##### Table of Contents



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, 2007
 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
    
    58-2299339(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    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
  Large Accelerated Filer o
    
    Accelerated Filer þ
    
    Non-accelerated Filer o
    
    Smaller Reporting Company o(Do not check if a smaller reporting company)
 o þ




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##### 



TABLE OF CONTENTS
 PagePART IItem 1. Business
    
    
    3Item 1A. Risk Factors
    
    
    11Item 1B. Unresolved Staff Comments
    
    
    13Item 2. Properties
    
    
    13Item 3. Legal Proceedings
    
    
    13Item 4. Submission of Matters to a Vote of Security Holders
    
    
    13PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    14Item 6. Selected Financial Data
    
    
    16Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 8. Financial Statements and Supplementary Data
    
    
    23Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    23Item 9A. Controls and Procedures
    
    
    23Item 9B. Other Information
    
    
    24PART IIIItem 10. Directors and Executive Officers of the Registrant and Corporate Governance
    
    
    24Item 11. Executive Compensation
    
    
    24Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    24Item 13. Certain Relationships and Related Transactions and Director Independence
    
    
    25Item 14. Principal Accounting Fees and Services
    
    
    25PART 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
   Spectrum of Service Offerings
  4




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
    
    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 (EDI) 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
  
    
    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
 5




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
    
    managing and staffing tool cribs.
    General MROP Sales
 Program and Approach
   Products
  6




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##### Table of Contents



% ofAggregateProduct Category
    
    Typical Products
    
    RevenueCutting Tools
    
    Drills, Taps, Carbide Tools, End Mills
    
    
    26.8
    %Abrasives
    
    Grinding Wheels, Sanding Belts, Discs, Sheets or Rolls
    
    
    13.6
    %Coolants, Lubricants, and Adhesives
    
    Metal Cutting Coolants, Aerosols, Industrial Adhesives
    
    
    8.0
    %Safety Products
    
    Gloves, Signs, Absorbents, Glasses
    
    
    6.4
    %Power Tools
    
    Air and Electric Drills, Impact Wrenches, Screwdrivers
    
    
    5.9
    %Hand Tools
    
    Wrenches, Socket Sets, Screwdrivers, Hammers
    
    
    5.4
    %Machine Tools and Accessories
    
    Milling Machines, Work Holding Vises, Tool Holders
    
    
    5.4
    %Maintenance Equipment and Supplies
    
    Hydraulic Tools, Paint, Lubrication Equipment
    
    
    5.2
    %Material Handling Equipment
    
    Hoists, Slings, Chain, Shelving, Casters
    
    
    2.7
    %Machinery
    
    Metal Removal Equipment, Metal Forming Equipment, AirCompressors
    
    
    2.1
    %Tapes
    
    Masking, Filament and Duct Tape
    
    
    1.9
    %Fasteners
    
    Socket Screws, Hex Screws, Anchors
    
    
    1.8
    %Electrical
    
    Fuses, Electrical Switches, Controls, Lighting
    
    
    1.6
    %Saw Blades
    
    Band, Hack, Hole, Jig Saw Blades
    
    
    1.5
    %Brushes
    
    Wire Wheel, Floor Brooms
    
    
    1.2
    %Welding Equipment and Supplies
    
    Welders, Weld Rod
    
    
    1.1
    %Industrial Pipes, Valves, Fittings and Metal Goods
    
    Pipes, Valves, Fittings, Angle Iron, Conduit
    
    
    1.1
    %Quality Control Products
    
    Electronic Calipers, Micrometers
    
    
    1.0
    %Contractor Supplies
    
    Power-Actuated Tools, Ladders, Shovels
    
    
    0.9
    %Tool & Die Supplies
    
    Ground Stock, Drill Rod, Die Sets
    
    
    0.7
    %Fluid Power
    
    Hydraulic and Pneumatic Valves, Cylinders, Pumps
    
    
    0.6
    %Power Transmission Equipment
    
    Belts, Drives, Bearings, Gears, Pulleys
    
    
    0.5
    %Industrial Hose
    
    Air Hose, Water Hose
    
    
    0.4
    %Other Products
    
    
    
    
    4.2
    %Total
    
    
    
    
    100.0
    %
 Customers
  7




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Sales and Marketing
       8




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Competition
   Management Information Systems
  ®
 Quality Control Standards
  9




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Personnel
   Leadership and Organizational Structure
  Executive Officers
  Name
    
    Age
    
    PositionCharles A. Lingenfelter
    
    
    57
    
    
    President and Chief Executive OfficerJack P. Healey
    
    
    48
    
    
    Executive Vice President, Chief Financial Officer, and Secretary
   Available Information
 www.idglink.com
 10




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Item 1A.
    
    Risk Factors.
  Our exploration and identification of strategic alternatives may have an adverse impact on our
operating results and/or financial outlook, and, if a strategic transaction is not consummated, our
stock price is likely to be adversely affected.
  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 $2.6 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.
  11




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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.
  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.
  A change in our pricing model to list less discount from a cost plus mark-up 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.
  12




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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.
  
 Item 1B.
    
    Unresolved Staff Comments.
  
 Item 2.
    
    Properties.
    
 Item 3.
    
    Legal Proceedings.
  
 Item 4.
    
    Submission of Matters to a Vote of Security Holders.
  13




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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
    
    
    Low2006First Quarter
    
    $
    8.45
    
    
    $
    7.60Second Quarter
    
    $
    9.99
    
    
    $
    8.06Third Quarter
    
    $
    9.06
    
    
    $
    7.92Fourth Quarter
    
    $
    9.89
    
    
    $
    8.152007First Quarter
    
    $
    13.19
    
    
    $
    9.89Second Quarter
    
    $
    13.60
    
    
    $
    9.50Third Quarter
    
    $
    11.43
    
    
    $
    8.40Fourth Quarter
    
    $
    11.94
    
    
    $
    9.50
   Dividends
  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 Program12/31/06 Balance
    
    
    471,881
    
    
    $
    8.75
    
    
    
    471,881
    
    
    $
    868,889First Quarter Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5,868,889Second Quarter Total
    
    
    50,800
    
    
    $
    10.62
    
    
    
    50,800
    
    
    $
    5,329,223Third Quarter Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5,329,223Fourth Quarter Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5,329,2232007 Total
    
    
    50,800
    
    
    $
    10.62
    
    
    
    50,800
    
    
    $
    5,329,223Since Inception of Plan
    
    
    522,681
    
    
    $
    8.94
    
    
    
    522,681
    
    
    $
    5,329,223
 14




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Five Year Stock Performance Graph
  
 2002
    
    2003
    
    2004
    
    2005
    
    2006
    
    2007INDUSTRIAL DISTRIBUTION GROUP
    
    
    100.00
    
    
    
    180.52
    
    
    
    269.48
    
    
    
    262.34
    
    
    
    321.10
    
    
    
    373.38SIC CODE INDEX
    
    
    100.00
    
    
    
    128.04
    
    
    
    173.38
    
    
    
    253.34
    
    
    
    290.61
    
    
    
    344.30RUSSELL 2000 INDEX
    
    
    100.00
    
    
    
    145.37
    
    
    
    170.81
    
    
    
    176.48
    
    
    
    206.91
    
    
    
    196.40
 15




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##### Table of Contents



Item 6.
    
    Selected Financial Data.
  Year Ended December 31,2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003(Dollars in thousands, except per share data)Statements of Income Data:Net sales
    
    $
    537,456
    
    
    $
    547,874
    
    
    $
    538,847
    
    
    $
    529,175
    
    
    $
    483,442Gross profit
    
    
    122,992
    
    
    
    121,062
    
    
    
    117,571
    
    
    
    115,712
    
    
    
    107,893Selling, general, and administrative expenses
    
    
    114,602
    
    
    
    108,244
    
    
    
    107,033
    
    
    
    105,599
    
    
    
    101,518Operating income
    
    
    8,390
    
    
    
    12,818
    
    
    
    10,538
    
    
    
    10,113
    
    
    
    6,375Net earnings
    
    $
    4,051
    
    
    $
    6,785
    
    
    $
    5,421
    
    
    
    7,314
    
    
    
    2,361Earnings per common share:Basic
    
    $
    0.43
    
    
    $
    0.72
    
    
    $
    0.58
    
    
    $
    0.78
    
    
    $
    0.26Diluted
    
    
    0.42
    
    
    
    0.70
    
    
    
    0.56
    
    
    
    0.75
    
    
    
    0.26Balance Sheet Data:Working capital
    
    $
    85,823
    
    
    $
    93,643
    
    
    $
    75,640
    
    
    $
    77,222
    
    
    $
    74,708Property and equipment, net
    
    
    4,352
    
    
    
    4,928
    
    
    
    4,672
    
    
    
    7,277
    
    
    
    7,161Total assets
    
    
    145,692
    
    
    
    160,012
    
    
    
    140,328
    
    
    
    146,062
    
    
    
    133,300Total debt
    
    
    11,188
    
    
    
    24,423
    
    
    
    12,901
    
    
    
    22,281
    
    
    
    26,533Stockholders equity
    
    $
    81,160
    
    
    $
    76,324
    
    
    $
    70,311
    
    
    $
    64,783
    
    
    $
    56,398
 
 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
  16




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Summary Comparison of FPS and General MROP Sales Results
   Year Ended December 31,2007
    
    
    2006
    
    
    2005Net Sales
    
    
    %
    
    
    Net Sales
    
    
    %
    
    
    Net Sales
    
    
    %(dollars in millions)FPS Sales, including storeroom management
    
    $
    332.0
    
    
    
    61.8
    %
    
    $
    325.4
    
    
    
    59.4
    %
    
    $
    301.9
    
    
    
    56.0
    %FPS Gross Profit
    
    $
    68.8
    
    
    
    20.7
    %
    
    $
    66.9
    
    
    
    20.6
    %
    
    $
    60.4
    
    
    
    20.0
    %General MROP Sales
    
    $
    205.5
    
    
    
    38.2
    %
    
    $
    222.5
    
    
    
    40.6
    %
    
    $
    236.9
    
    
    
    44.0
    %General MROP Gross Profit
    
    $
    54.2
    
    
    
    26.4
    %
    
    $
    54.2
    
    
    
    24.4
    %
    
    $
    57.2
    
    
    
    24.1
    %Total Sales
    
    $
    537.5
    
    
    
    100.0
    %
    
    $
    547.9
    
    
    
    100.0
    %
    
    $
    538.8
    
    
    
    100.0
    %Total Gross Profit
    
    $
    123.0
    
    
    
    22.9
    %
    
    $
    121.1
    
    
    
    22.1
    %
    
    $
    117.6
    
    
    
    21.8
    %
  17




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##### Table of Contents



Results of Operations
  Year Ended December 31,2007
    
    
    2006
    
    
    2005(dollars in thousands)Net sales
    
    $
    537,456
    
    
    
    100.0
    %
    
    $
    547,874
    
    
    
    100.0
    %
    
    $
    538,847
    
    
    
    100.0
    %Cost of sales
    
    
    414,464
    
    
    
    77.1
    %
    
    
    426,812
    
    
    
    77.9
    %
    
    
    421,276
    
    
    
    78.2
    %Gross profit
    
    
    122,992
    
    
    
    22.9
    %
    
    
    121,062
    
    
    
    22.1
    %
    
    
    117,571
    
    
    
    21.8
    %Selling, general, and administrative expenses
    
    
    114,602
    
    
    
    21.3
    %
    
    
    108,244
    
    
    
    19.8
    %
    
    
    107,033
    
    
    
    19.8
    %Operating income
    
    
    8,390
    
    
    
    1.6
    %
    
    
    12,818
    
    
    
    2.3
    %
    
    
    10,538
    
    
    
    2.0
    %Interest expense
    
    
    1,617
    
    
    
    0.3
    %
    
    
    1,434
    
    
    
    0.2
    %
    
    
    1,493
    
    
    
    0.3
    %Other income, net
    
    
    98
    
    
    
    0.0
    %
    
    
    60
    
    
    
    0.0
    %
    
    
    36
    
    
    
    0.0
    %Earnings before taxes
    
    
    6,871
    
    
    
    1.3
    %
    
    
    11,444
    
    
    
    2.1
    %
    
    
    9,081
    
    
    
    1.7
    %Provision for income taxes
    
    
    2,820
    
    
    
    0.5
    %
    
    
    4,659
    
    
    
    0.9
    %
    
    
    3,660
    
    
    
    0.7
    %Net earnings
    
    $
    4,051
    
    
    
    0.8
    %
    
    $
    6,785
    
    
    
    1.2
    %
    
    $
    5,421
    
    
    
    1.0
    %
 2007 Compared to 2006
 Net Sales
   Cost of Sales
  Selling, General and Administrative Expenses
  18




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Operating Income
  Interest Expense
  Provision for Income Taxes
  2006 Compared to 2005
 Net Sales
   19




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##### Table of Contents



Cost of Sales
  Selling, General and Administrative Expenses
  Operating Income
  Interest Expense
  Provision for Income Taxes
  Liquidity and Capital Resources
 Capital Availability and Requirements
   20




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Payments Due by Period (in thousands)Contractual Obligations
    
    Total
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    ThereafterLong Term Debt
    
    $
    10,513
    
    
    $
    0
    
    
    $
    0
    
    
    $
    10,513
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0Capital
Leases
    
    $
    770
    
    
    $
    155
    
    
    $
    155
    
    
    $
    155
    
    
    $
    155
    
    
    $
    150
    
    
    $
    0Operating Leases
    
    $
    27,357
    
    
    $
    6,259
    
    
    $
    4,754
    
    
    $
    3,017
    
    
    $
    2,060
    
    
    $
    1,589
    
    
    $
    9,678Total Contractual Cash Obligations
    
    $
    38,640
    
    
    $
    6,414
    
    
    $
    4,909
    
    
    $
    13,685
    
    
    $
    2,215
    
    
    $
    1,739
    
    
    $
    9,678
   Analysis of Cash Flows
     21




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Certain Accounting Policies and Estimates
   Allowance for Doubtful Accounts  Methodology
  Allowance for Doubtful Accounts
    
    2007
    
    
    2006
    
    
    2005(dollars in thousands)Balance at January 1
    
    $
    1,382
    
    
    $
    1,369
    
    
    $
    2,055Add: Charges (recoveries) to expense, net
    
    
    250
    
    
    
    370
    
    
    
    74Deduct: Write-offs
    
    
    295
    
    
    
    357
    
    
    
    760Balance at December 31
    
    $
    1,337
    
    
    $
    1,382
    
    
    $
    1,369Percentage of Gross Receivables
    
    
    1.8
    %
    
    
    1.7
    %
    
    
    2.0
    %
 Inventories  Slow Moving and Obsolescence
  Inventory Reserve
    
    2007
    
    
    2006
    
    
    2005(dollars in thousands)Balance at January 1
    
    $
    4,970
    
    
    $
    5,115
    
    
    $
    5,168
 22




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##### Table of Contents



Inventory Reserve
    
    2007
    
    
    2006
    
    
    2005(dollars in thousands)Add: Charges (recoveries) to expense, net
    
    
    546
    
    
    
    410
    
    
    
    1,208Deduct: Write-offs
    
    
    291
    
    
    
    555
    
    
    
    1,261Balance at December 31
    
    $
    5,225
    
    
    $
    4,970
    
    
    $
    5,115Percentage of Gross Inventory
    
    
    8.0
    %
    
    
    7.2
    %
    
    
    8.0
    %
 Impairment of Long-Lived Assets
  Deferred Income Tax Assets
   Self Insurance and Related Reserves
  
 Item 7A.
    
    Quantitative and Qualitative Disclosures about Market Risk.
  23




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##### Table of Contents



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
    Internal Control Over Financial Reporting
   
 Item 9B.
    
    Other Information.
  
 PART III
 
 Item 10.
    
    Directors and Executive Officers of the Registrant.
  24




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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.
    
    Independent Auditors Fees and Services.
  25




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##### Table of Contents



PART IV
 
 Item 15.
    
    Exhibits and Financial Statement Schedules.
  (a)
    
    (1) Financial StatementsManagements Annual Report on Internal Control over Financial ReportingReports of Independent Registered Public Accounting FirmConsolidated Balance Sheets as of December 31, 2007 and 2006Consolidated Statements of Income for the years ended December 31, 2007, 2006, and 2005Consolidated Statements of Stockholders Equity for the years ended December 31, 2007, 2006, and
2005Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006, and 2005Notes to Consolidated Financial Statements and Schedule(2) Financial Statement SchedulesSchedule II  Valuation and Qualifying AccountsAll other schedules have been omitted because any information required is included in the
financial statements or notes.(3) ExhibitsA list of the exhibits required to be filed as part of this Report by Item 601 of Regulation S-K,
including those incorporated by reference, is set forth in the Exhibit Index beginning on page
EI-1 immediately following page F-24 of this Form 10-K, which is incorporated herein by
reference.(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




---



##### Table of Contents



SIGNATURES
  Date: March 11, 2008
    INDUSTRIAL DISTRIBUTION GROUP, INC.By:

/s/ Charles A. LingenfelterCharles A. LingenfelterPresident and Chief Executive Officer  Date: March 11, 2008
    

/s/ Charles A. LingenfelterCharles A. Lingenfelter 
President, Chief Executive Officer, and Director 
(Principal Executive Officer)Date: March 11, 2008
    

/s/ Jack P. HealeyJack P. Healey 
Executive Vice President, Chief Financial Officer, and Secretary 
(Principal Financial and Accounting Officer)Date: March 11, 2008
    

/s/ Richard M. SeigelRichard M. Seigel 
Chairman of the BoardDate: March 11, 2008
    

/s/ David K. BarthDavid K. Barth 
DirectorDate: March 11, 2008
    

/s/ William R. FenoglioWilliam R. Fenoglio 
DirectorDate: March 11, 2008
    

/s/ William T. ParrWilliam T. Parr 
DirectorDate: March 11, 2008
    

/s/ George L. Sachs, Jr.George L. Sachs, Jr. 
DirectorDate: March 11, 2008
    

/s/ Ajita G. RajendraAjita G. Rajendra 
Director 27




---



##### 



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, 2007 and 2006
    
    
    F-5Consolidated Statements of Income for the Years Ended December 31, 2007, 2006, and 2005
    
    
    F-6Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2007, 2006, and 2005
    
    
    F-7Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006, and 2005
    
    
    F-8Notes to Consolidated Financial Statements and Schedule
    
    
    F-9Schedule II  Valuation and Qualifying Accounts for the Years Ended December 31, 2007, 2006, and 2005
    
    
    F-24




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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
         /s/ Ernst & Young LLP
 
 F-3




---



##### Table of Contents



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




---



##### Table of Contents



INDUSTRIAL
DISTRIBUTION GROUP, INC.
 AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2007 AND 2006
 2007
    
    
    2006ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    431
    
    
    $
    349Accounts receivable, net
    
    
    71,376
    
    
    
    80,949Inventories, net
    
    
    60,259
    
    
    
    63,851Deferred tax assets
    
    
    3,613
    
    
    
    3,645Prepaid and other current assets
    
    
    3,328
    
    
    
    3,734Total current assets
    
    
    139,007
    
    
    
    152,528PROPERTY AND EQUIPMENT, NET
    
    
    4,352
    
    
    
    4,928INTANGIBLE ASSETS, NET
    
    
    118
    
    
    
    159DEFERRED TAX ASSETS
    
    
    1,442
    
    
    
    1,485OTHER ASSETS
    
    
    773
    
    
    
    912Total assets
    
    $
    145,692
    
    
    $
    160,012LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Current portion of long-term debt and capital lease obligations
    
    $
    133
    
    
    $
    30Accounts payable
    
    
    46,309
    
    
    
    51,553Accrued compensation
    
    
    1,892
    
    
    
    2,431Other accrued liabilities
    
    
    4,850
    
    
    
    4,871Total current liabilities
    
    
    53,184
    
    
    
    58,885LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION
    
    
    11,055
    
    
    
    24,393OTHER LONG TERM LIABILITIES
    
    
    293
    
    
    
    410Total liabilities
    
    
    64,532
    
    
    
    83,688COMMITMENTS AND CONTINGENCIES (NOTE 11)STOCKHOLDERS EQUITY (NOTE 8):Preferred stock, $0.10 par value per share; 10,000,000 shares
authorized, no shares issued or outstanding in 2007 and 2006
    
    
    0
    
    
    
    0Common stock, $0.01 par value per share; 50,000,000 shares
authorized, 9,394,025 issued and outstanding in 2007 and
9,343,197 issued and outstanding in 2006
    
    
    94
    
    
    
    93Additional paid-in capital
    
    
    100,414
    
    
    
    99,630Accumulated deficit
    
    
    (19,348
    )
    
    
    (23,399
    )Total stockholders equity
    
    
    81,160
    
    
    
    76,324Total liabilities and stockholders equity
    
    $
    145,692
    
    
    $
    160,012
  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, 2007, 2006, AND 2005
  2007
    
    
    2006
    
    
    2005NET SALES
    
    $
    537,456
    
    
    $
    547,874
    
    
    $
    538,847COST OF SALES
    
    
    414,464
    
    
    
    426,812
    
    
    
    421,276Gross profit
    
    
    122,992
    
    
    
    121,062
    
    
    
    117,571SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
    
    
    114,602
    
    
    
    108,244
    
    
    
    107,033Operating income
    
    
    8,390
    
    
    
    12,818
    
    
    
    10,538INTEREST EXPENSE
    
    
    1,617
    
    
    
    1,434
    
    
    
    1,493OTHER INCOME, NET
    
    
    98
    
    
    
    60
    
    
    
    36EARNINGS BEFORE INCOME TAXES
    
    
    6,871
    
    
    
    11,444
    
    
    
    9,081PROVISION FOR INCOME TAXES
    
    
    2,820
    
    
    
    4,659
    
    
    
    3,660NET EARNINGS
    
    $
    4,051
    
    
    $
    6,785
    
    
    $
    5,421EARNINGS PER COMMON SHARE:Basic
    
    $
    0.43
    
    
    $
    0.72
    
    
    $
    0.58Diluted
    
    $
    0.42
    
    
    $
    0.70
    
    
    $
    0.56WEIGHTED AVERAGE SHARES:Basic
    
    
    9,363,752
    
    
    
    9,406,011
    
    
    
    9,394,140Diluted
    
    
    9,650,148
    
    
    
    9,666,996
    
    
    
    9,755,287
  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, 2007, 2006, AND 2005
 ADDITIONAL
    
    
    ACCUMULATEDCOMMON STOCK
    
    
    PAID IN
    
    
    EARNINGSSHARES
    
    
    AMOUNT
    
    
    CAPITAL
    
    
    (DEFICIT)
    
    
    TOTALBALANCE, 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
    
    
    
    177Income Tax benefit of stock options exercised
    
    
    0
    
    
    
    0
    
    
    
    125
    
    
    
    0
    
    
    
    125Issuance of shares pursuant to executive
restricted stock agreement
    
    
    70,000
    
    
    
    1
    
    
    
    (1
    )
    
    
    0
    
    
    
    0Income Tax benefit of 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
    
    
    
    194Income Tax benefit of 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
    )
    
    $
    76,324Sale of shares through employee stock purchase
plan
    
    
    23,073
    
    
    
    0
    
    
    
    237
    
    
    
    0
    
    
    
    237Issuance of shares pursuant to executive
restricted stock agreement
    
    
    42,405
    
    
    
    1
    
    
    
    0
    
    
    
    0
    
    
    
    1Income Tax benefit of restricted stock issuance
    
    
    0
    
    
    
    0
    
    
    
    74
    
    
    
    0
    
    
    
    74Stock options exercised
    
    
    36,150
    
    
    
    1
    
    
    
    166
    
    
    
    0
    
    
    
    167Stock based compensation
    
    
    0
    
    
    
    0
    
    
    
    165
    
    
    
    0
    
    
    
    165Income Tax benefit of stock options exercised
    
    
    0
    
    
    
    0
    
    
    
    55
    
    
    
    0
    
    
    
    55Amortization of restricted stock
    
    
    0
    
    
    
    0
    
    
    
    626
    
    
    
    0
    
    
    
    626Re-purchase of common stock
    
    
    (50,800
    )
    
    
    (1
    )
    
    
    (539
    )
    
    
    0
    
    
    
    (540
    )Net earnings
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    4,051
    
    
    
    4,051BALANCE, DECEMBER 31, 2007
    
    
    9,394,025
    
    
    $
    94
    
    
    $
    100,414
    
    
    $
    (19,348
    )
    
    $
    81,160
  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, 2007, 2006, AND 2005
 2007
    
    
    2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net earnings
    
    $
    4,051
    
    
    $
    6,785
    
    
    $
    5,421Adjustments to reconcile net earnings to net cash provided by operating activities:Depreciation and amortization
    
    
    1,193
    
    
    
    1,294
    
    
    
    1,226Gain on sale of assets
    
    
    0
    
    
    
    (111
    )
    
    
    (555
    )Deferred income taxes
    
    
    75
    
    
    
    680
    
    
    
    1,016Excess tax benefit from exercise of stock options
    
    
    (60
    )
    
    
    (360
    )
    
    
    0Stock based compensation expense
    
    
    791
    
    
    
    635
    
    
    
    448Changes in operating assets and liabilities, net of business unit sold:Accounts receivable, net
    
    
    9,573
    
    
    
    (15,288
    )
    
    
    (1,952
    )Inventories, net
    
    
    3,592
    
    
    
    (5,366
    )
    
    
    (2,239
    )Prepaid and other assets
    
    
    545
    
    
    
    132
    
    
    
    2,950Accounts payable
    
    
    (5,244
    )
    
    
    3,869
    
    
    
    650Accrued compensation
    
    
    (539
    )
    
    
    (460
    )
    
    
    (1,178
    )Other accrued and long-term liabilities
    
    
    (8
    )
    
    
    (829
    )
    
    
    (216
    )Total adjustments
    
    
    9,918
    
    
    
    (15,804
    )
    
    
    150Net cash provided by (used in) operating activities
    
    
    13,969
    
    
    
    (9,019
    )
    
    
    5,571CASH FLOWS FROM INVESTING ACTIVITIES:Additions to property and equipment, net
    
    
    (605
    )
    
    
    (2,138
    )
    
    
    (519
    )Proceeds from the sale of business unit and other
    
    
    0
    
    
    
    0
    
    
    
    789Proceeds from the sale of property and equipment
    
    
    29
    
    
    
    741
    
    
    
    2,297Net cash (used in) provided by investing activities
    
    
    (576
    )
    
    
    (1,397
    )
    
    
    2,567CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of common stock, net of issuance cost
    
    
    404
    
    
    
    1,141
    
    
    
    548Re-purchase of common stock
    
    
    (540
    )
    
    
    (2,979
    )
    
    
    (1,151
    )Excess tax benefit from exercise of stock options
    
    
    60
    
    
    
    360
    
    
    
    0Repayments on revolving credit facility
    
    
    (118,949
    )
    
    
    (191,905
    )
    
    
    (156,241
    )Borrowings on revolving credit facility
    
    
    105,087
    
    
    
    203,480
    
    
    
    147,341Debt and capital lease repayments
    
    
    (116
    )
    
    
    (72
    )
    
    
    (480
    )Debt
borrowings and sale-leaseback transaction
    
    
    743
    
    
    
    19
    
    
    
    0Deferred loan costs
    
    
    0
    
    
    
    0
    
    
    
    (598
    )Net cash (used in) provided by financing activities
    
    
    (13,311
    )
    
    
    10,044
    
    
    
    (10,581
    )NET CHANGE IN CASH AND CASH EQUIVALENTS
    
    
    82
    
    
    
    (372
    )
    
    
    (2,443
    )CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    
    
    349
    
    
    
    721
    
    
    
    3,164CASH AND CASH EQUIVALENTS, END OF YEAR
    
    $
    431
    
    
    $
    349
    
    
    $
    721SUPPLEMENTAL DISCLOSURES:Interest paid
    
    $
    1,647
    
    
    $
    1,264
    
    
    $
    1,195Income taxes paid, net of refunds
    
    $
    2,722
    
    
    $
    3,085
    
    
    $
    1,584
  F-8




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##### Table of Contents



INDUSTRIAL DISTRIBUTION GROUP, INC.
AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
 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




---



##### Table of Contents



Inventories
  Internal-Use Software
 .
 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
  F-10




---



##### Table of Contents



Long-Lived Assets
  Income Taxes
    Deferred Loan Costs
  Revenue Recognition
   F-11




---



##### Table of Contents



Software Costs
  Volume Rebates
  Shipping and Handling Costs
  Advertising Costs
  Financial Instruments
  Stock-Based Compensation
  Segments
  F-12




---



##### Table of Contents



New Accounting Pronouncements
       3. DIVESTITURES
  F-13




---



##### Table of Contents



4. PROPERTY AND EQUIPMENT
  2007
    
    
    2006Land, building, and improvements
    
    $
    1,928
    
    
    $
    1,909Leasehold improvements
    
    
    1,835
    
    
    
    2,470Furniture, fixtures, and equipment
    
    
    7,949
    
    
    
    6,939Computer hardware and software
    
    
    4,825
    
    
    
    4,768Total property and equipment
    
    
    16,537
    
    
    
    16,086Less accumulated depreciation
    
    
    (12,185
    )
    
    
    (11,158
    )Property and equipment, net
    
    $
    4,352
    
    
    $
    4,928
   5. SALE OF PROPERTY
   6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
  2007
    
    
    2006Revolving credit facility (Note 7)
    
    $
    10,513
    
    
    $
    24,375Other
    
    
    18
    
    
    
    48Total
long-term debt
    
    
    10,531
    
    
    
    24,423Capital Lease Obligations
    
    
    657
    
    
    
    0Total
    
    
    11,188
    
    
    
    24,423Less current portion
    
    
    (133
    )
    
    
    (30
    )Total
long-term debt and capital lease obligations, net of current portion
    
    $
    11,055
    
    
    $
    24,393
  Capital LeaseLong-Term Debt
    
    
    Obligations
    
    
    Total2008
    
    $
    18
    
    
    $
    115
    
    
    $
    1332009
    
    
    0
    
    
    
    123
    
    
    
    1232010
    
    
    10,513
    
    
    
    131
    
    
    
    10,6442011
    
    
    0
    
    
    
    140
    
    
    
    1402012
    
    
    0
    
    
    
    148
    
    
    
    148$
    10,531
    
    
    $
    657
    
    
    $
    11,188
 F-14




---



##### Table of Contents



7. REVOLVING CREDIT FACILITY
   8. CAPITAL STOCK
 Preferred Stock
   Stockholder Rights Plan
  F-15




---



##### Table of Contents



Common Stock
  Stock Repurchase Program
  9. STOCK BASED COMPENSATION
    2007
    
    2006
    
    2005Expected life (years)
    
    
    7
    
    
    
    7
    
    
    
    7Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected stock price volatility
    
    
    46
    %
    
    
    47
    %
    
    
    52
    %Risk-free interest rate (low-high)
    
    
    3.48% - 5.21
    %
    
    
    4.29% - 5.23
    %
    
    
    3.74% - 4.60
    %
 Stock Incentive Plan
  F-16




---



##### Table of Contents



Employee Stock Purchase Plan
  Management Incentive Plan
  Non-Stockholder Approved Equity Arrangements
  F-17




---



##### Table of Contents



2007
    
    2006
    
    2005WEIGHTED-
    
    
    
    
    
    WEIGHTED-
    
    
    
    
    
    WEIGHTED-AVERAGE
    
    
    
    
    
    AVERAGE
    
    
    
    
    
    AVERAGEEXERCISE
    
    
    
    
    
    EXERCISE
    
    
    
    
    
    EXERCISESHARES
    
    PRICE
    
    SHARES
    
    PRICE
    
    SHARES
    
    PRICEOutstanding at beginning of year
    
    
    698,196
    
    
    $
    5.49
    
    
    
    943,847
    
    
    $
    4.86
    
    
    
    974,669
    
    
    $
    4.60Granted
    
    
    8,000
    
    
    $
    11.50
    
    
    
    60,050
    
    
    $
    8.04
    
    
    
    45,000
    
    
    $
    8.31Forfeited and surrendered
    
    
    (48,350
    )
    
    $
    14.99
    
    
    
    (35,702
    )
    
    $
    8.98
    
    
    
    (20,205
    )
    
    $
    4.05Exercised
    
    
    (36,150
    )
    
    $
    4.64
    
    
    
    (269,999
    )
    
    $
    3.41
    
    
    
    (55,617
    )
    
    $
    3.34Outstanding at end of year
    
    
    621,696
    
    
    $
    4.88
    
    
    
    698,196
    
    
    $
    5.49
    
    
    
    943,847
    
    
    $
    4.86Exercisable at end of year
    
    
    566,999
    
    
    $
    4.52
    
    
    
    599,813
    
    
    $
    5.09
    
    
    
    853,847
    
    
    $
    4.66
  OPTIONS OUTSTANDING
    
    OPTIONS EXERCISABLEWEIGHTED
    
    WEIGHTED-
    
    
    
    
    
    WEIGHTED-REMAINING
    
    AVERAGE
    
    EXERCISABLE
    
    AVERAGERANGE OF EXERCISE
    
    OUTSTANDING
    
    CONTRACTUAL
    
    EXERCISE
    
    AT
    
    EXERCISEPRICE
    
    AT 12/31/07
    
    LIFE
    
    PRICE
    
    12/31/07
    
    PRICE$1.65  $5.00
    
    
    295,265
    
    
    
    4.13
    
    
    $
    2.55
    
    
    
    295,265
    
    
    $
    2.55$5.01  $10.00
    
    
    317,431
    
    
    
    3.34
    
    
    $
    6.83
    
    
    
    270,734
    
    
    $
    6.61$10.01 $15.00
    
    
    8,000
    
    
    
    9.15
    
    
    $
    11.50
    
    
    
    0
    
    
    $
    0.00$15.01 $20.00
    
    
    1,000
    
    
    
    0.35
    
    
    $
    19.00
    
    
    
    1,000
    
    
    $
    19.00621,696
    
    
    
    3.78
    
    
    $
    4.88
    
    
    
    566,999
    
    
    $
    4.52
      2007
    
    2006
    
    2005WEIGHTED-
    
    
    
    
    
    WEIGHTED-
    
    
    
    
    
    WEIGHTED-AVERAGE
    
    
    
    
    
    AVERAGE
    
    
    
    
    
    AVERAGEGRANT DATE
    
    
    
    
    
    GRANT DATE
    
    
    
    
    
    GRANT DATESHARES
    
    PRICE
    
    SHARES
    
    PRICE
    
    SHARES
    
    PRICEOutstanding, unvested at beginning
of year
    
    
    196,794
    
    
    $
    8.26
    
    
    
    112,911
    
    
    $
    8.35
    
    
    
    135,785
    
    
    $
    5.00Granted
    
    
    45,422
    
    
    $
    10.98
    
    
    
    93,883
    
    
    $
    7.92
    
    
    
    88,386
    
    
    $
    8.80Forfeited
    
    
    (9,348
    )
    
    $
    8.91
    
    
    
    (10,000
    )
    
    $
    6.20
    
    
    
    (41,260
    )
    
    $
    7.22Vested
    
    
    (42,405
    )
    
    $
    8.06
    
    
    
    0
    
    
    $
    0.00
    
    
    
    (70,000
    )
    
    $
    3.08Outstanding, unvested at end of year
    
    
    190,463
    
    
    $
    8.92
    
    
    
    196,794
    
    
    $
    8.26
    
    
    
    112,911
    
    
    $
    8.35
 F-18




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##### Table of Contents



Pro Forma Information under SFAS 123R
  2005Net earnings as reported
    
    $
    5,421Add: Total stock-based compensation expense included in the
determination of net earnings as reported, net of tax
    
    
    332Deduct: Total stock-based compensation expense determined under
fair-value based method for all awards, net of tax
    
    
    410Pro forma net earnings
    
    $
    5,343Basic earnings per common share:As reported
    
    $
    0.58Pro forma
    
    $
    0.57Diluted earnings per common share:As reported
    
    $
    0.56Pro forma
    
    $
    0.55
 10. INCOME TAXES
  2007
    
    
    2006
    
    
    2005Current
    
    $
    2,745
    
    
    $
    3,979
    
    
    $
    2,644Deferred
    
    
    75
    
    
    
    680
    
    
    
    1,016Total provision
    
    $
    2,820
    
    
    $
    4,659
    
    
    $
    3,660
  2007
    
    
    2006
    
    
    2005Tax at federal statutory rate
    
    $
    2,336
    
    
    $
    3,891
    
    
    $
    3,088State income tax, net of federal benefit
    
    
    309
    
    
    
    548
    
    
    
    405Nondeductible expenses
    
    
    125
    
    
    
    244
    
    
    
    245Change in valuation allowance
    
    
    (10
    )
    
    
    (19
    )
    
    
    0Tax contingency reserve and other
    
    
    60
    
    
    
    (5
    )
    
    
    (78
    )Provision for income taxes
    
    $
    2,820
    
    
    $
    4,659
    
    
    $
    3,660
  F-19




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##### Table of Contents



2007
    
    
    2006Deferred tax assets:Allowance for doubtful accounts
    
    $
    512
    
    
    $
    530Accrued employee benefits
    
    
    15
    
    
    
    19Capitalized inventory costs
    
    
    463
    
    
    
    530Inventory allowance
    
    
    1,999
    
    
    
    1,906Accrued liabilities
    
    
    786
    
    
    
    682Net operating loss carryforwards
    
    
    647
    
    
    
    682Book in excess of tax depreciation
    
    
    (5
    )
    
    
    (201
    )Book in excess of tax amortization
    
    
    1,377
    
    
    
    1,607Valuation allowance
    
    
    (532
    )
    
    
    (542
    )Other
    
    
    1
    
    
    
    (1
    )Total deferred tax assets
    
    
    5,263
    
    
    
    5,212Deferred tax liabilities:Intangible storeroom management contract
    
    
    (45
    )
    
    
    (60
    )Step-up in asset basis
    
    
    (163
    )
    
    
    (22
    )Total deferred liabilities
    
    
    (208
    )
    
    
    (82
    )Net deferred tax assets
    
    $
    5,055
    
    
    $
    5,130
     Balance at January 1, 2007
    
    $
    307,000Additions on tax positions related to the current year
    
    
    9,000Additions/(reductions) for tax positions of prior years
    
    
    (8,000
    )Reductions for settlements
    
    
    0Reductions due to statute expiration
    
    
    0Balance at December 31, 2007
    
    $
    308,000
    F-20




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##### Table of Contents



11. COMMITMENTS AND CONTINGENCIES
 Operating Leases
  2008
    
    $
    6,2592009
    
    
    4,7542010
    
    
    3,0172011
    
    
    2,0602012
    
    
    1,589Thereafter
    
    
    9,678$
    27,357
  Litigation
  Insurance
  12. SAVINGS PLANS
  F-21




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##### Table of Contents



13. RELATED-PARTY TRANSACTIONS
  14. SUBSEQUENT EVENTS (UNAUDITED)
  15. INTERIM FINANCIAL INFORMATION (UNAUDITED)
  2007FIRST
    
    
    SECOND
    
    
    THIRD
    
    
    FOURTHQUARTER
    
    
    QUARTER
    
    
    QUARTER
    
    
    QUARTERNet sales
    
    $
    135,105
    
    
    $
    132,578
    
    
    $
    134,319
    
    
    $
    135,454Cost of sales
    
    
    103,996
    
    
    
    103,241
    
    
    
    102,912
    
    
    
    104,315Gross profit
    
    
    31,109
    
    
    
    29,337
    
    
    
    31,407
    
    
    
    31,139Selling, general and administrative expenses
    
    
    28,190
    
    
    
    28,825
    
    
    
    28,773
    
    
    
    28,814Operating income
    
    
    2,919
    
    
    
    512
    
    
    
    3,634
    
    
    
    2,325Interest expense, net
    
    
    500
    
    
    
    445
    
    
    
    344
    
    
    
    328Other expense (income), net
    
    
    1
    
    
    
    19
    
    
    
    1
    
    
    
    (79
    )Earnings before income taxes
    
    
    2,420
    
    
    
    86
    
    
    
    2,289
    
    
    
    2,076Provision for income taxes
    
    
    951
    
    
    
    34
    
    
    
    990
    
    
    
    845Net earnings
    
    $
    1,469
    
    
    $
    52
    
    
    $
    1,299
    
    
    $
    1,231Earnings per share:Basic earnings per common share (*)
    
    $
    0.16
    
    
    $
    0.01
    
    
    $
    0.14
    
    
    $
    0.13Diluted earnings per common share (*)
    
    $
    0.15
    
    
    $
    0.01
    
    
    $
    0.14
    
    
    $
    0.13
 
 (*)
    
    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. F-22




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##### Table of Contents



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 (income) expense, 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
 F-23




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##### Table of Contents



INDUSTRIAL DISTRIBUTION GROUP, INC.
 
 SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
 ALLOWANCE FOR DOUBTFUL ACCOUNTS
 ADDITIONSCHARGEDBALANCE
    
    
    TO COSTSAT
    
    
    AND
    
    
    
    
    
    
    BALANCE ATBEGINNING
    
    
    EXPENSES
    
    
    
    
    
    
    END OFDESCRIPTION
    
    OF PERIOD
    
    
    NET (1)
    
    
    DEDUCTIONS
    
    
    PERIODYear ended December 31, 2007:Allowance for doubtful accounts
    
    $
    1,382
    
    
    
    250
    
    
    
    295
    
    
    $
    1,337Year 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
    
    
    $
    1,369
 
 (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, 2007:Inventory reserve
    
    $
    4,970
    
    
    
    546
    
    
    
    291
    
    
    $
    5,225Year ended December 31, 2006:Inventory reserve
    
    $
    5,115
    
    
    
    410
    
    
    
    555
    
    
    $
    4,970Year ended December 31, 2005:Inventory reserve
    
    $
    5,168
    
    
    
    1,208
    
    
    
    1,261
    
    
    $
    5,115
 
 (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-24




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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, 2007:Valuation allowance
    
    $
    542
    
    
    
    0
    
    
    
    10
    
    
    $
    532Year ended December 31, 2006:Valuation allowance
    
    $
    561
    
    
    
    0
    
    
    
    19
    
    
    $
    542Year ended December 31, 2005:Valuation allowance
    
    $
    561
    
    
    
    0
    
    
    
    0
    
    
    $
    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-25




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit2.1
    
    Agreement and Plan of Merger, effective February 20, 2008,
among Project Athena Holding Corporation, Project Athena
Merger Corporation and the Company (filed as Exhibit 2.1 of
Form 8-K (File No. 001-13195) on February 21, 2008 is hereby
incorporated by reference.3.1
    
    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, as amended, of the Company (filed as Exhibit 3.2 of
the Companys Quarterly Report on Form 10-Q (File No.
001-13195) on November 9, 2007 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) on
August 31, 2000 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)(*)10.1(c)
    
    Industrial Distribution Group 2007 Stock Incentive Plan (filed
as Exhibit 10.9 of the Companys Current Report on Form 8-K
(File No. 001-13195) on April 24, 2007 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 (a)
    
    Form of Restricted Stock Agreement (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)(*)10.7 (b)
    
    Form of Restricted Stock Agreement (filed as Exhibit 10.10 of
the Companys Current Report on Form 8-K (File No. 001-13195)
on May 30, 2007 is hereby incorporated by reference)
 F-26




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit10.8(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)10.8(d)
    
    Third 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
February 21, 2007 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, 2007.(**)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, 2007.(**)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, 2007.(**)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, 2007.
 
 (*)
    
    Management contract or compensatory plan or arrangement required to be filed as an exhibit.(**)
    
    Filed electronically herewith. F-27