Edgar Filing: INDUSTRIAL DISTRIBUTION GROUP INC

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

[ ] 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.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 58-2299339
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)

950 EAST PACES FERRY ROAD, SUITE 1575, ATLANTA, GEORGIA 30326
(Address of principal executive offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (404) 949-2100

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------

COMMON STOCK, PAR VALUE $0.01 PER SHARE NEW YORK STOCK EXCHANGE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

The aggregate market value of the voting stock held by nonaffiliates
(which for purposes hereof are all holders other than executive officers and
directors) of the Registrant as of March 1, 2002 is $13,279,042 (based on
7,588,024 shares held by nonaffiliates at $1.75 per share, the last sales price
on the NYSE on March 1, 2002).

At March 1, 2002, there were issued and outstanding 8,769,670 shares of
Common Stock, par value $0.01 per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive Proxy Statement for the 2002
Annual Meeting of Stockholders, to be filed with the Commission, are
incorporated by reference into Part III.

PART I

ITEM 1. BUSINESS.

BACKGROUND AND GENERAL

Industrial Distribution Group, Inc. was formed in 1997 through a
combination of industrial distribution companies. We are a nationwide supplier
of maintenance, repair, operating, and production (MROP) products and services
to manufacturers and other industrial users. We distribute a full line of MROP
products specializing in cutting tools, abrasives, hand and power tools,
coolants, lubricants, adhesives and machine tools, and we can supply virtually
any other MROP product that a customer may require. We also provide -- as a
targeted and increasing portion of our business -- an array of value-added
services and arrangements, primarily through our Flexible Procurement
Solutions(TM) program, that emphasize and utilize our specialized expertise in
product applications and production process improvements.

While continuing to provide direct sales of MROP products, we have
targeted sales through our Flexible Procurement Solutions, or FPS, program of
services as the principal growth area for our business. We believe that our
focus on and expansion of our FPS services are positioning IDG to address
proactively the increasing demands of customers in our market for ways to reduce
their overall MROP costs and enhance their operating efficiencies. We have the
expertise and ability to analyze a customer's acquisition, possession, and
application processes for MROP products, and then to design and implement a
customized program to streamline these processes and reduce their associated
costs. The specific programs we design may include improving the customers'
production and procurement processes, standardizing the products they use,
reducing the number of suppliers from which they purchase products, or
developing integrated supply arrangements that outsource to us some or all of
their MROP procurement and management functions.

As part of a strategic reorganization to enhance coordination and
improve internal efficiencies, we recently organized our operations into four
regional divisions, plus two specialty business units that have a distinct
industry focus. Each regional division is headed by a President who reports
directly to our Chief Executive Officer. We serve 64 of the top 75 U.S.
industrial markets and have an active presence in Mexico. We have more than
25,000 active customers (customers that purchased at least one item in the last
12 months), which include a diverse group of large and mid-sized national and
international corporations, including Boeing, General Electric, Ford,
Borg-Warner, and Stanley Tools, as well as many local and regional businesses.

We had net sales of $514.4 million for the year ended December 31,
2001. Based on 2001 sales, we believe IDG is among the top 20 MROP providers and
the top ten providers of MROP integrated supply services in the nation.

INDUSTRY OVERVIEW AND TRENDS

Manufacturers, processors, and other producers of industrial,
commercial, or consumer products have a continual need for a broad range of MROP
products. We estimate that the size of the market for industrial MROP products
in which we participate primarily is approximately $70 billion annually.
However, the entire U.S. MROP market is estimated to be in excess of $175
billion annually. This broader market includes electrical, PVF (pipes, valves,
and fittings), power transmission, and other product categories in which we
participate to a lesser extent.

Manufacturers and other users of MROP products continue to seek ways to
enhance efficiencies and reduce MROP process and procurement costs in order to
compete more effectively in the global economy. As a result, the industrial
supply industry continues to experience consolidation, as customers focus on the
convenience, cost savings, and economies of scale associated with a reduced
number of suppliers who are capable of providing superior service and product
selection.

The distribution channel associated with the MROP marketplace has
changed significantly in recent years. The e-commerce and business-to-business
solutions introduced by technological advancements and the Internet have
broadened the distribution channel in the MROP marketplace. While the first
distributors to enter this space were those who primarily use catalogs to sell
their products, we believe the recent trend is to use such technology as part of
a procurement solution strategy that provides customers the option to outsource
the commodity management aspects of MROP. As manufacturers have focused on their
core manufacturing or other production competencies, they have increasingly
outsourced their MROP procurement, management, and application processes in
search of more comprehensive MROP solutions.

We believe that we have the size, scale of operations, and
technological and skilled personnel resources necessary to benefit from these
industry trends and compete effectively in the MROP supply industry.

FLEXIBLE PROCUREMENT SOLUTIONS (FPS)

SERVICES PROGRAM AND APPROACH

FPS is both a broad program of the myriad services we offer to
customers and a reflection of our principal approach to addressing the MROP
needs of our customers. We approach our customers and their needs proactively,
not simply to sell MROP products, but to help design an overall MROP strategy
that improves our customers' supply chain and asset management and increases
their operational efficiencies. We offer our customers our expertise in process
improvement, inventory management, product application, productivity
improvements, cost savings, software solutions, and logistics. As a result of
our services, we hope that our customers can increase their profits and their
return on assets. Through FPS, we can provide any or all of these areas of
expertise, depending on the size and the specific needs of the customer.

We believe that the ability and flexibility to provide the ideal
combination of MROP services required by each customer is the key to capturing
market share for our business. The prerequisites for doing so will continue to
evolve, and we will remain vigilant in assessing the needs of and developing
solutions for our existing and prospective new customers. At December 31, 2001,
we had arrangements to provide FPS services with approximately 350 customers in
place, including 83 integrated supply arrangements with customers covering 117
sites.

SPECTRUM OF SERVICE OFFERINGS

The spectrum of services we offer in designing and implementing
Flexible Procurement Solutions for customers is broad and encompasses all three
phases of a customer's MROP cycle -- that is, the acquisition, possession, and
application of its MROP products. Our extensive process and product expertise
are key elements that allow us to present cost saving solutions to our
customers. Our industry and product-specific experience enable us to evaluate
manufacturing processes and the MROP products they use. With our understanding
of the most appropriate product for specific customer applications, we can help
identify the MROP product best suited for a customer's specific need, or we may
suggest process re-engineering in order to lower the customer's total MROP
costs. Our comprehensive product line supports our commitment to deliver the
most appropriate product to our customers. In addition to maintaining
approximately 400,000

stock keeping units ("SKUs"), as well as special items in stock for regular
customers, we can provide virtually any MROP item a customer may require.

Many MROP products -- such as drill bits, sandpaper, saw blades, and
gloves -- are consumed in production processes and are essential to maintain at
the point of production to avoid unnecessary downtime. Other MROP products --
such as power tools, scales, hoists, and lathes -- have relatively longer
operational lives and are therefore purchased less frequently, but still must be
available "on time" in order to achieve production efficiencies. In all cases,
the proper management of the procurement and application functions in order to
balance ready access with inventory costs is important to users of MROP
products. It is a fundamental part of our FPS services for all customers.

In addition to identifying and supplying the particular products a
customer requires (in the proper quantities and at the proper times), our
specialized services may include any one or more of the following to assist the
customer in maintaining and applying the products more efficiently:

- providing consolidated billing for MROP products and
computerized management reports to customers
regarding purchases and inventory levels;

- installing computer software and hardware to
implement an electronic data interchange system to
enable the customer to order products electronically,
without contacting us, by telephone or facsimile; and

- bar coding products in a customer's tool crib to
control inventory and track consumption by product,
employee, or cost center.

Other specific services, as needed to respond to a particular customer's MROP
requirements, can be designed and provided in order to achieve the desired
solution.

INTEGRATED SUPPLY ARRANGEMENTS

The most complete offering of services in our FPS program is our
"integrated supply" relationship, where we essentially form a strategic alliance
with the customer to procure, manage, and apply MROP products at the customer's
site and, in some cases, to share the benefits of the cost reductions achieved.
In addition to all or most of the other FPS services we provide, our integrated
supply relationships -- which are not standardized and vary from customer to
customer -- usually include:

- licensing to the customer our proprietary software
that helps manage the acquisition, inventory
management, and issuance of MROP products and other
key commodity supplies;

- gaining access to plant floors to re-engineer
procurement and production processes and standardize
MROP products;

- coordinating the purchase of multiple MROP product
lines;

- providing consolidated invoices and customized
management reports via a direct network link to
customers; and

- managing and staffing tool cribs.

In addition, in an integrated supply relationship, we, rather than the customer,
may own the inventory in the tool crib.

In an integrated supply relationship, we often achieve a minimum annual
reduction in the customer's total MROP costs in relation to their production
levels. We believe we can achieve such cost reductions through our focused and
ongoing analysis and re-engineering of a customer's production processes to
reduce the variety and number of MROP products that the customer uses. In
addition, we often achieve additional cost savings for the customer through the
reduction of certain tool crib staffing expenses; the reduction in shrinkage and
obsolete stock due to better inventory controls; and the elimination of certain
inventory holding costs. Where we save additional costs for a customer through
process improvements, the customer may share the additional savings with us.

We believe that, for appropriate customers, an integrated supply
arrangement also has other benefits. For example, through the use of our
proprietary Supply Management System, the customer experiences a better fill
rate for MROP products; reduces production downtime due to the unavailability of
key products; and obtains more useful information about inventory needs and
consumption by cost center than previously collected.

QUALITY CONTROL STANDARDS

Providing superior quality in the comprehensive range of MROP services
to customers is our hallmark. As part of our commitment to providing
solutions-oriented customer service, we emphasize quality assurance in all
phases of our operations. Our sales and service personnel receive ongoing
periodic training in our services solutions, our products, total quality
management and other team management skills to assure quality performance. We
expect that each of our principal regional locations will be International
Standards Organization ("ISO") 9002 compliant. Currently, three of our four
principal regional locations are ISO 9002 compliant. We may, on a selective
basis, retain or seek compliance at other levels of our operations if it is
cost-effective and strategic to do so.

PRODUCTS

In tandem with our FPS program and approach to serving our customers,
we remain focused on satisfying the fundamental requirement of our distribution
business -- getting to customers the MROP products they need, when they need
them. In order to do so, we offer a full line of industrial MROP products, with
approximately 400,000 SKUs in stock. In addition, we often maintain supplies of
special items for regular customers, and we are able to supply virtually any
special order MROP item. In order to achieve cost savings for us and for our
customers, we periodically review our special order activities to identify items
ordered with sufficient frequency to warrant inclusion in our stock.

Our principal product categories include cutting tools, abrasives, hand
and power tools, coolants, lubricants, adhesives, and machine tools. We are able
to offer significant depth and breadth in our core product lines throughout our
nationwide operations. Our offering of specific products from multiple
manufacturers, at different prices and quality levels, permits us to offer the
product that provides the best value for the customer. For example, if a
customer requires a drill bit to drill 100 holes, purchasing a top-of-the line
product that is designed for a requirement of drilling 10,000 holes would be
inefficient and costly. Our associates are trained specifically to assist
customers in making such intelligent cost-saving purchases, with the goal of
lowering the customer's total MROP product costs. We believe these factors
significantly enhance our volume of repeat business, and they are an integral
part of our overall customer costs reduction program and total procurement
solutions.

On an individual location basis, our products may be ordered
electronically through e-commerce, by telephone, by mail, or by facsimile. We
seek at all times to provide our customers with the most convenient method of
selecting and ordering products, which in the future may include paper and
electronic catalogs and Internet and other electronic commerce. We ship products
anywhere in the world in the time frame required by the customer. To facilitate
such "on time" delivery of our products, we store our stock MROP products
primarily in warehouses at various locations across the United States.

We currently obtain products from approximately 22,000 vendors. During
2001, no vendor provided as much as 10% of the products we sold. We believe we
are not materially dependent on any one vendor or small group of vendors.

The following table sets forth illustrative examples of the myriad
products we supply, organized by principal categories of MROP products, and also
shows our sales of such products as a percentage of our aggregate revenue for
2001:

% of
Aggregate
Product Category Typical Products Revenue
---------------- ---------------- ---------

Cutting Tools............................... Drills, Taps, Carbide Tools, End Mills 23.66%
Abrasives................................... Grinding Wheels, Sanding Belts, Discs, Sheets or Rolls 15.47%
Maintenance Equipment & Supplies........... Hydraulic Tools, Paint, Lubrication Equipment 9.63%
Hand Tools.................................. Wrenches, Socket Sets, Screw Drivers, Hammers 7.23%
Coolants, Lubricants, and Adhesives......... Metal Cutting Coolants, Aerosols, Industrial Adhesives 6.45%
Power Tools................................. Air and Electric Drills, Air Compressors, Impact
Wrenches, Screwdrivers 6.33%
Safety Products............................. Gloves, Signs, Absorbents, Glasses 5.45%
Machinery................................... Metal Removal Equipment, Metal Forming Equipment 4.54%
Saw Blades.................................. Band, Hack, Hole, Jig Saw Blades 2.58%
Material Handling Equipment................. Hoists, Slings, Chain, Shelving, Casters 2.44%
Machine Tools & Accessories................. Milling Machines, Work Holding Vises, Tool Holders 2.05%
Tapes....................................... Masking, Filament and Duct Tape 1.49%
Fasteners................................... Socket Screws, Hex Screws, Anchors 1.19%
Tool & Die Supplies......................... Ground Stock, Drill Rod, Die Sets 1.15%
Electrical.................................. Fuses, Electrical Switches, Controls 1.15%
Contractor Supplies......................... Power-Actuated Tools, Ladders, Shovels 1.03%
Metal Goods................................. Angle Iron, Conduit 0.95%
Brushes..................................... Wire Wheel, Floor Brooms 0.93%
Fluid Power................................. Hydraulic and Pneumatic Valves, Cylinders 0.83%
Power Transmission Equipment................ Belts, Drives, Bearings, Gears, Pulleys 0.82%
Quality Control Products.................... Electronic Calipers, Micrometers 0.74%
Other Products.............................. Special Order Items and Miscellaneous 3.89%
------
Total.................. 100.00%
======

CUSTOMERS

Our active customers, who number over 25,000, include a broad range of
industrial, commercial, and institutional users of MROP products, from
one-person machine shops to regional, national, and multi-national corporations
such as Boeing, General Electric, Ford, Borg-Warner, and Stanley Tools. For
2001, we sold products to over 1,300 customers who purchased at least $50,000 of
products, and no single customer accounted for more than 6% of our net sales.

We will continue to serve a large number and wide variety of customers.
Our principal customers (in terms of the amount of services and products
acquired from or through us) will likely continue to be divisions of large
national or multi-national corporations, and we will focus on increasing our
business with such customers. We expect, however, that we will place special
emphasis, through our FPS program, on marketing and selling our MROP services
and products to middle-market industrial users of MROP products.

SALES AND MARKETING

We have recently coordinated the marketing efforts associated with our
FPS program. We believe this coordination will allow us to compete more
effectively both in local markets and for multi-location contracts. Each of our
four regional divisions has personnel dedicated to these efforts focused on the
regional and local markets. Our Vice President of Flexible Procurement Solutions
is responsible for the development of large national accounts that require
cross-divisional coordination and to assist the regional efforts when necessary.

We have approximately 230 outside sales representatives and product
specialists and 210 inside sales/customer service representatives. Historically,
the majority of our outside sales representatives and product specialists called
on designated customers and were responsible for providing technical support to
those customers with respect to certain products. Our inside sales/customer
service representatives were responsible for certain types of direct customer
service contacts and order entry, but primarily focused on supporting the
outside sales representatives with respect to their respective customers.

As part of our strategy to focus more on marketing our FPS services
(and selling MROP products through such services), we are seeking to more
effectively use the expertise of our outside sales representatives and product
specialists. That expertise can be employed advantageously in the design and
implementation of MROP strategies to help customers improve production processes
and reduce their total procurement costs. Accordingly, rather than having the
majority of sales and marketing personnel focused upon sales of particular
products to customers, we are re-directing the substantial portion of our sales
force to focus on the broader spectrum of MROP services and on developing and
marketing to each customer a value-added solution to its MROP needs that goes
beyond the sale of particular products.

We are in the process of assessing, retraining and augmenting our sales
force as necessary to assure that it has the appropriate sales tools to achieve
the objectives of our strategy to focus on FPS. We will also continue, however,
to ensure that we have adequate personnel to provide our customers with any
dedicated or specialized product selection and applications expertise they
require for their traditional MROP solutions.

We provide regular training programs for our sales personnel and
special training programs for various product lines on both a national and
divisional basis. Each division also maintains a technical support group, as
part of its overall sales and marketing function, dedicated to answering
specific customer inquiries, assisting customers with the operation of products,
and finding low cost solutions to manufacturing problems.

MANAGEMENT INFORMATION SYSTEMS

We continue to work to improve company-wide our back office information
technology systems on a cost-effective basis. Through these systems we manage
key functions such as communication between warehouse and sales offices,
inventory and accounts receivable management, purchasing, pricing, sales and
distribution, and the preparation of periodic operating control reports. We have
chosen three "best of breed" distribution systems and are currently in the
process of converting our existing systems to those packages on a regional
basis. We expect this process to be substantially completed in 2002. As we
further consolidate our operations to achieve internal efficiencies, we may be
able to reduce the number of regional platforms or further integrate those
platforms.

At our customer locations we utilize computerized management and
information systems, including a highly specialized distributor based software,
our proprietary Supply Management System, and our InnoSource(R) System for
customer product procurement and management. These systems assist us in our
business-to-business product offerings, and all are important elements of our
overall ability to meet customers' requirements for increasing levels of
individualized MROP procurement solutions, as well as to achieve our desired
level of internal operating efficiencies. Our proprietary Supply Management
System and our InnoSource System are also key components in our FPS program.

COMPETITION

The industrial MROP products industry is highly competitive and
features numerous distribution channels, including: national, regional, and
local distributors; direct mail suppliers; Internet suppliers; large catalog
warehouses; and manufacturers' own sales forces. Many of our competitors are
small enterprises who sell to such customers in a limited geographic area, but
we also compete against several large MROP distributors that have significantly
greater resources than we do. Certain of our competitors sell identical products
for lower prices than we offer.

We believe, however, that we will be able to compete effectively
because of our ability to address the MROP needs of our customers for services
and solutions (as well as MROP products) that enable them to improve
productivity and reduce costs.

PERSONNEL

We had approximately 1,330 full-time and 30 part-time associates as of
December 31, 2001. Ten of our associates are employed pursuant to collective
bargaining agreements with local unions affiliated with the International
Brotherhood of Teamsters and the International Brotherhood of Electrical
Workers. We believe that the subsidiaries that have been employing these persons
pursuant to those contracts enjoy good relations with these associates, and we
have not experienced work stoppages. We believe our business relationships are
good with all of our associates.

EXECUTIVE OFFICERS OF THE REGISTRANT

Certain information regarding our executive officers is set forth in
the following table and paragraphs.

NAME AGE POSITION
---- --- --------

Andrew B. Shearer......................... 38 President and Chief Executive Officer
Jack P. Healey............................ 42 Senior Vice President, Chief Financial Officer, and Secretary
Thomas W. Aldridge, Jr.................... 54 Senior Vice President
Martin C. Burkland........................ 50 Northwest Division President
Mark W. Fuller............................ 53 Northeast Division President
Jeffrey W. Hayes.......................... 51 Midwest Division President
Charles A. Lingenfelter................... 51 Southern Division President

Mr. Shearer is one of our co-founders, and became our President and
Chief Executive Officer in August 2001. Mr. Shearer had served since 1991 as the
President of the IDG-York business unit, formerly Shearer Industrial Supply Co.,
one of the companies that combined to form us in 1997. Mr. Shearer received his
undergraduate degree in business management from New Hampshire College.

Mr. Healey joined us in June 1997 as Vice President and Chief Financial
Officer, and became Senior Vice President in 1998. Prior to 1997, Mr. Healey was
the partner in charge of assurance services for a regional accounting firm and
member of the SEC practice section of the AICPA, during which time he served as
auditor for The Distribution Group, Inc., one of our founding companies. Mr.
Healey is a certified public accountant and a certified fraud examiner. He
received his undergraduate degree in accounting from Syracuse University.

Mr. Aldridge joined us in August 1998, as Senior Vice President of
Procurement. Prior to that time, Mr. Aldridge served (since 1991) as Senior Vice
President, Vendor Relations, of Affiliated Distributors, a purchasing
organization for industrial distributors. From 1987 to 1990, Mr. Aldridge served
as Vice President -- Sales of Bauer Corporation, a manufacturer of industrial
ladders and personal access equipment. Mr. Aldridge received his undergraduate
degree from the University of Georgia.

Mr. Burkland was named President of our Northwest Division in January
2002. Prior to that time, Mr. Burkland served as President of B&J Industrial
Supply Co., a position he has held since 1995. Mr. Burkland received his
undergraduate degree from Central Washington University.

Mr. Fuller was named President of our Northeast Division in January
2002. Mr. Fuller served as President of IDG-New England from May 1998 until
December 2001. From 1991 to 1998, Mr. Fuller was President of Refco, Inc., which
we acquired in May 1998. Mr. Fuller received his undergraduate degree in Ceramic
Science from Pennsylvania State University.

Mr. Hayes was named President of our Midwest Division in January 2002.
Mr. Hayes served as President of our IDG-Cincinnati business unit from December
1998 to January 2002. Prior to that time, Mr. Hayes served as the Chief
Executive Officer of Innovative Distributor Group, Inc. from 1991 to 1998, when
we acquired that company. Mr. Hayes received his undergraduate degree from
Kenyon College.

Mr. Lingenfelter was named President of our Southern Division in
January 2002. Prior to that time, Mr. Lingenfelter served as President of our
IDG-Charlotte business unit from January 2001. Before that,

Mr. Lingenfelter was serving as President of The Distribution Group, Inc., one
of the companies that combined to form us in 1997 and with whom he had been an
executive since 1988. From 1973 to 1987, Mr. Lingenfelter served Ingersoll-Rand
Company, most recently as Vice President of Sales and Marketing for its Tools
Group. Mr. Lingenfelter received his undergraduate degree in Mechanical
Engineering from the Indiana Institute of Technology.

CERTAIN FACTORS AFFECTING FORWARD LOOKING STATEMENTS

From time to time, information provided by us or statements made by our
directors, officers or employees may constitute "forward-looking" statements
under the Private Securities Litigation Reform Act of 1995 and are subject to
numerous risks and uncertainties. Any statements made in this Annual Report on
Form 10-K, including any statements incorporated by reference, that are not
statements of historical fact are forward-looking statements. In some cases, you
can identify forward-looking statements by terminology such as "may", "will",
"should", "expects", "plans", "anticipates", "believes", "estimates",
"predicts", "intends", "potential", "continue", or the negative of such terms or
other comparable terminology. Forward-looking statements include our
expectations with respect to growth of sales, the affect of economic conditions,
the impact or operational improvements or cost reduction initiatives, operating
margins and overall profitability.

These forward-looking statements and other forward-looking statements
made by us or our representatives are based on a number of assumptions and
involve a number of risks and uncertainties, and, accordingly, actual results
could differ materially. Factors that may cause such differences include, but
are not limited to, the following:

OUR ABILITY TO SELL OUR SERVICES AND PRODUCTS IN THE QUANTITY WE DESIRE
DEPENDS HEAVILY UPON THE OPERATIONS LEVELS OF OUR CUSTOMERS AND THE
ECONOMIC FACTORS THAT AFFECT THEM.

Some of the primary markets for the products and services we sell are
subject to cyclical fluctuations that generally affect demand for industrial and
consumer durable goods produced by the users of MROP supplies. Consequently, the
demand for our services and products has been and will continue to be influenced
by most of the same national, regional, or even international economic factors
that affect the demand for and production of such goods. When our customers or
prospective customers reduce their production levels in response to lower demand
for their products, they have less need for MROP supplies and may delay or slow
(or even cancel) orders for MROP products or services.

The current economic environment continues to be adverse for many
customers to whom we have historically sold larger amounts of MROP products and
services. Unless and until these economic conditions dissipate, our results of
operations will continue to be adversely impacted.

BASED ON OUR PERCEPTION OF INDUSTRY TRENDS AMONG MROP CUSTOMERS, WE ARE
DEDICATING SIGNIFICANT RESOURCES TO OUR FPS PROGRAM, BUT WE CAN NOT BE
CERTAIN THAT THESE INITIATIVES WILL GENERATE THE GROWTH WE ANTICIPATE
AND DESIRE.

We have recently dedicated significant resources to promote our FPS
program as a strategic area for future growth. In particular, we have redirected
our sales and marketing efforts towards sales of broad-based services and
products through this program, rather than towards sales of particular products.
This focus is based on our perception of industry trends among users of MROP
products for more comprehensive solutions to their MROP requirements. If the
trends that we perceive do not continue to develop, FPS sales may not grow at
the levels we anticipate and desire, and our results of operations could be
affected.

In addition, we may encounter unanticipated difficulties in retraining
our sales and marketing personnel to focus more broadly on the sale of FPS
services to our customers, rather than focusing

exclusively or primarily on direct sales of MROP products. Such difficulties
could delay our anticipated growth in FPS sales.

THE DELIVERY OF OUR SERVICES REQUIRES HIGHLY SKILLED AND SPECIALIZED
EMPLOYEES WHO ARE NOT EASY TO LOCATE OR REPLACE.

The timely provision of our high-quality services requires an adequate
supply of skilled sales and customer service personnel, including the
specialists whose expertise is an essential element of our customer-oriented,
FPS program. Accordingly, our ability to implement solutions for our customers
depends to a significant degree on our ability to employ the skilled personnel
necessary to meet our marketing and servicing requirements. From time to time,
we have experienced difficulty in attracting or retaining sufficient numbers of
qualified personnel. As a result, our operating costs may be adversely affected
by turnover in such positions. We cannot assure you that we will be able to
maintain an adequately skilled sales and customer service force or that our
labor expenses will not increase as a result of a shortage in the supply of such
skilled personnel.

WE RELY HEAVILY ON OUR SENIOR MANAGEMENT AND THE EXPERTISE OF
MANAGEMENT PERSONNEL.

Our operations will depend for the immediate future on the efforts of
our executive officers, division presidents, and our other senior management.
Our business and prospects could be adversely affected if these persons, in
significant numbers, do not perform their key roles as expected, and we are
unable to attract and retain qualified replacements.

WE CONTINUE TO RELY UPON A VARIETY OF SYSTEMS FOR OUR INTERNAL
MANAGEMENT INFORMATION AND RELATED FUNCTIONS, WHICH COULD ADVERSELY
AFFECT OUR OPERATIONS UNTIL WE CAN IMPLEMENT OUR REGIONALIZED
MANAGEMENT INFORMATION TECHNOLOGY SYSTEM.

Until we can fully implement our regionalized management information
technology system, we will continue to utilize and be dependent upon a variety
of decentralized information and operating systems for many functions, such as
product ordering, financial reporting and analysis, and inventory control. We
may experience delays, disruptions, and unanticipated expenses as a result of
that situation, which could adversely affect our internal efficiency and our
ability to service customers. In any event, we will not be able to achieve the
full benefit of certain contemplated operating efficiencies and competitive
advantages until we have fully implemented our regionalized management
information technology system.

The implementation of our regionalized management information
technology system may involve several of our business units in simultaneous
information technology conversions. We may experience difficulties in
conjunction with these conversions, including difficulties with data conversion
from existing systems and the flow and integration of information into the new
financial systems. If such difficulties occur, we may experience delays,
disruptions, and unanticipated expenses, which could adversely affect our
internal efficiency and our ability to service customers in a regional area.

WE RELY ON A VARIETY OF DISTRIBUTION RIGHTS GRANTED BY OUR SUPPLIERS TO
OFFER THEIR PRODUCT LINES TO OUR CUSTOMERS.

For a substantial portion of our business, we depend on the collection
of varied distribution arrangements with suppliers for certain product lines
that have been established by our several operating subsidiaries in their
respective geographic markets. A significant percentage of these current
distribution arrangements are oral, and many of them can be terminated by the
supplier immediately or upon short notice. The termination or limitation by any
key supplier of its relationship with us could have a material adverse effect on
our results of operations and financial condition.

OUR INDUSTRY IS VERY COMPETITIVE, BOTH AS TO THE NUMBER AND STRENGTH OF
THE DIFFERENT COMPANIES WITH WHICH WE COMPETE AND THE BUSINESS TERMS
OFFERED TO POTENTIAL CUSTOMERS.

The industrial maintenance, repair, operating, and production supplies
industry is highly competitive and features numerous distribution channels,
including: national, regional, and local distributors; direct mail suppliers;
Internet suppliers; large catalog warehouses; and manufacturers' own sales
forces. Many of our competitors are small enterprises who sell to customers in a
limited geographic area, but we also compete against several large distributors
that have significantly greater resources than we do. Competition with all of
these distributors has increased as customers increasingly seek low-cost
alternatives to traditional methods of purchasing and sources of supply by,
among other things, reducing the number of their maintenance, repair, operating,
and production suppliers.

Competition in the MROP supplies industry may increase in other ways as
well. First, other distributors are consolidating to achieve economies of scale
and increase efficiencies. Second, new competitors, of which we are not
currently aware, may emerge, further increasing competition.

Other aspects of our industry also make it very competitive. For
example, some of our competitors sell the same products we sell at lower prices
than we offer. Moreover, we compete on the basis of our ability to design and
implement Flexible Procurement Solutions that will enable our customers to
achieve productivity improvements and reduce costs. We cannot assure you that we
will be able to compete successfully.

THE LIQUIDITY OF OUR STOCK DEPENDS HEAVILY ON OUR CONTINUED LISTING
WITH THE NEW YORK STOCK EXCHANGE.

In November 2001, we received official notice from the New York Stock
Exchange (NYSE) that we were below its continued listing criterion that requires
maintaining total market capitalization of not less than $15 million. We
submitted a plan to achieve ongoing compliance with the NYSE's continued listing
standards, which was accepted by the NYSE in December 2001 for a probationary
period. As a result, shares of our common stock continue to be listed on the
NYSE subject to our achievement in the future of financial and operating
objectives outlined in our plan. We can not be certain that we will achieve
those objectives and, if we do, there is no assurance that the NYSE will remove
the probationary period or that we will sustain the minimum market
capitalization requirements. The liquidity and the value of our shares could be
adversely impacted if we do not achieve these objectives and the NYSE delists
our stock.

ITEM 2. DESCRIPTION OF FACILITIES.

Currently, we own eight properties and lease 50 operating properties in
57 cities in the United States for our warehouse, sales, and administrative
offices. We also lease one property in one city in a foreign country. Certain
property locations contain multiple operations such as a warehouse and a sales
office. The facilities range in size from less than 1,000 square feet to over
120,000 square feet. Leases for

the facilities expire at various periods between 2002 and 2020. The aggregate
annual lease payments for real properties in 2001 were approximately $4.7
million.

Our corporate offices are located in approximately 10,000 square feet
of office space at 950 East Paces Ferry Road, Suite 1575, Atlanta, Georgia. This
lease commenced in December 1998 and expires in December 2003. We have subleased
approximately 3,000 square feet of this office space.

We believe that our facilities are adequate for our current needs and
do not anticipate inordinate difficulty in replacing such facilities or opening
additional facilities, if needed.

ITEM 3. LEGAL PROCEEDINGS.

We are, from time to time, a party to litigation arising in the normal
course of business. We do not believe that any of these actions, individually or
in the aggregate, will have a material adverse affect on our financial position
or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of security holders of the company
during the fourth quarter of the fiscal year covered by this report.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Our common stock trades on the NYSE under the symbol "IDG". The
following table sets forth for the periods indicated the high and low closing
market prices of the common stock on the NYSE.

PRICE RANGE
----------------
HIGH LOW
----- -----

2000
First Quarter............................................ $3.69 $2.88
Second Quarter........................................... $3.06 $2.31
Third Quarter............................................ $3.50 $2.44
Fourth Quarter........................................... $3.00 $1.75

2001
First Quarter............................................ $3.10 $1.95
Second Quarter........................................... $2.20 $1.80
Third Quarter............................................ $2.15 $1.30
Fourth Quarter........................................... $1.59 $1.19

2002
First Quarter (through March 15)......................... $2.78 $1.50

As of March 15, 2002, there were 142 holders of record of our common
stock. Investors who beneficially own our common stock that is held in street
name by brokerage firms or similar holders are not included in this number.
Accordingly, based upon the quantities of periodic reports requested by such
brokerage firms, we believe that the actual number of individual beneficial
owners of our common stock exceeds 1,900.

We have not paid dividends on our common stock. We currently intend to
retain our future earnings, if any, to finance the growth, development, and
expansion of our business and, accordingly, do not currently intend to declare
or pay any dividends on our common stock for the foreseeable future. The
declaration, payment, and amount of future dividends, if any, will be subject to
the discretion of our Board of Directors and will depend upon our future
earnings, results of operations, financial condition, and capital requirements,
among other factors. Under Delaware law, we are prohibited from paying any
dividends unless we have capital surplus or net profits available for this
purpose. In addition, our credit agreement with First Union National Bank and
other lenders prohibits the payment of dividends.

ITEM 6. SELECTED FINANCIAL DATA.

The following summary financial data as of and for the years ended
December 31, 2001, 2000, 1999, 1998, and 1997 have been derived from our audited
financial statements. All such financial statements reflect the requirements of
the Securities and Exchange Commission's Staff Accounting Bulletin No. 97 ("SAB
97"), which deem the historical financial statements of B&J Industrial Supply
Company ("B&J") -- one of the nine founding companies we acquired to commence
our current operations as a combined entity (the "Combination") -- to be our
historical financial statements for all periods prior to September 24, 1997, the
accounting effective date of those acquisitions. As a result, our financial
statements, and the following data, reflect the results of operations and
financial condition of B&J combined with Continental Air Tool, Inc., Northern
Tool & Supply, Inc., and Hawley Industrial Supplies, Inc., which we acquired
during 1998 and are accounted for under pooling-of-interests accounting
treatment (the "Pooled Companies") for the periods prior to September 24, 1997;
and the results of operations and financial condition of all nine founding
companies and the Pooled Companies are reflected in our financial statements and
data for the period of time from and after September 24, 1997. Companies
acquired during 1998 and 1999 and accounted for under the purchase method of
accounting (which includes all companies acquired during 1998 and 1999 other
than the Pooled Companies) are shown only for the period of time from and after
our acquisition of them. Those facts account for a substantial difference in
these financial data as of and for the fiscal years 1999 (and subsequent years)
as compared to fiscal years 1998 and 1997; they make comparisons of the data
among those periods misleading.

This selected financial data should be read in conjunction with our
audited consolidated financial statements and notes thereto, and Management's
Discussion and Analysis of Financial Condition and Results of Operations,
included in Item 7 of this Report.

YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- -------- --------
(in thousands)

STATEMENTS OF INCOME DATA:
Net sales(*) $ 514,385 $ 546,681 $ 547,935 $442,062 $154,748
--------- --------- --------- -------- --------
Gross profit 114,521 123,142 124,975 104,877 37,022
Selling, general, and administrative expenses 111,128 116,001 116,663 94,406 33,125
Unusual items 0 15,050 5,887 0 0
--------- --------- --------- -------- --------
Operating income (loss) 3,393 (7,909) 2,425 10,471 3,897
--------- --------- --------- -------- --------
Net (loss) income $ (1,358) $ (9,612) $ (1,889) $ 6,215 $ 2,316
EPS - basic and diluted $ (0.16) $ (1.11) $ (0.22) $ 0.75 $ 0.71

BALANCE SHEET DATA:
Working capital $ 79,907 $ 94,265 $ 78,148 $ 80,989 $ 81,152
Property and equipment, net 13,077 15,446 31,538 24,619 9,910
Total assets 201,044 223,958 230,804 211,465 147,246
Long-term debt, including current portion 42,762 53,305 47,953 39,699 11,653
Stockholders' equity $ 101,135 $ 102,115 $ 112,072 $113,595 $ 99,490

--------------
(*) Net sales reflect accounting changes required by Emerging Issues Task Force
pronouncement 00-10: Accounting for Shipping and Handling Fees and Costs. The
pronouncement requires that amounts billed to customers as shipping and handling
be classified as revenue.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

In the following discussions, most percentage and dollar amounts have
been rounded to aid presentation; as a result, all such figures are
approximations. References to approximations have generally been omitted.

GENERAL TRENDS AFFECTING OUR OPERATIONS

Over the past several years, we believe the market for MROP
requirements among large and middle-market companies has moved steadily towards
a demand for MROP services that are customized to meet the particular needs of
the customer in seeking to reduce its overall MROP costs and increase its
operating efficiencies. Such services may extend well beyond the traditional
supplying of MROP products on a timely basis at a favorable price.

In connection with distributing a full line of MROP products to meet
the needs of manufacturers and other industrial users, we have always offered to
many of our customers a wide range of specialized services relating to product
selection and applications and the customer's production processes that affect
the utilization and costs of MROP supplies. We were among the leaders in
offering integrated supply arrangements to customers who desired to outsource
all (or the substantial portion) of their MROP procurement and management
functions. Drawing upon our experiences with integrated supply and specialized
services and product knowledge, we have been expanding our Flexible Procurement
Solutions, or FPS, program to meet that demand for a wide variety of MROP
service offerings. We believe that demand is increasing, and we have positioned
our sales and marketing efforts to focus on FPS as a major business strategy. We
believe the success of our FPS-focused strategy will depend in major part on the
successful refocusing and training of our sales and marketing personnel as well
as our successful design and implementation of MROP procurement solutions that
customers desire.

As discussed elsewhere in this Report, FPS is both a program comprising
the myriad services that we offer to our customers and our approach to providing
those services and MROP products, which drives our efforts to design and
implement on an individualized basis the arrangement best-suited for each

customer's particular needs. Our historical integrated supply offerings now
represent points along the spectrum of services that we offer customers as part
of our FPS program. While FPS sales and marketing is now our major strategic
focus, we will continue to focus substantial attention on traditional or direct
sales of MROP products from stock or on a special order basis. Direct and
special order sales have historically been our principal source of revenue, and
we expect that they will remain a source of substantial revenue, even as we
increase our FPS sales.

A summary review of our sales results for the past three years reflects
the trend we see with respect to the demand for FPS services among our MROP
customers, which we believe supports our recognition of a trend within the
industry generally. Our total sales for 2001, 2000, and 1999 were $514.4
million, $546.7 million, and $547.9 million, respectively. Of these amounts, FPS
sales (including sales pursuant to integrated supply arrangements) have
increased steadily as a percentage of total sales, as reflected in the following
table. Our management expects the upward trend in FPS sales to continue for the
foreseeable future.

Year Ended December 31,
------------------------------------------------------------------------
2001 2000 1999
---------------------- ---------------------- ----------------------
Net Sales % of Total Net Sales % of Total Net Sales % of Total
--------- ---------- ---------- ---------- --------- ----------
(dollars in millions)

FPS Sales, including integrated supply $224.5 43.6% $209.0 38.2% $198.2 36.2%
Traditional Sales, including special orders 289.9 56.4 337.7 61.8 349.7 63.8
------ ----- ------ ----- ------ -----
Total Net Sales $514.4 100.0% $546.7 100.0% $547.9 100.0%
====== ===== ====== ===== ====== =====

CERTAIN EFFECTS OF OUR INCREASING FPS SALES

As our FPS sales increase, especially as a percentage of aggregate
sales relative to direct sales, we will experience some change in certain
factors by which we assess our operating results. For example, integrated supply
arrangements typically have lower operating margins in the implementation phase,
because we expense on a current basis the start-up costs we incur to design and
implement the necessary procedures (and place required equipment or personnel
onsite at the customers' locations). The operating margins generally increase
over the term of the arrangements, however, as our costs are reduced and
revenues from the customers increase. To a lesser extent than with integrated
supply arrangements, we may experience similar effects in connection with other
FPS services arrangements. We believe that our overall operating margin achieved
on FPS sales is and will remain consistent with our objectives for
profitability.

In FPS arrangements in which we become the exclusive or primary
supplier of a large volume of MROP products to a customer (as occurs with an
integrated supply contract), we typically offer volume discounts on products to
the customer as part of the overall arrangement to achieve mutually beneficial
results for the customer and us. These product discounts will yield a slightly
lower gross margin from FPS sales relative to traditional direct sales. On the
other hand, we believe that our selling, general and administrative expenses as
a percentage of sales decrease over time with respect to each long-term FPS
arrangement with a customer, which favorably affects our operating margin on FPS
sales to the customer. Moreover, we believe the overall impact of such FPS sales
on our operations enhances profitability.

As a result of factors such as the above, we may experience changes
relative to prior years in measures such as (1) our cost of sales as a
percentage of net sales and (2) our selling, general and administrative expenses
as a percentage of net sales, both as a result of adding new FPS customers and
increasing the volume of FPS sales relative to traditional direct sales. In some
cases, the volume of our overall business during a period of time may mask the
change. We believe that occurred to some extent in

2001 with respect to selling, general and administrative expenses as a
percentage of net sales, when our lower volume of business masked the otherwise
favorable impact that both our costs saving initiatives and our increased level
of FPS sales would have had on selling, general and administrative expenses as a
percentage of net sales. We believe that, when and if economic conditions in the
MROP industry improve and our overall volume of business increases, our
strategic focus on increasing the level of our FPS sales will yield favorable
results as to both of the above measures, as well as improve our profitability.

RESULTS OF OPERATIONS

The following table sets forth a summary of our operating data and
shows this data as a percentage of net sales for the periods indicated:

Year Ended December 31,
-------------------------------------------------------------------------------------
2001 2000 1999
----------------------- ------------------------ -----------------------
(dollars in thousands)

Net Sales(*) $514,385 100.0% $546,681 100.0% $547,935 100.0%
Cost of Sales 399,864 77.7 423,539 77.5 422,960 77.2
-------- ----- -------- ----- -------- -----
Gross Profit 114,521 22.3 123,142 22.5 124,975 22.8
Selling, General, and
Administrative Expenses 111,128 21.6 116,001 21.2 116,663 21.3
-------- ----- -------- ----- -------- -----
Unusual Items 0 0.0 15,050 2.7 5,887 1.1
-------- ----- -------- ----- -------- -----
Operating Income (Loss) $ 3,393 0.7% $ (7,909) (1.4)% $ 2,425 0.4%
======== ===== ======== ===== ======== =====

2001 COMPARED TO 2000

Net sales decreased $32.3 million, or 5.9%, from $546.7 million in 2000
to $514.4 million in 2001. Throughout 2001 (and with increasing severity as the
year progressed), our sales were adversely affected by production curtailments,
layoffs, and plant closures across our customer base as customers adapted to the
softness in the economy. These developments with our customers reduced their
demands for MROP products because the customers reduced their production levels
in response to lower demands for their goods. Growth in the FPS area of our
business partially offset the sales reduction due to economic conditions. While
our existing FPS customers were also impacted by capacity reductions in 2001,
total FPS sales increased 7.4% compared to 2000, from $209.0 million to $224.5
million for 2001 due to new customer accounts. Moreover, only a minor portion of
that increase reflects former direct sales to existing customers who converted
to an FPS arrangement.

Cost of sales decreased $23.7 million, or 5.6%, from $423.5 million in
2000 to $399.9 million in 2001. As a percentage of net sales, however, cost of
sales increased slightly from 77.5% in 2000 to 77.7% in 2001. The increase in
cost of sales as a percentage of sales is attributable in part to competitive
pricing pressures as all MROP suppliers faced a declining demand due to the
economic conditions adversely affecting our industry. Also, during 2001, we
increased our inventory reserves by approximately $0.7 million. However, for the
reasons discussed above under "General", the substantial increase in our FPS
sales in 2001 with the associated lower gross margin percentages contributed to
the relatively higher cost of sales as a percentage of sales.

Selling, general, and administrative expenses decreased $4.9 million,
or 4.2%, from $116.0 million

in 2000 to $111.1 million in 2001. As a percentage of sales, however, selling,
general, and administrative expenses increased slightly from 21.2% in 2000 to
21.6% in 2001. The decrease in selling, general, and administrative expenses as
an absolute amount is due to the impact of our headcount, cost reduction
initiatives, and lower selling costs. Personnel costs decreased $5.3 million,
after severance charges of $0.9 million, in comparison to 2000. A major part of
this reduction came from our total headcount decreasing 10.3% over the course of
2001. Additionally, we implemented a company-wide furlough program in September
2001 that resulted in a $1.7 million reduction in personnel costs in 2001. Our
other cost reduction initiatives included concerted efforts to reduce ongoing
operating and variable costs. The savings from these initiatives were partially
offset by a $0.9 million increase in bad debt expense over the prior period. The
increase in bad debt expense (which is largely attributable to the financial
pressures on customers from the general economic conditions previously in 2001),
along with the decrease in our net sales for 2001, account for the slight
increase in selling, general and administrative expenses as a percentage of net
sales. We believe that our past and ongoing initiatives will permit us to
achieve selling, general and administrative expense levels in the future that
will enhance profitability as we implement our FPS business strategy.

Operating income increased $11.3 million, or 142.9%, from a loss of
$7.9 million in 2000 to income of $3.4 million in 2001. This result is primarily
attributable to the facts that, during 2000, we incurred unusual items of $15.1
million related to the abandonment of our Enterprise Resource Planning ("ERP")
project and executive separation costs, and we did not incur any unusual items
in 2001.

2000 COMPARED TO 1999

Net sales decreased $1.3 million, or 0.2%, from $547.9 million in 1999
to $546.7 million in 2000. Higher interest rates and energy costs negatively
impacted our customers in the automobile, trucking, manufactured housing, and
aluminum industries during 2000. Growth in the integrated supply area of our
business (which is now part of our overall Flexible Procurement Solutions
program) partially offset the industry-specific economic conditions.

Cost of sales increased $0.6 million, or 0.1%, from $423.0 million in
1999 to $423.5 million in 2000. As a percentage of net sales, cost of sales
increased from 77.2% in 1999 to 77.5% in 2000. The increase in cost of sales as
a percentage of sales is primarily due to a reduction in sales to the higher
margin manufactured housing industry, which was somewhat offset by a reduction
in freight costs.

Selling, general, and administrative expenses decreased $0.7 million or
0.6% from $116.7 million in 1999 to $116.0 million in 2000. During 2000, we made
a concerted effort to reduce operating costs. Additionally, we achieved a
reduction in selling, general, and administrative expenses due to the closure of
six operating facilities. Increased expenses associated with the implementation
of our new health insurance plan partially offset these savings.

During 2000, we incurred unusual items of $15.1 million in the fourth
quarter related to the abandonment of our ERP project and executive separation
costs. During 1999, we incurred $5.9 million in unusual charges, of which $4.4
million related to settlement of the dissenting shareholder lawsuit. The
remaining $1.5 million of the unusual charge related to executive separation,
the closing of the Chevy Chase, Maryland office, and a write-off of
non-realizable acquisition costs.

Operating income decreased $10.3 million, or 426.1%, from income of
$2.4 million in 1999 to a loss of $7.9 million in 2000, primarily as a result of
the unusual items discussed above. Operating income as a percentage of net sales
decreased, from 0.4% in 1999 to (1.4%) in 2000, also reflecting such effects.

LIQUIDITY AND CAPITAL RESOURCES

CAPITAL AVAILABILITY AND REQUIREMENTS

As of January 31, 2002, we had $0.3 million of cash and cash
equivalents, an additional $79.5 million of working capital, and an aggregate of
$58.1 million of borrowing capacity under our revolving credit facility for $100
million with a syndicate of commercial banks (the "Credit Facility"). At
December 31, 2001, these amounts were $0.5 million, $79.4 million, and $58.0
million, respectively.

Our Credit Facility, which we entered into on December 22, 2000 and
expires on March 31, 2004, may be used for operations and acquisitions, and
provides $5 million for swinglines and $10 million for letters of credit.
Amounts outstanding under the Credit Facility bear interest at either the lead
bank's corporate rate or LIBOR, plus applicable margins, as we may select from
time to time. We incur a fee between 25 and 37.5 basis points on the average
daily-unused capacity during the term. Assets of all our subsidiaries secure the
Credit Facility. We are also subject to certain financial covenants regarding
fixed charges coverage, capital expenditures, and tangible net worth, which
could affect our borrowing base under the Credit Facility. On August 1, 2001, we
amended our Credit Facility. The amendment, among other things, eased certain
financial covenants and increased pricing on borrowings to reflect current
market conditions. We are presently in compliance with all such covenants and
anticipate that we will remain in compliance with the covenants.

The table below outlines our contractual cash obligations, excluding
interest, as they come due.

----------------------------------------------------------------------------------------------------------------
Payments Due by Period
----------------------------------------------------------------------------------------------------------------
Contractual Obligations Total 2002 2003 2004 2005 2006 Thereafter
----------------------------------------------------------------------------------------------------------------

Long Term Debt
including Capital Lease
Obligations $42,762 $ 747 $ 644 $39,824 $ 228 $ 201 $ 1,118
----------------------------------------------------------------------------------------------------------------

Operating Leases (a) $40,117 $ 7,202 $6,111 $ 3,457 $3,106 $3,099 $17,142
----------------------------------------------------------------------------------------------------------------

Obligations under the
Premium Finance
Arrangement(b) $ 4,615 $ 3,718 $ 897 $ 0 $ 0 $ 0 $ 0
----------------------------------------------------------------------------------------------------------------
Total Contractual Cash
Obligations $87,494 $11,667 $7,652 $43,281 $3,334 $3,300 $18,260
----------------------------------------------------------------------------------------------------------------

(a) Included in operating leases is a commitment for the payments
due for the remaining term of the leases associated with ERP
project that was abandoned in 2000. The full amount of this
commitment is recorded on the balance sheet at December 31,
2001 as a current liability of $1,892 and a long-term
liability of $1,595.

(b) In 2000, we made a $10.8 million payment in settlement of the
dissenter's rights lawsuit involving a subsidiary that was one
of our founding companies. That payment was financed through a
premium financing arrangement with one of our insurance
carriers that provided us $11.0 million of financing that we
used to make the $10.8 million payment and to pay other
obligations associated with that settlement. This premium is
being financed through the insurance carrier over a period of
thirty-six months commencing April 2000.

In addition to the contractual cash obligations noted above, we have
outstanding standby letters of credit in the amount of $2.4 million. These
standby letters of credit renew annually. At each annual renewal, we expect the
total amount of the commitment under the existing standby letters of credit to
decrease. The table below outlines commitment expiration per period.

---------------------------------------------------------------------------------------------------------------------
Amount of Commitment Expiration per Period
---------------------------------------------------------------------------------------------------------------------
Total amount 2002 2003 2004 2005 2006 Thereafter
committed
---------------------------------------------------------------------------------------------------------------------

Standby Letters of Credit $2,404 $ 189 $ 206 $ 209 $ 212 $ 215 $1,373
---------------------------------------------------------------------------------------------------------------------

Our principal ongoing capital requirements at the present time are for
servicing our outstanding debt as reflected in the above tables, carrying
inventory and accounts receivable, and purchasing and upgrading information
technology and equipment. We believe that cash flow from operations and the use
of available capacity under our Credit Facility will be adequate to meet our
obligations set forth above and to fund both our current operations and
anticipated internal expansion for at least the current year. However, the
indefinite continuation of the economic down cycle that prevailed during 2001
could begin to have a material impact on cash flow from operations and our
ability to meet covenant requirements, which could restrict our access to funds
in the near term. In addition, a reduction in working capital associated with
such an indefinite continuation of these economic conditions could limit our
ability to borrow under our Credit Facility, which could have a material adverse
effect on our operations. We do not believe our business will experience any
such results. We also believe we have streamlined and restructured our
operations both to withstand the effects on us from the current economic
conditions and to strengthen our liquidity position as well as our overall
operating performance when and if the economy begins to improve for our customer
base.

We may consider a strategic acquisition opportunity if presented; in
such case, cash financing would probably be necessary and we may need approval
from our current lenders or access to other capital sources, which might not be
available.

ANALYSIS OF CASH FLOWS

On an historical basis, net cash provided by (used in) operating
activities for fiscal years 2001, 2000 and 1999 was $14.6 million, ($3.8
million), and $0.2 million, respectively. The change from 2000 to 2001 was due
to the improved management of accounts receivable and inventory in addition to a
decline in business activity. Further, during 2001 we received $3.4 million in
federal income tax refunds. The change from 1999 to 2000 was due to an increase
in current assets and a decrease in trade payables and accrued liabilities.

Net cash used in investing activities for fiscal years 2001, 2000 and
1999 was $0.4 million, $6.4 million, and $11.4 million, respectively. During
2001, cash used in investing activities was primarily for the purchase of
property and equipment. Cash used in investing activities decreased from 2000 to
2001 primarily because 2000 included a $10.8 million payment made in settlement
of the dissenter's rights lawsuit involving a subsidiary that was one of our
founding companies. On the other hand, 2000 included our receipt of $7.7 million
of proceeds from the sale of a building in a transaction accounted for as a
sale-leaseback. During 1999, property and equipment additions included
expenditures for a building that was subsequently sold in 2000 in the
sale-leaseback transaction noted above. In addition to the above developments,
the change from 1999 to 2000 also reflects the halt in 2000 of capital
expenditures related to our subsequently abandoned ERP project.

Net cash (used in) provided by financing activities for fiscal years
2001, 2000 and 1999 was ($17.4 million), $13.0 million, and $10.7 million,
respectively. The decrease in cash provided by financing activities from 2000 to
2001 primarily reflects the net repayment of $9.8 million under our Credit
Facility in 2001 from available cash flow. Additionally, in 2000, we entered
into a premium financing arrangement with one of our insurance carriers that
provided us $11.0 million of financing that we used to make the $10.8 million
payment to the dissenting shareholder and pay other obligations associated with
that settlement. This premium is being financed through the insurance carrier
over a period of thirty six months commencing

April 2000. The increase from 1999 to 2000 was due to the proceeds from the
premium finance arrangement, net of payments, offset partially by a reduction in
borrowings on our Credit Facility.

CERTAIN ACCOUNTING POLICIES AND ESTIMATES

EVALUATION OF THE RECOVERY OF GOODWILL

We have recorded goodwill from prior business combinations amounting to
approximately $50.1 million at December 31, 2001. Goodwill is presently being
amortized using a straight-line method over 40 years. For the years ended
December 31, 2001, 2000, and 1999, the amount of goodwill amortization included
in our consolidated statements of operations was $1.3 million in each of the
three years.

Our current accounting policy for evaluating the recoverability of
goodwill is based upon management's estimates of the future undiscounted cash
flows attributable to the acquired business as compared to the carrying value of
the corresponding goodwill and other long-lived assets. Management's estimates
of the undiscounted cash flows are based upon factors such as projected future
sales, price increases, and other uncertain elements requiring significant
judgments. In connection with performing this impairment evaluation at December
31, 2001, we did not identify any goodwill considered to be impaired.

Effective January 1, 2002, we will adopt Statement of Financial
Accounting Standard No. 142, "Goodwill and Intangible Assets" ("Statement 142").
Statement 142 requires companies to discontinue the amortization of goodwill and
to apply an impairment only approach. This new approach requires the use of
valuation techniques and methodologies significantly different than the present
undiscounted cash flow policy that we currently follow.

In connection with the adoption of Statement 142, our conclusions about
the valuation and recoverability of goodwill may change. The impairment only
approach may result in impairment charges and reductions in the carrying amount
of goodwill on the balance sheet upon adoption. Subsequent to the initial
adoption of Statement 142, the impairment only approach may also have the affect
of increasing the volatility of our earnings if additional goodwill impairment
occurs at a future date.

We will apply SFAS No. 142 beginning in the first quarter of 2002.
Application of the nonamortization provisions of SFAS No. 142 is expected to
result in an increase in net income of $1,289,000 ($0.15 per share) per year. We
will test goodwill for impairment using the two-step process prescribed in SFAS
No. 142. The first step is a screen for potential impairment, while the second
step measures the amount of the impairment, if any. We expect to perform the
first of the required impairment tests of goodwill as of January 1, 2002 in the
first quarter of 2002. Based on the steps we have taken to prepare for the
adoption of SFAS No. 142, it is likely that most if not all of the goodwill will
be impaired using the impairment test required by SFAS No. 142. Any impairment
loss that is required to be recognized when adopting SFAS No. 142 will be
reflected as the cumulative effect of a change in accounting principle in the
first quarter of 2002. We have not yet determined the amount of the potential
impairment loss, as SFAS No. 142 requires a measurement date of January 1, 2002.
We plan to complete the measurement of the impairment loss in the first quarter
of 2002.

ALLOWANCE FOR DOUBTFUL ACCOUNTS - METHODOLOGY

An allowance for uncollectible accounts has been established based on
our collection experience and an assessment of the collectibility of specific
accounts. We evaluate the collectibility of accounts receivable based on a
combination of factors. Initially, we estimate an allowance for doubtful
accounts as a percentage of accounts receivable based on historical collections
experience. This initial estimate is periodically adjusted when we become aware
of a specific customer's inability to meet its financial

obligations (e.g., bankruptcy filing) or as a result of changes in the overall
aging of accounts receivable. We do not believe our estimate of the allowance
for doubtful accounts is likely to be adversely affected by any individual
customer, since we have no individually significant customers.

INVENTORIES - SLOW MOVING AND OBSOLESCENCE

In connection with certain contracts, we maintain certain special
inventories for specific customers' needs. In certain contracts, the customers
are required to purchase the special inventory at the point in time in which the
inventory reaches a certain age. However, for other customer relationships and
inventories, we are not protected by our customer from the risk of inventory
loss. In such cases, we rely on available return privileges with vendors, if
any. Therefore, in determining the net realizable value of inventories, we
identify slow moving or obsolete inventories that (1) we are not protected by
our customer agreements from risk of loss, and (2) are not eligible for return
under various vendor return programs. Based upon these factors, we estimate the
net realizable value of inventories and record any necessary adjustments as a
charge to cost of sales. If our inventory return privileges were discontinued in
the future, or if customers were unable to honor the provisions of certain
contracts which protect us from inventory losses, our risk of loss associated
with obsolete or slowing moving inventories would increase. Our reserve for
obsolete and slowing moving inventories was approximately $7.4 million and $8.6
million at December 31, 2001 and 2000, or 10.6% and 11.1% of gross inventories,
respectively.

DEFERRED INCOME TAX ASSETS

We currently have significant deferred tax assets, which are subject to
periodic recoverability assessments. The realization of our deferred tax assets
is principally dependent upon our being able to generate sufficient future
taxable income in certain tax jurisdictions. The factors used to assess the
likelihood of realization are our forecast of future taxable income, which is
based upon estimates and assumptions, and available tax planning strategies that
could be implemented to realize the net deferred tax assets on the basis of the
improved operating results in the third and fourth quarters of 2001 and the
projections for continuing improvement, we believe it is more likely than not
that our future operations will generate sufficient taxable income to realize
the deferred tax assets. If these estimates and related assumptions change in
the future, we may be required to record a valuation allowance against our
deferred tax assets resulting in additional income tax expense in our
consolidated statement of operations. We evaluate the realizability and
appropriateness of its deferred tax assets and liabilities quarterly and assess
the need for any valuation allowance against deferred tax assets.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We believe that our exposures to market risks are immaterial. We hold
no market risk sensitive instruments for trading purposes. At present, we do not
employ any derivative financial instruments, other financial instruments, or
derivative commodity instruments to hedge any market risk, and we have no plans
to do so in the future. To the extent we have borrowings outstanding under our
Credit Facility, we are exposed to interest rate risk because of the variable
interest rate under the facility.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The information required to be provided by this item is found on pages
F-1 through F-21 of this Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

Effective July 23, 2001, the Audit Committee of the Board of Directors
engaged the accounting firm of Ernst & Young LLP as independent auditors for the
year ending December 31, 2001. Arthur Andersen LLP was dismissed effective July
23, 2001. The change was recommended by our management and approved by our Audit
Committee of the Board of Directors.

During the two most recent fiscal years and subsequent interim period
preceding the date of this report, there were no disagreements with Arthur
Andersen LLP on any matter of accounting principles or practices, financial
statement disclosure, auditing scope or procedure, or any reportable events.

The report of Arthur Andersen LLP on our financial statements for the
two years ending December 31, 2000 contained no adverse opinion or disclaimer of
opinion and was not qualified or modified as to uncertainty, audit scope or
accounting principles.

We did not consult with Ernst & Young LLP during the two years ended
December 31, 2000 or subsequent interim period prior to July 23, 2001 on either
the application of accounting principles or type of opinion Ernst & Young LLP
might issue on our financial statements.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information contained under the heading "Election of Directors" in
the definitive Proxy Statement to be used in connection with the solicitation of
proxies for the Company's 2002 Annual Meeting of Stockholders, to be filed with
the Commission, is incorporated herein by reference. Pursuant to instruction 3
to paragraph (b) of Item 401 of Regulation S-K, information relating to the
executive officers of the Company is included in Item 1 of this Report.

ITEM 11. EXECUTIVE COMPENSATION.

The information contained under the heading "Executive Compensation" in
the definitive Proxy Statement to be used in connection with the solicitation of
proxies for the Company's 2002 Annual Meeting of Stockholders, to be filed with
the Commission, is incorporated herein by reference. In no event shall the
information contained in the Proxy Statement under the heading "Stockholder
Return Performance Graph" be deemed incorporated herein by such reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information contained under the heading "Voting Securities and
Principal Stockholders" in the definitive Proxy Statement to be used in
connection with the solicitation of proxies for the Company's 2002 Annual
Meeting of Stockholders, to be filed with the Commission, is incorporated herein
by reference. For purposes of determining the aggregate market value of the
Company's voting stock held by nonaffiliates, shares held by all directors and
executive officers of the Company have been excluded. The exclusion of such
shares is not intended to, and shall not, constitute a determination as to which
persons or entities may be "affiliates" of the Company as defined by the
Commission.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information contained under the heading "Certain Transactions" in
the definitive Proxy Statement to be used in connection with the solicitation of
proxies for the Company's 2002 Annual Meeting of Stockholders, to be filed with
the Commission, is incorporated herein by reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a) The following financial statements and notes thereto are filed as part
of this Report:

1. Financial Statements

Report of Independent Auditors (Ernst & Young LLP).
Report of Independent Public Accountants (Arthur Andersen LLP).
Consolidated Balance Sheets as of December 31, 2001 and 2000.
Consolidated Statements of Operations for the years ended December 31,
2001, 2000, and 1999.
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2001, 2000, and 1999.
Consolidated Statements of Cash Flows for the years ended December 31,
2001, 2000, and 1999.
Notes to Consolidated Financial Statements and Schedule as of December
31, 2001 and 2000 and for the years ended December 31, 2001, 2000,
and 1999.

2. Financial Statement Schedules

Schedule II - Valuation and Qualifying Accounts

All other schedules have been omitted because the information
required is either included in the financial statements or notes
or is not required.

(b) Reports on Form 8-K

The Company did not file any reports on Form 8-K during the last
quarter of the fiscal year ended December 31, 2001.

The exhibits set forth below are required to be filed with this Report
pursuant to Item 601 of Regulation S-K:

Exhibit
Number Description of Exhibit
------- ----------------------

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 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 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

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)

21.1 Subsidiaries of the Company

23.1 Consent of Ernst & Young LLP

23.2 Consent of Arthur Andersen LLP

(*) Management contract or compensatory plan or arrangement required to be
filed as an exhibit.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(a) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Atlanta,
State of Georgia, on the 29th day of March, 2002.

INDUSTRIAL DISTRIBUTION GROUP, INC.

By: /s/ Andrew B. Shearer
---------------------------------------
Andrew B. Shearer
President and Chief Executive Officer

SIGNATURE POSITION
--------- --------

/s/ Andrew B. Shearer President, Chief Executive Officer, and Director
-------------------------------------- (Principal Executive Officer)
Andrew B. Shearer

/s/ Jack P. Healey Senior Vice President, Chief Financial Officer, and
-------------------------------------- Secretary (Principal Financial and Accounting Officer)
Jack P. Healey

/s/ Richard M. Seigel Chairman of the Board
--------------------------------------
Richard M. Seigel

/s/ David K. Barth Director
--------------------------------------
David K. Barth

/s/ William J. Burkland Director
--------------------------------------
William J. Burkland

/s/ William R. Fenoglio Director
--------------------------------------
William R. Fenoglio

/s/ William T. Parr Director
--------------------------------------
William T. Parr

/s/ George L. Sachs, Jr. Director
--------------------------------------
George L. Sachs, Jr.

INDEX TO FINANCIAL STATEMENTS

Report of Independent Auditors (Ernst & Young LLP - 2001)..................................................... F-2
Report of Independent Public Accountants (Arthur Andersen LLP - 2000 and 1999)................................ F-3
Consolidated Balance Sheets at December 31, 2001 and 2000..................................................... F-4
Consolidated Statements of Operations for the Years Ended December 31, 2001, 2000, and 1999................... F-5
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2001, 2000, and 1999......... F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000, and 1999................... F-7
Notes to Consolidated Financial Statements and Schedule for the Years Ended
December 31, 2001, 2000, and 1999.......................................................................... F-8
Schedule II - Valuation and Qualifying Accounts............................................................... F-21

F-1

REPORT OF INDEPENDENT AUDITORS

To the Stockholders and Board of Directors of
Industrial Distribution Group, Inc.:

We have audited the accompanying consolidated balance sheet of INDUSTRIAL
DISTRIBUTION GROUP, INC. (a Delaware corporation) AND SUBSIDIARIES as of
December 31, 2001 and the related consolidated statements of operations,
stockholders' equity, and cash flows for the year ended December 31, 2001. Our
audit also included the financial statement schedule listed in the Index at Item
14(a). These consolidated financial statements and the schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and the schedule based on our
audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.

In our opinion, the 2001 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Industrial
Distribution Group, Inc. and subsidiaries as of December 31, 2001, and the
consolidated results of their operations and their cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth there in.

/s/ ERNST & YOUNG LLP

Atlanta, Georgia
February 22, 2002

F-2

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors of
Industrial Distribution Group, Inc.:

We have audited the accompanying consolidated balance sheet of INDUSTRIAL
DISTRIBUTION GROUP, INC. (a Delaware corporation) AND SUBSIDIARIES as of
December 31, 2000 and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the two years in the period
ended December 31, 2000. These consolidated financial statements and the
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and the schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Industrial Distribution Group,
Inc. and subsidiaries as of December 31, 2000 and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule, as it relates to the financial
information for each of the two years in the period ended December 31, 2000, has
been subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states, in all material
respects, the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.

/s/ ARTHUR ANDERSEN LLP

Atlanta, Georgia
March 16, 2001

F-3

INDUSTRIAL DISTRIBUTION GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE DATA)

2001 2000
-------- ---------

ASSETS

CURRENT ASSETS:
Cash and cash equivalents ......................................................... $ 476 $ 3,690
Accounts receivable, net .......................................................... 59,747 64,705
Inventories, net .................................................................. 61,907 68,518
Deferred tax assets ............................................................... 6,786 7,586
Prepaid and other current assets .................................................. 6,042 9,923
-------- ---------
Total current assets .............................................................. 134,958 154,422
PROPERTY AND EQUIPMENT, NET .......................................................... 13,077 15,446
INTANGIBLE ASSETS, NET ............................................................... 50,766 52,204
DEFERRED TAX ASSETS .................................................................. 701 345
OTHER ASSETS ......................................................................... 1,542 1,541
-------- ---------
Total assets ...................................................................... $201,044 $ 223,958
======== =========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Current portion of long-term debt ................................................. $ 747 $ 789
Book overdraft .................................................................... 4,873 8,230
Accounts payable .................................................................. 37,644 38,536
Accrued compensation .............................................................. 1,572 2,419
Current portion of management liability insurance ................................. 3,718 3,718
Other accrued liabilities ......................................................... 6,497 6,465
-------- ---------
Total current liabilities ...................................................... 55,051 60,157
LONG-TERM DEBT, NET OF CURRENT PORTION ............................................... 42,015 52,516
OTHER LONG-TERM LIABILITIES .......................................................... 2,843 9,170
-------- ---------
Total liabilities .............................................................. 99,909 121,843
-------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
STOCKHOLDERS' EQUITY:
Preferred stock, $.10 par value per share; 10,000,000
shares authorized, no shares issued or outstanding in 2001 and 2000 ............ 0 0
Common stock, $.01 par value per share; 50,000,000 shares authorized,
8,724,184 shares issued and outstanding in 2001, 8,493,360 issued
and 8,486,587 shares outstanding in 2000 ....................................... 87 85
Additional paid-in capital ........................................................ 97,579 97,293
Retained earnings ................................................................. 3,469 4,827
Treasury stock, at cost (0 and 6,773 shares in 2001 and 2000, respectively) ....... 0 (90)
-------- ---------
Total stockholders' equity ..................................................... 101,135 102,115
-------- ---------
Total liabilities and stockholders' equity ..................................... $201,044 $ 223,958
======== =========

The accompanying notes are an integral part of these
consolidated balance sheets.

F-4

INDUSTRIAL DISTRIBUTION GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)

2001 2000 1999
----------- ----------- -----------

NET SALES ............................................. $ 514,385 $ 546,681 $ 547,935
COST OF SALES ......................................... 399,864 423,539 422,960
----------- ----------- -----------
Gross profit ....................................... 114,521 123,142 124,975
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES ......... 111,128 116,001 116,663
UNUSUAL ITEMS ......................................... 0 15,050 5,887
----------- ----------- -----------
Operating income (loss) ............................ 3,393 (7,909) 2,425
INTEREST EXPENSE ...................................... 4,449 4,862 3,514
INTEREST INCOME ....................................... (31) (49) (78)
OTHER INCOME, NET ..................................... (14) (127) (80)
----------- ----------- -----------
LOSS BEFORE EXTRAORDINARY ITEM AND
INCOME TAXES ....................................... (1,011) (12,595) (931)
PROVISION (BENEFIT) FOR INCOME TAXES .................. 347 (3,183) 688
----------- ----------- -----------
LOSS BEFORE EXTRAORDINARY ITEM ........................ (1,358) (9,412) (1,619)
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT
OF DEBT, net of tax benefit ........................ 0 200 270
----------- ----------- -----------
NET LOSS .............................................. $ (1,358) $ (9,612) $ (1,889)
=========== =========== ===========
EARNINGS PER COMMON SHARE:
Basic and Diluted
Loss before extraordinary item .................. $ (0.16) $ (1.09) $ (0.19)
Extraordinary item .............................. (0.00) (0.02) (0.03)
----------- ----------- -----------
Net loss ........................................ $ (0.16) $ (1.11) $ (0.22)
=========== =========== ===========

WEIGHTED AVERAGE SHARES:
Basic and diluted .................................. 8,650,839 8,642,580 8,566,517
=========== =========== ===========

The accompanying notes are an integral part of these consolidated statements.

F-5

INDUSTRIAL DISTRIBUTION GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)

COMMON STOCK ADDITIONAL
--------------------- PAID-IN RETAINED TREASURY
SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL
---------- ------ ---------- -------- -------- ---------

BALANCE, DECEMBER 31, 1998 ...................... 8,484,953 $ 85 $ 97,272 $ 16,328 $ (90) $ 113,595
Cancellation and retirement of shares
held in escrow ............................. (19,360) 0 (345) 0 0 (345)
Sale of shares through employee stock
purchase plan .............................. 132,592 1 527 0 0 528
Issuance of shares for management
incentive program .......................... 43,646 1 182 0 0 183
Net loss ..................................... 0 0 0 (1,889) 0 (1,889)
---------- ----- -------- -------- ----- ---------
BALANCE, DECEMBER 31, 1999 ...................... 8,641,831 87 97,636 14,439 (90) 112,072
Purchase and retirement of
treasury stock ............................. (442,498) (5) (1,100) 0 0 (1,105)
Sale of shares through employee
stock purchase plan ........................ 192,851 2 468 0 0 470
Issuance of shares for management
incentive program .......................... 22,564 0 54 0 0 54
Issuance of common stock as contingent
consideration for acquired companies ....... 82,133 1 249 0 0 250
Other share cancellations .................... (3,521) 0 (14) 0 0 (14)
Net loss ..................................... 0 0 0 (9,612) 0 (9,612)
---------- ----- -------- -------- ----- ---------
BALANCE, DECEMBER 31, 2000 ...................... 8,493,360 85 97,293 4,827 (90) 102,115
Issuance of shares pursuant to executive
restricted stock agreement ................. 25,000 0 63 0 0 63
Purchase and retirement of
treasury stock ............................. (25,000) 0 (35) 0 0 (35)
Retirement of treasury stock ................. (6,773) 0 (90) 0 90 0
Sale of shares through employee
stock purchase plan ........................ 237,597 2 348 0 0 350
Net loss ..................................... 0 0 0 (1,358) 0 (1,358)
---------- ----- -------- -------- ----- ---------
BALANCE, DECEMBER 31, 2001 ...................... 8,724,184 $ 87 $ 97,579 $ 3,469 $ 0 $ 101,135
========== ===== ======== ======== ===== =========

The accompanying notes are an integral part of these consolidated statements.

F-6

INDUSTRIAL DISTRIBUTION GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
(IN THOUSANDS)

2001 2000 1999
--------- --------- ---------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ....................................................................... $ (1,358) $ (9,612) $ (1,889)
--------- --------- ---------
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation and amortization ............................................... 4,567 5,113 4,615
Gain on sale of assets ...................................................... (39) (142) (23)
Deferred taxes .............................................................. 444 (2,861) (438)
Extraordinary loss on early extinguishment of debt, net of tax benefit ...... 0 200 270
Loss on disposal of ERP ..................................................... 0 14,750 0
Changes in operating assets and liabilities,
net of acquisitions and dispositions:
Accounts receivable, net .................................................. 4,958 (1,187) (6,655)
Inventories, net .......................................................... 6,611 (1,905) (6,094)
Prepaids and other assets ................................................. 3,589 (2,900) 468
Accounts payable .......................................................... (892) (2,881) 6,298
Accrued compensation ...................................................... (784) (303) (831)
Other accrued liabilities ................................................. (2,544) (2,024) 4,500
--------- --------- ---------
Total adjustments .................................................... 15,910 5,860 2,110
--------- --------- ---------
Net cash provided by (used in) operating activities .................. 14,552 (3,752) 221
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, net of cash acquired ............................... 0 (250) (1,753)
Proceeds from sale of investments, net ......................................... 0 0 318
Additions to property and equipment ............................................ (749) (5,615) (16,436)
Proceeds from the sale of property and equipment ............................... 314 9,719 6,228
Payment to dissenting shareholder .............................................. 0 (10,750) 0
Proceeds from liquidation of life insurance policies ........................... 0 437 76
Other .......................................................................... 70 45 167
--------- --------- ---------
Net cash used in investing activities ....................................... (365) (6,414) (11,400)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of issuance costs .................. 350 470 528
Repayment of previous credit facility .......................................... 0 (49,400) 0
Initial borrowing on new credit facility ....................................... 0 49,400 0
Net (repayments) borrowings on credit facilities and other lines ............... (9,829) 4,429 9,239
Long-term debt borrowings ...................................................... 0 1,471 18
Long-term debt repayments ...................................................... (714) (548) (1,003)
Change in book overdraft ....................................................... (3,357) 1,166 2,169
Purchase and retirement of treasury stock ...................................... (35) (1,105) 0
Proceeds from management liability insurance, net of fees ...................... 0 10,750 0
Premium payments on management liability insurance ............................. (3,751) (2,791) 0
Deferred loan costs and other .................................................. (65) (837) (206)
--------- --------- ---------
Net cash (used in) provided by financing activities ......................... (17,401) 13,005 10,745
--------- --------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS ........................................... (3,214) 2,839 (434)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ...................................... 3,690 851 1,285
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR ............................................ $ 476 $ 3,690 $ 851
========= ========= =========
SUPPLEMENTAL DISCLOSURES:
Interest paid .................................................................. $ 3,752 $ 5,021 $ 3,575
========= ========= =========
Net income taxes (refunded) paid ............................................... $ (3,139) $ 1,729 $ 1,540
========= ========= =========
NONCASH TRANSACTIONS:
Common stock issued in relation to acquisitions (Note 3) ....................... $ 0 $ 250 $ 0
========= ========= =========

The accompanying notes are an integral part of these consolidated statements.

F-7

INDUSTRIAL DISTRIBUTION GROUP, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

DECEMBER 31, 2001, 2000, AND 1999

1. BASIS OF PRESENTATION

ORGANIZATION AND BUSINESS

Industrial Distribution Group, Inc. ("IDG" or the "Company"), a
Delaware corporation, was formed on February 12, 1997 to create a
nationwide supplier of cost-effective, flexible procurement solutions
for manufacturers and other users of maintenance, repair, operating,
and production ("MROP") products. The Company conducts business in 34
states and two foreign countries, providing product expertise in the
procurement and application of MROP products to a wide range of
industries.

On September 24, 1997, IDG completed an initial public offering of its
common stock and, concurrent with the offering, acquired nine
industrial distribution companies, (collectively referred to as the
"Founding Companies"). The accompanying financial statements include
the results of operations of the nine Founding Companies for all
periods presented. IDG merged with three companies in 1998, which were
accounted for as poolings of interests. Accordingly, their results of
operations are also included in the accompanying financial statements
for all periods presented. Acquisitions made in 1999 and 1998 using the
purchase method of accounting were accounted for from their dates of
acquisition.

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of the
Company and its subsidiaries, all of which are wholly-owned. All
significant intercompany accounts and transactions have been eliminated
in consolidation.

Certain reclassifications have been made to prior year amounts to
conform to the current year presentation.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates, and the differences could be
material.

CASH EQUIVALENTS

The Company considers all short-term investments with original
maturities of three months or less to be cash equivalents.

ACCOUNTS RECEIVABLE

Accounts receivable is composed of trade receivables that are credit
based and do not require collateral. An allowance for uncollectible
accounts has been established based on the Company's collection
experience and an assessment of the collectibility of specific
accounts. The Company evaluates the collectibility of accounts
receivable based on a combination of factors. Initially, the Company
estimates an allowance for doubtful accounts as a percentage of
accounts receivable based on historical collections experience. This
initial estimate is periodically adjusted when the Company becomes
aware of a specific customer's inability to meet its financial
obligations (e.g., bankruptcy

F-8

filing) or as a result of changes in the overall aging of accounts
receivable. The allowance amounted to $1,522,000 and $1,182,000 as of
December 31, 2001 and 2000, respectively.

INVENTORIES

Inventories consist primarily of merchandise purchased for resale and
are stated at the lower of cost or market value. Cost is determined on
a first-in first-out basis, and market is considered to be net
realizable value. In determining the net realizable value, the Company
identifies slow moving or obsolete inventories that are not eligible
for return under various vendor return programs and estimates
appropriate loss provisions related thereto. Management evaluates the
adequacy of the loss provision regularly, with any adjustments charged
to cost of sales. The reserve for obsolete and slow moving inventories
was $7,365,000 and $8,612,000 as of December 31, 2001 and 2000,
respectively.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost, less accumulated
depreciation. Expenditures for repairs and maintenance are charged to
expense as incurred. Upon retirement or disposal of assets, the cost
and related accumulated depreciation are removed from the accounts and
any resulting gain or loss is recognized as other income (expense) in
the statements of operations.

Depreciation is computed using the straight-line method over the
following estimated useful lives:

Buildings and improvements 40 years
Leasehold improvements Life of related lease
Furniture, fixtures, and equipment 5-10 years
Computer hardware and software 3-5 years

INTANGIBLE ASSETS

Intangible assets consist primarily of goodwill, which is amortized
using the straight-line method over a period not to exceed 40 years.
The Company continually evaluates whether later events and
circumstances have occurred that indicate the remaining balance of
goodwill may not be recoverable. In evaluating possible impairment, the
Company, in accordance with Statement of Financial Accounting Standards
("SFAS") No. 121 "Accounting for the Impairment of Long Lived Assets
and for Long Lived Assets to be Disposed Of", uses an estimate of the
undiscounted operating cash flows, before interest, over the remaining
life of the related assets. See "New Accounting Pronouncements" below
for discussion of future implementation of SFAS 142 and its effects on
goodwill.

Amortization expense related to intangible assets for 2001, 2000, and
1999 was $1,724,000, $1,468,000 and $1,338,000, respectively. At
December 31, 2001 and 2000, accumulated amortization of intangible
assets was $5,222,000 and $3,773,000, respectively.

INCOME TAXES

The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes" which requires that deferred tax assets
and liabilities be recognized using currently enacted tax rates for the
effect of temporary differences between the book and tax bases of
recorded assets and liabilities. SFAS No. 109 also requires that
deferred tax assets be reduced by a valuation allowance if it is more
likely than not that some portion or all of the deferred tax asset will
not be realized. The Company currently has significant deferred tax
assets, which are subject to periodic recoverability assessments. The
realization of our deferred tax assets is principally dependent upon
the Company being able to generate sufficient future taxable income in
certain tax jurisdictions. The factors used to assess the likelihood of
realization are the Company's forecast of future taxable income, which
is based upon estimates and assumptions, and available tax planning
strategies that could be implemented to realize the net deferred tax
assets. If these estimates and related assumptions change in the
future, the Company may be required to record a valuation allowance
against its deferred tax assets resulting in additional income tax
expense in the Company's consolidated statement of operations.
Management evaluates the realizability and appropriateness of its
deferred tax assets and liabilities quarterly and assesses the need for
any valuation allowance against deferred tax assets.

F-9

REVENUE RECOGNITION

Revenue is recognized on sales of products at the time title and risk
of loss passes to the buyer, which is generally at the time of
shipment. In accordance with the Emerging Issues Task Force - Issue
00-10, "Accounting for Shipping and Handling Fees and Costs," the
Company has recognized as revenue any amounts billed to a customer in a
sale transaction related to shipping and handling for 2001 and 2000.
Revenues for 1999 have been restated for comparative purposes.

SHIPPING AND HANDLING COSTS

The Company's freight-in is recorded in cost of sales and freight-out
is included in selling, general, and administrative expenses.
Freight-out totaled $5,387,000, $5,303,000 and $5,687,000 for the years
ended December 31, 2001, 2000, and 1999, respectively.

FINANCIAL INSTRUMENTS

The Company's carrying value of financial instruments approximates fair
value due to the short maturity of those instruments (cash, trade
receivables, accounts payable, and accrued liabilities), or, in the
case of debt, due to the instrument having a variable interest rate.
Credit risk on trade receivables is minimized by the large and diverse
nature of the Company's customer base. No one customer represented more
than 6% of the Company's accounts receivable or sales for the periods
presented. The Company's international sales represent less than 1% of
sales for the periods presented.

INSURANCE

The Company's insurance for employee-related health care benefits is
effectively self-insured, subject to specific aggregate stop loss
limits. A third-party administrator is used to process and administer
all related claims. The Company accrues an estimate of health insurance
expense on a monthly basis based upon the claim estimates established
by the third-party administrator and consultants at the beginning of
the calendar year. The Company's employee health insurance liability
for incurred but not reported or unpaid claims is estimated based on
the Company's historical actual claims experience rate.

BOOK OVERDRAFT

Under the Company's cash management system, checks issued but not
presented to banks frequently result in overdraft balances for
accounting purposes and are classified as a current liability in the
consolidated balance sheets.

COMPREHENSIVE INCOME (LOSS)

SFAS No. 130, "Reporting Comprehensive Income," establishes standards
for the reporting of comprehensive income in a company's financial
statements. Comprehensive income (loss) includes all changes in a
company's equity during the period that results from transactions and
other economic events other than transactions with its stockholders. In
2001, 2000, and 1999 the Company's comprehensive loss equals net loss.

SEGMENTS

SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," requires that an enterprise disclose certain information
about operating segments. The Company considers its entire business as
one operating segment for purposes of SFAS No. 131.

F-10

NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations," and No. 142, "Goodwill and
Intangible Assets," effective for fiscal years beginning after December
15, 2001. SFAS No. 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001.
SFAS No. 141 also includes guidance on the initial recognition and
measurement of goodwill and other intangible assets arising from
business combinations completed after June 30, 2001. SFAS No. 142
prohibits the amortization of goodwill and intangible assets with
indefinite useful lives. Under the new rules, goodwill (and intangible
assets deemed to have indefinite lives) will no longer be amortized but
will be subject to annual impairment tests in accordance with the
Statement. Other intangible assets will continue to be amortized over
their remaining useful lives.

The Company will adopt SFAS No. 142 beginning in the first quarter of
2002. Application of the nonamortization provisions of SFAS No. 142 is
expected to result in an increase in net income of approximately
$1,289,000 or $0.15 per share per year. The Company will test goodwill
for impairment using the two-step process prescribed in SFAS No. 142.
The first step is a screen for potential impairment, while the second
step measures the amount of the impairment, if any. The Company expects
to perform the first of the required impairment tests of goodwill as of
January 1, 2002 in the first quarter of 2002. Based on the steps the
Company has taken to prepare for the adoption of SFAS No. 142, it is
likely that most if not all of the goodwill will be impaired using the
impairment test required by SFAS No. 142. The Company currently
evaluates goodwill for impairment by comparing the entity level
unamortized balance of goodwill to projected undiscounted cash flows,
which does not result in an indicated impairment. Any impairment loss
that is required to be recognized when adopting SFAS No. 142 will be
reflected as the cumulative effect of a change in accounting principle
in the first quarter of 2002. The Company has not yet determined the
amount of the potential impairment loss, as SFAS No. 142 requires a
measurement date of January 1, 2002. The Company plans to complete the
measurement of the impairment loss in the first quarter of 2002.

In August 2001, the FASB issued SFAS No. 144, "Accounting for
Impairment of Long-Lived Assets or Disposal of Long-Lived Assets",
which addresses financial accounting and reporting for the impairment
or disposal of long-lived assets and supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Disposed Of", and the accounting and reporting provisions of
APB Opinion No. 30, "Reporting the Results of Operations" for a
disposal of a segment of a business. SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001, with earlier
application encouraged. The Company expects to adopt SFAS No. 144 as of
January 1, 2002 and it does not expect that the adoption of the
Statement will have a significant impact on the Company's financial
position and results of operations.

3. ACQUISITIONS AND DIVESTITURES

During 2000, the Company paid additional merger consideration to the
former stockholders of a wholly-owned subsidiary pursuant to the terms
of the acquisition agreement. The consideration totaled $500,000 and
resulted in an increase in goodwill, as the acquisition was originally
accounted for using the purchase method of accounting. The payment
consisted of $250,000 in cash and $250,000 of the Company's common
stock.

During 2000, the Company divested of an operating subsidiary for a
total consideration of $1,580,000 in the form of a note receivable. The
note, as amended, is due in 2002 and is classified in prepaid and other
current assets on the balance sheet as of December 31, 2001. This
divestiture resulted in a gain of $15,000.

F-11

4. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at December 31, 2001
and 2000 (in thousands):

2001 2000
-------- --------

Land, building, and improvements ........... $ 8,451 $ 8,644
Leasehold improvements ..................... 2,854 2,785
Furniture, fixtures, and equipment ......... 9,498 9,078
Computer hardware and software ............. 6,349 6,306
-------- --------
27,152 26,813
Less accumulated depreciation .............. (14,075) (11,367)
-------- --------
Property and equipment, net ................ $ 13,077 $ 15,446
======== ========

Depreciation expense totaled $2,843,000, $3,645,000 and $3,277,000 for
the years ended December 31, 2001, 2000, and 1999, respectively.

In June 2000, the Company sold a 125,000 square foot warehouse and
office facility for $7,700,000, and recorded a $2,000 gain on the sale.
The Company concurrently leased the entire facility for the next twenty
years, with an additional four consecutive five-year optional renewal
terms. The base rent during the first five years is fixed at $867,000
per year. The Company is also responsible for taxes on the facility.
The total commitment disclosed in Note 10 for this lease is
$17,518,000.

5. UNUSUAL ITEMS

In the fourth quarter of 2000 the Company recorded a charge of
$14,750,000 related to the abandonment of the implementation of the
J.D. Edwards Enterprise Resource Planning ("ERP") system. The charge
consists of three components: a $7,999,000 impairment charge under SFAS
121 relating to the abandonment, with no future value, of all
previously capitalized ERP assets; a $5,900,000 accrual for future
lease payments under noncancellable operating leases; and an $851,000
accrual for legal and other costs expected to be incurred as a result
of the termination of the ERP system. Subsequent to the charge and
prior to December 31, 2000 the Company made payments for lease
obligations and legal fees totaling $198,000. At December 31, 2000,
accruals related to the ERP charge were $6,553,000. During 2001, the
Company made payments of $2,315,000 for lease payments and other
related expenses, which were charged against the accrual, leaving a
balance of $4,238,000 at December 31, 2001, of which $2,644,000 is
classified as current in other accrued liabilities and $1,594,000 is
included in other long-term liabilities on the balance sheet. In the
fourth quarter of 2000 the Company also incurred a charge of $300,000
related to executive severance costs.

Unusual items for 1999 were $5,887,000. This amount consists primarily
of $4,400,000 added to the accrual for the settlement with the
dissenting shareholder (Note 10). Also included in the amount are costs
related to executive severance, costs incurred in connection with
closing the Washington, D.C. office, and certain assets written off due
to cessation of acquisition activities. Accruals established for the
severance costs and the closing of the Washington, D.C. office were
fully utilized, as originally intended, as of December 31, 2000.

F-12

6. LONG-TERM DEBT

At December 31, 2001 and 2000, long-term debt consisted of the
following (in thousands):

2001 2000
-------- --------

Revolving credit facility (Note 7) ............................................. $ 39,600 $ 49,429
Mortgage payable at 7%, due in monthly installments of $14,963,
including interest, through June 2012, at which time remaining
principal and interest are due; secured by land and building with
a net book value of approximately $1.4 million ........................... 1,332 1,415
Other .......................................................................... 1,830 2,461
-------- --------
Total debt ............................................................... 42,762 53,305
Less current portion ........................................................... (747) (789)
-------- --------
Total long-term debt ..................................................... $ 42,015 $ 52,516
======== ========

Maturities of long-term debt as of December 31, 2001 are as follows (in
thousands):

2002..................................................................................... $ 747
2003..................................................................................... 644
2004..................................................................................... 39,824
2005..................................................................................... 228
2006..................................................................................... 201
Thereafter............................................................................... 1,118
-------
$42,762
=======

For the years ended December 31, 2001, 2000, and 1999, the Company
incurred interest costs of $4,449,000, $5,307,000 and $3,895,000,
respectively, with $0, $445,000 and $381,000 capitalized and
$4,449,000, $4,862,000 and $3,514,000 expensed, respectively.

7. REVOLVING CREDIT FACILITIES

In December 2000, the Company entered into a $100,000,000 revolving
credit facility with a five financial institution syndicate. The
facility expires on March 31, 2004 and has a first security interest in
the assets of the business units. The agreement provides that the
facility may be used for operations and acquisitions, and provides
$5,000,000 for swinglines and $10,000,000 for letters of credit.
Amounts outstanding under the credit facility bear interest at either
the lead bank's corporate rate or LIBOR, as selected by the Company
from time to time, plus applicable margins. This rate was 6.3% and 9.5%
at December 31, 2001 and 2000, respectively. There is an annual
commitment fee on the unused portion of the facility equal to between
25 and 37.5 basis points of the average daily unused portion of the
aggregate commitment depending on the indebtedness to adjusted EBITDA
ratio, as defined.

In December 2000, the Company recorded an extraordinary loss, net of
tax, on early extinguishment of debt of $200,000 to cover the costs of
terminating the previous $100,000,000 revolving credit facility with a
six-bank syndicate that the Company entered into in December 1999. In
December 1999, the Company had amended its credit agreement, and
recorded an extraordinary loss, net of tax, on early extinguishment of
debt of $270,000.

Total commitment fees totaled $185,000 and $279,000 in 2001 and
2000, respectively. The amounts outstanding under the facility at
December 31, 2001 and 2000 were $39,600,000 and $49,429,000,
respectively, which have been classified as long-term liabilities.
Additionally, the Company had outstanding letters of credit of
$2,404,000 and $2,654,000 under the facility at December 31, 2001 and
2000, respectively. The revolving credit facility contains various
covenants pertaining to the maintenance of certain financial ratios.
These covenants include requirements for interest coverage, net worth,
and capital expenditures, among other restrictions. The covenants also
prohibit the payment of cash dividends. The Company was in compliance
with these covenants as of December 31, 2001 and 2000.

F-13

8. CAPITAL STOCK

PREFERRED STOCK

Pursuant to the Company's certificate of incorporation, the board of
directors, from time to time, may authorize the issuance of shares of
preferred stock in one or more series, may establish the number of
shares to be included in any such series, and may fix the designations,
powers, preferences, and rights (including voting rights) of the shares
of each such series and any qualifications, limitations, or
restrictions thereon. No stockholder authorization is required for the
issuance of shares of preferred stock unless imposed by then-applicable
law. Shares of preferred stock may be issued for any general corporate
purpose, including acquisitions. The board of directors may issue one
or more series of preferred stock with rights more favorable with
regard to dividends and liquidation than the rights of holders of
common stock.

In August 2000, the Board of Directors authorized 1,000,000 shares of
the Company's previously authorized 10,000,000 shares of preferred
stock be designated 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, 2001 and 2000.

STOCKHOLDER RIGHTS PLAN

In August 2000, the Company adopted a stockholder rights plan. The plan
entailed a dividend on August 30, 2000 of one right for each
outstanding share of the Company's common stock. Each right entitles
the holder to buy one one-hundredth of a share of the new Series A
Participating Cumulative Preferred Stock at an exercise price of $12.00
per right, or, in certain circumstances, to acquire common stock of an
acquirer. Each one one-hundredth of a share of such preferred stock
would be essentially the economic equivalent of a share of the
Company's common stock. The rights will trade with the Company's common
stock until exercisable. The rights will not be exercisable until ten
calendar days following a public announcement that a person or group
has acquired 20% of the Company's common stock, or, if any person or
group has acquired such an interest, the acquisition by that person or
group of an additional 2% of the Company's common stock. The Company
will generally be entitled to redeem the rights at $.001 per right at
any time until the date of public announcement that shares resulting in
a 20% stock position have been acquired, and in certain other
circumstances. The rights have no voting power, and until exercised, no
dilutive effect on net income per common share.

COMMON STOCK

Options are included in the computation of diluted earnings per share
("EPS") where the options' exercise price was less than the average
market price of the common shares during the year. These stock options
outstanding did not have a dilutive effect to the weighted average
common shares outstanding for purposes of calculating diluted EPS
during 2001, 2000, or 1999. During 2001, 2000, and 1999, options where
the exercise price exceeded the average market price of the common
shares totaled 722,386, 1,010,323, and 1,305,900, respectively. The
options expire ten years from the date of grant and vest ratably over
three-to-four year periods.

At December 31, 2001, the Company has several stock-based compensation
plans, which are described below. The Company applies Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized for its stock
incentive plan and its employee stock purchase plan. Had compensation
cost for the Company's stock-based compensation plans been determined
based on the fair value at the grant dates for awards under those plans
consistent with the method established in SFAS No. 123, the Company's
net income and EPS would have been reduced to the pro forma amounts
indicated below (in thousands, except per share data):

2001 2000 1999
------- ------- -------

Net loss:
As reported ..................... $(1,358) $(9,612) $(1,889)
Pro forma ....................... (2,291) (10,819) (3,064)
Basic and Diluted EPS:
As reported ..................... $ (0.16) $ (1.11) $ (0.22)
Pro forma ....................... (0.26) (1.25) (0.36)

F-14

The total value of options granted in 2001, 2000, and 1999 was
$623,000, $21,000, and $2,074,000, respectively. The weighted average
value of the options on the date of grant in 2001, 2000, and 1999 was
$1.40, $1.78, and $2.72, respectively. The fair value of each option
grant was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions:

2001 2000 1999
------------ ------------- ------------

Expected life (years) ....................... 7 7 7
Dividend yield .............................. 0% 0% 0%
Expected stock price volatility ............. 86% 57% 60%
Risk-free interest rate (low-high) .......... 2.12% - 5.32% 6.61% 5.58% - 6.39%

STOCK INCENTIVE PLAN

In July 1997, the Company adopted its stock incentive plan to provide
key employees, officers, and directors an opportunity to own common
stock of the Company and to provide incentives for such persons to
promote the financial success of the Company. Awards under the stock
incentive plan may be structured in a variety of ways, including
"incentive and nonqualified stock options," shares of common stock
subject to terms and conditions set by the board of directors
("restricted stock awards"), and stock appreciation rights ("SARs").
Incentive stock options may be granted only to full-time employees
(including officers) of the Company and any subsidiaries. Nonqualified
options, restricted stock awards, SARs, and other permitted forms of
awards may be granted to any person employed by or performing services
for the Company, including directors. The stock incentive plan provides
for the issuance of an aggregate number of shares of common stock equal
to 15% of the Company's diluted shares of common stock outstanding from
time to time, subject to the issuance of a maximum of 1,000,000 shares
pursuant to incentive stock options. The Company currently has 345,463
shares available for issue under the stock incentive plan.

In December 1999, the Company issued 400,000 nonqualified stock options
to a senior executive, who surrendered 300,000 of these options in July
2001. Under separate provisions of the stock incentive plan, these
options are not subject to the 1,000,000-share limitation mentioned
above.

Incentive stock options are subject to certain limitations prescribed
by the Internal Revenue Code and generally may not be exercised more
than ten years from the stated grant date. The board of directors of
the Company (or a committee designated by the board) generally has
discretion to set the terms and conditions of options and other awards,
including the term, exercise price, and vesting conditions, if any; to
select the persons who receive such grants and awards; and to interpret
and administer the stock incentive plan.

A summary of the status of the stock incentive plan as of December 31,
2001, 2000, and 1999 and changes during the years then ended is
presented in the table below:

2001 2000 1999
----------------------- ------------------------ ------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- ---------- ---------

Outstanding at beginning of year ....... 1,010,323 $10.70 1,305,900 $12.19 598,429 $15.57
Granted ................................ 449,088 $ 1.95 12,000 $ 3.25 761,899 $ 9.62
Forfeited and surrendered .............. (396,246) $13.21 (307,577) $16.72 (54,428) $13.46
--------- --------- ---------
Outstanding at end of year ............. 1,063,165 $ 6.07 1,010,323 $10.70 1,305,900 $12.19
========= ========= =========
Exercisable at end of year ............. 608,390 $ 8.38 469,987 $11.52 284,967 $14.60
========= ========= =========

F-15

The following table summarizes information about all stock options
outstanding at December 31, 2001:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- ------------------------------
WEIGHTED WEIGHTED- WEIGHTED-
REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF EXERCISE OUTSTANDING CONTRACTUAL EXERCISE AT EXERCISE
PRICE AT 12/31/01 LIFE PRICE 12/31/01 PRICE
----------------- ----------- ------------------- -------- ----------- ---------

$ 1.75 - $ 5.00 549,748 9.1 $ 2.52 202,999 $ 3.74
$ 5.01 - $10.00 340,637 7.2 $ 6.47 236,786 $ 6.48
$10.01 - $15.00 15,000 6.7 $11.44 11,250 $11.44
$15.01 - $20.00 157,780 5.7 $17.02 157,355 $17.02
--------- -------
1,063,165 7.9 $ 6.07 608,390 $ 8.38
========= =======

EMPLOYEE STOCK PURCHASE PLAN

In 1997, the Company adopted an employee stock purchase plan (the
"Stock Purchase Plan") under which qualified employees of the Company
and its subsidiaries have the right to purchase shares of common stock
on a quarterly basis through payroll deductions by the employee. The
Stock Purchase Plan is administered by the compensation committee of
the Company's board of directors. The Stock Purchase Plan was amended
at the Shareholder's meeting on May 16, 2001 to increase the available
shares under the plan from 500,000 to 1,000,000. The price paid for a
share of common stock under the plan is 85% of the fair market value
(as defined in the Stock Purchase Plan) of a share of common stock at
the beginning or the end of each quarterly purchase period, whichever
is lower. The amount of any participant's payroll deductions or cash
contributions made pursuant to the Stock Purchase Plan may not exceed
10% of such participant's total annual compensation and may not exceed
$25,000 per year. Shares issued in 2001, 2000, and 1999 were 237,597,
192,851, and 132,592, respectively. The Company has issued 600,901
shares under the Stock Purchase Plan as of December 31, 2001.

MANAGEMENT INCENTIVE PLAN

In 1998, the Company adopted a management incentive plan whereby
management is awarded shares of restricted stock based on attaining
certain performance goals. The Company did not issue any shares in 2001
for 2000 performance under the plan and does not expect to issue any
shares in 2002 for 2001 performance. The number of shares issued in
2000 for 1999 performance was 22,564 shares. The number of shares
issued in 1999 for 1998 performance was 43,646 shares. All shares were
issued at fair market value. A maximum of 250,000 shares of common
stock may be issued under this fixed plan.

RETIREMENT OF TREASURY STOCK

In July 2000, the Company repurchased 442,498 shares of its common
stock from a former executive of the Company and certain of his family
members, at a purchase price of $2.50 per share, for an aggregate
purchase price of $1,105,000. The treasury stock was subsequently
retired.

In November 2001, the Company repurchased 25,000 shares of its common
stock from a former executive of the Company, at a purchase price of
$1.40 per share, for an aggregate purchase price of $35,000. The
treasury stock was subsequently retired.

In December 2001, the Company retired 6,773 shares of treasury stock
purchased in 1998 for an aggregate purchase price of $90,000.

9. INCOME TAXES

The provision (benefit) for income taxes includes income taxes deferred
because of temporary differences between financial statement and tax
bases of assets and liabilities and consisted of the following for the
years ended December 31, 2001, 2000 and 1999 (in thousands):

F-16

2001 2000 1999
----- ------- -------

Current ........................... $ (97) $ (322) $ 1,126
Deferred .......................... 444 (2,861) (438)
----- ------- -------
Total provision (benefit) ......... $ 347 $(3,183) $ 688
===== ======= =======

The provision (benefit) for income taxes for the years ended December
31, 2001, 2000, and 1999 differs from the amount computed by applying
the statutory rate of 34% due to the following (in thousands):

2001 2000 1999
------- ------- -------

Tax at federal statutory rate .................... $ (344) $(4,282) $ (316)
Nondeductible expenses ........................... 193 172 133
Nondeductible goodwill amortization .............. 441 443 428
State income tax, net of federal benefit ......... (43) (542) (37)
Nondeductible dissenting stockholder expense ..... 0 0 465
Other ............................................ 100 1,026 15
------- ------- -------
Provision (benefit) for income taxes ....... $ 347 $(3,183) $ 688
======= ======= =======

Deferred taxes are recorded based on differences between the financial
statement and tax bases of assets and liabilities. Temporary
differences, which give rise to a significant portion of deferred tax
assets and liabilities at December 31, 2001 and 2000, are as follows
(in thousands):

2001 2000
-------- --------

Deferred tax assets:
Allowance for doubtful accounts ............... $ 583 $ 453
Accrued employee benefits ..................... 120 279
Capitalized inventory costs ................... 1,243 542
Inventory allowance ........................... 2,821 3,298
Accrued liabilities ........................... 2,028 2,849
Net operating loss carryforwards .............. 1,752 1,928
AMT credit .................................... 238 0
Other ......................................... 273 90
------- -------
9,058 9,439
------- -------
Deferred tax liabilities:
Book versus tax depreciation .................. (314) (250)
Intangible integrated supply contract ......... (164) (180)
Step-up in asset basis ........................ (566) (876)
I.R.C. ss. 481 -- last-in first-out .......... (111) (201)
Book versus tax amortization .................. (416) 0
Other ......................................... 0 (1)
------- -------
(1,571) (1,508)
------- -------
Net deferred tax assets ................... $ 7,487 $ 7,931
======= =======

The Company has net operating loss carryforwards for federal income tax
purposes of approximately $1,050,000 as of December 31, 2001, which
expire 2011 through 2018. The utilization of the related available
deferred tax asset of $357,000 at December 31, 2001 is subject to
certain limitations under section 382 of the Internal Revenue Code as a
result of an ownership change that occurred.

The Company has net operating loss carryforwards for state income tax
purposes of approximately $31,602,000 as of December 31, 2001, which
expire in various years through 2021. The related deferred tax asset
for these state net operating loss carryforwards is approximately
$1,395,000 as of December 31, 2001.

F-17

10. COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

The Company leases certain warehouse and office facilities as well as
certain vehicles and office equipment under operating leases.
Management expects that in the normal course of business, leases that
expire will be renewed or replaced by other leases, except in the case
of ERP leases, which will not be renewed.

The minimum future rental payments, net of sublease revenues, under all
leases as of December 31, 2001 were as follows (in thousands):

2002........................................ $ 7,202
2003........................................ 6,111
2004........................................ 3,457
2005........................................ 3,106
2006........................................ 3,099
Thereafter.................................. 17,142
-------
$40,117
=======

During the years ended December 31, 2001, 2000, and 1999, gross rental
expense under operating leases totaled $5,782,000, $6,002,000, and
$5,576,000, respectively, with related sub-lease rental income of
$246,000, $370,000, and $210,000, respectively.

LITIGATION

In April 2000, the Company settled the dissenter's rights lawsuit
involving its wholly owned subsidiary, The Distribution Group, Inc.
("TDG"), and Alvis J. Waite that had been pending in DeKalb County
Superior Court, Georgia, File No. 97-14388-4. On behalf of TDG, the
Company paid Mr. Waite $10,750,000 in full satisfaction of all disputes
and issues raised by the lawsuit, in which the court had entered a
judgment that adopted the recommendations of the court-appointed
appraiser. Including a charge taken in the fourth quarter of 1999, the
Company had previously provided a dissenting shareholder accrual of
$11,172,000 as of December 31, 1999, that was adequate to cover the
payment as well as related legal fees. The payment to Mr. Waite was
made from the proceeds, net of fees, of a management liability
insurance policy provided through an insurance carrier, which is
payable over 36 months and carries interest at 8.15%. During 2000, the
Company made payments of $2,791,000 for premiums on the management
liability insurance policy, which along with $15,000 of legal fees,
were charged against the accrual, leaving a balance of $8,366,000 at
December 31, 2000. During 2001, the Company made payments of $3,751,000
for premiums on the management liability insurance policy, which were
charged against the accrual, leaving a balance of $4,615,000 at
December 31, 2001. Of this balance, $3,718,000 is classified as the
current portion of management liability insurance, and the remaining
$897,000, which is payable in 2003, is included in other long-term
liabilities. This was accounted for as a financing of the settlement
liability for financial reporting purposes.

The Company is subject to various claims and legal actions, which arise
in the ordinary course of business. The Company believes that the
ultimate resolution of such matters will not have a material adverse
effect on the Company's financial position or results of operations.

INSURANCE

The Company initiated a self-insured group health insurance plan for
all employees on January 1, 2000, whereby the Company is self-insured
for the majority of claims, subject to specific aggregate stop loss
limits. The Company utilizes consultants and administrators to assist
in determining its liability for unasserted or unpaid claims. The
Company believes that the ultimate liability for payment of claims has
been adequately reserved for, and any additional exposure will not have
a material adverse effect on the Company's financial position or
results of operations.

F-18

11. SAVINGS PLANS

All employees who are age 21 or older and have completed 30 days of
service are eligible to participate in the Company's 401(k) plan (the
"Plan"). Employees are eligible to receive matching contributions from
the Company after they have completed one year of service. Once
eligibility requirements are met, employees may contribute between 1%
and 15% of their compensation to the Plan, subject to tax law
limitations. For 2001, 2000, and 1999 the Company matched, at its sole
discretion, 25% of employee contributions up to a maximum of 1 1/2% of
the employee's salary.

Total company contributions to the Plan during 2001, 2000, and 1999
were $497,000, $563,000, and $571,000, respectively.

12. RELATED-PARTY TRANSACTIONS

The Company leases facilities from various related parties. Renewal of
these leases, if applicable, are based on management's best estimate of
market value. Rental expense recognized under these leases was
$1,077,000, $1,308,000, and $1,415,000 for the years ended December 31,
2001, 2000, and 1999, respectively.

13. INTERIM FINANCIAL INFORMATION (UNAUDITED)

On January 1, 2000 the Company entered into a self-insured healthcare
plan subject to an aggregate stop loss limit on a "claims paid" basis
(Note 10). In the first three quarters of fiscal 2000, the Company
failed to appropriately record the estimate of claims incurred but not
paid during each of the respective quarters. This resulted in an
understatement of previously reported selling, general, and
administrative expenses of $448,000, $432,000 and $457,000 during the
quarters ended March 31, 2000, June 30, 2000 and September 30, 2000,
respectively. Consequently, the Company restated its results of
operations for the first three fiscal quarters of 2000. There was no
impact on cash flow from operations in any of the quarters of fiscal
year 2000 due to this restatement. The Company's unaudited quarterly
results of operations for the fiscal years ended December 31, 2001 and
2000 (as previously reported and as restated for the first three
quarters of fiscal 2000) are as follows (in thousands, except for per
share amounts):

F-19

2001
-----------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- --------

Net sales ............................................ $ 136,169 $ 131,364 $ 123,883 $122,969
Cost of sales ........................................ 105,728 101,821 96,420 95,895
--------- --------- --------- --------
Gross profit ................................... 30,441 29,543 27,463 27,074
Selling, general and administrative expenses ......... 29,788 29,341 26,225 25,774
--------- --------- --------- --------
Operating income ............................... 653 202 1,238 1,300
Interest expense ..................................... 1,358 1,166 1,042 883
Other loss (income), net ............................. 5 (56) (31) 37
--------- --------- --------- --------
(Loss) income before income taxes .................... (710) (908) 227 380
(Benefit) provision for income taxes ................. (114) (183) 340 304
--------- --------- --------- --------
Net (loss) income .................................... $ (596) $ (725) $ (113) $ 76
========= ========= ========= ========

Basic and Diluted (loss) income per share(**)......... $ (.07) $ (.08) $ (.01) $ .01
========= ========= ========= ========

2000
FIRST QUARTER SECOND QUARTER THIRD QUARTER
--------------------- -------------------- ---------------------
AS AS AS
PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY AS FOURTH
REPORTED(*) RESTATED REPORTED(*) RESTATED REPORTED(*) RESTATED QUARTER
----------- -------- ----------- -------- ----------- -------- --------

Net sales ................................... $140,849 $140,849 $139,615 $139,615 $133,723 $133,723 $132,494
Cost of sales ............................... 109,268 109,268 107,983 107,983 103,492 103,492 102,796
-------- -------- -------- -------- -------- -------- --------
Gross profit ............................ 31,581 31,581 31,632 31,632 30,231 30,231 29,698
Selling, general and administrative
expenses .................................. 29,348 29,796 28,831 29,263 28,220 28,677 28,265
Unusual items ............................... 0 0 0 0 0 0 15,050
-------- -------- -------- -------- -------- -------- --------
Operating income (loss) ................. 2,233 1,785 2,801 2,369 2,011 1,554 (13,617)
Interest expense ............................ 1,229 1,229 1,168 1,168 1,142 1,142 1,323
Other (income) loss, net .................... (48) (48) 29 29 (58) (58) (99)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before extraordinary
item and income taxes ....................... 1,052 604 1,604 1,172 927 470 (14,841)
Provision (benefit) for income taxes ........ 527 355 750 585 353 178 (4,301)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before extraordinary item ..... 525 249 854 587 574 292 (10,540)
Extraordinary loss on early
extinguishment of debt, net of tax
benefit ................................... 0 0 0 0 0 0 200
-------- -------- -------- -------- -------- -------- --------
Net Income (loss) ........................... $ 525 $ 249 $ 854 $ 587 $ 574 $ 292 $(10,740)
======== ======== ======== ======== ======== ======== ========
Earnings per common share:
Basic and Diluted
Income (loss) before
extraordinary item(**) .................. $ 0.06 $ 0.03 $ 0.10 $ 0.07 $ 0.07 $ 0.03 $ (1.25)
Extraordinary item ...................... 0.00 0.00 0.00 0.00 0.00 0.00 (0.02)
-------- -------- -------- -------- -------- -------- --------
Net Income (loss)** ..................... $ 0.06 $ 0.03 $ 0.10 $ 0.07 $ 0.07 $ 0.03 $ (1.27)
======== ======== ======== ======== ======== ======== ========

(*) In accordance with EITF - Issue 00-10, the Company has reclassified
from selling, general, and administrative expenses to revenues
$1,334,000, $1,322,000, and $1,266,000, in the first, second, and third
quarter of 2000, respectively.

(**) The sum of the EPS for the quarters does not equal the total for the
year due to the weighted average shares calculation and rounding.

F-20

INDUSTRIAL DISTRIBUTION GROUP, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999

ADDITIONS
--------------------------------
CHARGED
TO COSTS
BALANCE AT AND CHARGED TO BALANCE AT
BEGINNING EXPENSES OTHER END OF
DESCRIPTION OF PERIOD NET(3) ACCOUNT(1) DEDUCTIONS(2) PERIOD
------------ ---------- --------- ---------- ------------- ----------

Year ended December 31, 2001: ............... $1,182 $ 878 $ 0 $538 $1,522
Allowance for doubtful accounts

Year ended December 31, 2000: ............... 1,480 (110) 0 188 1,182
Allowance for doubtful accounts

Year ended December 31, 1999: ............... 1,562 245 14 341 1,480
Allowance for doubtful accounts

(1) Reserves acquired in connection with acquisitions in 1999.

(2) Deductions represent the write off of uncollectible receivables, net of
recoveries.

(3) Amounts charged to costs and expenses are net of adjustments to state
the allowance based on the Company's collection experience and
management's assessment of the collectibility of specific accounts.

ADDITIONS
------------------------------
CHARGED
TO COSTS
BALANCE AT AND CHARGED TO BALANCE AT
BEGINNING EXPENSES OTHER END OF
DESCRIPTION OF PERIOD NET(3) ACCOUNT(1) DEDUCTIONS(2) PERIOD
------------ ---------- ---------- ---------- ------------- ----------

Year ended December 31, 2001: ............... $8,612 $ 743 $348 $2,338 $7,365
Inventory reserve

Year ended December 31, 2000: ............... 8,383 423 909 1,103 8,612
Inventory reserve

Year ended December 31, 1999: ............... 7,612 823 237 289 8,383
Inventory reserve

(1) In 1999, reserves were acquired in connection with acquisitions. In
2000 and 2001 amounts were a balance sheet re-classification.

(2) Deductions represent the write off of obsolete inventory.

(3) Amounts charged to costs and expenses are net of adjustments to state
the reserve based on the Company's experience and management's
assessment of the net realizable value of specific inventory accounts.

F-21