
    21
    
    
    
    0.0
    %
    
    
    30
    
    
    
    0.0
    %Earnings before taxes
    
    
    9,081
    
    
    
    1.7
    %
    
    
    8,528
    
    
    
    1.6
    %
    
    
    4,148
    
    
    
    0.8
    %Provision for income taxes
    
    
    3,660
    
    
    
    0.7
    %
    
    
    1,214
    
    
    
    0.2
    %
    
    
    1,787
    
    
    
    0.4
    %Net earnings
    
    $
    5,421
    
    
    
    1.0
    %
    
    $
    7,314
    
    
    
    1.4
    %
    
    $
    2,361
    
    
    
    0.4
    %
 2005 Compared to 2004
 Net Sales
  19




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Cost of Sales
  Selling, General and Administrative Expenses
  Operating Income
  Interest Expense, net
  Provision for Income Taxes
  2004 Compared to 2003
 Net Sales
  20




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##### Table of Contents



Cost of Sales
  Selling, General and Administrative Expenses
  Operating Income
  Interest Expense, net
  Provision for Income Taxes
  21




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Liquidity and Capital Resources
 Capital Availability and Requirements
     Payments Due by Period (in thousands)Contractual Obligations
    
    Total
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    ThereafterLong Term Debt
    
    $
    12,818
    
    
    $
    0
    
    
    $
    18
    
    
    $
    0
    
    
    $
    0
    
    
    $
    12,800
    
    
    $
    0Operating Leases
    
    $
    27,347
    
    
    $
    5,240
    
    
    $
    4,075
    
    
    $
    3,410
    
    
    $
    2,411
    
    
    $
    1,483
    
    
    $
    10,728Estimated Interest Payments
    
    $
    4,435
    
    
    $
    785
    
    
    $
    836
    
    
    $
    887
    
    
    $
    938
    
    
    $
    989
    
    
    $
    0Total Contractual Cash Obligations
    
    $
    44,600
    
    
    $
    6,025
    
    
    $
    4,929
    
    
    $
    4,297
    
    
    $
    3,349
    
    
    $
    15,272
    
    
    $
    10,728
    22




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Analysis of Cash Flows
      Certain Accounting Policies and Estimates
   23




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Allowance for Doubtful Accounts  Methodology
  Allowance for Doubtful Accounts
    
    2005
    
    
    2004
    
    
    2003(dollars in thousands)Balance at January 1
    
    $
    2,055
    
    
    $
    3,719
    
    
    $
    3,183Add: Charges (recoveries) to expense, net
    
    
    74
    
    
    
    802
    
    
    
    862Deduct:
Write-offs
    
    
    760
    
    
    
    2,466
    
    
    
    326Balance at December 31
    
    $
    1,369
    
    
    $
    2,055
    
    
    $
    3,719Percentage of Gross Receivables
    
    
    2.0
    %
    
    
    3.1
    %
    
    
    6.1
    %
 Inventories  Slow Moving and Obsolescence
  Inventory Reserve
    
    2005
    
    
    2004
    
    
    2003(dollars in thousands)Balance at January 1
    
    $
    5,168
    
    
    $
    5,597
    
    
    $
    6,702Add: Charges (recoveries) to expense, net
    
    
    1,208
    
    
    
    (193
    )
    
    
    5Deduct: Write offs
    
    
    1,261
    
    
    
    236
    
    
    
    1,110Balance at December 31
    
    $
    5,115
    
    
    $
    5,168
    
    
    $
    5,597Percentage of Gross Inventory
    
    
    8.0
    %
    
    
    8.3
    %
    
    
    9.1
    %
 Impairment of Long-Lived Assets
  24




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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.
  25




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##### Table of Contents



Item 9A. Controls and Procedures.
 Disclosure Controls and Procedures
    Internal Control Over Financial Reporting
   
 Item 9B. Other Information .
  
 PART III
 
 Item 10. Directors and Executive Officers of the Registrant.
  26




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##### Table of Contents



Item 11. Executive Compensation.
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
  
 Item 13. Certain Relationships and Related Transactions.
  
 Item 14. Principal Accountants Fees and Services.
  
 PART IV
 
 Item 15. Exhibits and Financial Statement Schedules.
  Financial Statements
          27




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##### Table of Contents



(b)
    
    Exhibits.See Item 15(a)(3).(c)
    
    Financial Statement Schedules.See Item 15(a)(2).
 28




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##### Table of Contents



SIGNATURES
  Date: March 3, 2006
    
    INDUSTRIAL DISTRIBUTION GROUP, INC.By:
    
    // Charles A. LingenfelterCharles A. LingenfelterPresident and Chief Executive Officer
  Date: March 3, 2006
    
    // Charles A. LingenfelterCharles A. LingenfelterPresident, Chief Executive Officer, and Director(Principal Executive Officer)Date: March 3, 2006
    
    // Jack P. HealeyJack P. HealeyExecutive Vice President, Chief Financial Officer, and Secretary(Principal Financial and Accounting Officer)Date: March 3, 2006
    
    // Richard M. SeigelRichard M. SeigelChairman of the BoardDate: March 3, 2006
    
    // David K. BarthDavid K. BarthDirectorDate: March 3, 2006
    
    // William J. BurklandWilliam J. BurklandDirectorDate: March 3, 2006
    
    // William R. FenoglioWilliam R. FenoglioDirectorDate: March 3, 2006
    
    // William T. ParrWilliam T. ParrDirectorDate: March 3, 2006
    
    // George L. Sachs, Jr.George L. Sachs, Jr.DirectorDate: March 3, 2006
    
    // Andrew B. ShearerAndrew B. ShearerDirector
 29




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##### Table of Contents



INDEX
 Managements Annual Report on Internal Control over Financial Reporting
    
    
    F-2Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
    
    
    F-3Report of Independent Registered Public Accounting Firm on the Financial Statements
    
    
    F-4Consolidated Balance Sheets at December 31, 2005 and 2004
    
    
    F-5Consolidated Statements of Income for the Years Ended December 31, 2005, 2004, and 2003
    
    
    F-6Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2005, 2004, and
2003
    
    
    F-7Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004, and 2003
    
    
    F-8Notes to Consolidated Financial Statements and Schedule for the Years Ended December 31, 2005,
2004, and 2003
    
    
    F-9Schedule II  Valuation and Qualifying Accounts for the Years Ended December 31, 2005, 2004, and
2003
    
    
    F-22
 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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##### Table of Contents



Report of Independent Registered Public Accounting Firm on Internal Control
Over Financial Reporting
          
 F-3




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm on the Financial Statements
       Ernst & Young LLP
 
 F-4




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##### Table of Contents



INDUSTRIAL DISTRIBUTION GROUP, INC.
AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 DECEMBER 31, 2005 AND 2004
 2005
    
    
    2004ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    721
    
    
    $
    3,164Accounts receivable, net
    
    
    65,661
    
    
    
    64,582Inventories, net
    
    
    58,485
    
    
    
    56,835Deferred tax assets
    
    
    3,652
    
    
    
    4,363Prepaid and other current assets
    
    
    3,324
    
    
    
    6,144Total current assets
    
    
    131,843
    
    
    
    135,088PROPERTY AND EQUIPMENT, NET
    
    
    4,672
    
    
    
    7,277INTANGIBLE ASSETS, NET
    
    
    201
    
    
    
    243DEFERRED TAX ASSETS
    
    
    2,158
    
    
    
    2,463OTHER ASSETS
    
    
    1,454
    
    
    
    991Total assets
    
    $
    140,328
    
    
    $
    146,062LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Current portion of long-term debt
    
    $
    83
    
    
    $
    196Accounts payable
    
    
    47,684
    
    
    
    47,960Accrued compensation
    
    
    2,891
    
    
    
    4,095Other accrued liabilities
    
    
    5,545
    
    
    
    5,615Total current liabilities
    
    
    56,203
    
    
    
    57,866LONG-TERM DEBT, NET OF CURRENT PORTION
    
    
    12,818
    
    
    
    22,085OTHER LONG TERM LIABILITIES
    
    
    996
    
    
    
    1,328Total liabilities
    
    
    70,017
    
    
    
    81,279COMMITMENTS AND CONTINGENCIES (NOTE 11)STOCKHOLDERS EQUITY (NOTE 9):Preferred stock, $0.10 par value per share;
10,000,000 shares authorized, no shares
issued or outstanding in 2005 and 2004
    
    
    0
    
    
    
    0Common stock, $0.01 par value per share;
50,000,000 shares authorized, 9,382,515
issued and outstanding in 2005, 9,343,850
issued and outstanding in 2004
    
    
    94
    
    
    
    93Additional paid-in capital
    
    
    100,401
    
    
    
    100,295Accumulated deficit
    
    
    (30,184
    )
    
    
    (35,605
    )Total stockholders equity
    
    
    70,311
    
    
    
    64,783Total liabilities and stockholders equity
    
    $
    140,328
    
    
    $
    146,062
  F-5




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##### Table of Contents



INDUSTRIAL DISTRIBUTION GROUP, INC.
AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF INCOME
 FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
  2005
    
    
    2004
    
    
    2003NET SALES
    
    $
    538,847
    
    
    $
    529,175
    
    
    $
    483,442COST OF SALES
    
    
    421,276
    
    
    
    413,463
    
    
    
    375,549Gross profit
    
    
    117,571
    
    
    
    115,712
    
    
    
    107,893SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
    
    
    107,033
    
    
    
    105,599
    
    
    
    101,518Operating income
    
    
    10,538
    
    
    
    10,113
    
    
    
    6,375INTEREST EXPENSE, NET
    
    
    1,493
    
    
    
    1,606
    
    
    
    2,257OTHER INCOME, NET
    
    
    36
    
    
    
    21
    
    
    
    30EARNINGS BEFORE INCOME TAXES
    
    
    9,081
    
    
    
    8,528
    
    
    
    4,148PROVISION FOR INCOME TAXES
    
    
    3,660
    
    
    
    1,214
    
    
    
    1,787NET EARNINGS
    
    $
    5,421
    
    
    $
    7,314
    
    
    $
    2,361EARNINGS PER COMMON SHARE:Basic
    
    $
    0.58
    
    
    $
    0.78
    
    
    $
    0.26Diluted
    
    $
    0.56
    
    
    $
    0.75
    
    
    $
    0.26WEIGHTED AVERAGE SHARES:Basic
    
    
    9,394,140
    
    
    
    9,339,276
    
    
    
    8,991,822Diluted
    
    
    9,755,287
    
    
    
    9,704,243
    
    
    
    9,141,049
  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, 2005, 2004, AND 2003
 ADDITIONAL
    
    
    ACCUMULATEDCOMMON STOCK
    
    
    PAID IN
    
    
    EARNINGSSHARES
    
    
    AMOUNT
    
    
    CAPITAL
    
    
    (DEFICIT)
    
    
    TOTALBALANCE, DECEMBER 31, 2002
    
    
    8,860,073
    
    
    $
    88
    
    
    $
    97,852
    
    
    $
    (45,280
    )
    
    $
    52,660Sale of shares through employee stock
purchase plan
    
    
    93,719
    
    
    
    1
    
    
    
    233
    
    
    
    0
    
    
    
    234Stock options exercised
    
    
    233,943
    
    
    
    3
    
    
    
    836
    
    
    
    0
    
    
    
    839Stock based compensation
    
    
    0
    
    
    
    0
    
    
    
    40
    
    
    
    0
    
    
    
    40Tax benefit from stock options exercised
    
    
    0
    
    
    
    0
    
    
    
    180
    
    
    
    0
    
    
    
    180Amortization of restricted stock
    
    
    0
    
    
    
    0
    
    
    
    84
    
    
    
    0
    
    
    
    84Net earnings
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    2,361
    
    
    
    2,361BALANCE, 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
    
    
    
    271Purchase 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
    )
    
    $
    70,311
  F-7




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##### Table of Contents



INDUSTRIAL DISTRIBUTION GROUP, INC.
AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
 2005
    
    
    2004
    
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net earnings
    
    $
    5,421
    
    
    $
    7,314
    
    
    $
    2,361Adjustments to reconcile net earnings to net cash provided by
operating activities:Depreciation and amortization
    
    
    1,226
    
    
    
    909
    
    
    
    2,305Gain on sale of assets
    
    
    (555
    )
    
    
    (66
    )
    
    
    (404
    )Deferred income taxes
    
    
    1,016
    
    
    
    (1,023
    )
    
    
    597Stock based compensation expense
    
    
    177
    
    
    
    137
    
    
    
    40Income tax benefit of stock options exercised
    
    
    125
    
    
    
    226
    
    
    
    180Amortization of restricted stock
    
    
    271
    
    
    
    114
    
    
    
    84Income tax benefit of restricted stock issuance
    
    
    137
    
    
    
    0
    
    
    
    0Changes in operating assets and liabilities, net of business
unit sold:Accounts receivable, net
    
    
    (1,952
    )
    
    
    (7,475
    )
    
    
    523Inventories, net
    
    
    (2,239
    )
    
    
    (824
    )
    
    
    1,554Prepaids and other assets
    
    
    2,950
    
    
    
    (561
    )
    
    
    (959
    )Accounts payable
    
    
    650
    
    
    
    8,291
    
    
    
    (582
    )Accrued compensation
    
    
    (1,178
    )
    
    
    1,864
    
    
    
    352Other accrued liabilities
    
    
    (478
    )
    
    
    (1,513
    )
    
    
    1,373Total adjustments
    
    
    150
    
    
    
    79
    
    
    
    5,063Net cash provided by operating activities
    
    
    5,571
    
    
    
    7,393
    
    
    
    7,424CASH FLOWS FROM INVESTING ACTIVITIES:Additions to property and equipment, net
    
    
    (519
    )
    
    
    (1,040
    )
    
    
    (495
    )Proceeds from the sale of business unit and other
    
    
    789
    
    
    
    5
    
    
    
    0Proceeds from the sale of property and equipment
    
    
    2,297
    
    
    
    127
    
    
    
    3,055Net cash provided by (used in) investing activities
    
    
    2,567
    
    
    
    (908
    )
    
    
    2,560CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of common stock, net of issuance cost
    
    
    548
    
    
    
    594
    
    
    
    1,073Purchase of common stock
    
    
    (1,151
    )
    
    
    0
    
    
    
    0Repayments on revolving credit facility
    
    
    (156,241
    )
    
    
    (113,160
    )
    
    
    (125,350
    )Borrowings on revolving credit facility
    
    
    147,341
    
    
    
    109,010
    
    
    
    117,300Short-term debt (repayments) borrowings
    
    
    (113
    )
    
    
    11
    
    
    
    0Long-term debt repayments
    
    
    (367
    )
    
    
    (113
    )
    
    
    (1,780
    )Premium payments on management liability insurance
    
    
    0
    
    
    
    0
    
    
    
    (930
    )Deferred loan costs
    
    
    (598
    )
    
    
    0
    
    
    
    (412
    )Net cash used in financing activities
    
    
    (10,581
    )
    
    
    (3,658
    )
    
    
    (10,099
    )NET CHANGE IN CASH AND CASH EQUIVALENTS
    
    
    (2,443
    )
    
    
    2,827
    
    
    
    (115
    )CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    
    
    3,164
    
    
    
    337
    
    
    
    452CASH AND CASH EQUIVALENTS, END OF YEAR
    
    $
    721
    
    
    $
    3,164
    
    
    $
    337SUPPLEMENTAL DISCLOSURES:Interest paid
    
    $
    1,056
    
    
    $
    1,289
    
    
    $
    1,588Income taxes paid (refunded)
    
    $
    1,584
    
    
    $
    4,478
    
    
    $
    (550
    )
  F-8




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##### Table of Contents



INDUSTRIAL DISTRIBUTION GROUP, INC.
AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
DECEMBER 31, 2005, 2004, AND 2003
 1. BASIS OF PRESENTATION
 Organization and Business
  Basis of Presentation
   2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Use of Estimates
  Cash Equivalents
  Accounts Receivable
  F-9




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##### Table of Contents



Inventories
  Property and Equipment
  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
  Long-Lived Assets
  Income Taxes
  F-10




---



##### Table of Contents



Deferred Loan Costs
  Revenue Recognition
   Software Costs
  F-11




---



##### Table of Contents



Volume Rebates
  Shipping and Handling Costs
  Financial Instruments
  Insurance Reserves
  Stock-Based Compensation
   F-12




---



##### Table of Contents



2005
    
    
    2004
    
    
    2003Net earnings as reported
    
    $
    5,421
    
    
    $
    7,314
    
    
    $
    2,361Add: Total stock-based
compensation expense included in
the determination of net earnings
as reported, net of tax
    
    
    332
    
    
    
    208
    
    
    
    88Deduct: Total stock-based
compensation expense determined
under fair-value based method for
all awards, net of tax
    
    
    410
    
    
    
    429
    
    
    
    413Pro forma net earnings
    
    $
    5,343
    
    
    $
    7,093
    
    
    $
    2,036Basic earnings per common share:As reported
    
    $
    0.58
    
    
    $
    0.78
    
    
    $
    0.26Pro forma
    
    $
    0.57
    
    
    $
    0.76
    
    
    $
    0.23Diluted earnings per common share:As reported
    
    $
    0.56
    
    
    $
    0.75
    
    
    $
    0.26Pro forma
    
    $
    0.55
    
    
    $
    0.73
    
    
    $
    0.22
 New Accounting Pronouncements
    F-13




---



##### Table of Contents



Segments
  3.
    
    DIVESTITURESDuring 2005, the Company sold the net assets of one of its operating subsidiaries. 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 has been classified as an offset to
selling, general and administrative expenses in the accompanying 2005 statements of income.4.
    
    NOTE RECEIVABLEDuring 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 has an implicit interest rate of 3.1%
and is unsecured. The balance of the note receivable was $250,000 and $700,000 for the years
ended December 31, 2005 and 2004, respectively. The remaining $250,000 is classified as an
other asset on the accompanying balance sheets as of December 31, 2005.5.
    
    PROPERTY AND EQUIPMENTProperty and equipment consisted of the following at December 31, 2005 and 2004 (in thousands):
 2005
    
    
    2004Land, building, and improvements
    
    $
    2,865
    
    
    $
    4,639Leasehold improvements
    
    
    2,160
    
    
    
    2,733Furniture, fixtures, and equipment
    
    
    6,973
    
    
    
    6,974Computer hardware and software
    
    
    3,763
    
    
    
    3,899Total property and equipment
    
    
    15,761
    
    
    
    18,245Less accumulated depreciation
    
    
    (11,089
    )
    
    
    (10,968
    )Property and equipment, net
    
    $
    4,672
    
    
    $
    7,277
  6.
    
    SALE OF PROPERTYDuring 2005, the Company sold a property, located in Greensboro, NC, in a continued effort to
consolidate warehouse facilities, improve logistic efficiencies and reduce assets. The
Greensboro property sold for $2,249,000, net of closing costs. The gain associated with this
sale was $401,000 and is classified as a component of selling, general, and administrative
expenses. There were no relocation or severance costs associated with this sale of property.
This sale was part of the Companys facility rationalization plan initiated in 2002.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 the closing of these facilities was 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 statements of income.
 F-14




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##### Table of Contents



7.
    
    LONG-TERM DEBTAt December 31, 2005 and 2004, long-term debt consisted of the following (in thousands):
 2005
    
    
    2004Revolving credit facility (Note 8)
    
    $
    12,800
    
    
    $
    21,700Other
    
    
    101
    
    
    
    581Total debt
    
    
    12,901
    
    
    
    22,281Less current portion
    
    
    (83
    )
    
    
    (196
    )Total long-term debt
    
    $
    12,818
    
    
    $
    22,085
  2006
    
    $
    02007
    
    
    182008
    
    
    02009
    
    
    02010
    
    
    12,800Thereafter
    
    
    0$
    12,818
 For the years ended December 31, 2005, 2004, and 2003, the Company incurred interest expense of
$1,527,000, $1,630,000, and $2,278,000, respectively. The long-term debt of the Companys
revolving credit facility has a first priority security interest.8.
    
    REVOLVING CREDIT FACILITYIn December 2000, the Company entered into a $100,000,000 revolving credit facility with a five
financial institution syndicate. On July 18, 2005, the Company amended this agreement to extend
it to July 18, 2010 and to provide a $75,000,000 credit facility with an accordion option
enabling the Company to expand the facility to $110,000,000. The agreement provides that the
facility may be used for operations and acquisitions, and provides $7,500,000 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 5.7% and 4.7% at December 31, 2005 and 2004,
respectively. There is an annual commitment fee on the unused portion of the facility equal to
25 basis points of the average daily unused capacity during the term. Commitment fees totaled
$166,000 and $173,000 in 2005 and 2004, respectively. The amounts outstanding under the facility
at December 31, 2005 and 2004 were $12,800,000 and $21,700,000, respectively, which are
classified as long-term liabilities in the consolidated balance sheets. Additionally, the
Company had outstanding letters of credit of $1,627,000 and $2,050,000 under the facility at
December 31, 2005 and 2004, respectively. At December 31, 2004, the revolving credit facility
contained various covenants pertaining to the maintenance of certain financial ratios. These
covenants included requirements for fixed charge coverage, net worth, and capital expenditures,
among other restrictions. Financial covenants under the amended Credit Facility are required if
the monthly average excess availability under the line falls below $15.0 million. In such case,
the Credit Facility contains a requirement for fixed charge coverage of 1.1:1.0. The Company has
the ability to repurchase up to $5.0 million of its common stock during any one fiscal year
under the terms of the agreement. Covenants under the amended Credit Facility prohibit the
payment of cash dividends, among various other restrictions. The Company was in compliance with
the covenants as of December 31, 2005 and 2004.9.
    
    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
 F-15




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##### Table of Contents



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, 2005 and 2004.
 Stockholder Rights Plan
  Common Stock
    2005
    
    
    2004
    
    
    2003Expected life (years)
    
    
    7
    
    
    
    7
    
    
    
    7Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected stock price volatility
    
    
    52
    %
    
    
    56
    %
    
    
    58
    %Risk-free interest rate (low-high)
    
    
    3.74% - 4.60
    %
    
    
    3.17% - 4.51
    %
    
    
    3.62
    %
  F-16




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##### Table of Contents



Stock Repurchase Program
  Stock Incentive Plan
    2005
    
    
    2004
    
    
    2003WEIGHTED-
    
    
    
    
    
    
    WEIGHTED-
    
    
    
    
    
    
    WEIGHTED-AVERAGE
    
    
    
    
    
    
    AVERAGE
    
    
    
    
    
    
    AVERAGEEXERCISE
    
    
    
    
    
    
    EXERCISE
    
    
    
    
    
    
    EXERCISESHARES
    
    
    PRICE
    
    
    SHARES
    
    
    PRICE
    
    
    SHARES
    
    
    PRICEOutstanding at beginning of year
    
    
    914,669
    
    
    $
    4.61
    
    
    
    1,026,336
    
    
    $
    4.45
    
    
    
    1,263,959
    
    
    $
    4.34Granted
    
    
    30,000
    
    
    $
    8.33
    
    
    
    25,000
    
    
    $
    5.50
    
    
    
    25,000
    
    
    $
    3.06Forfeited and surrendered
    
    
    (20,205
    )
    
    $
    4.05
    
    
    
    (40,033
    )
    
    $
    2.26
    
    
    
    (28,680
    )
    
    $
    5.53Exercised
    
    
    (55,617
    )
    
    $
    3.34
    
    
    
    (96,634
    )
    
    $
    3.25
    
    
    
    (233,943
    )
    
    $
    3.56Outstanding at end of year
    
    
    868,847
    
    
    $
    4.83
    
    
    
    914,669
    
    
    $
    4.61
    
    
    
    1,026,336
    
    
    $
    4.45Exercisable at end of year
    
    
    813,847
    
    
    $
    4.70
    
    
    
    773,005
    
    
    $
    4.82
    
    
    
    677,661
    
    
    $
    5.38
 F-17




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##### Table of Contents



OPTIONS OUTSTANDING
    
    
    OPTIONS EXERCISABLEWEIGHTED
    
    
    WEIGHTED-
    
    
    
    
    
    
    WEIGHTED-REMAINING
    
    
    AVERAGE
    
    
    EXERCISABLE
    
    
    AVERAGERANGE OF EXERCISE
    
    OUTSTANDING
    
    
    CONTRACTUAL
    
    
    EXERCISE
    
    
    AT
    
    
    EXERCISEPRICE
    
    AT 12/31/05
    
    
    LIFE
    
    
    PRICE
    
    
    12/31/05
    
    
    PRICE$1.65  5.00
    
    
    482,196
    
    
    
    5.95
    
    
    $
    2.39
    
    
    
    473,861
    
    
    $
    2.38$5.0110.00
    
    
    330,156
    
    
    
    4.07
    
    
    $
    6.55
    
    
    
    283,491
    
    
    $
    6.42$10.01  15.00
    
    
    15,000
    
    
    
    2.67
    
    
    $
    11.44
    
    
    
    15,000
    
    
    $
    11.44$15.01  20.00
    
    
    41,495
    
    
    
    1.75
    
    
    $
    17.07
    
    
    
    41,495
    
    
    $
    17.07868,847
    
    
    
    4.98
    
    
    $
    4.83
    
    
    
    813,847
    
    
    $
    4.70
 Employee Stock Purchase Plan
  Management Incentive Plan
  Non-Stockholder Approved Equity Arrangements
  10. INCOME TAXES
  F-18




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##### Table of Contents



2005
    
    
    2004
    
    
    2003Current
    
    $
    2,644
    
    
    $
    2,237
    
    
    $
    1,190Deferred
    
    
    1,016
    
    
    
    (1,023
    )
    
    
    597Total provision
    
    $
    3,660
    
    
    $
    1,214
    
    
    $
    1,787
  2005
    
    
    2004
    
    
    2003Tax at federal statutory rate
    
    $
    3,088
    
    
    $
    2,900
    
    
    $
    1,526State income tax, net of federal benefit
    
    
    405
    
    
    
    333
    
    
    
    193Nondeductible expenses
    
    
    245
    
    
    
    269
    
    
    
    214Change in valuation allowance
    
    
    0
    
    
    
    (2,595
    )
    
    
    0Tax contingency reserve and other
    
    
    (78
    )
    
    
    307
    
    
    
    (146
    )Provision for income taxes
    
    $
    3,660
    
    
    $
    1,214
    
    
    $
    1,787
  2005
    
    
    2004Deferred tax assets:Allowance for doubtful accounts
    
    $
    527
    
    
    $
    779Accrued employee benefits
    
    
    32
    
    
    
    47Capitalized inventory costs
    
    
    495
    
    
    
    603Inventory allowance
    
    
    1,607
    
    
    
    1,959Accrued liabilities
    
    
    841
    
    
    
    933Net operating loss carryforwards
    
    
    788
    
    
    
    835Book in excess of tax depreciation
    
    
    247
    
    
    
    492Book in excess of tax amortization
    
    
    1,830
    
    
    
    2,027Valuation allowance
    
    
    (561
    )
    
    
    (561
    )Other
    
    
    133
    
    
    
    159Total deferred tax assets
    
    
    5,939
    
    
    
    7,273Deferred tax liabilities:Intangible storeroom management contract
    
    
    (76
    )
    
    
    (91
    )Step-up in asset basis
    
    
    (53
    )
    
    
    (356
    )Total deferred liabilities
    
    
    (129
    )
    
    
    (447
    )Net deferred tax assets
    
    $
    5,810
    
    
    $
    6,826
   F-19




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##### Table of Contents



11. COMMITMENTS AND CONTINGENCIES
 Operating Leases
  2006
    
    $
    5,2402007
    
    
    4,0752008
    
    
    3,4102009
    
    
    2,4112010
    
    
    1,483Thereafter
    
    
    10,728$
    27,347
  Litigation
  Insurance
  12. SAVINGS PLANS
  13. RELATED-PARTY TRANSACTIONS
  F-20




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##### Table of Contents



14. INTERIM FINANCIAL INFORMATION (UNAUDITED)
  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 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
 2004FIRST
    
    
    SECOND
    
    
    THIRD
    
    
    FOURTHQUARTER
    
    
    QUARTER
    
    
    QUARTER
    
    
    QUARTERNet sales
    
    $
    126,141
    
    
    $
    133,926
    
    
    $
    134,539
    
    
    $
    134,569Cost of sales
    
    
    98,239
    
    
    
    104,908
    
    
    
    105,740
    
    
    
    104,576Gross profit
    
    
    27,902
    
    
    
    29,018
    
    
    
    28,799
    
    
    
    29,993Selling, general and administrative expenses
    
    
    25,893
    
    
    
    26,315
    
    
    
    26,123
    
    
    
    27,268Operating income
    
    
    2,009
    
    
    
    2,703
    
    
    
    2,676
    
    
    
    2,725Interest expense, net
    
    
    389
    
    
    
    415
    
    
    
    394
    
    
    
    408Other expense (income), net
    
    
    (24
    )
    
    
    23
    
    
    
    2
    
    
    
    (22
    )Earnings before income taxes
    
    
    1,644
    
    
    
    2,265
    
    
    
    2,280
    
    
    
    2,339Provision (benefit) for income taxes
    
    
    631
    
    
    
    869
    
    
    
    (1,195
    )
    
    
    909Net earnings
    
    $
    1,013
    
    
    $
    1,396
    
    
    $
    3,475
    
    
    $
    1,430Earnings per share:Basic earnings per common share
    
    $
    0.11
    
    
    $
    0.15
    
    
    $
    0.37
    
    
    $
    0.15Diluted earnings per common share(*)
    
    $
    0.11
    
    
    $
    0.14
    
    
    $
    0.36
    
    
    $
    0.15
 
 (*)
    
    The sum of the diluted earnings per common share does not equal the total for the year
due to the weighted average shares calculation and rounding. F-21




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##### Table of Contents



INDUSTRIAL DISTRIBUTION GROUP, INC.
 
 SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
 ALLOWANCE FOR DOUBTFUL ACCOUNTS
 ADDITIONSCHARGEDBALANCE
    
    TO COSTSAT
    
    AND
    
    
    
    
    
    BALANCE ATBEGINNING
    
    EXPENSES
    
    
    
    
    
    END OFDESCRIPTION
    
    OF PERIOD
    
    NET(1)
    
    DEDUCTIONS
    
    PERIODYear 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
    
    
    $
    2,055Year ended December 31, 2003:Allowance for doubtful accounts
    
    $
    3,183
    
    
    
    862
    
    
    
    326
    
    
    $
    3,719
 
 (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 collectibility of specific accounts. INVENTORY RESERVE
 ADDITIONSCHARGEDTO COSTSBALANCE AT
    
    AND
    
    
    
    
    
    BALANCE ATBEGINNING
    
    EXPENSES
    
    
    
    
    
    END OFDESCRIPTION
    
    OF PERIOD
    
    NET(1)
    
    DEDUCTIONS(2)
    
    PERIODYear ended December 31, 2005:Inventory reserve
    
    $
    5,168
    
    
    
    1,208
    
    
    
    1,261
    
    
    $
    5,115Year ended December 31, 2004:Inventory reserve
    
    $
    5,597
    
    
    
    (193
    )
    
    
    236
    
    
    $
    5,168Year ended December 31, 2003:Inventory reserve
    
    $
    6,702
    
    
    
    5
    
    
    
    1,110
    
    
    $
    5,597
 
 (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-22




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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, 2005:Valuation allowance
    
    $
    561
    
    
    
    0
    
    
    
    0
    
    
    $
    561Year ended December 31, 2004:Valuation allowance
    
    $
    3,156
    
    
    
    0
    
    
    
    2,595
    
    
    $
    561Year ended December 31, 2003:Valuation allowance
    
    $
    3,156
    
    
    
    0
    
    
    
    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-23




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##### 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, 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)10.5(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
No. 333-58072) on
March 3, 2006 is hereby incorporated by reference)
 EI-1




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit(**)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, 2005.(**)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, 2005.(**)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, 2005.(**)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, 2005.
 
 (*)
    
    Management contract or compensatory plan or arrangement required to be filed as an
exhibit.(**)
    
    Filed electronically herewith. EI-2