INDUSTRIAL DISTRIBUTION GROUP INC, S-1/A, 1998-09-21

INDUSTRIAL DISTRIBUTION GROUP INC
S-1/A, 1998-09-21
MACHINERY, EQUIPMENT & SUPPLIES

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 18, 1998

REGISTRATION NO. 333-51851
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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INDUSTRIAL DISTRIBUTION GROUP, INC.
(Exact name of Registrant as specified in its charter)

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<S> <C> <C>
DELAWARE 5085 58-229339
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>

2500 Royal Place
Tucker, Georgia 30084
(770) 243-9000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)

Martin S. Pinson
Chairman and Chief Executive Officer
2500 Royal Place
Tucker, Georgia 30084
(770) 243-9000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)

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Copy to:

W. Randy Eaddy, Esq.
Kilpatrick Stockton LLP
1100 Peachtree Street
Atlanta, Georgia 30309
(404) 815-6500

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.

If any of the securities on this Form are being offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the
following box: [X]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED SEPTEMBER 18, 1998

PROSPECTUS
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5,000,000 SHARES

(LOGO)
(INDUSTRIAL DISTRIBUTION GROUP, INC.)

COMMON STOCK
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

---------------------

This Prospectus covers 3,740,751 shares of common stock, $.01 par value
(the "Common Stock"), which may be offered and issued by Industrial Distribution
Group, Inc. (the "Company" or "IDG") from time to time in connection with the
merger with or acquisition by the Company of other businesses or assets or to
certain third parties who may provide professional, advisory, or other services
to the Company in connection with such transactions or other business of the
Company ("New Issue Shares"), and 1,192,115 additional shares of Common Stock
previously issued by the Company that may be resold from time to time by certain
persons (the "Selling Shareholders") named herein, or by certain transferees of
such persons who may be named in a supplement or amendment to this Prospectus
(the "Resale Shares"). The Company will not receive any of the proceeds from the
sale of any of the Resale Shares. It is expected that the terms of acquisitions
involving the issuance of New Issue Shares covered by this Prospectus will be
determined by direct negotiations with the owners or controlling persons of the
businesses or assets to be merged with or acquired by the Company, or the third
parties providing services to the Company, and that the shares of Common Stock
issued will be valued at prices reasonably related to market prices current
either at the time the terms for an acquisition or services are agreed upon or
at or about the time of delivery of shares. No underwriting discounts or
commissions will be paid, although finder's fees may be paid from time to time
with respect to specific transactions. Any person receiving any such fees may be
deemed to be an underwriter within the meaning of the Securities Act of 1933, as
amended (the "Securities Act").

This Prospectus also covers the possible future resale by certain persons
who may receive New Issue Shares in circumstances that restrict their ability to
resell such shares unless they are covered by an effective registration
statement, in which event such persons will also become Selling Shareholders for
purposes of this Prospectus. In addition, this Prospectus covers the possible
issuance of 67,134 shares of Common Stock (the "Option Shares") pursuant to
options to purchase such shares granted to certain Selling Shareholders in
connection with the acquisition by the company of a business owned by such
Selling Shareholders.

The Company currently has 8,466,704 shares of its Common Stock listed on
the New York Stock Exchange, of which 3,795,000 are registered and available for
unrestricted trading in the public markets unless owned by affiliates of the
Company. All of the Resale Shares are listed on the New York Stock Exchange, and
application will be made by the Company to list the New Issue Shares and the
Option Shares on such exchange from time to time as they are issued. On
September 15, 1998, the closing price of the Common Stock on the New York Stock
Exchange was $6 1/2 per share.

All expenses of this offering will be paid by the Company except that the
Selling Shareholders will bear fees and expenses of their counsel and
commissions or discounts of underwriters, dealers or agents in connection with
the sale of Resale Shares.

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The date of this Prospectus is , 1998.
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TABLE OF CONTENTS

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PAGE
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Additional Information...................................... 2
Prospectus Summary.......................................... 3
Risk Factors................................................ 7
Selling Shareholders........................................ 11
Possible Offerings by the Company........................... 14
Price Range of Common Stock................................. 15
Dividend Policy............................................. 15
Summary Financial Data...................................... 16
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 17
Business.................................................... 24
Management.................................................. 32
Principal Stockholders...................................... 38
Certain Transactions........................................ 39
Shares Eligible for Future Sale............................. 41
Description of Capital Stock................................ 41
Legal Matters............................................... 43
Experts..................................................... 43
Index to Financial Information.............................. F-1
</TABLE>

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act with
respect to the Common Stock offered hereby. This Prospectus, which is a part of
the Registration Statement, does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock, reference is
hereby made to the Registration Statement and the exhibits and schedules filed
as a part thereof. Statements contained in this Prospectus concerning the
provisions or contents of any contract, agreement, or any other document
referred to herein are not necessarily complete. With respect to each such
contract, agreement, or document filed as an exhibit to the Registration
Statement, reference is made to such exhibit for a more complete description of
the matters involved, and each statement shall be deemed qualified in its
entirety by such reference to the copy of the applicable document filed with the
Commission. A copy of the Registration Statement, including the exhibits and
schedules thereto, may be inspected without charge at the Public Reference
section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the following regional offices of the Commission:
New York Regional Office, 7 World Trade Center, 13th Floor, New York, New York
10048; and Chicago Regional Office, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of the Registration Statement and the exhibits
and schedules thereto can be obtained from the Public Reference Section of the
Commission upon payment of prescribed fees. The Commission maintains an Internet
web site that contains reports, proxy and information statements and other
information filed electronically with the Commission. The address of that site
is http://www.sec.gov.

The Company is subject to the informational and periodic reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith, files periodic reports, proxy statements,
and other information with the Commission. Such periodic reports, proxy
statements, and other information will be available for inspection and copying
at the public reference facilities and other regional offices referred to above.
The Company intends to furnish its stockholders with annual reports containing
audited financial statements and such other reports as may be required from time
to time by law or the New York Stock Exchange.

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PROSPECTUS SUMMARY

The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in this Prospectus.
Unless the context otherwise requires, all references herein to the "Company" or
"IDG" shall mean Industrial Distribution Group, Inc.

THE COMPANY

Industrial Distribution Group, Inc. (the "Company" or "IDG") was formed in
February 1997 to create a leading, nationwide supplier of cost-effective,
flexible procurement solutions for manufacturers and other users of maintenance,
repair, operating, and production ("MROP") products. The Company distributes a
full line of industrial MROP products, emphasizing its specialized expertise in
product applications. The Company's principal product categories include
abrasives, cutting tools, hand and power tools, and coolants, lubricants, and
adhesives. Utilizing its proprietary computerized Supply Management System, the
Company's application and product specialists are able to analyze a customer's
acquisition, possession, and application processes for MROP supplies and design
programs to streamline the processes and reduce associated costs. Such programs
may include improving a customer's production and procurement processes,
standardizing MROP products, reducing the number of suppliers, or developing
integrated supply arrangements that outsource to the Company some or all of a
customer's MROP procurement and management functions.

In September 1997, IDG completed its initial public offering of Common
Stock and, at the same time, acquired the following nine industrial distribution
companies: Associated Suppliers, Inc., B&J Industrial Supply Company, Cramer
Industrial Supplies, Grinding Supplies Company, J.J. Stangel Co., Shearer
Industrial Supply Company, Slater Industrial Supply Company, The Distribution
Group, Inc. (formerly known as Industrial Distribution Group, Inc.), and
Tri-Star Industrial Supply, Inc., collectively referred to as the "Founding
Companies." Through September 15, 1998, the Company had completed the
acquisition of 13 additional companies: Continental Air Tools, Inc., Northern
Tool & Supply, Inc., E.C. Blackstone Company, Refco, Inc., Hawley Industrial
Supplies, Inc., The New England Group Industrial Distributors, Inc., Industrial
& Tool Suppliers, LLC, Buford Bros., Inc., Knox Industrial Supplies, Inc., LD
Supply, Inc., Cardinal Machinery, Inc., Petry & Morrow, Inc., and JM Tool &
Supply, Inc.

The Company intends to establish a nationwide presence, with MROP product
and service capabilities in all or most of the top 50 U.S. industrial markets.
Currently, the Company has 73 operating locations in 64 cities, along with four
small facilities abroad. The Company's more than 29,000 customers include a
diverse group of major national and international corporations, including
AlliedSignal, Black & Decker, Boeing, Chrysler, General Motors, Hoechst
Celanese, PPG Industries, and Shell Oil, as well as small and large local and
regional businesses. On a pro forma combined basis, the Company had net sales of
approximately $332.2 million for the year ended December 31, 1997 (which
includes three acquisitions accounted for as poolings (the "Pooled Companies").

The Company estimates that the size of the market for industrial MROP
products in which it participates primarily is approximately $70 billion
annually. However, the entire United States MROP market is estimated to be in
excess of $175 billion annually, and includes electrical, PVF (pipes, valves,
and fittings), power transmission, and other product categories in which the
Company participates to a lesser extent. This larger market is highly
fragmented, with the 50 largest distributors (all of which have annual sales
over $90 million) accounting for less than 15% of the market.

Manufacturers and other users of MROP products are seeking 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 is experiencing consolidation, as customers focus on the convenience,
cost savings, and economies of scale associated with a reduced number of
suppliers capable of providing superior service and product selection. Further,
as manufacturers focus on their core manufacturing or other production
competencies, they are increasingly outsourcing their MROP procurement,
management, and application

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processes in search of comprehensive MROP solutions, such as integrated supply.
The Company believes that it will benefit from these industry trends.

The Company believes that it has the size, scale of operations, and
resources necessary to compete effectively in the evolving industrial MROP
supply industry. The Company's size and scale of operations allow it to benefit
from high volume purchasing, attract the highly skilled personnel required to
deliver enhanced levels of service, and realize internal operating efficiencies.
The Company's resources and product knowledge enable it to offer a comprehensive
product line and invest in sophisticated inventory management and control
systems needed to support its enhanced levels of customer service. Moreover,
management believes that the Company's overall position enhances its ability to
implement its acquisition strategy in the consolidating and fragmented MROP
industry.

OPERATING STRATEGY

Superior Product Expertise and Comprehensive Product Line. One of the
Company's core competencies is its extensive product expertise. With its
understanding of the most appropriate product for specific customer
applications, the Company can identify the MROP product best suited for a
customer's specific need. This expertise benefits the customer in two ways, each
of which lowers the customer's total MROP costs. First, the customer increases
the efficiency of its manufacturing processes by minimizing downtime and other
indirect costs. Second, by providing only that level of quality required by the
application, the Company can lower the customer's MROP product costs. The
Company's comprehensive product line supports its commitment to deliver the most
appropriate product to its customers. In addition to maintaining over 100,000
stock keeping units ("SKUs"), as well as special items in stock for regular
customers, the Company can provide virtually any MROP item, including
special-order items.

Centralized Corporate Functions and Decentralized Operating Management. At
the corporate level, on the one hand, the Company is consolidating functions
such as financial, accounting, management information systems, employee
benefits, and certain purchasing arrangements to eliminate duplicative
administrative and other costs that otherwise would be incurred at each of its
operating locations. The resulting operating efficiencies, along with the
enhanced leverage from higher volume purchasing, should provide the Company an
advantage over smaller regional and local competitors. At the operating
subsidiary level, on the other hand, the Company is employing a decentralized
management structure that focuses management at each operating subsidiary on
day-to-day operating matters, profitability, and growth, as well as identifying
potential acquisition candidates. The Company believes that its decentralized
management philosophy will result in better customer service by allowing local
management the flexibility to implement policies and make decisions based on
first-hand assessments of the needs and desires of individual customers.

Superior Customer Service. Providing superior quality and a comprehensive
range of MROP services to customers is the IDG hallmark. As part of its
commitment to customer service, the Company emphasizes quality assurance in all
phases of its operations. The Company's sales and service personnel receive
ongoing periodic training in TQM ("total quality management") and other team
management skills to assure such quality performance. IDG also will seek
certification under the International Standards Organization ("ISO") 9002
standards for distribution with respect to its principal locations and expects
to make such certification a Company-wide objective for all future principal
locations.

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GROWTH STRATEGY

Internal Growth. Management believes that significant opportunities exist
to increase revenues and earnings through internal expansion. Through focused
marketing both inside and outside the United States, the Company will seek to
add revenue by offering additional products and services to new and existing
customers and identifying any unserved facilities of its larger existing
customers. Where necessary to increase its market share, the Company will open
or expand facilities in the vicinity of existing operations. The Company will
also consider the desirability of internal expansion into new geographic
markets.

Acquisitions in Select Geographic Markets. The Company has launched an
aggressive acquisition program to take advantage of consolidation opportunities
within the highly fragmented industrial MROP market. The Company will continue
to seek to acquire successful MROP distribution and related businesses that are
large enough to establish a significant initial presence and to provide for
future Company expansion in the particular market. The Company will continue to
seek to retain the management of acquired businesses.

Expansion into International Markets. The Company believes that the
consolidation and outsourcing trends that provide growth opportunities in the
United States offer comparable opportunities in international markets. The
Company plans initially to extend its offering of flexible procurement solutions
to foreign manufacturing facilities of its domestic customers to develop a base
for potentially expanded international operations. The Company has been active
in the Peoples Republic of China since 1988, establishing sales offices in
Beijing (1994) and Shanghai (1996), and in Mexico since 1997.

THE OFFERING AND SELLING SHAREHOLDERS

This Prospectus, as appropriately supplemented or amended, may be used from
time to time (i) by the Company to issue shares of Common Stock, up to an
aggregate maximum of 3,740,751 shares ("New Issue Shares"), in connection with
mergers or other acquisitions by the Company of other businesses, or to certain
third parties who may provide professional, advisory, or other services to the
Company (ii) by persons who, as of September 15, 1998, have been issued
1,192,115 shares of Common Stock or who, in the future, may be issued some or
all of the New Issue Shares by the Company, or by their transferees ("Selling
Shareholders"), in connection with resales by such persons, or (iii) by the
Company to issue shares of Common Stock, up to an aggregate maximum of 67,134
shares ("Option Shares") pursuant to options to purchase such shares granted to
certain Selling Shareholders in connection with the acquisition by the company
of a business owned by such Selling Shareholders. The number of shares that may
be offered and issued by the Company at any particular time in the future, and
the number of shares that may be resold by persons who become Selling
Shareholders in the future (and the identity and other information about such
Selling Shareholders), are not presently known. Such information, to the extent
known and required by applicable law in the future, will be provided in one or
more supplements or amendments to this Prospectus. For certain information about
persons who are presently known to be Selling Shareholders, see "Selling
Shareholders", below.

As of September 15, 1998, the Company had issued and outstanding 8,466,704
shares of Common Stock.

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All references herein to the Company refer to the Company and its
subsidiaries. The Company's principal executive offices are located at 2500
Royal Place, Tucker, Georgia 30084, where its telephone number is (770)
243-9000.

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SUMMARY FINANCIAL DATA

The following summary financial data as of and for the years ended December
31, 1997, 1996, and 1995, have been derived from audited financial statements of
the Company; the financial data as of and for the years ended December 31, 1994
and 1993, as well as the financial data as of June 30, 1998 and for the six
months ended June 30, 1998 and 1997, have been derived from unaudited financial
statements of the Company. All such financial statements of the Company 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 companies acquired by
IDG to commence its current operations as a combined entity, effective for
accounting purposes as of September 24, 1997 -- to be the historical financial
statements of the Company for all periods prior to September 24, 1997. As a
result, the Company's financial statements, and the following data, reflect the
results of operations and financial condition of B&J and the Pooled Companies
for the periods prior to September 24, 1997; the results of operations and
financial condition of all nine Founding Companies and the Pooled Companies are
reflected in the financial statements and data of the Company for only the
period of time from and after September 24, 1997. Those facts account for a
substantial difference in these financial data as of and for the year ended
December 31, 1997 as compared to prior periods; they make comparisons of the
data among the periods misleading; and they are a further reason that these
historical results are not indicative of the results that the Company may
achieve in the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation."

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<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
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1998 1997 1997 1996 1995 1994 1993
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(IN THOUSANDS)
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STATEMENTS OF INCOME DATA:
Net sales..................... $196,401 $40,113 $153,218 $68,266 $59,944 $22,108 $50,460
-------- ------- -------- ------- ------- ------- -------
Gross profit.................. 44,841 9,187 35,492 15,492 14,181 5,922 12,977
Selling, general, and
administrative.............. 40,076 7,859 31,595 14,649 13,281 5,175 11,734
-------- ------- -------- ------- ------- ------- -------
Operating income.............. 4,765 1,328 3,897 843 900 747 1,243
Net income.................... 3,076 705 2,316 364 322 410 465
BALANCE SHEET DATA:
Working capital............... $ 72,843 $ 79,645 $ 9,551 $ 8,645 $ 8,752 $ 9,177
Property and equipment, net... 13,603 9,910 2,156 2,082 2,080 2,039
Total assets.................. 167,362 146,381 27,252 23,542 21,384 21,476
Long-term debt, including
current portion............. 8,382 11,653 7,959 7,180 6,586 6,516
Stockholders' equity.......... 113,487 99,490 11,223 9,425 9,072 8,919
</TABLE>

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RISK FACTORS

An investment in the shares of Common Stock offered hereby involves a high
degree of risk. In addition to the other information in this Prospectus, the
following risk factors should be considered carefully in evaluating an
investment in the Common Stock.

This Prospectus contains certain forward-looking statements (as such term
is defined in the Securities Act) concerning the Company's operations,
performance, and financial condition, including, in particular, the likelihood
of the Company's success in developing and expanding its business. These
statements are based upon a number of assumptions and estimates which are
inherently subject to significant uncertainties and contingencies, many of which
are beyond the control of the Company. Actual results may differ materially from
those expressed or implied by such forward-looking statements. Factors that
could cause actual results to differ materially include those set forth below.

LIMITED COMBINED OPERATING HISTORY

Although each of the Founding Companies had operated for over 20 years,
IDG's operation of these businesses as a combined entity only commenced in
September 1997 when they were acquired. There can be no assurance that the
Company will be able to integrate successfully the businesses of the Founding
Companies or any subsequently acquired companies or to operate profitably. There
can be no assurance that the Company's management group, certain of whom,
including the Chief Executive Officer, have not previously worked in the MROP
industry, will be able to manage effectively the combined entity. Failure to
integrate successfully its acquired businesses could have a material adverse
effect on the Company's results of operations and financial condition.

ABSENCE OF INTEGRATED SYSTEMS

Until the Company implements its centralized management systems, the
Company will utilize and be dependent upon the information and operating systems
of the several companies it acquires for ordering products, recording and
analyzing financial results, controlling inventory, and other important
functions. Although the Company has put in place certain control mechanisms, it
may nonetheless experience delays, disruptions, and unanticipated expenses in
implementing, integrating, and operating its centralized systems, any of which
could have a material adverse effect on the Company's results of operations and
financial condition. The Company will not be able to fully achieve certain
contemplated operating efficiencies and competitive advantages until it has
implemented fully its centralized management information and operating systems.

RISKS ASSOCIATED WITH EXPANSION THROUGH ACQUISITIONS

The Company's growth strategy contemplates the ongoing acquisitions of MROP
distribution and related businesses. As a result, the Company's future success
is dependent, in part, upon its ability to identify, finance, and acquire
suitable businesses on favorable terms and then to integrate and manage the
acquired businesses successfully. Acquisitions involve special risks, including
risks associated with unanticipated liabilities, diversion of management
attention, and possible adverse effects on earnings resulting from increased
goodwill amortization, potential increased interest costs, the issuance of
additional securities, the dependence on retention, hiring, and training of key
personnel, and difficulties relating to the integration of the acquired
businesses. Although the Company believes that it can implement successfully its
acquisition program and establish a nationwide presence, there can be no
assurance that the Company will be able to do so. Further, there can be no
assurance that future acquisitions will not have an adverse effect upon the
Company's results of operations, particularly during periods in which the
operations of acquired businesses are being integrated into the Company's
operations. See "Business -- Business Strategies -- Growth Strategy".

The Company intends to use a combination of shares of Common Stock and
other types of consideration in making future acquisitions. The extent to which
the Company will be able or willing to use Common Stock for this purpose will
depend on the market value of the Common Stock from time to time and the
willingness of potential sellers to accept it as full or partial payment. If the
Company is unable to use its Common Stock
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for acquisitions, the Company's ability to make acquisitions may depend upon its
ability to raise additional capital, including through borrowings. Such
borrowings could create other risks for the Company and its stockholders. No
assurance can be given that the Company will be able to obtain the capital it
will need to finance its acquisition program.

DEPENDENCE ON SUPPLIER RELATIONSHIPS

Each of the Company's acquired businesses has distribution rights for
certain product lines in its respective geographic market. For the foreseeable
future, until it implements procedures for more centralized procurement
arrangements, the Company will depend upon the maintenance of these distribution
rights for a substantial portion of its business. A significant percentage of
these current distribution arrangements with its suppliers 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 the
Company could have a material adverse effect on the Company's results of
operations and financial condition.

COMPETITION

The industrial MROP supplies industry is highly competitive and features
numerous distribution channels, including: national, regional, and local
distributors; direct mail suppliers; large warehouse chains; hardware stores;
and manufacturers' own sales forces. Many of the Company's competitors are small
enterprises who sell to customers in a limited geographic area, but the Company
also competes against several large MROP distributors that have significantly
greater resources than the Company. As customers increasingly seek low-cost
alternatives to traditional methods of purchasing and sources of supply, they
are, among other things, reducing the number of their MROP suppliers. Also, MROP
distributors are consolidating to achieve economies of scale and increase
efficiencies, which consolidation trend could cause the industry to become more
competitive. In addition, new competitors may emerge. Certain of the Company's
competitors sell identical products for prices lower than those offered by the
Company. Moreover, the Company also competes on the basis of responsiveness to
the needs of customers for quality service, product diversity, and availability.
There can be no assurance that the Company will be able to compete successfully
under such conditions.

DEPENDENCE ON KEY PERSONNEL

The Company's operations depend for the foreseeable future on the
continuing efforts of its executive officers and the senior management of the
businesses it acquires, and the Company likely will depend on the senior
management of any significant businesses it acquires in the future, especially
as the Company enters into new geographic markets. The business and prospects of
the Company could be adversely affected if these persons, in significant
numbers, do not continue their key roles, and the Company is unable to attract
and retain qualified replacements. See "-- Limited Combined Operating History".

LABOR AVAILABILITY

The timely provision of high-quality service by the Company requires an
adequate supply of skilled sales and customer service personnel, including the
application and product specialists whose expertise is an essential element of
the Company's customer-oriented, flexible procurement solutions approach.
Accordingly, the Company's ability to implement its strategies depends to a
degree on its ability to employ the skilled personnel necessary to meet the
Company's marketing and services requirements. From time to time, the Company
has experienced difficulty in attracting or retaining sufficient numbers of
qualified personnel. In addition, the operating costs of the Company may be
adversely affected by turnover in such positions. There can be no assurance that
the Company will be able to maintain an adequately skilled sales and customer
service force or that the Company's labor expenses will not increase as a result
of a shortage in the supply of such skilled personnel.

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INDUSTRY CYCLICALITY

Some of the primary markets for the products sold by the Company are
subject to cyclical fluctuations that generally affect demand for industrial and
consumer durable goods produced by the users of MROP products. Consequently, the
demand for MROP products has been and may continue to be influenced by many of
those same national or regional factors. Changes in economic conditions
resulting in a change in the current business cycle could have a material
adverse effect on the Company's results of operations and financial condition.

CONTROL BY MANAGEMENT AND FORMER OWNERS OF FOUNDING COMPANIES

Directors and officers of the Company, and former stockholders of the
Founding Companies, own beneficially an aggregate of approximately 43% of the
outstanding Common Stock. See "Principal Stockholders". Accordingly, these
persons, if they were to act in concert, would have substantial influence over
the affairs of the Company, including the ability potentially to control the
election of directors and other matters requiring stockholder approval by simple
majority vote.

YEAR 2000 COMPLIANCE

The "year 2000 issue" arises from the widespread use of computer programs
that rely on two-digit date codes to perform computations or decision-making
functions. Many of these programs may fail due to an inability to properly
interpret date codes beginning January 1, 2000. For example, such programs may
misinterpret "00" as the year 1900 rather than 2000. In addition, some
equipment, being controlled by microprocessor chips, may not deal appropriately
with the year "00." The Company is evaluating its computer systems to determine
which modifications and expenditures will be necessary to make its systems
compatible with 2000 year requirements. The Company believes that its systems
will be year-2000 compliant upon implementation of such modifications. The
Company's total costs (historical plus estimated future costs) of addressing
Year 2000 issues are estimated to be in the range of $250,000 to $500,000, of
which less than $100,000 has been incurred. However, there can be no assurance
that all necessary modifications will be identified and corrected or that
unforeseen difficulties or cost will not arise. In addition, there can be no
assurance that the systems of other companies on which the Company's systems
rely will be modified on a timely basis, or that the failure by another company
to properly modify its systems will not negatively impact the systems or
operations of the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Year 2000".

LEGAL PROCEEDING

On November 18, 1996, Milliken & Company ("Milliken"), a textile
manufacturer and customer of The Distribution Group, Inc. ("TDG"), filed suit
against a manufacturer of an industrial product and TDG in the Superior Court of
Troup County, Georgia, Civil Action No. 96-CV-964. Milliken claims that a
product sold to it by TDG as a distributor of the defendant-manufacturer was
defective and caused a fire, severely damaging Milliken's textile manufacturing
plant in LaGrange, Georgia. Milliken alleges damages of $500 million against the
defendants. TDG has denied any liability, and its insurance carrier is
vigorously defending the lawsuit on its behalf. While the damages alleged by
Milliken are exceptional in amount, the inclusion of the distributor of a
product, along with its manufacturer, as a defendant in an action for alleged
product defectiveness is unexceptional. The litigation is in discovery, and
while it is not possible to predict with accuracy the outcome of any such
litigation matter, the Company believes that its insurance, which provides for
$12 million of coverage, will be adequate to cover any loss to TDG that might
result from the lawsuit.

CERTAIN ANTI-TAKEOVER PROVISIONS

Certain provisions of the Company's Certificate of Incorporation and Bylaws
and Delaware law may make a change in control of the Company more difficult to
effect, even if a change in control were in the stockholders' interests.
Provisions in the Company's Certificate of Incorporation allow the Board to
determine the terms of preferred stock that may be issued by the Company without
approval of the holders of the

9
<PAGE> 11

Common Stock. The ability of the Company to issue preferred stock in such manner
could enable the Board to prevent changes in management and control of the
Company. See "Description of Capital Stock -- Preferred Stock".

VOLATILITY OF MARKET PRICE

From time to time, there may be significant volatility in the market price
of the Common Stock. Quarterly operating results of the Company, changes in
earnings estimated by analysts, changes in general conditions in the economy or
the financial markets, or other developments affecting the Company could cause
the market price of the Common Stock to fluctuate substantially. In addition, in
recent years the stock market has experienced extreme price and volume
fluctuations. This volatility has had a significant effect on the market prices
of securities issued by many companies for reasons unrelated to their operating
performance. Therefore, the Company cannot predict the market price for the
Common Stock.

SHARES ELIGIBLE FOR FUTURE SALE

Sales of a substantial number of shares of Common Stock in the public
market could adversely affect the market price for the Common Stock. The number
of outstanding shares of Common Stock available for sale in the public market is
limited by (i) contractual agreements between the Company and the stockholders
of all of the Founding Companies and certain subsequently acquired businesses
not to sell for two years the shares of Common Stock received by them in their
respective acquisitions; (ii) pooling-of-interest accounting treatment
restrictions; (iii) contractual agreements between the Company and the
stockholders of the Founding Companies and subsequently acquired businesses to
place certain numbers of shares of Common Stock received by them in their
respective acquisitions in escrow for a one- or two-year period; and (iv)
applicable restrictions under the Securities Act. A total of 3,874,281 shares
are subject to the above two-year limitation, but otherwise would be eligible
for sale subject to the volume and holding period limitations of Rule 144
beginning one year after the respective dates they were issued. As a result of
those agreements and restrictions, no shares other than the 3,795,000 shares
offered in the initial public offering and the 1,192,115 Resale Shares covered
by this Prospectus are currently eligible for sale. See "Shares Eligible for
Future Sale".

POLICY TO PAY NO DIVIDENDS

The Company presently intends to retain its earnings to finance its growth
and expansion and for general corporate purposes. Consequently, it does not
anticipate paying any cash dividends in the foreseeable future. In addition, the
Company's future financing agreements may contain limitations on the payment of
cash dividends and other distributions of assets. See "Dividend Policy".

10
<PAGE> 12

SELLING SHAREHOLDERS

IDENTITY, OWNERSHIP OF STOCK, AND RELATED MATTERS

The following table sets forth the names of the Selling Shareholders who
are presently known, the number of shares beneficially owned by each such
Selling Shareholder as of September 15, 1998, and the percentage of the total
outstanding Common Stock of the Company owned by each such Selling Shareholder
prior to any offering hereby. All of such shares are covered by this Prospectus
and the Registration Statement of which it forms a part, and may be offered for
resale by the Selling Shareholders from time to time. Except as set forth in the
footnotes to the table below, no Selling Shareholder has had any position,
office, or other material relationship with the Company or any of its
predecessors or affiliates within the past three years.

Each of the Selling Shareholders named below acquired his or her shares in
connection with the acquisition by the Company of a corporation in which he or
she was a stockholder. The aggregate consideration in each of these transactions
was shares of Common Stock, the assumption of certain liabilities, and, in some
transactions, cash. In connection with those transactions, the Company and the
Selling Shareholders entered into agreements pursuant to which the Company
agreed to file this Registration Statement to cover the possible resale of
shares acquired by the Selling Shareholder in the transaction. Such agreements
generally required the Selling Shareholders to place at least 10% of the shares
they received into escrow for a one- or two-year period. Although such escrowed
shares are registered hereunder, the Selling Shareholders will not be able to
sell such escrowed shares until the applicable escrow period has expired. Such
agreements also may impose certain restrictions on the transfer of shares by the
Selling Shareholders, including restrictions relating to "pooling-of-interest"
accounting treatment of the acquisitions and other restrictions mutually agreed
upon between the Company and the Selling Shareholders.

<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP OF KNOWN
SELLING SHAREHOLDERS AS OF
SEPTEMBER 15, 1998
---------------------------------------
NUMBER OF SHARES(1) PERCENTAGE(1)(2)
------------------- -----------------
<S> <C> <C>
James O. Gauthier(3) and Kay L. Gauthier.................... 124,030 1.46%
Mike Hiatt.................................................. 10,968 *
Samuel S. Mitchell(3)(4).................................... 64,833 *
D. Gray Farley(3) and Clora P. Farley(5).................... 120,576 1.42
Harry Y. McLaughlin(5)...................................... 110,862 1.30
James Fairbanks and Claudia Fairbanks(5).................... 45,821 *
Phil Jaskoviak and Susan Jaskoviak.......................... 2,655 *
Phil Jaskoviak(5)........................................... 9,298 *
Gary Giberson and Beulah S. Giberson, JT TEN(5)............. 5,426 *
Revocable Living Trust of Glen E. Johnson and Ann B. Johnson
Trust with AB Tax Provisions (Formula Clause) September
26, 1990.................................................. 647 *
Ernie Plant................................................. 64 *
Roger A. Gertz(5)........................................... 1,550 *
Roger A. Gertz and Eva Gertz................................ 323 *
Continental Air Tool, Inc. Employee Stock Ownership Plan.... 105,747 1.25
Dave Gentle(5).............................................. 4,131 *
Mark W. Fuller(3)........................................... 77,886 *
Lincoln E. Fuller(3)........................................ 77,886 *
Russell E. Fuller........................................... 36,512 *
Joyce I. Fuller............................................. 16,357 *
Joseph H. Stagg, III(3)..................................... 127,370 1.50
Mercedes W. Stagg........................................... 27 *
</TABLE>

11
<PAGE> 13

- ---------------

* Less than 1%.
(1) All of the shares held are being registered hereunder and may be offered and
resold by the Selling Shareholder pursuant to this Prospectus. There is no
assurance, however, that any of the Selling Shareholders will sell any or
all of such shares.

(2) Based on 8,466,704 shares outstanding on September 15, 1998.

(3) In connection with the acquisition transaction in which the Company issued
the shares to the Selling Shareholder, the Selling Shareholder entered into
an employment agreement with a subsidiary of the Company pursuant to which
he agreed to provide certain services to the subsidiary for a period of two
to three years from the closing date of the acquisition. Under each such
employment agreement, the Selling Shareholder is paid an annual salary, may
be eligible for an annual bonus (subject to certain performance criteria),
and is eligible for Company benefits of the type generally provided to
similarly situated employees of the Company for comparable services.

(4) All of the shares held by the Selling Shareholder are subject to a
restriction pursuant to which the Selling Shareholder agreed that he will
not, directly or indirectly, without the consent of the Company, sell or
otherwise dispose of the shares for a period of up to two years after the
acquisition in which the shares were issued to him.

(5) Includes currently exercisable options for shares of Common Stock issued to
the Selling Shareholder in connection with the acquisition by the Company of
Continental Air Tool, Inc. Options for an aggregate of 67,134 shares were
issued to the following Selling Shareholders: D. Gray Farley (20,657
shares); Harry Y. McLaughlin (20,657 shares); Phil Jaskoviak (8,263 shares);
Roger Gertz (1,032 shares); Dave Gentle (4,131 shares); Gary Giberson (4,131
shares); and James Fairbanks (8,263 shares). All such options are
exercisable at $7.31 per share.

The Selling Shareholders may offer and sell all or a portion of the shares
from time to time, but are under no obligation to offer or sell any of the
shares. See "Manner of Offering". Because the Selling Shareholders may sell all,
none, or any part of the shares from time to time, no estimate can be given as
to the number of shares (or as to the percentage of the total outstanding Common
Stock of the Company) that will be beneficially owned by a Selling Shareholder
upon termination of any offering.

This Prospectus also covers the possible resale of the shares of Common
Stock by certain other currently unknown persons who may become the record or
beneficial owners of such shares as a result of certain types of private
transactions, including but not limited to gifts and transfers pursuant to a
foreclosure or similar proceeding by a lender or other creditor to whom shares
may be pledged as collateral to secure an obligation of a Selling Shareholder.
Each such transferee of a Selling Shareholder is hereby deemed to be a Selling
Shareholder for purposes of making resales of shares using this Prospectus. To
the extent required by applicable law, information about such transferees, if
there shall be any (including the name and number of shares owned and proposed
to be sold), will be set forth in an appropriate supplement to this Prospectus.

This Prospectus also covers the possible resale of shares of Common Stock
by certain other currently unknown persons who may become the record or
beneficial owners of such shares ("New Issue Shares", as discussed elsewhere
herein) as a result of future acquisitions by the Company. Each such person is
hereby deemed to be a Selling Shareholder for purposes of making resales of such
shares using this Prospectus. To the

12
<PAGE> 14

extent required by applicable law, information about such persons (including the
name and number of shares owned and proposed to be sold) will be set forth in an
appropriate supplement to this Prospectus.

MANNER OF OFFERING

The shares may be offered and sold by or for the account of a Selling
Shareholder, from time to time as market conditions permit, on the NYSE or
otherwise, at prices and on terms then prevailing or in negotiated transactions.
The shares may be sold by one or more of the following methods, without
limitation: (a) a block trade in which a broker or dealer so engaged will
attempt to sell the shares as agent, but may position and resell a portion of
the block as principal to facilitate the transaction; (b) purchases by a broker
or dealer (including a specialist or market maker) as principal and resale by
such broker or dealer for its account pursuant to this Prospectus; (c) ordinary
brokerage transactions and transactions in which the broker solicits purchasers;
and (d) face-to-face transactions between sellers and purchasers without a
broker-dealer. In effecting sales, brokers or dealers engaged by the Selling
Shareholders may arrange for other brokers or dealers to participate. Such
brokers or dealers may receive commissions or discounts from the Selling
Shareholders and/or the purchasers of the shares for whom such brokers or
dealers act as agents or to whom they sell as principals, or both (which
compensation as to a particular broker-dealer might be in excess of customary
commissions), in amounts to be negotiated. At the time a particular offer of the
shares is made by one or more of the Selling Shareholders, a Prospectus
Supplement, if required, will be distributed that will set forth the aggregate
number of shares being offered and the terms of the offering, including the name
or names of any underwriters, dealers or agents, any discounts, commissions, and
other items constituting compensation from the Selling Shareholders, and any
discounts, commissions, or concessions allowed or reallocated or paid to
dealers, including the proposed selling price to prospective purchasers. The
Selling Shareholders and such brokers and dealers and any other participating
brokers or dealers may be deemed to be "underwriters", within the meaning of the
Securities Act, in connection with such sales. There can be no assurance,
however, that all or any of the shares will be offered by the Selling
Shareholders. The Company knows of no existing arrangements between the Selling
Shareholders and any broker, dealer, finder, underwriter, or agent relating to
the sale or distribution of the shares.

The Company will not receive any of the proceeds of any sales of the shares
by the Selling Shareholders. The Company will bear substantially all expenses of
the offering, including, without limitation, all registration and filing fees,
printing expenses, fees and disbursements of counsel and independent public
accountants for the Company, fees of the NASD, transfer taxes, fees of transfer
agents and registrars, and costs of insurance, if any. All underwriting
discounts, selling commissions, and broker's fees applicable to the sale of any
shares, and fees and expenses of any counsel to the Selling Shareholders, will
be borne by the Selling Shareholders or by such persons other than the Company
as agreed by and among the Selling Shareholders and such other persons.

No dealer, sales person or other individual has been authorized to give any
information or to make any representations not contained in this Prospectus. If
given or made, such information or representations must not be relied upon as
having been authorized by the Company or the Underwriters. This Prospectus does
not constitute an offer to sell, or a solicitation of an offer to buy, the
Common Stock in any jurisdiction where, or to any person to whom, it is unlawful
to make such offer or solicitation. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances, create an implication
that there has not been any change in the facts set forth in this Prospectus or
in the affairs of the Company since the date hereof.

ISSUANCE OF OPTION SHARES

Pursuant to stock option agreements between the Company and certain Selling
Shareholders that were entered into in connection with the acquisition of
Continental Air Tool, Inc. ("Continental"), the Company granted to such Selling
Shareholders, all of whom previously held options to purchase shares of common
stock of Continental, options to purchase an aggregate of 67,134 shares of
Common Stock of the Company (the "Option Shares"). Such options are immediately
exercisable (except for approximately 16% thereof, for an aggregate of 10,741
Option Shares, that are subject to an escrow arrangement and may not become
exercisable in full until March 2000, if at all) at an exercise price of $7.31
per share, and all such options expire on April 25, 2001. Any of the Option
Shares that are not deemed to be effectively registered for

13
<PAGE> 15

issuance upon the exercise of an option (or that may be held immediately
following exercise by a Selling Shareholder who is an affiliate of the Company
under Rule 144), shall be covered by this Prospectus for possible resale by the
Selling Stockholders.

POSSIBLE OFFERINGS BY THE COMPANY

In certain acquisition transactions by the Company where permitted by
applicable securities laws in light of the structure and terms of the particular
transaction, the Company may be able to use this Prospectus to issue registered
shares to the persons who own the acquired businesses. This Prospectus covers
the issuance by the Company of up to 3,740,751 shares ("New Issue Shares") in
connection with such possible transactions or in connection with the provision
of professional, advisory, or other services to the Company by certain third
parties. In any such event, the New Issue Shares would be freely tradable by the
recipients, unless restricted by contractual arrangements negotiated in
connection with the transaction or services, or if a particular recipient were
an affiliate of the Company under Rule 144 of the Securities Act or subject to
resale restrictions as a result of being an affiliate of the acquired business
under applicable provisions of Rule 145 under the Securities Act. (In either
such latter event, the New Issue Shares issued to any such affiliate would be
covered by this Prospectus for possible resale by the affiliate, who would
become, for all such purposes, a Selling Shareholder under this Prospectus.) In
connection with offerings and issuances of New Issue Shares by the Company from
time to time, the Company does not expect to use any underwriter or
broker-dealer to sell the shares on behalf of the Company. In such transactions,
the consideration or proceeds to the Company for the shares would be the
business and assets of the companies it acquired or the services provided by the
third party.

14
<PAGE> 16

PRICE RANGE OF COMMON STOCK

The Company's Common Stock began trading on the New York Stock Exchange
(the "NYSE") under the symbol "IDG" on September 24, 1997. Prior to that time,
there was no trading market for the Common Stock. The following table sets forth
for the periods indicated the high and low sales prices of the Common Stock on
the NYSE.

<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1997
Third Quarter (from September 24, 1997)................... $21 $20 7/16
Fourth Quarter............................................ $23 1/4 $14 9/16
1998
First Quarter............................................. $20 5/16 $15 9/16
Second Quarter............................................ $21 5/16 $15
Third Quarter (through September 15, 1998)................ $15 5/8 $ 5 1/4
</TABLE>

As of September 15, 1998, there were 338 holders of record of the Common
Stock. Investors who beneficially own 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, the Company believes that the actual number of individual
beneficial owners of its Common Stock exceeds 1,700.

DIVIDEND POLICY

The Company has not paid dividends on its Common Stock. The Company
currently intends to retain its future earnings, if any, to finance the growth,
development, and expansion of the Company's business and, accordingly, does not
currently intend to declare or pay any dividends on the Common Stock for the
foreseeable future. The declaration, payment, and amount of future dividends, if
any, will be subject to the discretion of the Company's Board of Directors and
will depend upon the future earnings, results of operations, financial
condition, and capital requirements of the Company, among other factors. Under
Delaware law, the Company is prohibited from paying any dividends unless it has
capital surplus or net profits available for this purpose. In addition, the
Company's loan agreement with The First National Bank of Chicago and other bank
lenders prohibits the payment of dividends if there exists, or would exist as a
result thereof, a default under the loan agreement.

15
<PAGE> 17

SUMMARY FINANCIAL DATA

The following summary financial data as of and for the years ended December
31, 1997, 1996, and 1995 have been derived from audited financial statements of
the Company; the financial data as of and for the years ended December 31, 1994
and 1993, as well as the financial data as of June 30, 1998 and for the six
months ended June 30, 1998 and 1997, have been derived from unaudited financial
statements of the Company. All such financial statements of the Company 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 companies acquired by
IDG to commence its current operations as a combined entity, effective for
accounting purposes as of September 24, 1997 -- to be the historical financial
statements of the Company for all periods prior to September 24, 1997. As a
result, the Company's financial statements, and the following data, reflect the
results of operations and financial condition of B&J and the Pooled Companies
for the periods prior to September 24, 1997; the results of operations and
financial condition of all nine Founding Companies and the Pooled Companies are
reflected in the financial statements and data of the Company for only the
period of time from and after September 24, 1997. Those facts account for a
substantial difference in these financial data as of and for the year ended
December 31, 1997 as compared to prior periods; they make comparisons of the
data among the periods misleading; and they are a further reason that these
historical results are not indicative of the results that the Company may
achieve in the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

16
<PAGE> 18

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

GENERAL

The Company provides flexible procurement solutions for manufacturers and
other users of industrial MROP products, distributing a full line of such
products and providing specialized services to a diverse group of more than
20,000 customers. The Company sells MROP supplies directly from stock using
catalogs or similar methods (stock sales); such sales, on a combined basis, were
$225.1 million and $196.7 million in 1997 and 1996, respectively. The Company
also sells products and services pursuant to supply contracts (normally for a
duration of at least one year) for fixed prices or fixed margins on certain
products or product lines; such supply contracts generated sales, on a combined
basis, of $80.8 million and $81.5 million in 1997 and 1996, respectively.
Pursuant to integrated supply contracts, the Company manages tool cribs and
provides a level of enhanced service to certain customers, often with a
guaranteed minimum reduction in the customer's total MROP costs. The Company
began offering integrated supply contracts in 1995, and revenues from such
contracts, on a combined basis, have grown to $26.3 million in 1997 and $12.1
million in 1996 from $6.3 million in 1995. Total sales for 1997 and 1996 were
$332.2 million and $290.5 million, respectively.

Management expects the upward trend in its integrated supply business and
its specialized services supply business to continue for the foreseeable future,
driven by increasing demand from customers to outsource their MROP procurement
and management functions and for customized MROP procurement solutions.
Integrated supply arrangements are still in the early stages of development, but
management believes such arrangements are becoming increasingly attractive to
customers. IDG has selected integrated supply as a major focus of its operating
strategy. Because start-up costs necessary to design and implement an integrated
supply arrangement are currently expensed as incurred, such contracts typically
have a lower operating margin, in their implementation phase, than the Company's
other principal categories of revenue. Management believes, however, that
margins on these arrangements generally increase over the term of a contract (as
the Company's costs are reduced and savings to the customer increase), and that
integrated supply contracts will become a significant component of the Company's
operating results.

Management believes that the success of the Company's integrated supply and
other specialized services supply contract business will depend in major part on
the Company's utilization of technology to design and implement the MROP
procurement solutions that customers desire. The Company, on a combined basis,
invested over $800,000 in 1996 and $842,000 in 1997 to develop and upgrade its
information systems, including its proprietary Supply Management System and its
internal management information systems in order to expand its capabilities to
successfully and profitably deliver such specialized services to customers. The
Company will continue to commit resources to its technological capabilities in
order to provide superior customer service and achieve internal operating
efficiencies.

Since B&J is deemed to be the acquiring company under provisions of
Securities and Exchange Commission Staff Accounting Bulletin No. 97, the
Company's historical financial information prior to September 24, 1997 reflects
only the operations of B&J, together with the Pooled Companies. Management's
analysis of such information alone would not convey important information about
the Company on a combined basis, or about the historical results of operations
achieved by the other eight Founding Companies whose businesses were also
acquired by the Company as of September 24, 1997. Management has also included,
therefore, its analysis of certain combined financial information of the Company
together with all nine Founding Companies and the Pooled Companies.

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

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION

These discussions may contain certain forward-looking information and
statements concerning the Company's operations, performance, and financial
condition, including, in particular, the likelihood of the Company's success in
developing and expanding its business. These statements are based upon a number
of
17
<PAGE> 19

assumptions and estimates that are inherently subject to significant
uncertainties and contingencies, many of which are beyond the control of the
Company. Actual results may differ materially from those expressed or implied by
such forward-looking statements. Factors that could cause actual results to
differ include, but are not limited to: the availability of attractive
acquisition opportunities, the successful integration and management of acquired
businesses, improvement of operating efficiencies, the availability of working
capital and financing for future acquisitions, the Company's ability to grow
internally through expansion of services and customer bases and reduction of
overhead, seasonality, the continuation of key supplier relationships, the
ability of the Company to compete successfully in the highly competitive and
diverse MROP market, the Company's ability to attract and retain key personnel,
the effects of the Year 2000 issue, and other factors discussed in more detail
under "Risk Factors" elsewhere in this Prospectus.

The timing and magnitude of acquisitions and assimilation costs may also
materially affect results. Accordingly, the operating results for any particular
period are not necessarily indicative of the results that may be achieved for
any subsequent period.

RESULTS OF OPERATIONS -- COMBINED

The following table sets forth certain combined operating data and shows
such data as a percentage of net sales for the periods indicated. These combined
data include the operating results of B&J together with the results of the other
eight Founding Companies and the Pooled Companies, on a combined basis, for the
entire periods presented.

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
----------------------------------- ------------------------------------------------------
1998 1997 1997 1996 1995
---------------- ---------------- ---------------- ---------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales................... $196,401 100.0% $160,660 100.0% $332,169 100.0% $290,486 100.0% $265,444 100.0%
Cost of Sales............... 151,560 77.2 123,679 77.0 255,777 77.0 222,370 76.6 203,728 76.7
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Gross Profit................ 44,841 22.8 36,981 23.0 76,392 23.0 68,116 23.4 61,716 23.3
Selling, General, and
Administrative............ 40,076 20.4 32,002 19.9 67,347 20.3 61,897 21.3 55,957 21.1
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Operating Income............ $ 4,765 2.4% $ 4,979 3.1% $ 9,045 2.7% $ 6,219 2.1% $ 5,759 2.2%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>

These combined operating data for the periods prior to the acquisition and
combination of the Founding Companies by IDG (the "Combination"), effective as
of September 24, 1997, may not be indicative of the Company's post-Combination
operations for several reasons. The Founding Companies operated as separate
privately owned entities until the Combination, and the Pooled Companies
operated as separate entities until their acquisition by the Company. Therefore,
their results of operations reflect varying tax structures, which in turn have
influenced other matters such as owners' compensation. Accordingly, selling,
general, and administrative expenses, among other matters, may not be comparable
among the individual Founding Companies and the Pooled Companies. As a result of
the Combination, the Company has new senior management, incurred implementation
costs of the Combination, and has begun to incur amortization expenses from the
goodwill associated with the Combination. Moreover, these combined operating
data do not represent combined results of operations presented in accordance
with generally accepted accounting principles; rather, for all periods prior to
September 24, 1997, they are only summations of the respective line items from
historical financial information of the individual Founding Companies and the
Pooled Companies.

As a result of the Combination, the Company expects to realize savings from
several sources, including (a) increased volume discounts and rebates from
vendors, (b) consolidation of certain administrative functions, (c) the
reduction in interest payments related to the repayment of certain former
Founding Company debt, and (d) its ability to borrow at lower interest rates
than the Founding Companies. These savings will be offset, to some extent, by
costs related to IDG's holding company structure and costs associated with being
a public company. No such anticipated effect is reflected in the combined
financial information or the following discussion; only results actually
achieved by the Company during the period since September 24, 1997 are
reflected.

18
<PAGE> 20

Six Months Ended June 30, 1998 Compared to June 30, 1997

Net sales increased $35.7 million or 22.2% from $160.7 million for the six
months ended June 30, 1997 to $196.4 million for the six months ended June 30,
1998. Acquisitions contributed $18.9 million in revenues for the period. The
nine Founding Companies experienced a 10.6% internal growth rate over 1997.
Several of IDG's larger customers made large purchases during the first quarter
of 1998.

Cost of sales increased $27.9 million or 22.5% from $123.7 million for the
six months ended June 30, 1997 to $151.6 million for the six months ended June
30, 1998. The cost of sales increase is due to the increase in net sales. As a
percentage of net sales, however, cost of sales increased from 77.0% in 1997 to
77.2% in 1998. The increase in cost of sales as a percentage of net sales is due
to a change in product mix resulting primarily from acquisitions.

Selling, general, and administrative expenses increased $8.1 million or
25.2% for the six months ended June 30, 1997 from $32.0 million in 1997 to $40.1
million in 1998. As a percentage of net sales, selling, general, and
administrative expenses increased from 19.9% in 1997 to 20.4% in 1998. The
increase included $317,000 of non-recurring expenses related to acquisitions.
Excluding these non-recurring expenses, selling, general, and administrative
expenses for the first quarter of 1998 were $39.8 million or 20.2% of net
revenues. In addition, during 1998, the Company incurred increased professional
fees and expenses related to staffing a corporate office and incurred costs
related to being a public company. Excluding non-recurring expenses and
corporate expenses, selling, general, and administrative expenses were 19.2% of
net revenues for the quarter ended June 30, 1998. Part of the decrease in
expenses is a result of the companies using the existing infrastructure to
support increased sales during the six months ended June 30, 1998 as compared to
the same period in 1997. The acquired companies have lower selling, general, and
administrative expenses as a percentage of net revenues.

Operating income decreased $214,000 or 4.3% from $5.0 million for the six
months ended June 30, 1997 to $4.8 million for the six months ended June 30,
1998. As a percentage of net sales, operating income decreased from 3.1% in 1997
to 2.4% in 1998.

1997 Compared To 1996

Net sales increased $41.7 million, or 14.3%, from $290.5 million in 1996 to
$332.2 million in 1997. This increase was attributable, in major part, to an
increase in integrated supply and other specialized services supply contract
sales. In addition, new customers and existing customers increased orders.

Cost of sales increased $33.4 million, or 15.0%, from $222.4 million in
1996 to $255.8 million in 1997, primarily as a result of increased sales during
the latter period. As a percentage of net sales, cost of sales also increased
slightly, from 76.6% to 77.0%, due to a change in product mix and certain large
sales to a few customers at lower margins.

Selling, general, and administrative expenses increased $5.4 million, or
8.8%, from $61.9 in 1996 to $67.3 million in 1997. The increase is attributable
to the higher volume of business, start-up costs associated with new integrated
supply contracts, salary increases, and related benefits. In addition, the
Company incurred increased professional fees and costs associated with
establishing and staffing a corporate office during the 1997 period. As a
percentage of net sales, however, selling, general, and administrative expenses
decreased 1.0% from 1996 to 1997.

Operating income increased $2.8 million, or 45.4%, from $6.2 million in
1996 to $9.0 million in 1997. As a percentage of net sales, operating income
increased from 2.1% in 1996 to 3.1% in 1997.

1996 Compared To 1995

Net sales increased $25.1 million, or 9.4%, from $265.4 million in 1995 to
$290.5 million in 1996. The increase is attributable to an increase in all
revenue categories. In addition, price increases and an acquisition at the end
of 1995 contributed to increased revenues. These factors were offset by the loss
of revenues to one large customer due to a change in their billing arrangement.

19
<PAGE> 21

Cost of sales increased $18.7 million, or 9.1%, from $203.7 million in 1995
to $222.4 in 1996, primarily as a result of increased sales. As a percentage of
net sales, however, cost of sales decreased from 76.7% in 1995 to 76.6% in 1996.
The decrease was primarily due to a higher margin product mix, increased margin
as a result of the change in the billing arrangement with the customer discussed
above, and increased vendor rebates.

Selling, general, and administrative expenses increased $5.9 million, or
10.6%, from $56.0 million in 1995 to $61.9 million in 1996. This increase is
attributable to the higher volume of business, start-up costs associated with
new integrated supply contracts, and salary increases. As a percentage of net
sales, these expenses increased from 21.1% in 1995 to 21.3% in 1996. The
increase was primarily due to higher start-up costs associated with new
specialized services and integrated supply contracts and an increase in
infrastructure including technological upgrades and enhancements needed to
support increased volume.

Operating income increased $460,000, or 18.0%, from $5.8 million in 1995 to
$6.2 million in 1996. As a percentage of net sales, operating income decreased
from 2.2% in 1995 to 2.1% in 1996.

RESULTS OF OPERATIONS -- HISTORICAL

The following table sets forth certain operating data of the Company
(which, pursuant to the requirements of SAB 97, are based on the historical
financial results of B&J and the Pooled Companies for the periods prior to
September 24, 1997, and include the other eight Founding Companies only for the
period from September 24, 1997) and shows such data as a percentage of net sales
for the periods indicated:

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
----------------------------------- ----------------------------------------------------
1998 1997 1997 1996 1995
---------------- ---------------- ---------------- --------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales.............. $196,401 100.0% $ 40,113 100.0% $153,218 100.0% $68,266 100.0% $59,944 100.0%
Cost of Sales.......... 151,560 77.2 30,926 77.1 117,726 76.8 52,774 77.3 45,763 76.4
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Gross Profit........... 44,841 22.8 9,187 22.9 35,492 23.2 15,492 22.7 14,181 23.6
Selling, General, and
Administrative....... 40,076 20.4 7,859 19.6 31,595 20.6 14,649 21.5 13,281 22.2
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Operating Income....... $ 4,765 2.4% $ 1,328 3.3% $ 3,897 2.6% $ 843 1.2% $ 900 1.4%
======== ===== ======== ===== ======== ===== ======= ===== ======= =====
</TABLE>

Six Months Ended June 30, 1998 Compared to June 30, 1997

Net sales increased $156.3 million from $40.1 million for the six months
ended June 30, 1997 to $196.4 million for the six months ended June 30, 1998.
This was primarily due to the contributed revenue of the other eight Founding
Companies and the $23.7 million in acquisition revenue during the first two
quarters of 1998.

Cost of sales increased $120.7 million from $30.9 million for the six
months ended June 30, 1997 to $151.6 million for the six months ended June 30,
1998. The increase in cost of sales as a percentage of net sales is due to the
higher cost of sales percentage of the Founding Companies and the acquired
companies.

Selling, general, and administrative expenses increased $32.2 million for
the six months ended June 30, 1997 from $7.9 million in 1997 to $40.1 million in
1998, again primarily attributable to the effect of the SAB 97 accounting for
the Combination and the acquisitions. As a percentage of net sales, selling,
general, and administrative expenses increased from 19.6% in 1997 to 20.4% in
1998. Expenses included $317,000 of non-recurring expenses related to
acquisitions. Excluding these non-recurring expenses, selling, general, and
administrative expenses for the six months ended June 30, 1998 were $39.8
million or 20.2% of net revenues. In addition, during 1998, the Company incurred
increased professional fees and expenses related to staffing a corporate office
and incurred costs related to being a public company. Excluding such corporate
expenses, selling, general, and administrative expenses were 19.1% of revenues.
The decrease in selling, general, and administrative expenses as a percentage of
net revenues is primarily due to these costs being lower as a percentage of net
sales for the acquired companies.

Operating income increased $3.4 million from $1.3 million for the six
months ended June 30, 1997 to $4.8 million for the six months ended June 30,
1998, reflecting the effects of the Combination and the acquisitions. As a
percentage of net sales, however, operating income decreased from 3.3% in 1997
to 2.4% in 1998.

20
<PAGE> 22

1997 Compared To 1996

Net sales increased $84.9 million, or 124.3%, from $68.3 million in 1996 to
$153.2 million in 1997. This was due primarily to the contributed revenue of the
other eight Founding Companies following the Combination on September 24, 1997,
but it also reflects increased international sales and sales to a large customer
by B&J during the period.

Cost of sales increased $64.9 million, or 122.9%, from $52.8 million in
1996 to $117.7 million in 1997. The increase is primarily due to the substantial
increase in sales, which reflected primarily the effect of the Combination
discussed above. As a percentage of net sales, cost of sales decreased from
77.3% in 1996 to 76.8% in 1997. The decrease was primarily due to a higher
margin product mix and increased vendor rebates.

Selling, general, and administrative expenses increased $16.9 million, or
116.4%, from $14.6 million in 1996 to $31.6 million in 1997, which reflected
primarily the effect of the Combination discussed above. Selling, general, and
administrative expenses decreased from 21.5% to 20.6%. B&J's selling, general,
and administrative expenses as a percentage of net sales decreased from 1996 to
1997 due to the ability of B&J to use its existing corporate overhead levels to
accommodate increased sales.

Operating income increased $3.1 million, or 157.0%, from $.8 million in
1996 to $3.9 million in 1997. Operating income as a percentage of net sales
increased, however, from 1.2% in 1996 to 2.6% in 1997.

1996 Compared To 1995

Net sales increased $8.4 million, or 14.1%, from $59.9 million in 1995 to
$68.3 million in 1996. This increase was attributable to increased sales to
B&J's aerospace and international customers.

Cost of sales increased $7.0 million, or 15.5%, from $45.8 million in 1995
to $52.8 million in 1996. As a percentage of net sales, cost of sales increased
from 76.4% in 1995 to 77.3% in 1996. The increase was primarily due to a change
in product mix.

Selling, general, and administrative expenses increased $1.3 million or 1%,
from $13.3 million in 1995 to $14.6 million in 1996. As a percentage of net
sales, however, selling, general, and administrative expenses decreased from
21.5% in 1995 to 20.8% in 1996. The decrease was primarily due to the ability to
support increased sales volume with the existing infrastructure.

Operating income was basically unchanged from 1995 to 1996. Operating
income as a percentage of net sales decreased from 1.4% to 1.2% in 1996.

YEAR 2000

The Company has hired outside consultants to assess the impact of Year 2000
on its information technology ("IT") systems and its non-systems IT functions
and processes involving embedded chip technology. In addition, the Company hired
in August 1998 a Chief Information Officer to direct its IT functions and
activities, including spearheading its Year 2000 inventory and correction
efforts.

All inventories of IT systems of the Company as of September 1, 1998 are
substantially complete and in the process of being validated. The Company found
date deficiencies in the IT systems of several of its subsidiaries, and has
replaced one system and is in the process of replacing the other deficient
systems. The Company is conducting an inventory of its non-systems IT functions
and processes. Overall, project plans call for the completion of the correction
of Year 2000 problems in both IT systems and non-systems IT functions and
processes of the Company during 1999. The Company has surveyed its banks,
payroll, and benefits vendors and administrators to determine the status of
their Year 2000 compliance programs and has received (or reasonably expects to
receive) written representations from those vendors that their systems will be
Year 2000 compliant. In addition, the Company is in the process of surveying
customers with whom it engages in electronic commerce ("e-commerce") to
determine the status of their Year 2000 compliance programs.

The Company currently believes that its most reasonably likely worst case
Year 2000 scenario is the inability of its IT system to interface with the IT
systems of its subsidiaries or its customers with whom it engages in e-commerce.
In the first scenario, the Company's ability to effectively consolidate the
affected subsidiary's financial condition and results of operations with the
Company's other subsidiaries could result in

21
<PAGE> 23

incomplete financial reporting. In the second scenario, the Company's manner of
receiving orders from customers that order electronically would be adversely
affected.

The Company is developing contingency plans to ensure that it can address
aspects of these and other of its operational systems that could be affected by
Year 2000 issues. For example, should the Company's customers' e-commerce
systems fail to integrate with the Company's systems due to date deficiencies or
should the Company's IT links to its subsidiaries be disrupted, the Company will
utilize telephone or facsimile communication.

Based on the Company's Year 2000 work to date, the Company's total costs
(historical plus estimated future costs) of addressing Year 2000 issues are
currently estimated to be in the range of $250,000 to $500,000, of which less
than $100,000 has been incurred. Such amounts do not include the purchase and
implementation by the Company of an enterprise-wide IT system, expected to be
completed in 1999, which the Company expects to be Year 2000 compliant. The
Company's purchase of the enterprise-wide IT system is part of its continuing
effort to implement system-wide controls and efficiencies and standardize
processes, rather than being a result of Year 2000 issues.

For further discussion regarding the Year 2000, see disclosure under "Risk
Factors" in the Company's Form 10-K for the year ended December 31, 1997.

LIQUIDITY AND CAPITAL RESOURCES

As of July 31, 1998, the Company had $3.3 million of cash and cash
equivalents, $69.7 million of working capital, and an aggregate of $71 million
of borrowing capacity under a revolving credit facility for $75 million with a
syndicate of commercial banks ("the Credit Facility"). At December 31, 1997,
these amounts were $31.4 million, $77.6 million, and $75 million, respectively.

The Credit Facility has a three-year term from December 11, 1997, may be
used for operations and acquisitions, and provides $5 million each for
swinglines and 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 selected by the Company from time to time. The Company incurs a fee
between 20 and 30 basis points on the average daily unused capacity during the
term. The Credit Facility is secured by the stock of all the subsidiaries of the
Company.

The principal operating capital requirements of the Company are for
inventory and accounts receivable and purchasing and upgrading property and
equipment. The Company also has implemented an acquisition program to pursue
strategic consolidation opportunities in the fragmented MROP industry, and while
it expects to fund such acquisitions primarily through the issuance of stock,
the Company expects that it will also use cash in connection with certain of its
acquisitions. The Company believes that it will have sufficient cash from
working capital, cash flow from operations, and borrowings, including use of
available capacity under the Credit Facility, to fund both its current
operations and anticipated internal expansion, as well as its acquisition
program for at least the next year.

On an historical basis (consistent with the requirements of SAB 97), net
cash provided by (used in) operating activities for fiscal years 1997, 1996,
1995 and the six months ended June 30, 1998 and 1997 was ($1.8 million),
($124,000), $527,000, ($366,000), and $899,000, respectively. The change in the
fiscal years was principally due to increases in working capital requirements
for inventory and accounts receivable, and changes in accrued liabilities. The
change for the six month period was principally due to increased working capital
requirements.

For fiscal years 1997, 1996 and 1995 net cash provided by (used in)
investing activities was $1.7 million, $26,000 and ($567,000), respectively. On
an historical basis, net cash provided by (used in) investing activities for
fiscal years was primarily attributable to cash of the other eight Founding
Companies acquired in the Combination, capital expenditures, and proceeds from
the sale of short-term investments. For the six months ended June 30, 1998 and
1997, net cash provided by (used in) investing activities was ($13,641,000) and
($221,000), respectively. The increase for the 1998 period was primarily due to
cash used for acquisitions.

22
<PAGE> 24

On an historical basis, net cash provided by financing activities for
fiscal years 1997, 1996 and 1995 was $30.0 million, $418,000 and $483,000,
respectively. The increase in 1997 was principally due to the completion of the
Company's initial public offering on September 29, 1997 for $56.6 million of net
proceeds and the use of a portion of those proceeds for the repayment of
substantially all amounts outstanding under existing lines of credit of the
Founding Companies. On an historical basis, net cash provided by (used in)
financing activities for the six months ended June 30, 1998 and 1997 was
($11,948,000) and ($32,000), respectively. The change was primarily due to the
repayment of lines of credit of certain acquired companies.

23
<PAGE> 25

BUSINESS

GENERAL

Industrial Distribution Group, Inc. (the "Company" or "IDG") was formed in
February 1997 to create a leading, nationwide supplier of cost-effective,
flexible procurement solutions for manufacturers and other users of maintenance,
repair, operating, and production ("MROP") products. The Company distributes a
full line of industrial MROP products, emphasizing its specialized expertise in
product applications. The Company's principal product categories include
abrasives, cutting tools, hand and power tools, and coolants, lubricants, and
adhesives. Utilizing its proprietary computerized Supply Management System, the
Company's application and product specialists are able to analyze a customer's
acquisition, possession, and application processes for MROP supplies in order to
design programs to streamline the processes and reduce associated costs. Such
programs may include improving a customer's production and procurement
processes, standardizing MROP products, reducing the number of suppliers, or
developing integrated supply arrangements that outsource to the Company some or
all of a customer's MROP procurement and management functions.

In September 1997, IDG completed its initial public offering of Common
Stock and, at the same time, acquired the following nine industrial distribution
companies: Associated Suppliers, Inc., B&J Industrial Supply Company, Cramer
Industrial Supplies, Grinding Supplies Company, J.J. Stangel Co., Shearer
Industrial Supply Company, Slater Industrial Supply Company, The Distribution
Group, Inc. (formerly known as Industrial Distribution Group, Inc.), and
Tri-Star Industrial Supply, Inc., collectively referred to as the "Founding
Companies". Through September 15, 1998, the Company had completed the
acquisition of 13 additional companies: Continental Air Tools, Inc., Northern
Tool & Supply, Inc., E.C. Blackstone Company, Refco, Inc., Hawley Industrial
Supplies, Inc., The New England Group Industrial Distributors, Inc., and
Industrial & Tool Suppliers, LLC, Buford Bros., Inc., Knox Industrial Supplies,
Inc., LD Supply, Inc., Cardinal Machinery, Inc., Petry & Morrow, Inc., and JM
Tool & Supply, Inc.

The Company intends to establish a nationwide presence, with MROP product
and service capability in all or most of the top 50 U.S. industrial markets.
Currently, the Company has 73 operating locations in 64 cities, along with four
small facilities abroad. The Company's more than 29,000 customers include a
diverse group of major national and international corporations, including
AlliedSignal, Black & Decker, Boeing, Chrysler, General Motors, Hoechst
Celanese, PPG Industries, and Shell Oil, as well as small and large local and
regional businesses. On a pro forma combined basis, the Company had net sales of
approximately $332.2 million for the year ended December 31, 1997.

INDUSTRY OVERVIEW

Manufacturers, processors, and other producers of industrial, commercial,
or consumer products have a continual need for a broad range of industrial MROP
products. Many of these products -- such as drill bits, sandpaper, and saw
blades -- 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.

processes in search of comprehensive MROP solutions, such as integrated supply.
The Company believes that it will benefit from these industry trends.

BUSINESS STRATEGIES

Operating Strategy

Flexible Procurement Solutions; Integrated Supply. The Company believes
the key to serving customers in the changing MROP market is the ability to
design and implement customized flexible procurement solutions for acquiring,
possessing, and applying MROP products to satisfy each customer's particular
needs and achieve its cost reduction objectives. The spectrum of services
necessary to deliver such solutions is broad. For customers who are not yet
prepared to outsource their entire MROP procurement and management functions,
the Company provides a range of options from which customers may select the
appropriate types and level of service. For customers who desire total
procurement solutions designed and implemented through a single distributor, the
Company offers its "fully integrated supply" programs, which permit customers to
outsource to the Company the entire MROP procurement and management function,
including ownership by the Company of inventory in the customer's on-site MROP
supply room (or "tool crib"). The Company's services include, as needed by the
customer: assessing a customer's total procurement costs for its MROP
requirements (comprised of product ordering, carrying, management,
administrative, and other overhead costs); re-engineering procurement and
production processes; standardizing products; reducing the number of
distributors, with a corresponding reduction in purchase orders and invoices
processed by customers; reducing the numbers of products used by the customer;
acquiring supplies on an "on-time" basis; managing and supplying MROP items
using the Supply Management System, the Company's proprietary software for the
management of integrated supply sites; managing and staffing customers' tool
cribs; bar coding products in tool cribs to facilitate ordering and to track and
control consumption by employee, product, or cost center; and generating a
variety of customer-designed management reports.

25
<PAGE> 27

acquisition candidates. The Company believes that its decentralized management
philosophy will result in better customer service by allowing local management
the flexibility to implement policies and make decisions based on first-hand
assessments of the needs and desires of individual customers.

Commitment to Technology. The Company's proprietary computerized Supply
Management System and its internal management and information systems will be
instrumental in delivering high quality customer service and in reducing the
Company's operating costs. The Supply Management System is designed to allow a
customer to order products directly from the Company, set internal purchase
control limits for its personnel, coordinate the management of MROP items within
its tool cribs, run customized reports, and perform numerous other functions
that facilitate the procurement process or reduce its costs. When fully
implemented, the Company's internal management and information systems will
track all of its products nationwide and will enable a customer and the
Company's sales personnel anywhere to determine the availability of products in
stock on a real time basis and to evaluate alternative products and pricing. The
Company is committed to continually assessing and implementing technological
innovations that will enhance its ability to serve customers and improve its
operating results. The Company will seek to use technology to reduce its order
processing and receiving costs, by means such as product bar coding, electronic
funds transfer ("EFT"), electronic data interchange ("EDI"), and vendor managed
inventory ("VMI") modules to facilitate on-time procurement of products, without
the administrative expense and inconveniences of the traditional exchange of
purchase orders and invoices.

Growth Strategy

Acquisitions in Select Geographic Markets. The Company has launched an
aggressive acquisitions program to take advantage of consolidation opportunities
that management believes exist within the highly fragmented industrial MROP
market. The Company will continue to focus primarily on industrial MROP markets
in the United States, and has initially focused on expanding its existing
markets as well as those major markets where the Company does not presently
operate. The Company will continue to seek to acquire successful MROP
distribution and related businesses that are large enough to establish a
significant initial presence and to provide for future Company expansion in the
particular market. The Company will continue to seek to retain the management of
acquired businesses.

"Hub and Spoke" Expansion Strategy. The Company is utilizing a "hub and
spoke" approach both for acquisitions and internal expansion. In establishing a
"hub" location, the Company generally will assess both the volume of MROP
utilization in the geographic area and the ready availability of transportation
and warehouse facilities to permit the Company to develop and support smaller
operations in surrounding regions through centralization of some functions at
the hub location. Upon establishing a hub, the Company will seek to acquire or
open additional smaller operations, or "spokes", in the surrounding geographic
area to increase market penetration or capitalize on operating efficiencies
available through the hub.

markets. The Company plans initially to extend its offering of flexible
procurement solutions to foreign manufacturing facilities of its domestic
customers to develop a base for potentially expanded international operations.
The Company has been active in the People's Republic of China since 1988,
establishing sales offices in Beijing (1994) and Shanghai (1996), and in Mexico
since 1997.

FLEXIBLE PROCUREMENT SOLUTIONS; INTEGRATED SUPPLY

The ability to deliver customized flexible procurement solutions that are
specially designed to reduce a particular customer's MROP costs is one of the
fundamental strengths of the Company. The spectrum of services necessary to
design and implement such solutions for customers in the changing industrial
MROP market is broad and must encompass all three phases of a customer's MROP
cycle -- acquisition, possession, and application. The Company offers the entire
spectrum of services in order to assure its ability to design and implement
procurement solutions that meet each particular customer's MROP requirements.

Some customers may require nearly the entire spectrum of services -- a
so-called "fully integrated supply" relationship, where the Company essentially
forms a strategic alliance with the customer to procure, manage, and apply MROP
products at the customer's site and to share the benefits of the cost reductions
achieved. The Company's fully integrated supply relationships, which are not
standardized and vary from customer to customer, usually include licensing IDG's
proprietary Supply Management System to the customer; gaining access to plant
floors to re-engineer procurement and production processes and standardize MROP
products; coordinating the purchase of multiple MROP product lines; providing
consolidated invoices and customized management reports via a direct network
link to customers; and managing and staffing tool cribs. In addition, in a fully
integrated supply relationship, the Company, rather than the customer, generally
owns the inventory in the tool crib. The Company believes that the nature of
integrated supply relationships will continue to evolve, and it will seek to
maintain the capability to provide whatever level of integration its customers
may require over time.

In a fully integrated supply relationship, the Company often guarantees a
minimum annual reduction in the customer's total MROP costs. The Company
believes it can achieve such guaranteed cost reductions through its focused and
ongoing analysis and re-engineering of a customer's production processes to
reduce the variety and number of MROP products used by the customer. In addition
to the contractually guaranteed cost reductions, the Company often achieves
additional costs 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 the Company saves additional costs for a customer through process
improvements, the customer usually shares the additional savings with the
Company. The Company believes that, for appropriate customers, a fully
integrated supply arrangement also has other benefits. For example, through the
use of the Company's 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.

Other customers require less comprehensive solutions, and the Company has
the flexibility to design and implement only those services needed by the
customer. In addition to selections from the services described for fully
integrated supply arrangements, these specialized services may include any one
or more of the following: 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 EDI system to
enable the customer to order products from its own location electronically
without contacting the Company 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 services, as needed to respond to a
particular customer's MROP requirements, can be designed and implemented to
achieve the desired solution.

At December 31, 1997, the Company had in place 18 fully integrated supply
arrangements with customers covering 24 sites, and supply contracts for
specialized services with over 250 customers.

27
<PAGE> 29
PRODUCTS

The Company offers a full line of industrial MROP products, stocks specific
items for regular customers, and can satisfy virtually any requirement a
customer may have for an MROP application or service. The Company's principal
categories of products include abrasives, cutting tools, hand and power tools,
coolants, lubricants, and adhesives, among others. The Company will be able to
offer significant depth and breadth in its core product lines to customers
throughout its nationwide operations, which will distinguish it from most of its
present competitors. The Company's products may be ordered electronically, by
telephone, by mail, or by facsimile. The Company will at all times seek to
provide its customers with the most convenient method of selecting and ordering
products, which in the future may include paper and electronic catalogs,
Internet commerce, and other publications.

The Company's offering of specific products from multiple manufacturers at
different prices and quality levels permits the Company 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, it would be inefficient and more costly
to purchase the top-of-the line product that is designed for a requirement of
drilling 10,000 holes. The Company's application and product specialists 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.
The Company believes these factors will significantly enhance its volume of
repeat business, and they are an integral part of the Company's overall customer
costs reduction and total procurement solution.

The following table sets forth the MROP products offered by the Company,
based on the Industrial Distribution Association product categories, describes
typical products in each category, and presents the percentage of the Company's
aggregate revenues from sales of the product category for 1997 (including the
Pooled Companies):

<TABLE>
<CAPTION>
% OF
AGGREGATE
PRODUCT CATEGORY TYPICAL PRODUCTS REVENUE
- ---------------- ---------------- ---------
<S> <C> <C>
Abrasives.......................... Grinding Wheels, Sanding Belts, 18.0%
Discs, Sheets or Rolls
Cutting Tools...................... Drills, Taps, Carbide Tools, End 17.6%
Mills
Hand Tools......................... Wrenches, Socket Sets, Screw 11.3%
Drivers, Hammers
Power Tools........................ Air and Electric Drills, Air 10.8%
Compressors, Impact Wrenches,
Screwdrivers
Maintenance Equipment & Supplies... Hydraulic Tools, Paint, Lubrication 6.3%
Equipment
Coolants, Lubricants, and
Adhesives........................ Metal Cutting Coolants, Aerosols, 5.9%
Industrial Adhesives
Material Handling Equipment........ Hoist, Slings, Chain, Shelving, 5.4%
Casters
Safety Products.................... Gloves, Signs, Absorbents, Glasses 3.9%
Contractor Supplies................ Powder-Actuated Tools, Ladders, 2.0%
Shovels
Machine Tools & Accessories........ Milling Machines, Work Holding 1.6%
Vises, Tool Holders
Fluid Power........................ Hydraulic and Pneumatic Valves, 1.6%
Cylinders
Fasteners.......................... Socket Screws, Hex Screws, Anchors 1.4%
Electrical......................... Fuses, Electrical Switches, Controls 1.3%
Saw Blades......................... Band, Hack, Hole, Jig Saw Blades 1.2%
Tapes.............................. Masking, Filament and Duct Tape 1.2%
Quality Control Products........... Electronic Calipers, Micrometers 0.9%
Tool & Die Supplies................ Ground Stock, Drill Rod, Die Sets 0.9%
Power Transmission Equipment....... Belts, Drives, Bearings, Gears, 0.8%
Pulleys
Brushes............................ Wire Wheel, Floor Brooms 0.6%
</TABLE>

28
<PAGE> 30

<TABLE>
<CAPTION>
% OF
AGGREGATE
PRODUCT CATEGORY TYPICAL PRODUCTS REVENUE
- ---------------- ---------------- ---------
<S> <C> <C>
Welding Equipment & Supplies....... Welders, Weld Rod 0.5%
Industrial Pipe, Valves &
Fittings......................... Pipes, Valve, Fittings 0.4%
Industrial Hose.................... Air Hose, Water Hose 0.4%
Metal Goods........................ Angle Iron, Conduit 0.1%
Other Products..................... Special Order Items and 5.9%
Miscellaneous
------
Total............................ 100%
======
</TABLE>

In addition to maintaining over 100,000 SKUs in stock, the Company often
maintains supplies of special items for regular customers. Moreover, the Company
is able to supply virtually any special order MROP item. In order to achieve
costs savings for the Company and its customers, the Company periodically
reviews its special order activities to identify items ordered with sufficient
frequency to warrant inclusion in the Company's stock.

The Company obtains its products from approximately 17,000 vendors. During
1997, only one vendor provided as much as 10% of the products sold by the
Company, and no other vendor provided more than 3%. The Company believes it is
not materially dependent on any one vendor or small group of vendors.

The Company ships products anywhere in the world in the time frame required
by the customer. To facilitate such "on time" delivery of the Company's
products, the Company stores its stock MROP products primarily in warehouses at
various locations across the United States. See "-- Properties".

CUSTOMERS

The Company's customers, who number over 29,000, include a broad range of
industrial, commercial, and institutional users of MROP products, from
one-person machine shops to national and multinational corporations such as
AlliedSignal, Black & Decker, Boeing, Chrysler, General Motors, Hoechst
Celanese, PPG Industries, and Shell Oil. For 1997, the Company sold products to
over 840 customers who purchased at least $50,000 of products, and no single
customer accounted for as much as 5% of the Company's net sales.

The Company will continue to serve a large number and wide variety of
customers, as part of its planned growth and nationwide expansion strategy.
Management does expect, however, that the Company will place special emphasis on
marketing and sales of core product categories to mid- to large-sized users of
MROP products who require the value-added benefits of the Company's flexible
procurement solutions.

SALES AND MARKETING

The Company has approximately 275 outside sales representatives, 315 inside
sales/customer service representatives, and 27 application and product
specialists. Most of the inside sales/customer service representatives support
the outside sales representatives and are responsible for certain types of
customer service contacts and order entry. The application and product
specialists call on designated customers and are responsible for designing and
presenting the Company's flexible procurement solutions to those customers and
providing technical support with respect to certain products. These specialists
are highly trained individuals who build relationships with customers and assist
them in reducing total procurement costs and improving production processes.
Once the Company's internal operating systems are integrated, its entire sales
force will have access to customers' historic product preferences, order values,
and inventory levels for all of the products stocked by the Company. The sales
force will also be able to access billing information and plant and industry
information, and to input product orders. The Company has invested significant
resources in developing these sales force automation systems and databases. The
databases will be a key component of the Company's marketing strategy and can
offer the Company an ongoing competitive advantage in increasing sales to
existing customers and attracting new customers.

The Company has centralized the administration of Company-wide training
programs and will provide intensive ongoing TQM training programs for all
Company personnel. In addition, each of the Company's operating subsidiaries
provides regular training programs for its sales personnel and special training
programs for any products distributed only in its market area. Each operating
subsidiary also maintains a technical

29
<PAGE> 31

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.

PROPERTIES

As of September 15, 1998, the Company owned 10 properties and leased 63
properties in 64 cities in the United States for its warehouse, sales, and
administrative offices. The Company also leases four properties in four cities
in other countries. Certain property locations contain multiple operations such
as a warehouse and a sales office. The facilities range in size from 550 square
feet to 68,064 square feet. Leases for the facilities expire at various periods
between 1998 and 2009. The aggregate annual lease payments for real properties
in 1997 were approximately $1,185,000 (including the Pooled Companies).

The Company's principal corporate offices are located at 2500 Royal Place,
Tucker, Georgia, where the Company is expanding a portion of TDG's principal
operating location to accommodate its executive offices. The Company also leases
office space in Chevy Chase, Maryland for use by its Chairman and Chief
Executive Officer as a satellite office.

The Company believes that its facilities are adequate for its needs and
does not anticipate inordinate difficulty in replacing such facilities or
opening additional facilities, if needed.

MANAGEMENT INFORMATION SYSTEMS

The Company will develop, maintain, and utilize computerized management and
information systems, including its internal management and information systems
and its proprietary PC-based Supply Management System for customer product
procurement and management. Both of these systems are important elements of the
Company's ability to meet customers' requirements for increasing levels of
individualized total MROP procurement solutions and also to achieve the
Company's desired level of operating efficiencies. The Company utilizes its
proprietary Supply Management System in providing flexible procurement solutions
for customers. In addition, certain other of its acquired businesses have
internal information systems that allow centralized management of key functions,
including communication links between warehouse and sales offices, inventory and
accounts receivable management, purchasing, pricing, sales and distribution, and
the preparation of periodic operating control reports that provide concise and
timely information regarding key aspects of its business.

In connection with developing its internal Company-wide systems, the
Company is drawing upon the best features of the existing systems that have been
utilized by its acquired businesses. Once these systems are integrated, certain
of the information systems will operate over a wide area network, and the
real-time information system will allow each warehouse and sales center to share
information and monitor daily progress relating to sales activities, credit
approval, inventory levels, stock balancing, vendor returns, order fulfillment,
and other measures of performance. In addition, the Company's systems will
enable it to automatically purchase inventory from certain vendors based on
projected customer ordering models.

COMPETITION

The industrial MROP products industry is highly competitive and features
numerous distribution channels, including: national, regional, and local
distributors; direct mail suppliers; large warehouse chains; hardware stores;
and manufacturers' own sales forces. Many of the Company's competitors are small
enterprises who sell to such customers in a limited geographic area, but the
Company also competes against several large MROP distributors that have
significantly greater resources than the Company. Certain of the Company's
competitors sell identical products for lower prices than those offered by the
Company. Management believes, however, that the Company's ability to compete
effectively is dependent primarily upon its ability to respond to the needs of
its customers through quality service and product diversity and availability.
Management believes the Company's operating and growth strategies will yield
operating efficiencies that enhance its ability to compete successfully for the
types of customers it desires.

30
<PAGE> 32

PERSONNEL

The Company had approximately 1,375 full-time and 40 part-time associates
as of July 31, 1998. Eleven of the Company's associates are employed pursuant to
a collective bargaining agreement with local unions affiliated with the
International Brotherhood of Teamsters. Management believes that the subsidiary
that has been employing these persons pursuant to that contract enjoys good
relations with these associates, and has not experienced work stoppages.
Management believes the Company's relations with all of its associates is good.

LEGAL MATTERS

On November 18, 1996, Milliken & Company ("Milliken"), a textile
manufacturer and customer of TDG, filed suit against a manufacturer of an
industrial product and TDG in the Superior Court of Troup County, Georgia, Civil
Action No. 96-CV-964. Milliken claims that a product sold to it by TDG as a
distributor of the defendant-manufacturer was defective and caused a fire,
severely damaging Milliken's textile manufacturing plant in LaGrange, Georgia.
Milliken alleges damages of $500 million against the defendants. TDG has denied
any liability, and its insurance carrier is vigorously defending the lawsuit on
its behalf. While the damages alleged by Milliken are exceptional in amount, the
inclusion of the distributor of a product, along with its manufacturer, as a
defendant in an action for alleged product defectiveness is unexceptional. The
litigation is in discovery, and while it is not possible to predict with
accuracy the outcome of any such litigation matter, the Company believes that
its insurance, which provides for $12 million of coverage, will be adequate to
cover any loss to Predecessor-IDG that might result from the lawsuit.

On December 22, 1997, TDG brought an action in DeKalb County Superior
Court, Georgia, File No. 97-14388-4, against a former shareholder, Alvis J.
Waite, under the Georgia dissenters' rights provisions of the Georgia Business
Corporation Code (the "GBCC"). On July 24, 1998, the Dekalb County Superior
Court issued an order transferring the case to the Superior Court of Fulton
County. Mr. Waite, as a shareholder of TDG, had exercised his rights pursuant to
the GBCC to dissent from the merger of TDG with the Company. In accordance with
the GBCC, TDG offered to pay Mr. Waite $4.2 million for his interest in TDG. Mr.
Waite rejected that offer and demanded payment of $9 million. TDG brought this
action to seek a judicial determination of the value of Mr. Waite's interest in
TDG as of the time of the merger. The proceeding is in discovery, and it is not
possible to predict the outcome at this time.

31
<PAGE> 33

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

Certain information as of September 15, 1998 regarding the directors and
executive officers of the Company is set forth in the following table and
paragraphs.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Martin S. Pinson(1)(3).......................... 52 Chairman of the Board, Chief Executive Officer
and President
Jack P. Healey.................................. 39 Senior Vice President, Chief Financial Officer,
and Secretary
Thomas W. Aldridge, Jr.......................... 51 Senior Vice President
David K. Barth.................................. 54 Director
William J. Burkland............................. 36 Director; Vice President of B&J
William R. Fenoglio(1)(2)(3).................... 58 Director
William T. Parr(2)(3)........................... 61 Director
George L. Sachs, Jr.(1)......................... 57 Director; President of Tri-Star
Richard M. Seigel(2)(3)......................... 51 Director
Andrew B. Shearer............................... 35 Director; President of Shearer
Douglass C. Smith(1)............................ 57 Director; Chairman and Chief Executive Officer
of TDG
</TABLE>

- ---------------

(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee

Mr. Pinson joined the Company in June 1997 as its Chairman and Chief
Executive Officer. He became President of the Company in August 1998. Prior to
joining the Company, Mr. Pinson had served as Executive Vice President (from
inception) and Chief Financial Officer (from inception to 1995) of U.S. Office
Products Company, an international office products supplier to corporate,
commercial, and industrial customers, which engaged in a consolidation of office
products suppliers and which he co-founded in 1994. From 1991 to 1995, Mr.
Pinson served as President of Pinson and Associates, a Washington, D.C.-based
investment, legal, and consulting services firm primarily serving development
stage companies. From 1973 to 1990, Mr. Pinson was Senior Vice President and
Secretary of Greater Washington Investors, Inc., a publicly-owned venture
capital investment company, where he specialized in developing investment
strategy and locating new investment opportunities. He received his
undergraduate degree from Union College and his law degree from Georgetown
University.

Mr. Healey joined the Company in June 1997 as Vice President, Chief
Financial Officer, and Secretary and was named Senior Vice President in May
1998. Prior to joining the Company, Mr. Healey was the partner in charge of
assurance services (since 1983) for Miller Ray Healey & Houser, a regional
accounting firm and member of the SEC practice section of AICPA, during which
time he served as auditor for TDG. Prior to joining that firm, Mr. Healey was a
senior auditor with the international accounting firm of Ernst & Young. 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 the Company in August 1998 as Senior Vice President.
Prior to joining the Company, Mr. Aldridge served (since 1991) as Senior Vice
President, Vendor Relations, of Affiliated Distributors, a purchasing
organization for industrial distributors. From 1987 through 1990, Mr. Aldridge
served as Vice President -- Sales of Bauer Corporation, a manufacturer of
industrial ladders and personal access equipment. From 1970 through 1987, he
held various management positions with AT&T, a telecommunications company. Mr.
Aldridge received his undergraduate degree from the University of Georgia.

Mr. Barth is the President of Barth Smith Company, an investment and
management consulting firm specializing in strategy, marketing, operating and
executive staffing issues associated with various distribution channels, which
he founded in 1991 and which assisted the Company with its formation in 1997.
Prior to that

32
<PAGE> 34

time, he served as Vice President, Planning and Development, from 1985 to 1990,
and Treasurer, from 1979 to 1984, of W.W. Grainger, Inc., a national distributor
of maintenance, repair, and operating supplies and related information to
commercial, industrial, contractor, and institutional customers. Mr. Barth also
served as Treasurer, Financial Services Group, from 1975 to 1979, and Manager,
Treasury Operations, from 1972 to 1975, of Borg-Warner Corporation, a
multinational diversified manufacturing, finance, and services company. Mr.
Barth received his undergraduate degree from Knox College in Galesburg,
Illinois, and his Masters in Business Administration from the University of
California at Berkeley.

Mr. Burkland is a co-founder of the Company. Mr. Burkland has served since
1994 as the Vice President of Finance and Controller of B & J Industrial Supply
Company. From 1992 to 1994, Mr. Burkland served as B & J's Director of
International Sales, during which he initiated, managed, and expanded B & J's
international business. Mr. Burkland received his undergraduate degree in
business administration from the University of Washington.

Mr. Fenoglio served as the President and Chief Executive Officer of Augat,
Inc., a manufacturer of connector products, from 1994 to 1996. Prior to that
time, Mr. Fenoglio served as President and Chief Executive Officer (1991 to
1994) and Chief Operating Officer (1985 to 1991) of Barnes Group, Inc., a
diversified manufacturer and distributor which owns Bowman Distribution Company.
From 1961 to 1984, Mr. Fenoglio was employed by General Electric Corporation and
served as the Vice President and General Manager of the Component Motor Division
from 1981 to 1984. Mr. Fenoglio is currently a director of the Southern New
England Telecommunications Corporation, Southern New England Telephone Company,
and Standex International, Inc., and he has served as Chairman of the Board of
Connecticut Business & Industry Association. Mr. Fenoglio received his
undergraduate engineering degree from Rose Hulman Institute of Technology and
completed the Advanced Executive Program at Northwestern University's J.L.
Kellogg Graduate School of Management.

Mr. Parr has served as Vice Chairman and a director of J. Smith Lanier &
Co., an insurance placement company, since 1980. He currently serves as a
director of ITC Holding Company, Inc. and several of its subsidiaries, including
ITC Services Co., Inc. (a management services company), Valley Telephone,
InterCall, Inc. (a conference calling service provider), and Globe
Telecommunications, Inc. (a non-regulated telecommunications provider). He also
serves as a director of AvData Systems, Inc. and ITC DeltaCom, Inc. Mr. Parr
received his undergraduate degree in mathematics from Georgia State University.

Mr. Sachs is a co-founder of the Company. Mr. Sachs has served since 1985
as the President of Tri-Star Industrial Supply, Inc., one of the companies that
founded the Company in 1997 ("Tri-Star"), and from 1978 to 1985, he served as
Tri-Star's Vice President -- Finance. Prior to joining Tri-Star, Mr. Sachs
served as an Audit Manager for Arthur Andersen & Co. from 1968 to 1978. Mr.
Sachs received his undergraduate degree in accounting from California State
Polytechnic University, and is a certified public accountant.

Mr. Seigel served as the Chairman and Chief Executive Officer of SYSCO Food
Services of Los Angeles, a subsidiary of SYSCO Corporation that distributes a
broad range of products and services to restaurants, hotels, hospitals, schools,
the military, and other institutions, from 1990 to October 1997. Prior to that
time, Mr. Seigel had been Senior Vice President of SYSCO Corporation (1988 to
1990), which he joined in 1988 following the acquisition by SYSCO Corporation of
a subsidiary of Staley-Continental, Inc. for which Mr. Seigel served as
President from 1984 to 1988. Mr. Seigel received his undergraduate degree from
Knox College and his Masters in Business Administration from The Amos Tuck
School of Business at Dartmouth College.

Mr. Shearer is a co-founder of the Company. Mr. Shearer has served since
1991 as the President of Shearer Industrial Supply Co. ("Shearer"), one of the
companies that founded the Company in 1997. Prior to becoming President, Mr.
Shearer was employed by Shearer in various positions from 1985. Mr. Shearer
received his undergraduate degree in business management from New Hampshire
College.

Mr. Smith is a co-founder of the Company and served as its President and
Chief Operating Officer from inception to August 1998, when he became Chairman
and Chief Executive Officer of TDG, which he co-founded in 1981. Mr. Smith
served as TDG's President and Chief Executive Officer from its inception until
it

33
<PAGE> 35

was acquired by the Company in September 1997. Mr. Smith was also a co-founder
in 1972, and President, of Boring & Smith Industries, Inc., a predecessor of
TDG. Mr. Smith received his undergraduate degree from the University of Maryland
and his Masters in Business Administration from Emory University.

EXECUTIVE COMPENSATION AND EMPLOYMENT AGREEMENTS

The following table sets forth the total compensation paid or accrued by
the Company for services rendered during the fiscal year ended December 31,
1997, to or for the Company's chief executive officer and each of the Company's
two other executive officers during fiscal 1997 (the "Named Executive
Officers"). (In August 1998, Mr. Smith resigned as Chief Operating Officer and
President of the Company in connection with resuming positions with TDG, of
which he is now Chairman and Chief Executive Officer.) The Company was organized
in February 1997, did not have any executive officers until June 1997, and did
not conduct any operations until September 1997.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------ SECURITIES
FISCAL OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS/SARS(#) COMPENSATION
- --------------------------- ------ -------- ------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Martin S. Pinson.............. 1997 $145,833 $ -- $-- 103,800 $--
Chief Executive Officer(1)
Douglass C. Smith............. 1997 219,286 -- -- 27,000 --
Chief Operating Officer(2)
Jack P. Healey................ 1997 87,500 40,000 -- 20,800 --
Chief Financial Officer(1)
</TABLE>

- ---------------

(1) Mr. Pinson's and Mr. Healey's employment by the Company commenced June 1,
1997 and their respective salary amounts above reflect their contractual
annual base salaries of $250,000 and $150,000, respectively, from such
commencement date.
(2) Mr. Smith's compensated employment by the Company commenced on September 29,
1997. Prior to that time, he served as an officer of the Company without
compensation from it, and he was employed as an executive officer of TDG,
which became a subsidiary of the Company pursuant to the Company's
consummation of its acquisition of the nine founding companies, on September
29, 1997. Mr. Smith's compensation includes all amounts paid by TDG to him
during 1997 and reflects his contractual annual base salary from the Company
of $250,000 from the September 29, 1997 commencement date.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS/SARS PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERMS(2)
OPTION/SARS EMPLOYEES IN EXERCISE OR EXPIRATION ---------------------
GRANTED(1) FISCAL YEAR BASE PRICE DATE 5% 10%
----------- ------------ ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Martin S. Pinson............ 103,800 25.33% $17.00 9/23/07 $887,490 $2,459,125
Douglass C. Smith........... 27,000 6.59 17.00 9/23/07 230,850 639,657
Jack P. Healey.............. 20,800 5.08 17.00 9/23/07 177,840 492,772
</TABLE>

- ---------------

(1) Mr. Pinson's and Mr. Healey's options vest beginning one year from the date
of grant in 33 1/3% increments on the anniversary of the date of grant. Mr.
Smith's options vest beginning one year from the date of grant in 25%
increments on the anniversary of the date of grant.
(2) Based on assumed rates of stock price appreciations, as required by the
Commission.

34
<PAGE> 36

FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
FISCAL YEAR END AT FISCAL YEAR END(1)
--------------------------- ---------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Martin S. Pinson................................. 0 103,800 $-- $0
Douglass C. Smith................................ 0 27,000 -- 0
Jack P. Healey................................... 0 20,800 -- 0
</TABLE>

- ---------------

(1) As required by the rules of the Securities and Exchange Commission, the
value of unexercised in-the-money options is calculated based on the closing
sale price of the Company's Common Stock on the New York Stock Exchange as
of the last business day of its fiscal year, December 31, 1997, which was
$15 11/16 per share. Because the closing sale price of the Company's Common
Stock on December 31, 1997 was less than the exercise price of the options,
no unexercised options were in-the-money.

The Company has entered into employment agreements with Messrs. Pinson,
Healey, and Smith. The agreements provide for a base salary of $250,000,
$250,000, and $150,000 per year for Messrs. Pinson, Smith, and Healey,
respectively; an annual bonus as determined by the Company's Board of Directors;
and Company benefits of the type generally provided to key executives.

While the Company may terminate an employment agreement at any time during
the term, if the Company terminates the agreement other than for cause, death,
or disability, the Company must pay severance based on the officer's base salary
under the agreement for the greater of 12 months or the unexpired portion of the
term and any performance bonus to which the officer would otherwise be entitled
for the fiscal year in which such termination occurs. Messrs. Pinson's and
Healey's employment agreements each have a three-year term from June 1, 1997,
and Mr. Smith's employment agreement has a three-year term from September 29,
1997. Mr. Smith's agreement was amended in August 1998 and now relates to the
positions as Chairman and Chief Executive Officer of TDG, rather than to his
former positions with the Company. All of the agreements contain customary
proscriptions against misuse of Company information, competition with the
Company, and solicitation of employees of the Company.

DIRECTORS' COMPENSATION

The Company pays its outside directors an annual fee of $10,000, payable
quarterly. The Company reimburses all directors for their travel and other
expenses incurred in connection with attending Board or Committee meetings, and
also reimburses its outside directors for actual expenses otherwise incurred in
performing their duties. The Company has granted each outside director (Messrs.
Barth, Fenoglio, Parr, and Seigel) options to purchase 15,000 shares of Common
Stock at $17.00 per share. Such options will vest in three equal installments on
the first three anniversaries of the date of grant.

STOCK INCENTIVE PLAN

In July 1997, the Board of Directors voted to adopt the Company's 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. Prior to the Company's initial
public offering in September 1997, the Company's stockholders approved the Stock
Incentive Plan. The Board of Directors adopted several technical amendments to
the Stock Incentive Plan on March 5, 1998 and recommended that the Company's
public stockholders approve the Stock Incentive Plan, as amended, at the 1998
Annual Meeting of Stockholders of the Company

Awards granted under the Stock Incentive Plan may be structured in a
variety of ways, including "incentive stock options", as defined in Section 422
of the Internal Revenue Code, as amended ("IRC"), "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, including its subsidiaries. Non-
35

<PAGE> 37

qualified 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
fully 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.

Incentive stock options are also subject to certain limitations prescribed
by the IRC, including the requirement that such options may not be granted to
employees who own more than 10% of the combined voting power of all classes of
voting stock of the Company, unless the option price is at least 110% of the
fair market value of the Common Stock subject to the option. In addition, such
incentive stock options may not be exercised for more than five years from the
stated grant.

The Compensation Committee of the Board of Directors (or a subcommittee of
the Compensation Committee comprised solely of "outside directors" within the
meaning of Section 162(m) of the IRC, in the case of option grants to the
Company's Chief Executive Officer and the four other most highly compensated
executive officers of the Company ("Designated Executive Officers")) otherwise
generally has discretion to set the terms and conditions of options and
restricted stock 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. The Stock Incentive
Plan limits the number of shares of Common Stock with respect to which options
may be granted to any individual during any calendar year to 450,000.

As of December 31, 1997, options to purchase an aggregate of 413,825 shares
of Common Stock have been granted under the Stock Incentive Plan and were
outstanding, including options for 211,600 shares of Common Stock to various
directors and executive officers of the Company. This amount includes options
for 103,800, 27,000, and 20,800 shares of Common Stock issued to Mr. Pinson, Mr.
Smith, and Mr. Healey, respectively, and 15,000 shares to each of the four
outside directors.

EMPLOYEE STOCK PURCHASE PLAN

The Company has 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 price to be 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. A maximum of 500,000 shares of Common Stock may be issued under the Stock
Purchase Plan. The Stock Purchase Plan may be terminated or amended by the
Company's Board of Directors; provided, however, that no such amendment shall
(i) disqualify the Stock Purchase Plan under Section 423 of the IRC or (ii)
without the consent of a participant, materially impair the rights of such
participant with respect to any shares of Common Stock previously purchased for
him or her under the Stock Purchase Plan.

The Stock Purchase Plan is intended to qualify under Sections 421 and 423
of the IRC. In accordance therewith, no income will be recognized by a
participant when shares are acquired pursuant to the Stock Purchase Plan. With
certain exceptions, when a participant disposes of such shares, he or she will
recognize a capital gain equal to the difference between the acquisition price
and the amount realized on such disposition. The Company will not be allowed a
deduction with respect to any shares transferred to a participant pursuant to
the Stock Purchase Plan.

MANAGEMENT INCENTIVE PROGRAM

The Company has adopted a Management Incentive Program (the "Management
Incentive Program"). The Company believes that the Management Incentive Program
will play a central role in providing incentives and rewarding key management
personnel of the Company and its business units for achieving performance goals
that promote the financial success of the Company and enhance value for the
Company's stockholders.
36
<PAGE> 38

The Management Incentive Program will be administered by a committee
designated by the Board of Directors (the "Program Committee") that meets the
requirements of Section 162(m) of the IRC. The Program Committee has the right
to delegate to the Chief Executive Officer, Chief Operating Officer, or Chief
Financial Officer of the Company administration of certain aspects of the
Management Incentive Program as it relates to participants other than Designated
Executive Officers. Presently, the Compensation Committee of the Board serves as
the Program Committee, except that with respect to decisions concerning the
Designated Executive Officers, its subcommittee comprised of Messrs. Fenoglio
and Seigel will serve as the Program Committee.

Prior to, or as soon as practical after, the commencement of each fiscal
year beginning with 1998, the Program Committee will establish the rules or
guidelines applicable under the Management Incentive Program for that fiscal
year (the "Program Rules") for one or more groups of eligible participants who
may include executive officers and other management personnel. Program Rules in
general will establish performance goals relating to, among other things,
increasing operating income and return on investment, increasing stockholder
value, promoting growth and efficient use of resources, and achieving specific
individual goals. The performance criteria applicable to Designated Executive
Officers will include one or more of the following: operating income, return on
investment, estimated earnings, net income, earnings per share, return on
equity, return on assets (or net assets), pre-tax profit, market value of the
Company's stock, and total stockholder return. The maximum incentive award
payable to an eligible participant in any year will be $1.0 million, which will
be paid in such form as the Program Committee provides.

Awards will generally be paid in cash, unless the Program Committee
specifies at the beginning of the year that some or all of the award will be
paid in shares of Common stock (or that the executive can elect some or all of
the award to be paid in shares). Subject to adjustment for any change in
corporate capitalization, the maximum number of shares that can be issued under
the Management Incentive Program is 250,000.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

Pursuant to the Company's Certificate of Incorporation and Bylaws, the
Company is obligated to indemnify each of its directors and officers to the
fullest extent permitted by law with respect to all liability and losses
suffered and reasonable expenses incurred by such person in any action, suit, or
proceeding in which such person was (or is made or threatened to be made) a
party or is otherwise involved by reason of the fact that such person is or was
a director or officer of the Company. The Company has entered into
indemnification agreements with its directors and certain executive officers. It
will be obligated to pay the reasonable expenses of the directors or officers
incurred in defending such proceedings if the indemnified party agrees to repay
all amounts advanced by the Company if it is ultimately determined that such
indemnified party is not entitled to indemnification. See "Description of
Capital Stock -- Indemnification and Limitations on Liability of Officers and
Directors".

37
<PAGE> 39

PRINCIPAL STOCKHOLDERS

The table below sets forth information regarding the beneficial ownership
of the Common Stock, as of September 15, 1998 by (i) each person known to the
Company to be the beneficial owner of more than 5% of the outstanding shares of
Common Stock, (ii) each director and executive officer of the Company, and (iii)
all directors and executive officers of the Company as a group. Unless otherwise
indicated, each of the stockholders listed below has sole voting and investment
power with respect to the shares beneficially owned by them.

<TABLE>
<CAPTION>
SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED PERCENT(1)
- ------------------------ ------------------ ----------
<S> <C> <C>
Lang H. Gerhard(2).......................................... 626,400 7.40%
West Highland Capitol, Inc.(2).............................. 626,400 7.40%
Estero Partners LLC(2)...................................... 507,567 5.99%
West Highland Partners L.P.(2).............................. 438,399 5.18%
Dresdner RCM Global Investors LLC(3)........................ 544,700 6.43%
Dresdner Bank AG(4)......................................... 544,700 6.43%
Andrew B. Shearer(5)........................................ 515,639 6.09%
William J. Burkland(6)...................................... 144,332 1.70%
Douglass C. Smith(7)........................................ 130,249 1.53%
Martin S. Pinson(10)........................................ 116,800 1.38%
George L. Sachs, Jr.(11).................................... 56,645 *
Thomas W. Aldridge, Jr...................................... -- *
Jack P. Healey(12).......................................... 34,983 *
David K. Barth(8)........................................... 28,066 *
William T. Parr(9)(13)...................................... 7,200 *
William R. Fenoglio(13)..................................... 8,000 *
Richard M. Seigel(13)....................................... 16,000 *
All Directors and Executive Officers as a Group (11
persons).................................................. 1,057,914(5) 12.5%
(6)(7)
(10)(11)
(12)(13)
</TABLE>

- ---------------
* Denotes less than 1%.

(1) The percentages shown are based on 8,466,704 shares of the Common Stock
outstanding on August 27, 1998 plus, as to each person and group listed,
the number of shares of Common Stock deemed owned by such holder pursuant
to Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), assuming the exercise of options held by such holder that
are exercisable within 60 days of September 15, 1998 ("exercisable
options").

(2) Each reporting person's address is 300 Drakes Landing Road, Suite 290,
Greenbrae, California 94904. Each reporting person claims shared voting and
investment power with respect to the shares owned by it and has filed
Schedules 13D and 13G with the SEC as a member of a group with each other
reporting person to which this footnote applies.

(3) The address of Dresdner RCM Global Investors LLC is 4 Embaracadero Center
Suite 3000, San Francisco, California 94111.

(4) The address of Dresdner Bank AG is Jurgen-Ponto-Platz 1, 60301 Frankfurt,
Germany.

(5) The address for Mr. Shearer is 2500 Royal Place, Tucker, Georgia 30084.
Includes 750 shares subject to exercisable options.

(6) Includes an aggregate of 300 shares held by Mr. Burkland as custodian for
his three minor children and 750 shares subject to exercisable options.
Does not include an aggregate of 28,291 shares owned by Mr. Burkland's
wife, with respect to which Mr. Burkland disclaims beneficial ownership.

(7) Does not include an aggregate of 372,331 shares owned by Mr. Smith's wife
and his two adult daughters, with respect to which Mr. Smith disclaims
beneficial ownership. Includes 6,375 shares subject to exercisable options.

38
<PAGE> 40

(8) Does not include an aggregate of 11,533 shares owned by Mr. Barth's
business associate, with respect to which Mr. Barth disclaims beneficial
ownership.

(9) Does not include an aggregate of 1,200 shares owned by Mr. Parr's wife,
with respect to which Mr. Parr disclaims beneficial ownership.

(10) Includes 34,600 shares subject to exercisable options.

(11) Includes 875 shares subject to exercisable options.

(12) Includes 6,933 shares subject to exercisable options.

(13) Includes 5,000 shares subject to exercisable options.

CERTAIN TRANSACTIONS

FORMATION OR COMBINATION RELATED MATTERS

In February 1997, the Company entered into agreements with nine companies
(the "Founding Companies") that the Company acquired in September 1997 (the
"Combination") to (i) confirm their respective intentions (without effecting a
binding commitment to consummate the Combination) to assist the Company's
pursuit of the Combination and the Company's initial public offering
("Offering") and (ii) commit to pay their pro rata share of the expenses
thereof, whether or not the transactions were consummated. The Founding
Companies advanced $1,496,950 to the Company pursuant to those agreements.

In 1997, one of the Founding Companies paid $7,500 to Barth Smith Company,
a consulting firm in which David K. Barth, a director of the Company, has a 75%
ownership interest. The Company will pay Barth Smith Company an amount equal to
1% of the cash payment ultimately paid to a dissenting stockholder of TDG in
connection with the Combination.

In February 1997, Mr. Barth purchased 11,533 shares of Common Stock at an
aggregate purchase price of $100. In June 1997, Messrs. Pinson, Healey, and
Barth purchased 69,200, 25,950, and 11,533 shares, respectively, at aggregate
purchase prices of $600, $225, and $100, respectively.

During 1997, TDG paid approximately $157,000 in fees to Miller Ray Healey &
Houser, certified public accountants, in connection with accounting services
performed on behalf of TDG. Jack P. Healey was a partner in Miller Ray Healey &
Houser through May 1997.

In connection with the Combination, and as consideration for their
respective interests in the Founding Companies, certain officers, directors, and
principal stockholders of the Company, and certain family members and related
parties of such individuals, received shares of Common Stock of the Company as
follows: Douglass C. Smith -- 495,106 shares (including 371,332 shares that are
not beneficially owned by Mr. Smith); William J. Burkland -- 684,467 shares
(including 541,185 shares that are not beneficially owned by Mr. Burkland);
Andrew B. Shearer -- 514,889 shares; and George L. Sachs, Jr. -- 53,989 shares.

Upon consummation of the Combination, the Company succeeded to certain real
property leases as lessee with respect to which stockholders of the Company
(former stockholders of certain of the Founding Companies), or their affiliates,
are the lessors. The Company believes that the monthly rent and other terms of
each of these leases are not less favorable to the Company than could be
obtained from unaffiliated parties for comparable properties in the respective
geographic areas. Specifically, following consummation of the Combination, the
Company leases property in (i) Spokane, Washington from a company in which the
father of William J. Burkland has a 25% ownership interest; (ii) Whitehall,
Pennsylvania from Andrew B. Shearer; (iii) York, Pennsylvania from a company in
which Andrew B. Shearer has a 40% ownership interest; (iv) Reading,
Williamsport, and York, Pennsylvania from a trust of which Andrew B. Shearer's
mother is the trustee and he and his father, brother, and sisters are the
beneficiaries; (v) Hazelton and Lancaster, Pennsylvania from a trust of which
Andrew B. Shearer and his father, brother, and sisters are the beneficiaries;
and (vi) St. Louis and Springfield, Missouri from a company in which George L.
Sachs, Jr. has a 15% ownership interest. Messrs. Burkland, Shearer, and Sachs
are directors of the Company, and Mr. Shearer is also a principal stockholder of
the Company.

In connection with the consummation of the Combination, the Company caused
the release of certain personal guarantees of indebtedness of the Founding
Companies granted by certain former stockholders of

39
<PAGE> 41

those Founding Companies who are now officers or directors of the Company. The
aggregate amount of such guarantees for each of these individuals is as follows:
Douglass C. Smith -- $31,000 and George L. Sachs, Jr. -- $1,929,670.

Prior to the Combination, B&J had agreed to pay Charles T. Burkland, a
former president and a significant stockholder of B&J, a non-qualified, unfunded
pension in the amount of $10,000 per month during his lifetime and thereafter to
his spouse, if she survived him, for her lifetime. As a condition to B&J's
participation in the Combination, B&J made a lump sum payment of $1.11 million
to Charles T. Burkland in exchange for relief from its obligation to make such
monthly pension payments through 2012. As part of that arrangement, the Company
agreed to make such $10,000 monthly payments beginning in January 2013, if
either Mr. Burkland or his spouse is then surviving, and continuing thereafter
until both of them are deceased. In addition, the Company has agreed to pay 75%
of the health and dental insurance costs of Mr. Burkland and his spouse until
their deaths. Mr. Burkland is 72 years old, and his spouse is 68 years old. Mr.
Burkland is the father of William J. Burkland, a director of the Company.

OTHER RELATED PARTY MATTERS

The Company has entered into an agreement with Barth Smith Company pursuant
to which that company will assist IDG in the implementation of its acquisition
program through December 1998. Pursuant to the agreement, the Company is paying
Barth Smith Company a monthly retainer of $12,500 plus expenses, a transaction
fee for each acquisition, and a cash bonus if the Company meets certain
increases in revenues due to the acquisitions and meets earnings per share
targets for fiscal 1998. The Company has paid approximately $226,500 to the
Barth Smith Company under this agreement for the period from August 1997 through
July 1998.

Since January 1997, TDG and the Company have paid approximately $425,000 in
insurance premiums to J. Smith Lanier & Co., an independent insurance agency, in
connection with business and health insurance purchased by TDG and the Company.
William T. Parr, a director of the Company, is the Vice Chairman of, and has a
12% ownership interest in, J. Smith Lanier & Co.

In September 1998, an operating subsidiary of the Company entered into a
real property lease as lessee with respect to which Andrew B. Shearer is the
lessor. The property is located in York, Pennsylvania and will serve as the
Company's primary distribution center in the Northeast. The term of the lease
will commence upon completion of the construction of office and warehouse space,
anticipated to occur in December, 1998. Annual rent under the lease will be
$319,215. The Company believes that the rent and other terms of this lease are
not less favorable to the Company than could be obtained from unaffiliated
parties for a comparable property in the York, Pennsylvania area. Mr. Shearer is
a principal stockholder and director of the Company.

POLICY RESPECTING RELATED PARTY TRANSACTIONS

On July 10, 1997, the Board of Directors adopted a policy that any
transactions between the Company and any of its officers, directors, or
principal stockholders or affiliates must be on terms no less favorable than
those that could be obtained from unaffiliated parties in comparable situations
and must be approved by a majority of the disinterested members of the Board of
Directors. The Audit Committee of the Board of Directors is responsible for
reviewing all related party transactions on a continuing basis and potential
conflict of interest situations where appropriate.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Messrs. Pinson, Parr, and Seigel served as members of the Company's
Compensation Committee during the 1997 fiscal year. Mr. Fenoglio was appointed
on March 5, 1998 to serve on the Compensation Committee. While Mr. Pinson is the
Chairman of the Board and Chief Executive Officer of the Company, none of Mr.
Parr, Mr. Fenoglio, or Mr. Seigel is an officer or former officer of the
Company.

40
<PAGE> 42

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices and impair the Company's ability to
raise capital through the sale of equity securities.

The Company has outstanding 8,466,704 shares of Common Stock. The 3,795,000
shares sold in the Company's initial public offering are freely tradable without
restrictions or further registration under the Securities Act, unless purchased
by "affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act ("Rule 144"). In addition, the 1,192,115 Resale Shares covered by
this Prospectus will be freely tradable by purchasers who are not affiliated
with the Company; provided, however, that the Selling Shareholders may not sell
any such shares until the expiration of restrictions imposed by
pooling-of-interest accounting rules and contractual restrictions agreed upon
with the Company. See "Selling Shareholders". In addition, any of the New Issue
Shares that are issued by the Company pursuant to this Prospectus in connection
with future acquisitions, and any of the Options Shares issued by the Company
pursuant to this Prospectus, generally will be freely tradable by persons not
affiliated with the Company, unless subject to pooling-of-interest accounting
treatment restrictions or contractual restrictions agreed upon with the Company.
Furthermore, the Company has filed registration statements on Form S-8 under the
Securities Act to register 1,000,000 shares of Common Stock issuable pursuant to
the Stock Incentive Plan and 500,000 shares of Common Stock issuable pursuant to
the Stock Purchase Plan. The shares issued pursuant to the Stock Purchase Plan
and issuable upon exercise of options granted under the Stock Incentive Plan
will be freely tradable by the holders thereof unless purchased by affiliates as
defined under Rule 144.

Shares of Common Stock not sold in the initial public offering, pursuant to
the Stock Purchase Plan, upon exercise of options granted under the Stock
Incentive Plan, or pursuant to this Offering were issued and sold by the Company
in private transactions in reliance upon the exemption from registration
contained in Section 4(2) of the Securities Act and are restricted securities
under Rule 144. These shares may not be sold unless they are registered under
the Securities Act or are sold pursuant to an applicable exemption from
registration, pursuant to Rule 144. In general, under Rule 144 as currently in
effect, beginning 90 days after the Company's initial public offering, a person
who has beneficially owned any such shares for at least one year, including
"affiliates" of the Company, would be entitled to sell in broker's transactions
or to market makers within any three-month period a number of shares that does
not exceed the greater of 1% of the then outstanding shares of Common Stock or
the average weekly trading volume of the Common Stock on the New York Stock
Exchange during the four calendar weeks preceding the date on which notice of
the sale is filed with the Commission. Sales under Rule 144 are also subject to
certain manner of sale restrictions and notice requirements and to the
availability of current public information concerning the Company. A person (or
persons whose shares are aggregated) who is not an "affiliate" of the Company at
any time during the 90 days preceding a sale, and who has beneficially owned
such shares for at least two years, would be entitled to sell such shares under
Rule 144(k) without regard to the availability of current public information,
volume limitations, manner of sale provisions, or notice requirements. The above
is a summary of Rule 144 and is not intended to be a complete description
thereof. Notwithstanding the eligibility of certain shares to be sold after the
expiration of the 90 day period, such shares are subject to certain lockup
agreements described below.

As a condition to the acquisitions of the Founding Companies, the
stockholders of the Founding Companies agreed that they will not, directly or
indirectly, sell or otherwise dispose of the shares of Common Stock issued to
them as acquisition consideration for a period of two years after such
acquisitions. In addition, as a condition to acquisitions of additional
businesses, shares issued by the Company to stockholders of such businesses may
be subject to pooling-of-interest accounting treatment restrictions or
contractual restrictions agreed upon with the Company similar to the
restrictions applicable to the stockholders of the Founding Companies.

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock, $.01 par value per share, and 10,000,000 shares of Preferred
Stock, $.10 par value per share, having such rights and

41
<PAGE> 43

privileges as the Board of Directors may from time to time determine. 8,466,704
shares of Common Stock, and no shares of Preferred Stock, are issued and
outstanding.

The following summary of the Company's capital stock does not purport to be
complete and is qualified in its entirety by reference to the Certificate of
Incorporation, as amended, and Bylaws of the Company that are included as
exhibits to the Registration Statement of which this Prospectus forms a part,
and the applicable provisions of the Delaware General Corporation Law.

COMMON STOCK

Holders of Common Stock are entitled to one vote per share on any issue
submitted to a vote of the stockholders and do not have cumulative voting rights
in the election of directors. Accordingly, the holders of a majority of the
outstanding shares of Common Stock voting in an election of directors can elect
all of the directors then standing for election, if they choose to do so. All
shares of Common Stock are entitled to share equally in such dividends as the
Board of Directors of the Company may, in its discretion, declare out of sources
legally available therefor. See "Dividend Policy". Upon dissolution,
liquidation, or winding up of the Company, holders of Common Stock are entitled
to receive on a ratable basis, after payment or provision for payment of all
debts and liabilities of the Company and any preferential amount due with
respect to outstanding shares of Preferred stock, all assets of the Company
available for distribution, in cash or in kind. Holders of shares of Common
Stock do not have preemptive or other subscription rights, conversion or
redemption rights, or any rights to share in any sinking fund. All currently
outstanding shares of Common Stock are, and the shares offered hereby (when sold
in the manner contemplated by this Prospectus) will be, fully paid and
nonassessable.

The Bylaws provide that, subject to any rights of holders of Preferred
Stock to elect additional directors under specified circumstances, the Company's
Board of Directors will consist of not less than three but no more than 15
directors. Currently, there are nine directors, four of whom are independent
directors.

The Bylaws provide that, subject to any rights of the Preferred Stock, and
unless the Board of Directors otherwise determines, any vacancies may be filled
by the affirmative vote of a majority of the remaining directors. A vacancy
resulting from an increase in the number of directors also may be filled by
action of the Board of Directors.

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 purposes, 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.
Any such series of Preferred Stock also could be used for the purpose of
preventing a hostile takeover of the Company that is considered to be desirable
by the holders of the Common Stock, could otherwise adversely affect the voting
power of the holders of Common Stock, and could serve to perpetuate the
directors' control of the Company under certain circumstances. No transaction is
now contemplated that would result in the issuance of any such shares of
Preferred Stock.

INDEMNIFICATION AND LIMITATIONS ON LIABILITY OF OFFICERS AND DIRECTORS

The Company's Certificate of Incorporation provides for indemnification of
directors to the full extent permitted by Delaware law and, to the extent
permitted by such law, eliminate or limit the personal liability of directors to
the Company and its stockholders for monetary damages for certain breaches of
fiduciary duty and the duty of care. Such indemnification may be available for
liabilities arising in connection with this Offering. Insofar as indemnification
for liabilities under the Securities Act may be permitted to directors, officers
or
42
<PAGE> 44

persons controlling the Company pursuant to the foregoing provisions, the
Company has been informed that, in the opinion of the Commission, such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable. Pursuant to its Certificate of Incorporation, the
Company may indemnify its officers, employees, agents and other persons to the
fullest extent permitted by Delaware law. The Company's Bylaws obligate the
Company, under certain circumstances, to advance expenses to its directors and
officers in defending an action, suit or proceeding for which indemnification
may be sought. In addition, the Company has entered into indemnification
agreements with its directors and executive officers pursuant to which the
Company has agreed to indemnify such persons in certain circumstances.

The Company's Bylaws also provide that the Company shall have the power to
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the Company, or who, while a director,
officer, employee or agent, is or was serving as a director, officer, trustee,
general partner, employee or agent of one of the Company's subsidiaries or, at
the request of the Company, of any other organization, against any liability
asserted against such person or incurred by such person in any such capacity,
whether the Company would have the power to indemnify such person against such
liability under Delaware law. The Company has purchased and agreed to maintain
insurance on behalf of all of its directors and executive officers.

OTHER MATTERS

The Common Stock is listed on the New York Stock Exchange under the symbol
"IDG".

The transfer agent and registrar for the Company's Common Stock is American
Stock Transfer & Trust Company.

LEGAL MATTERS

Certain legal matters with respect to the validity of the shares of Common
Stock offered hereby will be passed upon for the Company by Kilpatrick Stockton
LLP, counsel to the Company.

EXPERTS

The audited financial statements of the Company, TDG, Cramer Industrial
Supply Company, Associated Suppliers, Inc., and LD Supply, Inc. in this
Prospectus and elsewhere in the Registration Statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.

The audited financial statements of Shearer Industrial Supply Co. in this
Prospectus and elsewhere in the Registration Statement have been audited by
Miller & Co. LLP, independent public accountants, as indicated in their reports
with respect thereto, and are included herein in reliance upon the authority of
said firm as experts in giving said reports.

The audited financial statements of J. J. Stangel Co. in this Prospectus
and elsewhere in the Registration Statement have been audited by Schenck &
Associates, SC, independent public accountants, as indicated in their reports
with respect thereto, and are included herein in reliance upon the authority of
said firm as experts in giving said reports.

The audited financial statements of Tri-Star Industrial Supply, Inc. in
this Prospectus and elsewhere in the Registration Statement have been audited by
Baird, Kurtz & Dobson, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.

43
<PAGE> 45

INDEX TO FINANCIAL INFORMATION

HISTORICAL FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Industrial Distribution Group, Inc. ("IDG" or the "Company")
Report of Independent Public Accountants.................. F-3
Consolidated Balance Sheets............................... F-4
Consolidated Statements of Operations..................... F-5
Consolidated Statements of Stockholders' Equity........... F-6
Consolidated Statements of Cash Flows..................... F-7
Notes to Consolidated Financial Statements................ F-8
Consolidated Balance Sheets at June 30, 1998
(unaudited)............................................ F-20
Consolidated Statements of Operations for the Six Months
Ended June 30, 1998 and 1997 (unaudited)............... F-21
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1998 and 1997 (unaudited)............... F-22
Notes to Consolidated Financial Statements (unaudited).... F-23
Industrial Distribution Group, Inc. (now known as The
Distribution Group, Inc.)
Report of Independent Public Accountants.................. F-27
Balance Sheets............................................ F-28
Statements of Income...................................... F-29
Statements of Shareholders' Equity........................ F-30
Statements of Cash Flows.................................. F-31
Notes to Financial Statements............................. F-32
Associated Suppliers, Inc.
Report of Independent Public Accountants.................. F-38
Consolidated Balance Sheets............................... F-39
Consolidated Statements of Income......................... F-40
Consolidated Statements of Shareholders' Equity........... F-41
Consolidated Statements of Cash Flows..................... F-42
Notes to Consolidated Financial Statements................ F-43
Cramer Industrial Supplies, Inc.
Report of Independent Public Accountants.................. F-49
Consolidated Balance Sheets............................... F-50
Consolidated Statements of Operations..................... F-51
Consolidated Statements of Stockholders' Equity........... F-52
Consolidated Statements of Cash Flows..................... F-53
Notes to Consolidated Financial Statements................ F-54
LD Supply, Inc.
Report of Independent Public Accountants.................. F-58
Balance Sheet............................................. F-59
Statement of Operations................................... F-60
Statement of Shareholders' Equity......................... F-61
Statement of Cash Flows................................... F-62
Notes to Financial Statements............................. F-63
</TABLE>

F-1
<PAGE> 46

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Shearer Industrial Supply Co.
Report of Independent Certified Public Accountants........ F-67
Consolidated Balance Sheets............................... F-68
Consolidated Statements of Earnings....................... F-70
Consolidated Statements of Stockholders' Equity........... F-71
Consolidated Statements of Cash Flows..................... F-72
Notes to Consolidated Financial Statements................ F-74
J. J. Stangel Co.
Report of Independent Public Accountants.................. F-83
Balance Sheets............................................ F-84
Statements of Income and Retained Earnings................ F-86
Statements of Cash Flows.................................. F-87
Notes to Financial Statements............................. F-88
Tri-Star Industrial Supply, Inc.
Independent Accountants' Report........................... F-93
Balance Sheets............................................ F-94
Statements of Income...................................... F-95
Statements of Retained Earnings........................... F-96
Statements of Cash Flows.................................. F-97
Notes to Financial Statements............................. F-98

PRO FORMA FINANCIAL STATEMENTS
Industrial Distribution Group, Inc. ("IDG" or the "Company")
Introduction to Unaudited Pro Forma Combined Financial
Information............................................ P-1
Unaudited Pro Forma Condensed Combined Statement of
Operations............................................. P-2
Notes to Unaudited Pro Forma Condensed Combined Financial
Information............................................ P-4
</TABLE>

F-2
<PAGE> 47

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Industrial Distribution Group, Inc.:

We have audited the accompanying consolidated balance sheets of INDUSTRIAL
DISTRIBUTION GROUP, INC. AND SUBSIDIARIES (a Delaware corporation) (Note 1) as
of December 31, 1996 and 1997 and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. 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, 1996 and 1997 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.

ARTHUR ANDERSEN LLP

Atlanta, Georgia

July 30, 1998

F-3
<PAGE> 48

INDUSTRIAL DISTRIBUTION GROUP, INC.

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1996 AND 1997

<TABLE>
<CAPTION>
1996 1997
------- --------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,586 $ 31,534
Short-term investments.................................... 948 0
Accounts receivable, net.................................. 9,299 36,099
Inventories, net.......................................... 10,674 42,427
Deferred tax assets....................................... 570 1,550
Prepaid and other current assets.......................... 226 2,468
------- --------
Total current assets.............................. 23,303 114,078
PROPERTY AND EQUIPMENT, NET................................. 2,156 9,910
DEFERRED TAX ASSETS......................................... 1,085 642
INTANGIBLE ASSETS, NET...................................... 0 19,584
OTHER ASSETS................................................ 708 2,167
------- --------
Total assets...................................... $27,252 $146,381
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Cash overdraft............................................ $ 187 $ 722
Current portion of long-term debt......................... 299 781
Lines of credit........................................... 6,566 5,836
Accounts payable.......................................... 5,438 21,656
Accrued compensation...................................... 564 2,131
Other accrued liabilities................................. 698 3,307
------- --------
Total current liabilities......................... 13,752 34,433
LONG-TERM DEBT.............................................. 1,094 5,036
OTHER LONG-TERM LIABILITIES................................. 1,183 7,422
------- --------
Total liabilities................................. 16,029 46,891
------- --------
COMMITMENTS AND CONTINGENCIES (NOTE 8)
STOCKHOLDERS' EQUITY:
Preferred stock, $.10 par value per share; 10,000,000
shares authorized, no shares issued or outstanding in
1996 and 1997.......................................... 0 0
Common stock, $.01 par value per share; 50,000,000 shares
authorized, 1,531,179 and 7,880,110 shares issued in
1996 and 1997, respectively............................ 15 79
Additional paid-in capital................................ 3,590 89,298
Retained earnings......................................... 7,797 10,113
Treasury stock, at cost (45,628 and 0 shares in 1996 and
1997, respectively).................................... (179) 0
------- --------
Total stockholders' equity........................ 11,223 99,490
------- --------
Total liabilities and stockholders' equity........ $27,252 $146,381
======= ========
</TABLE>

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

F-4
<PAGE> 49

INDUSTRIAL DISTRIBUTION GROUP, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997

<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
NET SALES.................................................. $ 59,944 $ 68,266 $ 153,218
COST OF SALES.............................................. 45,763 52,774 117,726
---------- ---------- ----------
Gross profit............................................. 14,181 15,492 35,492
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES.............. 13,281 14,649 31,595
---------- ---------- ----------
INCOME FROM OPERATIONS..................................... 900 843 3,897
INTEREST EXPENSE........................................... 662 740 966
INTEREST INCOME............................................ (58) (73) (461)
OTHER INCOME, NET.......................................... (93) (315) (178)
---------- ---------- ----------
INCOME BEFORE INCOME TAXES................................. 389 491 3,570
PROVISION FOR INCOME TAXES................................. 67 127 1,254
---------- ---------- ----------
NET INCOME................................................. $ 322 $ 364 $ 2,316
========== ========== ==========
EARNINGS PER SHARE:
Basic.................................................... $ 0.24 $ 0.25 $ 0.71
========== ========== ==========
Diluted.................................................. $ 0.24 $ 0.25 $ 0.71
========== ========== ==========
WEIGHTED AVERAGE SHARES:
Basic.................................................... 1,367,688 1,446,439 3,258,555
========== ========== ==========
Diluted.................................................. 1,367,688 1,446,439 3,282,927
========== ========== ==========
</TABLE>

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

F-5
<PAGE> 50

INDUSTRIAL DISTRIBUTION GROUP, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------ PAID-IN RETAINED TREASURY
SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL
--------- ------ ---------- -------- -------- -------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994.................... 1,407,685 $14 $ 2,100 $ 7,120 $(179) $ 9,055
Common stock issued........................... 6,868 0 50 0 0 50
Common stock purchased...................... (3,175) 0 (19) 0 0 (19)
Net income.................................. 0 0 0 322 0 322
--------- --- ------- ------- ----- -------

BALANCE, DECEMBER 31, 1995.................... 1,411,378 14 2,131 7,442 (179) 9,408
Common stock issued........................... 119,801 1 1,459 0 0 1,460
Dividends paid.............................. 0 0 0 (9) 0 (9)
Net income.................................. 0 0 0 364 0 364
--------- --- ------- ------- ----- -------

BALANCE, DECEMBER 31, 1996.................... 1,531,179 15 3,590 7,797 (179) 11,223
Retired treasury stock........................ (45,628) 0 (179) 0 179 0
Issuance of common stock to founding
companies and management................. 2,592,981 26 29,239 0 0 29,265
Initial public offering..................... 3,795,000 38 56,561 0 0 56,599
Sale of shares through employee stock
purchase plan............................ 6,578 0 87 0 0 87
Net income.................................. 0 0 0 2,316 0 2,316
--------- --- ------- ------- ----- -------

BALANCE, DECEMBER 31, 1997.................... 7,880,110 $79 $89,298 $10,113 $ 0 $99,490
========= === ======= ======= ===== =======
</TABLE>

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

F-6
<PAGE> 51

INDUSTRIAL DISTRIBUTION GROUP, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997

<TABLE>
<CAPTION>
1995 1996 1997
------ -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 322 $ 364 $ 2,316
------ -------- --------
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization.......................... 328 311 1,000
Gain on sale of assets................................. (18) (149) (24)
Deferred taxes......................................... (242) (499) (615)
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable.................................. (938) (1,154) (1,192)
Inventories, net..................................... (598) 528 457
Prepaids and other assets............................ 327 35 (636)
Accounts payable..................................... 1,324 362 (1,916)
Accrued compensation................................. 145 (32) 225
Other accrued liabilities............................ (123) 110 (1,400)
------ -------- --------
Total adjustments................................. 205 (488) (4,101)
------ -------- --------
Net cash (used in) provided by operating
activities...................................... 527 (124) (1,785)
------ -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Changes in short-term investments......................... (133) (34) 948
Cash from acquired companies.............................. 0 205 1,851
Additions to property and equipment, net.................. (334) (75) (1,014)
Cash surrender value of life insurance.................... (100) (70) (29)
------ -------- --------
Net cash provided by (used in) investing
activities...................................... (567) 26 1,756
------ -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in cash overdraft.................................. (103) 76 535
Proceeds from issuance of common stock, net of issuance
costs.................................................. 50 6 56,599
Short-term (repayments) borrowings........................ 580 663 (15,871)
Payments on long-term debt................................ (25) (318) (11,286)
Purchase of treasury stock................................ (19) 0 0
Dividends paid............................................ 0 (9) 0
------ -------- --------
Net cash provided by financing activities......... 483 418 29,977
------ -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... 443 320 29,948
CASH AND CASH EQUIVALENTS, beginning of year................ 823 1,266 1,586
------ -------- --------
CASH AND CASH EQUIVALENTS, end of year...................... $1,266 $ 1,586 $ 31,534
====== ======== ========
SUPPLEMENTAL DISCLOSURES:
Interest paid............................................. $ 745 $ 746 $ 964
====== ======== ========
Income taxes paid......................................... $ 211 $ 382 $ 1,031
====== ======== ========
NONCASH TRANSACTIONS:
Common stock issued in acquisitions (Note 1).............. $ 0 $ 1,460 $ 35,312
====== ======== ========
</TABLE>

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

F-7
<PAGE> 52

INDUSTRIAL DISTRIBUTION GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1995, 1996, AND 1997

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 products. The Company conducts
business in 19 states and provides integrated supply, contract supply,
stock/nonstock sales, machine tool sales as well as industrial services to a
wide range of industries.

BASIS OF PRESENTATION

In September 1997, IDG completed an initial public offering of its common
stock (NYSE: IDG) and, concurrent with the offering, acquired the following nine
industrial distribution companies: Associated Suppliers, Inc., B&J Industrial
Supply Company ("B&J"), Cramer Industrial Supplies, Inc., Grinding Supplies
Company, J.J. Stangel Co., Shearer Industrial Supply Co. ("Shearer"), Slater
Industrial Supply, Inc., The Distribution Group, Inc. ("TDG") (formerly known as
Industrial Distribution Group, Inc.), and Tri-Star Industrial Supply, Inc.
(collectively referred to as the "Founding Companies"). The accompanying
financial statements of IDG represent B&J (deemed to be the acquiring company
under the provisions of the Securities and Exchange Commission's Staff
Accounting Bulletin No. 97) for the three years ended December 31, 1997 and
include the results of operations of the other eight Founding Companies since
the effective date of the acquisitions (Note 11).

During 1998, IDG acquired three companies Northern Tool & Supply Company,
Inc. ("NTS"), Continental Air Tool, Inc., d/b/a Continental-McLaughlin Equipment
& Supply, and Hawley Industrial Supplies, Inc. (collectively referred to as the
"Pooled Companies"). These acquisitions were accounted for using the
pooling-of-interests method of accounting. The Company's financial statements
include the results of operations for the Pooled Companies for all periods
presented. IDG issued 618,559 shares in these pooling-of-interests transactions.

INITIAL PUBLIC OFFERING AND ACQUISITIONS

Effective September 22, 1997, IDG declared a 115.333 for 1 stock split. All
amounts in the financial statements and notes thereto have been restated for
this stock split.

On September 24, 1997, the Company sold 3,795,000 shares of common stock to
the public at $17 per share (the "Offering"). The net proceeds to the Company
from the Offering (after deducting underwriting commissions and offering
expenses) were $56.6 million. Of this amount, $25.1 million was used to reduce
the Founding Companies' indebtedness under their existing lines of credit.

The consideration for the acquisitions of the Founding Companies consisted
of the Company's common stock. A total of 3,330,224 shares of company common
stock was issued to the stockholders of the Founding Companies. These
stockholders have contractually agreed with the Company not to offer, sell, or
otherwise dispose of any of these shares for a minimum period of two years after
the Offering. The fair value of these shares reflects this restriction.

The closing of the acquisitions and the Offering occurred on September 29,
1997. For accounting purposes, however, September 24, 1997 has been established
as the effective date of the acquisitions because management has determined that
effective control of the operations of the Founding Companies transferred to IDG
on that date.

F-8
<PAGE> 53

INDUSTRIAL DISTRIBUTION GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The acquisitions were accounted for using the purchase method of
accounting. The allocations of purchase price to the assets acquired and
liabilities assumed of the Founding Companies have been recorded based on
preliminary estimates of fair value as follows (in thousands):

<TABLE>
<S> <C>
Working capital, net........................................ $ 26,798
Property and equipment...................................... 7,664
Integrated supply contracts................................. 570
Goodwill.................................................... 19,144
Other assets................................................ 2,075
Liabilities assumed......................................... (20,939)
--------
$ 35,312
========
</TABLE>

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

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

USE OF ESTIMATES

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

CASH EQUIVALENTS

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

ACCOUNTS RECEIVABLE

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 allowance amounted to $240,000 and $994,000 as of
December 31, 1996 and 1997, 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 an average
cost basis, and market is considered to be net realizable value.

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 consolidated statements of
operations.

F-9
<PAGE> 54

INDUSTRIAL DISTRIBUTION GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>
<S> <C>
Buildings and improvements............................ 40 years
Leasehold improvements................................ Life of related lease
Furniture, fixtures, and equipment.................... 5-10 years
Computer hardware and software........................ 5 years
</TABLE>

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 uses the most appropriate method of evaluation
given the circumstances surrounding the particular acquisition, which has
generally been an estimate of the related business unit's undiscounted operating
income before interest and taxes over the remaining life of the goodwill.

Additionally, $570,000 of the purchase price was allocated to the value of
integrated supply contracts which is included in intangible assets on the
balance sheet and is amortized over 13 years.

Amortization expense related to intangible assets for 1995, 1996, and 1997
was $0, $0, and $134,000, respectively. At December 31, 1996 and 1997,
accumulated amortization of intangible assets was $0 and $134,000, respectively.

OTHER ASSETS

Other assets as of December 31, 1996 and 1997 included the cash surrender
values of executive life insurance policies totaling $747,000 and $1,422,000,
respectively.

OTHER LONG-TERM LIABILITIES

One stockholder of TDG who owned approximately 45% of its stock dissented
from the business unit's participation in the Offering. Pursuant to Georgia's
dissenters' rights statute, the stockholder will be paid cash for the fair value
of his interest in TDG (Note 8).

INCOME TAXES

The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
SFAS No. 109 requires recognition of deferred tax assets and liabilities using
currently enacted tax rates.

REVENUE RECOGNITION

Revenue is recognized on sales of products at the time of shipment.

COST OF SALES

Cost of sales consists of the cost of materials purchased, offset by
rebates received from suppliers.

FINANCIAL INSTRUMENTS

F-10
<PAGE> 55

INDUSTRIAL DISTRIBUTION GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

one customer represented more than 10% of the Company's accounts receivable or
sales for the periods presented.

RECLASSIFICATIONS

Certain reclassifications have been made to 1995 and 1996 amounts to
conform to the current year presentation.

NEW ACCOUNTING PRONOUNCEMENTS

In 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No.
121, "Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of," effective for fiscal years beginning after December 15, 1995. The
adoption of this statement as of January 1, 1996 did not have a significant
impact on the Company's financial position or results of operations.

The Company computes basic and diluted earnings per share in accordance
with SFAS No. 128, "Earnings Per Share." The adoption of this statement in 1997
had no effect on previously reported earnings per share ("EPS").

In 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income," which
establishes standards for the reporting of comprehensive income in a company's
financial statements. Comprehensive income includes all changes in a company's
equity during the period that result from transactions and other economic events
other than transactions with its stockholders. For the Company, SFAS No. 130
will be effective for the year beginning January 1, 1998. The Company has not
completed its analysis of the impact of this new pronouncement. However, based
on a preliminary review, the Company believes the implementation of SFAS No. 130
will not have a significant effect on its current financial reporting.

In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information," which requires that an enterprise
disclose certain information about operating segments. SFAS No. 131 is effective
for financial statements for the Company's fiscal year ending December 31, 1998.
The Company does not expect that SFAS No. 131 will require significant revision
of prior disclosures.

3. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at December 31, 1996 and
1997 (in thousands):

<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Land, building, and improvements............................ $ 1,569 $ 5,345
Leasehold improvements...................................... 889 1,846
Furniture, fixtures, and equipment.......................... 1,535 4,637
Computer hardware and software.............................. 1,062 2,026
------- -------
5,055 13,854
Less accumulated depreciation............................... (2,899) (3,944)
------- -------
Property and equipment, net................................. $ 2,156 $ 9,910
======= =======
</TABLE>

Depreciation expense totaled $328,000, $311,000, and $866,000 for the years
ended December 31, 1995, 1996, and 1997, respectively.

F-11
<PAGE> 56

INDUSTRIAL DISTRIBUTION GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. REVOLVING CREDIT FACILITIES

In December 1997, the Company entered into a $75,000,000 revolving credit
facility with a five-bank syndicate. The facility has a three-year term, bears
interest at either the bank's corporate base rate or a Eurodollar rate plus
applicable margins, and has a first security interest in the capital stock of
the Company's business units. The agreement provides that the facility be used
for operations and acquisitions and provides $5,000,000 each for swinglines and
letters of credit. There is an annual commitment fee on the unused portion of
the facility equal to between 20 and 30 basis points of the average daily unused
portion of the aggregate commitment depending on the indebtedness to adjusted
EBITDA ratio. At December 31, 1997, no amounts were outstanding under this
facility. The revolving credit facility contains various covenants pertaining to
maintenance of certain financial relationships. These covenants include
requirements for interest coverage, cash flow, and net worth, among other
restrictions. The Company is in compliance with these covenants as of December
31, 1997.

Concurrent with the Offering, the Company obtained loan availability
through a line of credit of one of the acquired business units. This loan was
originally obtained in November 1993 and amended in March 1996. The loan
availability under the line of credit is determined by a formula based on trade
accounts receivable and merchandise inventory, not to exceed $15,000,000. As of
December 31, 1997, the Company had $1,111,000 drawn on this line of credit. The
line is secured by trade accounts receivable, merchandise inventory,
intangibles, and other assets. The loan was repaid and the line closed
subsequent to December 31, 1997.

Borrowings under the agreement bear interest, at the election of the
Company, at either the bank's prime rate, plus a margin based on the Company's
ratio of debt to adjusted tangible net worth, or LIBOR, plus a margin based on
the Company's ratio of debt to adjusted tangible net worth. The prime rate is
adjusted daily based on published rates, while the LIBOR rate is locked in for
one, two, or three months, based on the Company's election. Interest is payable
monthly with the principal balance due March 1998.

Additionally, the Company had available $7,250,000 through various lines of
credit. As of December 31, 1997, the Company had $4,725,000 drawn against these
lines of credit. Of the amount outstanding, approximately $1,400,000 bears
interest at LIBOR plus 2.125%. The remaining balance bears interest at rates
ranging from prime plus .125% to prime plus 1%. A portion of these lines contain
covenants regarding certain financial statement amounts, ratios, and activities
of one of the Company's business units. Also, certain advances under the lines
are secured by the assets of one of the Company's business units and are
partially guaranteed by that business unit's president.

F-12
<PAGE> 57

INDUSTRIAL DISTRIBUTION GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. LONG-TERM DEBT

At December 31, 1996 and 1997, long-term debt consisted of the following
(in thousands):

<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
9.75% mortgage payable, due in monthly installments of
$15,036, including interest, through July 1999, at which
time remaining principal and interest are due; secured by
a building with a net book value of approximately $2.3
million................................................... $ 0 $1,573
Note payable to bank, due February 1999, payable in monthly
installments of $11,500, plus interest at prime plus .25%;
collateralized by inventory, property and equipment, and
accounts receivable and guaranteed by the stockholders of
the Company............................................... $ 0 $1,251
Notes payable due to various parties through 2008, bearing
interest between 7% and 10.40%............................ 326 1,148
Note payable to officer, due June 30, 1999, bearing interest
at 7%..................................................... 99 128
Demand note payable to stockholder, renewed annually,
bearing interest at 6%.................................... 186 169
Commercial mortgage note payable to bank, due July 2022,
payable in monthly installments of $2,500, plus interest
at prime plus .75%........................................ 652 622
Other....................................................... 130 926
------ ------
Total long-term debt.............................. 1,393 5,817
Less current portion........................................ (299) (781)
------ ------
Total long-term debt, less current portion........ $1,094 $5,036
====== ======
</TABLE>

Maturities of long-term debt as of December 31, 1997 are as follows (in
thousands):

<TABLE>
<S> <C>
1998........................................................ $ 781
1999........................................................ 3,161
2000........................................................ 296
2001........................................................ 195
2002........................................................ 162
Thereafter.................................................. 1,222
</TABLE>

6. 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 purposes, 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.

COMMON STOCK

Options to purchase 409,825 shares of common stock at $17 per share were
granted on September 24, 1997. The dilution effect of stock options outstanding
during 1997 added 24,372 shares to the weighted average common shares
outstanding for purposes of calculating diluted EPS. The options granted on

F-13
<PAGE> 58

INDUSTRIAL DISTRIBUTION GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

September 24, 1997, which expire in 2007, were still outstanding at December 31,
1997 and vest ratably over a three-to-four year period. No options or other
dilutive securities were outstanding during 1995 and 1996.

At December 31, 1997, the Company has two stock-based compensation plans,
which are described below. The Company applies APB Opinion No. 25 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):

<TABLE>
<CAPTION>
1995 1996 1997
----- ----- ------
<S> <C> <C> <C>
Net income:
As reported............................................... $ 322 $ 364 $2,316
Pro forma................................................. 322 364 2,002
Basic EPS:
As reported............................................... $0.24 $0.25 $ 0.71
Pro forma................................................. 0.24 0.25 0.61
Diluted EPS:
As reported............................................... $0.24 $0.25 $ 0.71
Pro forma................................................. 0.24 0.25 0.61
</TABLE>

The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions:
risk-free interest rate between 5.35% and 6.18%, an expected life of seven to
eight years; volatility of 42%, dividend yield of 0%. The total value of options
granted in 1995, 1996, and 1997 was $0, $0, and $3,696,000, respectively.

STOCK INCENTIVE PLAN

In July 1997, the Company adopted its stock incentive plan, which was
approved by stockholders in May 1998. The plan provides 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.

Incentive stock options are also subject to certain limitations prescribed
by the Internal Revenue Code and may not be exercised for more than five 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.

F-14
<PAGE> 59

INDUSTRIAL DISTRIBUTION GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of the status of the stock incentive plan as of December 31, 1997
and changes during the year then ended is presented below:

<TABLE>
<CAPTION>
SHARES EXERCISE PRICE
---------- --------------
<S> <C> <C>
Fixed options:
Outstanding at beginning of year.......................... 0 $ 0.00
Granted................................................ 409,825 17.00
---------- ------
Outstanding at end of year................................ 409,825 $17.00
========== ======
Options exercisable at end of year.......................... 0 0
========== ======
Weighted average remaining contractual life................. 9.75 years
</TABLE>

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 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. A
maximum of 500,000 shares of common stock may be issued under the Stock Purchase
Plan. The Stock Purchase Plan may be terminated or amended by the Company's
board of directors.

7. INCOME TAXES

The provision for income taxes includes income taxes deferred because of
temporary differences between financial statement and tax bases of assets and
liabilities and consisted of the following for the years ended December 31,
1995, 1996, and 1997 (in thousands):

<TABLE>
<CAPTION>
1995 1996 1997
----- ----- ------
<S> <C> <C> <C>
Current..................................................... $ 309 $ 628 $1,869
Deferred.................................................... (242) (501) (615)
----- ----- ------
Total provision $ 67 $ 127 $1,254
===== ===== ======
</TABLE>

The provision for income taxes for the years ended December 31, 1995, 1996,
and 1997 differs from the amount computed by applying the statutory rate of 34%
due to the following (in thousands):

<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ------
<S> <C> <C> <C>
Tax at federal statutory rate............................... $132 $167 $1,214
Nondeductible expenses...................................... 41 29 35
Tax-exempt interest income.................................. (10) (10) (11)
Goodwill amortization....................................... 0 0 47
State income tax, net of federal benefit.................... 0 0 104
Cash surrender value of life insurance...................... (34) (23) 3
Other....................................................... (62) (36) (138)
---- ---- ------
Provision for income taxes........................ $ 67 $127 $1,254
==== ==== ======
</TABLE>

F-15
<PAGE> 60

INDUSTRIAL DISTRIBUTION GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, 1996 and 1997 are as follows (in thousands):

<TABLE>
<CAPTION>
1996 1997
------ -------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts........................... $ 81 $ 351
Accrued employee benefits................................. 200 231
Capitalized inventory costs............................... 83 309
Inventory allowance....................................... 1,074 1,927
Accrued liabilities....................................... 0 828
Net operating loss carryforward........................... 54 241
Other..................................................... 209 164
------ -------
1,701 4,051
------ -------
Deferred tax liabilities:
Book over tax depreciation................................ $ (17) $ (50)
Prepaid insurance......................................... (29) (5)
Intangible integrated supply contract..................... 0 (206)
Step-up in asset basis.................................... 0 (917)
Section 481 -- LIFO....................................... 0 (584)
Other..................................................... 0 (97)
------ -------
(46) (1,859)
------ -------
Net deferred tax assets........................... $1,655 $ 2,192
====== =======
</TABLE>

The Company has net operating loss carryforwards for federal income tax
purposes of approximately $650,000 as of December 31, 1997, which expire 2008
through 2010. The utilization of the related available deferred tax asset of
$241,000 at December 31, 1997 is subject to certain limitations of the Internal
Revenue Code Section 382.

The Company intends to file a consolidated federal income tax return, which
includes the operations of the Founding Companies for periods subsequent to the
acquisition date.

8. COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

The Company leases certain warehouse and office facilities as well as
certain vehicles and office equipment under operating leases. Management expects
that in the normal course of business, leases that expire will be renewed or
replaced by other leases.

The minimum future rental payments, net of sublease revenues, under all
leases as of December 31, 1997 were as follows (in thousands):

<TABLE>
<S> <C>
1998........................................................ $2,385
1999........................................................ 1,692
2000........................................................ 876
2001........................................................ 498
2002........................................................ 365
Thereafter.................................................. 1,155
------
$6,971
======
</TABLE>

F-16
<PAGE> 61

INDUSTRIAL DISTRIBUTION GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

During the years ended December 31, 1995, 1996, and 1997, rental expense
under operating leases totaled $554,000, $665,000, and $1,196,000, respectively.

LITIGATION

On November 18, 1996, Milliken & Company ("Milliken"), a textile
manufacturer and customer of TDG, filed suit against a manufacturer of an
industrial product and TDG. Milliken claims that a product sold to it by TDG as
a distributor of the defendant-manufacturer was defective and caused a fire,
severely damaging Milliken's textile manufacturing plant in LaGrange, Georgia.
Milliken alleges damages of $500 million against the defendants. TDG has denied
any liability, and its insurance carrier is vigorously defending the lawsuit on
its behalf. The inclusion of the distributor of a product, along with its
manufacturer, as a defendant in an action for alleged product defectiveness is
unexceptional. The litigation is in the early stages of discovery, and while it
is not possible to predict with accuracy the outcome of any such litigation
matter, the Company believes that its insurance, which provides for $12 million
of coverage, will be adequate to cover any loss to TDG that might result from
the lawsuit.

On August 27, 1997, Robert Hallager filed suit against his former employer,
Jessop Steel Company, and several manufacturers and distributors of industrial
products, including Shearer. Mr. Hallager claims that he contracted cobalt
poisoning and other pulmonary problems requiring his cessation of work and
lifetime monitoring as a result of this exposure to steel containing cobalt,
chromium, and nickel through a grinding process utilizing abrasive tools
supplied by his employer by the various defendant-manufacturers and
distributors. Mr. Hallager alleges damages "in excess of $50,000." The
litigation is in the very early stages, and no answer is yet due from or has
been filed by Shearer. Shearer intends to deny any liability, and its insurance
carrier is expected to defend the lawsuit on Shearer's behalf. While it is not
possible to predict with accuracy the outcome of any such litigation matter, the
Company believes that its insurance, which provides for $7 million of coverage,
will be adequate to cover any loss to Shearer that might result from the
lawsuit.

On December 22, 1997, TDG brought an action in DeKalb County Superior
Court, Georgia, File No. 97-14388-4, against a former stockholder under the
Georgia dissenters' rights provisions of the Georgia Business Corporation Code
(the "GBCC"). This former stockholder of TDG had exercised his rights pursuant
to the GBCC to dissent from the merger of TDG with the Company. In accordance
with the GBCC, TDG offered to pay the former stockholder $4.2 million for his
interest in TDG. The former stockholder rejected that offer and demanded payment
of $9 million. TDG brought this action to seek a judicial determination of the
value of his interest in TDG as of the time of the merger. The proceeding is in
the early stages of discovery, and it is not possible to predict the outcome at
this time.

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, including those identified above, will not have a
material adverse effect on the Company's financial position or results of
operations.

INSURANCE

One of the Founding Companies began participating in a self-insured health
insurance plan during 1997. Estimated reserves for reported and unreported
claims are funded through a VEBA trust. The balance of this trust was
approximately $414,000 as of December 31, 1997 and represents management's best
estimate of its liability as of the end of the year. Revisions to estimated
reserves are recorded in the period in which they become known.

EMPLOYMENT AGREEMENTS

Included in the employment agreements of the Company's three executive
officers and each of the nine presidents of the Founding Companies is a
change-of-control provision. Upon certain changes in the majority stockholders
or board of directors, the executive officers and company presidents may elect
to receive a cash

F-17
<PAGE> 62

INDUSTRIAL DISTRIBUTION GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

payment equal to the present value of their base salary for the longer of two
years or the remaining term of their contract.

9. SAVINGS PLANS

Beginning January 1, 1989, B&J established a 401(k) savings plan (the
"Plan") for the Company's nonunion employees under which participants may
contribute up to 10% of their compensation. Employees over age 21 with more than
one year of service who are not covered by a union plan are eligible for
participation in the Plan. During 1996 and 1995, the Company made contributions
to the Plan equivalent to 5% of eligible participants' salaries. The Company's
contributions totaled $149,000 and $101,000 during 1996 and 1995, respectively.
As a result of the acquisition of the other Founding Companies, the Company had
a total of seven 401(k) plans in effect since September 24, 1997. In addition to
these seven plans, each of the Pooled Companies maintained a 401(k) plan. Total
company contributions to 401(k) plans during 1997 were $264,000.

Effective January 1, 1998, or upon respective acquisition date of the
Pooled Companies, all existing 401(k) plans were merged into one new plan (the
"New Plan"). All employees who are age 21 or older and have completed one year
of service are eligible to participate in the New Plan. Once eligibility
requirements are met, employees may join the New Plan on a quarterly basis.
Employees may contribute between 1% and 15% of their compensation to the New
Plan, subject to tax law limitations. For 1998, the Company will match 25% of
the employee contribution up to a maximum of 1 1/2% of the employees' salary.

One of the Founding Companies had a profit-sharing plan in effect during
1997. Employees must have one year of service and cannot be covered by a union
plan. Participation in the profit-sharing plan was closed as of January 1, 1998.
Employer discretionary contributions vest over a seven-year period. No
contributions have been made since September 24, 1997. Participants in the plan
may continue participating in the plan while also participating in the New Plan.
In addition, NTS, one of the Pooled Companies, had a profit-sharing plan in
effect during 1997. Total employer contributions to this plan were $33,000 in
1997. No company contributions will be made to NTS's plan going forward.
Participants in this plan are eligible to also participate in the New Plan.

10. RELATED-PARTY TRANSACTIONS

A business unit leases a facility from four former stockholders of the
business unit (one of whom is a current director of the Company) under an
operating lease that expires November 30, 2002. Minimum annual lease payments
are $82,000 and are subject to increases at five-year intervals, based on
increases in the consumer price index. Rental expense recognized under this
lease was $82,000 for each of the years ended December 31, 1995, 1996, and 1997.

B&J was obligated to a retired officer to provide monthly payments of
$10,000 over his remaining life or, in the event he predeceases his spouse, over
the life of the spouse. As of December 31, 1996, B&J had accrued $1,133,000,
discounted at a 10% annual interest rate to cover the cost of this obligation.
The Company made a lump-sum payment of $1.1 million during 1997 for relief from
its obligation through 2012. If either the retired officer or his spouse is
surviving as of January 2013, monthly payments of $10,000 shall resume. In
addition, the Company agreed to pay 75% of the health and dental insurance costs
of the retired officer and his spouse until their deaths.

A business unit of IDG leases certain properties used in its operations
from a related-party family trust. A current member of the board of directors of
IDG participates in this trust. Rent expense under these noncancelable leases
was approximately $67,000 during 1997.

11. PRO FORMA COMBINED FINANCIAL INFORMATION (UNAUDITED)

The following pro forma combined financial information for the two years
ended December 31, 1997 includes the results of B&J (deemed to be the financial
acquiror) combined with the other eight Founding

F-18
<PAGE> 63

INDUSTRIAL DISTRIBUTION GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Companies and the three Pooled Companies as if the acquisitions had occurred on
January 1 of each respective period. This pro forma combined financial
information includes the effects of (a) the acquisitions, (b) the Offering, (c)
amortization of goodwill resulting from the acquisitions, (d) elimination of
interest expense for the debt that was paid from the offering proceeds, and (e)
provision for income taxes at 40%, even though one of the acquired companies had
a Chapter S corporate tax status.

The EPS amounts are based on 7,963,387 and 7,963,405 shares deemed to be
outstanding for the periods ended December 31, 1996 and 1997, respectively. The
net income amounts include estimates of the federal and state taxes that would
have been applicable to the Company had the acquisitions occurred at the
beginning of each respective period. The underlying tax rates differ from
statutory federal and state rates primarily because amortization of goodwill
related to the acquisitions is not deductible for tax purposes.

The pro forma combined financial information does not purport to represent
what the Company's financial position or results of operations would actually
have been if such transactions and events in fact had occurred on those dates or
to project the Company's results of operations for any future period. (In
thousands, except for per share amounts.)

<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Net sales................................................... $290,241 $332,169
======== ========
Net income.................................................. $ 2,748 $ 4,965
======== ========
Diluted earnings per share.................................. $ 0.35 $ 0.62
======== ========
</TABLE>

12. INTERIM FINANCIAL INFORMATION (UNAUDITED)

The following table sets forth certain quarterly financial data for the
periods indicated (in thousands, except for per share amounts):

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
1997:
Net sales......................................... $19,444 $20,669 $27,182 $85,923
Gross profit...................................... 4,299 4,888 6,279 20,026
Net income........................................ 184 521 653 958
Diluted EPS*...................................... $ 0.12 $ 0.35 $ 0.31 $ 0.12
1996:
Net sales......................................... $16,378 $16,427 $17,626 $17,835
Gross profit...................................... 3,732 3,734 4,160 3,866
Net income........................................ 106 36 331 (109)
Diluted EPS....................................... $ 0.08 $ 0.02 $ 0.22 $ (0.07)
</TABLE>

- ---------------

* The sum of the diluted EPS for 1997 by quarter does not agree with the amount
disclosed on the statement of operations due to the weighted average effect of
the shares issued in the Offering and to the Founding Companies late in the
third quarter of 1997.

F-19
<PAGE> 64

INDUSTRIAL DISTRIBUTION GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS EXCEPT SHARE DATA)

(UNAUDITED)

(NOTE 1)

<TABLE>
<CAPTION>
JUNE 30,
1998
--------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents................................. $ 5,579
Accounts Receivable, net.................................. 50,043
Inventory, net............................................ 52,032
Prepaid and Other Current Assets.......................... 6,381
--------
Total Current Assets.............................. 114,035
Property and Equipment, net............................... 13,603
Intangible Assets, net.................................... 37,618
Other Assets.............................................. 2,106
--------
Total Assets...................................... $167,362
========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short Term Debt........................................... $ 5,125
Accounts Payable.......................................... 29,861
Accrued Compensation...................................... 2,910
Other Accrued Liabilities................................. 3,296
--------
Total Current Liabilities......................... 41,192
Long-Term Debt............................................ 3,257
Deferred Income Taxes..................................... 217
Other Long-Term Liabilities............................... 9,209
--------
Total Liabilities................................. 53,875
STOCKHOLDERS' EQUITY:
Common Stock, par value $.01 per share, 50,000,000
shares authorized; 8,466,713 shares issued and
outstanding in 1998; 7,880,110 shares in 1997.......... 85
Additional Paid-In Capital................................ 100,213
Retained Earnings......................................... 13,189
--------
Total Stockholders' Equity........................ 113,487
--------
Total Liabilities & Stockholders' Equity.......... $167,362
========
</TABLE>

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

F-20
<PAGE> 65

INDUSTRIAL DISTRIBUTION GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT SHARE DATA)

(UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
NET SALES................................................... $ 196,401 $ 40,113
COST OF SALES............................................... 151,560 30,926
---------- ----------
Gross profit.............................................. 44,841 9,187
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 40,076 7,859
---------- ----------
Income from operations.................................... 4,765 1,328
INTEREST EXPENSE............................................ 487 443
OTHER (INCOME) EXPENSE...................................... (702) (202)
---------- ----------
INCOME BEFORE INCOME TAXES.................................. 4,980 1,087
PROVISION FOR INCOME TAXES.................................. 1,904 382
---------- ----------
NET INCOME.................................................. $ 3,076 $ 705
========== ==========
BASIC EARNINGS PER SHARE.................................... $ .38 $ .47
========== ==========
DILUTED EARNINGS PER SHARE.................................. $ .38 $ .47
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING (Basic)................. 8,052,006 1,495,061
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING (Diluted)............... 8,110,302 1,495,061
========== ==========
</TABLE>

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

F-21
<PAGE> 66

INDUSTRIAL DISTRIBUTION GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------
1998 1997
-------- ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 3,076 $ 705
-------- ------
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization.......................... 1,369 197
Amortization of deferred loan cost..................... 30 --
Provision for deferred taxes........................... (483) (232)
Loss on disposal of equipment.......................... 24 6
Gain on sale of investments............................ (6) --
Changes in operating assets and liabilities:
Accounts receivable, net............................. (3,603) 124
Inventories, net..................................... 672 490
Prepaid assets....................................... (445) 50
Other assets......................................... (15) --
Accounts payable..................................... (950) (595)
Accrued compensation................................. 448 509
Deferred loan costs.................................. (15) --
Other accrued liabilities............................ (468) (355)
-------- ------
Total adjustments................................. (3,442) 194
-------- ------
Net cash (used in) provided by operating
activities....................................... (366) 899
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment, net.................. (3,325) (197)
Proceeds from the sale of property and equipment.......... 32 --
Cash paid in acquisitions................................. (12,086) --
Deposits.................................................. (12) --
Cash surrender value of life insurance.................... 914 --
Cash from acquired companies.............................. 839 --
Proceeds from sale of investments......................... (3) (24)
-------- ------
Net cash used in investing activities..................... (13,641) (221)
-------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... 178 (3)
Payments on short term debt............................... (7,257) (387)
Payments on long-term debt................................ (4,865) 366
Adjustments to conform year ends of certain pooled
companies.............................................. (4) (8)
-------- ------
Net cash used in financing activities..................... (11,948) (32)
-------- ------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... (25,955) 646
CASH AND CASH EQUIVALENTS, beginning of period.............. 31,534 1,585
======== ======
CASH AND CASH EQUIVALENTS, end of period.................... $ 5,579 $2,231
======== ======
Supplemental Cash Flow Information:
Cash Paid for Interest.................................... $ 273 $ 183
======== ======
Cash Paid for Income Taxes................................ $ 1,709 $ 39
======== ======
</TABLE>

The accompanying notes are an integral part of these financial statements

F-22
<PAGE> 67

INDUSTRIAL DISTRIBUTION GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1998

1. BASIS OF PRESENTATION

Industrial Distribution Group, Inc., a Delaware corporation ("IDG" or the
"Company"), 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 products. In September 1997,
IDG completed an initial public offering (the "offering") of its Common Stock,
and at the same time, acquired the following nine industrial distribution
companies: Associated Suppliers, Inc. ("Associated"), B&J Industrial Supply
Company ("B&J"), Cramer Industrial Supplies ("Cramer"), Grinding Supplies
Company ("Grinding"), J.J. Stangel Company ("J.J. Stangel"), Shearer Industrial
Supply Company ("Shearer"), Slater Industrial Supply Company ("Slater"), The
Distribution Group ("TDG") and Tri-Star Industrial Supply, Inc. ("Tri-Star"),
collectively referred to as the "Founding Companies". The consideration for the
acquisitions of the Founding Companies consisted of a total of 3,330,224 shares
of Company Common Stock. B&J has been identified as the acquiror for financial
statement presentation purposes pursuant to Staff Accounting Bulletin 97 ("SAB
97"). The acquisitions were accounted for using the purchase method of
accounting. The allocations of purchase price to the assets acquired and
liabilities assumed of the Founding Companies were recorded based on fair value.

The closing of the acquisitions and the offering occurred on September 29,
1997. For accounting purposes, however, September 24, 1997 has been established
as the effective date of the acquisitions because management has determined that
effective control of the operations of the Founding Companies transferred to IDG
on that date.

The accompanying unaudited interim financial statements of IDG represent
B&J (as the SAB 97 financial acquiror) for the three and six months ended June
30, 1997. They also represent B&J, the eight Founding Companies and acquisitions
treated as purchases from the date of purchase for the three and six months
ended June 30, 1998. All periods presented give retroactive effect to the
results of companies acquired by IDG in business combinations accounted for
under the pooling-of-interests method (the "Pooled Companies"). See Note 3.

The accompanying unaudited interim financial statements are prepared
pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly,
certain information and footnotes required by generally accepted accounting
principles for complete financial statements are not included herein. The
Company believes all adjustments necessary for a fair presentation of these
interim statements have been included and are of a normal and recurring nature.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

There were no significant changes in the accounting policies of the Company
during the periods presented.

3. ACQUISITIONS

During March 1998, the Company acquired three industrial distributors, E.C.
Blackstone Company, Continental Air Tools, Inc. d/b/a/ Continental-McLaughlin,
and Northern Tool & Supply, Inc. Blackstone was accounted for using the purchase
method of accounting while Continental and Northern Tool were accounted for
using the pooling-of-interests method of accounting.

During the second quarter of 1998, the Company acquired seven industrial
supply distributors, REFCO, Inc., Hawley Industrial Supplies, Inc., New England
Group Industrial Distributors, Inc. d/b/a Industrial Suppliers of New England,
Industrial and Tool Suppliers, L.L.C., Buford Brothers, Inc., Knox Industrial
Supplies, Inc., and L.D. Supply, Inc.

F-23
<PAGE> 68

INDUSTRIAL DISTRIBUTION GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

REFCO, Inc., Hawley Industrial Supplies, Inc., New England Group Industrial
Distributors, Inc. and Industrial and Tool Suppliers, L.L.C. were acquired in
May, 1998 to give IDG a presence in the New England area. REFCO, Inc., located
in Boylston, Massachusetts, and New England Group Industrial Distributors, Inc.,
located in Nashua, New Hampshire, were each acquired for cash and stock. Hawley
Industrial Supplies, Inc., located in Bridgeport, Connecticut, and Industrial
and Tool Suppliers, L.L.C., located in Portland, Maine, were acquired for stock.
The New England acquisitions, except for Hawley, were accounted for using the
purchase method of accounting. Under the purchase method of accounting, the
Company's financial statements include their operating results from the date of
acquisition. Likewise, goodwill recorded in connection with their acquisition is
being amortized on a straight-line basis over 40 years. Hawley was accounted for
using the pooling-of-interests method of accounting. The Company's financial
statements give retroactive effect to the acquisition of Hawley for all periods
presented.

Buford Brothers, located in Nashville, Tennessee, was acquired in May,
1998. This acquisition was accounted for using the purchase method of
accounting.

Knox Industrial Supplies, located in Santa Ana, California, will expand the
Company's market in the Southern California area. Knox, acquired in May, 1998,
was accounted for as an asset purchase. Accordingly, the Company's financial
statements include their operating results from the date of their acquisition.
No goodwill is recorded in conjunction with an asset purchase.

L.D. Supply, located in Wichita, Kansas, was acquired in June, 1998. L.D.
Supply was accounted for using the purchase method of accounting.

4. CREDIT FACILITY

In December 1997, the Company entered into a $75,000,000 revolving credit
facility with a five-bank syndicate. The facility has a three-year term, bears
interest at either the bank's corporate base rate or a Eurodollar rate plus
applicable margins, and is secured by a first security interest in the capital
stock of the Company's business units. The agreement provides that the facility
be used for operations and acquisitions and provides $5,000,000 each for
swinglines and letters of credit. There is an annual commitment fee on the
unused portion of the facility equal to between 20 and 30 basis points of the
average daily unused portion of the aggregate commitment depending on the
indebtedness to adjusted EBITDA ratio, as defined. At June 30, 1998, $4,000,000
was outstanding under this facility at an effective interest rate of 6.35%. The
revolving credit facility contains various covenants pertaining to maintenance
of certain financial relationships. The Company was in compliance with these
covenants as of June 30, 1998.

5. CAPITAL STOCK

During the second quarter of 1998, the Company issued 652,322 shares of its
Common Stock to acquire five companies.

6. INCOME TAXES

The Company intends to file a consolidated federal income tax return, which
includes the operations of all acquired companies for periods subsequent to
their respective acquisition dates. Each acquired company will file a "short
period" federal income tax return through its acquisition date.

7. COMMITMENTS AND CONTINGENCIES

On November 18, 1996, Milliken & Company, a textile manufacturer and
customer of TDG, filed suit against a manufacturer of an industrial product and
TDG. Milliken claims that a product sold to it by TDG as a distributor of the
defendant-manufacturer was defective and caused fire, severely damaging
Milliken's textile manufacturing plant in LaGrange, Georgia. Milliken alleges
damages of $500 million against the defendants.

F-24
<PAGE> 69

INDUSTRIAL DISTRIBUTION GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

TDG has denied any liability, and its insurance carrier is vigorously defending
the lawsuit on its behalf. The inclusion of the distributor of a product, along
with its manufacturer, as a defendant in an action for alleged product
defectiveness is unexceptional. The litigation is in discovery, and while it is
not possible to predict with accuracy the outcome of any such litigation matter,
the Company believes that its insurance, which provides for $12 million of
coverage, will be adequate to cover any loss to TDG that might result from the
lawsuit.

On December 22, 1997, TDG brought an action in DeKalb County Superior
Court, Georgia, File No. 97-14388-4, against a former stockholder, under the
Georgia dissenters' rights provisions of the Georgia Business Corporation Code
(the "GBCC). On July 24, 1998, the DeKalb County Superior Court issued an order
transferring the case to the Superior Court of Fulton County. The former
stockholder of TDG had exercised his rights pursuant to the GBCC to dissent from
the merger of TDG with the Company. In accordance with the GBCC, TDG offered to
pay the former stockholder $4.2 million for his interest in TDG. The former
stockholder rejected that offer and demanded payment of $9 million. TDG brought
this action to seek a judicial determination of the value of his interest in TDG
as of the time of the merger. The proceedings are still in discovery, and it is
not possible to predict the outcome at this time.

8. NEW PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for the
reporting of comprehensive income in a company's financial statements.
Comprehensive income includes all changes in a company's equity during the
period that result from transactions and other economic events other than
transactions with its stockholders. For the Company, SFAS No. 130 is effective
for the year beginning January 1, 1998. Implementation of SFAS No. 130 did not
have a significant effect on its current financial reporting.

In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." SFAS No.
131 requires that an enterprise disclose certain information about operating
segments. SFAS No. 131 is effective for financial statements for the Company's
fiscal year ending December 31, 1998. The Company does not expect that SFAS No.
131 will have a significant impact on its current financial statements nor will
it require significant revision of prior disclosures.

9. PRO FORMA COMBINED FINANCIAL INFORMATION

The following pro forma combined financial information for the six months
ended June 30, 1998 reflects the results of the Company. For the six months
ended June 30, 1997, it includes the historical results of B&J and the Pooled
Companies combined with the other eight Founding Companies as if the
acquisitions had occurred on January 1. This pro forma combined financial
information includes the effects of (a) the acquisitions; (b) the offering; (c)
amortization of goodwill resulting from the acquisitions; (d) elimination of
interest expense for the debt that was paid from the offering proceeds; and (e)
provision for income taxes at 40%, even though one of the acquired companies had
a Chapter S corporate tax status.

The earnings per share amounts are based on 8,466,713 and 7,880,110 common
shares deemed to be outstanding for the periods ended June 30, 1998 and 1997
respectively. For the six months ended June 30, 1997, the net income amounts
include estimates of the federal and state taxes that would have been applicable
to the Company had the acquisitions occurred at the beginning of the period. The
underlying tax rates differ from statutory federal and state rates primarily
because amortization of goodwill related to the acquisitions is not deductible
for tax purposes.

F-25
<PAGE> 70

INDUSTRIAL DISTRIBUTION GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Net Sales................................................... $196,401 $160,936
-------- --------
Net Income.................................................. $ 3,076 $ 2,711
======== ========
Earnings per Share.......................................... $ .36 $ .34
======== ========
</TABLE>

F-26
<PAGE> 71

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Industrial Distribution Group, Inc.:

We have audited the accompanying balance sheets of INDUSTRIAL DISTRIBUTION
GROUP, INC. (a Georgia corporation) as of December 31, 1995 and 1996 and the
related statements of income, shareholders' equity, and cash flows for each of
the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Industrial Distribution
Group, Inc. as of December 31, 1995 and 1996 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles.

/s/ ARTHUR ANDERSEN LLP

Atlanta, Georgia
May 23, 1997

F-27
<PAGE> 72

INDUSTRIAL DISTRIBUTION GROUP, INC.
(NOW KNOWN AS THE DISTRIBUTION GROUP, INC. ("TDG"))

BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1995 1996 1997
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 12 $ 8 $ 13
Trade accounts receivable, net of allowance for doubtful
accounts of $148 in 1995, 1996, and 1997............... 7,154 9,256 9,924
Inventories, net.......................................... 11,927 14,074 14,649
Other receivables......................................... 141 144 269
Prepaid expenses and other assets......................... 67 460 295
------- ------- -------
Total current assets.............................. 19,301 23,942 25,150
PROPERTY AND EQUIPMENT, net................................. 2,142 2,166 1,961
OTHER ASSETS................................................ 909 320 1,055
------- ------- -------
Total assets...................................... $22,352 $26,428 $28,166
======= ======= =======

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities under line of credit................... $ 0 $ 1,062 $ 0
Current maturities of long-term debt...................... 42 47 54
Accounts payable.......................................... 6,168 4,730 6,679
Accrued expenses.......................................... 1,326 942 734
------- ------- -------
Total current liabilities......................... 7,536 6,781 7,467
------- ------- -------
LINE OF CREDIT, less current maturities..................... 9,368 13,993 14,539
------- ------- -------
LONG-TERM DEBT, less current maturities..................... 1,650 1,604 1,574
------- ------- -------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 1,000,000 shares authorized,
110,665 shares issued and outstanding in 1995, 1996,
and 1997............................................... 1 1 1
Additional paid-in capital................................ 307 307 307
Retained earnings......................................... 3,490 3,742 4,278
------- ------- -------
Total shareholders' equity........................ 3,798 4,050 4,586
------- ------- -------
Total liabilities and shareholders' equity........ $22,352 $26,428 $28,166
======= ======= =======
</TABLE>

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

F-28
<PAGE> 73

INDUSTRIAL DISTRIBUTION GROUP, INC.
(NOW KNOWN AS THE DISTRIBUTION GROUP, INC.)

STATEMENTS OF INCOME
(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX-MONTH
PERIOD ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- -----------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES........................................ $75,624 $83,526 $90,786 $45,184 $49,960
COST OF SALES.................................... 55,948 62,361 67,330 34,308 37,562
------- ------- ------- ------- -------
Gross profit................................... 19,676 21,165 23,456 10,876 12,398
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES.... 17,447 18,803 21,160 9,785 10,747
------- ------- ------- ------- -------
Income from operations................. 2,229 2,362 2,296 1,091 1,651
------- ------- ------- ------- -------
OTHER INCOME (EXPENSE):
Gain (loss) on sale of assets.................. 10 3 12 4 3
Interest expense............................... (856) (963) (1,016) (511) (778)
Other income (expense)......................... 43 57 47 8 19
Litigation costs (Note 8)...................... (165) (245) (621) (84) (21)
------- ------- ------- ------- -------
(968) (1,148) (1,578) (583) (777)
------- ------- ------- ------- -------
Income before state income tax
provision............................ 1,261 1,214 718 508 874
STATE INCOME TAX PROVISION (Note 2).............. 6 12 25 25 41
------- ------- ------- ------- -------
NET INCOME....................................... $ 1,255 $ 1,202 $ 693 $ 483 $ 833
======= ======= ======= ======= =======
PRO FORMA FEDERAL INCOME TAX PROVISION........... $ 208 $ 292
------- -------
PRO FORMA NET INCOME............................. $ 485 $ 541
======= =======
</TABLE>

The accompanying notes are an integral part of these statements.

F-29
<PAGE> 74

INDUSTRIAL DISTRIBUTION GROUP, INC.
(NOW KNOWN AS THE DISTRIBUTION GROUP, INC.)

STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------- ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993..................... 110,665 $1 $307 $2,100 $2,408
Net income................................... 0 0 0 1,255 1,255
Distributions to shareholders................ 0 0 0 (517) (517)
------- -- ---- ------ ------
BALANCE, December 31, 1994..................... 110,665 1 307 2,838 3,146
Net income................................... 0 0 0 1,202 1,202
Distributions to shareholders................ 0 0 0 (550) (550)
------- -- ---- ------ ------
BALANCE, December 31, 1995..................... 110,665 1 307 3,490 3,798
Net income................................... 0 0 0 693 693
Distributions to shareholders................ 0 0 0 (441) (441)
------- -- ---- ------ ------
BALANCE, December 31, 1996..................... 110,665 1 307 3,742 4,050
Net income................................... 0 0 0 833 833
Distributions to shareholders................ 0 0 0 (297) (297)
------- -- ---- ------ ------
BALANCE, June 30, 1997 (unaudited)............. 110,665 $1 $307 $4,278 $4,586
======= == ==== ====== ======
</TABLE>

The accompanying notes are an integral part of these statements.

F-30
<PAGE> 75

INDUSTRIAL DISTRIBUTION GROUP, INC.
(NOW KNOWN AS THE DISTRIBUTION GROUP, INC.)

STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX-MONTH
PERIOD ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------- ------------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................. $ 1,255 $ 1,202 $ 693 $ 483 $ 833
------- ------- ------- ------- -------
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation........................ 271 320 357 166 203
(Gain) loss on sale of assets....... (10) (3) (12) (4) (3)
Changes in assets and liabilities:
Trade accounts receivable, net.... (544) (510) (2,102) (2,258) (670)
Inventories, net.................. (1,500) (1,387) (2,147) (242) (608)
Other receivables................. 10 (59) (3) 126 (124)
Prepaid expenses and other
assets......................... 115 (338) 196 191 (494)
Accounts payable and accrued
expenses....................... 1,125 707 (1,822) (473) 1,741
------- ------- ------- ------- -------
Total adjustments.............. (533) (1,270) (5,533) (2,494) 46
------- ------- ------- ------- -------
Net cash provided by (used in)
operating activities......... 722 (68) (4,840) (2,011) 878
------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets........... 20 5 23 15 5
Capital expenditures................... (276) (202) (392) (171) (43)
------- ------- ------- ------- -------
Net cash used in investing
activities................... (256) (197) (369) (156) (38)
------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) borrowings under line
of credit........................... (80) 819 5,687 2,521 (516)
Principal repayments of long-term
debt................................ (20) (33) (41) (20) (23)
Repayment of note payable to
shareholder......................... 0 (150) 0 0 0
Distributions to shareholders.......... (517) (550) (441) (311) (296)
------- ------- ------- ------- -------
Net cash (used in) provided by
financing activities......... (617) 86 5,205 2,190 (835)
------- ------- ------- ------- -------
NET CHANGE IN CASH AND CASH
EQUIVALENTS............................ (151) (179) (4) 23 5
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD................................. 342 191 12 12 8
------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD................................. $ 191 $ 12 $ 8 $ 35 $ 13
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Noncash financing to purchase assets... $ 23 $ 60 $ 0
======= ======= =======
Interest paid.......................... $ 856 $ 963 $ 919
======= ======= =======
Income taxes paid...................... $ 6 $ 12 $ 25
======= ======= =======
</TABLE>

The accompanying notes are an integral part of these statements.

F-31
<PAGE> 76

INDUSTRIAL DISTRIBUTION GROUP, INC.
(NOW KNOWN AS THE DISTRIBUTION GROUP, INC.)

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995, AND 1996

1. DESCRIPTION OF THE BUSINESS

Industrial Distribution Group, Inc. (the "Company" or "TDG") is a wholesale
industrial supply distribution company headquartered in Tucker, Georgia, with
branch offices and warehouses in Georgia, North Carolina, South Carolina,
Indiana, Tennessee, and Oregon. The Company distributes industrial supplies and
equipment throughout the United States. The Company is also an authorized repair
center for many of its suppliers and provides additional services, such as
customizing conveyor belts and band saw blades, for its customers.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRESENTATION OF FINANCIAL STATEMENTS

The financial statements of the Company include the corporate headquarters
as well as its operating divisions, Boring-Smith, Dixie Industrial Supply, and
Ensco Supply. All significant interdivisional transactions and balances have
been eliminated.

CASH EQUIVALENTS

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

TRADE ACCOUNTS RECEIVABLE

An allowance for doubtful accounts has been established based on a review
of the current status of existing receivables, historical collection experience,
and management's evaluation of the effect of existing economic conditions.
Receivables are charged to the allowance account when deemed to be
uncollectible.

INVENTORIES

Inventories consist primarily of merchandise purchased for resale and are
stated at the lower of cost or market. Cost is determined by the first-in,
first-out basis, and market is considered to be net realizable value.
Inventories are stated net of an allowance of $150,000 to adjust cost to net
realizable value as of December 31, 1996.

PROPERTY AND EQUIPMENT

<TABLE>
<S> <C>
Buildings................................................... 19-31 years
Office and warehouse equipment.............................. 5-7 years
Vehicles.................................................... 3-5 years
</TABLE>

OTHER ASSETS

As of December 31, 1995, other assets included a receivable from a
shareholder for $52,000. During 1996, in connection with the settlement of a
lawsuit filed by the shareholder (Note 8), the Company forgave the receivable
from this shareholder.

INCOME TAXES

The Company, with the consent of its shareholders, has elected as of
January 1, 1990 to be taxed under the provisions of subchapter S of the Internal
Revenue Code. Accordingly, the financial statements do not

F-32
<PAGE> 77
INDUSTRIAL DISTRIBUTION GROUP, INC.
(NOW KNOWN AS THE DISTRIBUTION GROUP, INC.)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

include a provision for current income taxes because the Company does not incur
federal income taxes. Instead, its earnings and losses are included in the
shareholders' personal income tax returns, and the shareholders are taxed based
on their personal income tax strategies.

Subsequent to year-end, the Company will change from an S corporation to a
C corporation for federal and state income tax reporting purposes, which will
require the Company to recognize the tax consequences of operations in its
statements of income. The supplemental pro forma information included in the
accompanying statements of income reflects the estimated impact of recognizing
income tax expenses as if the Company had been a C corporation for tax reporting
purposes for the year ended December 31, 1996.

NATURE OF OPERATIONS, RISKS, AND UNCERTAINTIES

The Company operates primarily in wholesale distribution of industrial
supplies. There are no other significant business segments in which the Company
operates. The Company has a broad customer base representing many diverse
industries. As of December 31, 1994, 1995, and 1996, no one customer represented
greater than 10% of the Company's revenues or accounts receivable. The principal
industries served by Dixie Industrial Supply are the metal working, chemical,
transportation, textile, pulp and paper, and furniture industries. Dixie
Industrial Supply has seven branches located in North Carolina, South Carolina,
Georgia, and Tennessee. The principal customers of Boring-Smith are the
manufactured housing, recreational vehicle, and boating industries throughout
the continental United States who purchase production tools and supplies.
Boring-Smith distributes its products from three stationary warehouses and eight
mobile warehouses. Ensco Supply's principal customers are primarily commercial
mechanical, electrical, HVAC, and general contractors who purchase power tools
and related supplies. Ensco Supply has three warehouses, all located in North
Carolina.

The following schedule reflects the distribution in gross sales for the
years ended December 31, 1994, 1995, and 1996:

<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Dixie Industrial Supply..................................... 62% 62% 64%
Boring-Smith................................................ 27 28 26
Ensco Supply................................................ 11 10 10
--- --- ---
100% 100% 100%
=== === ===
</TABLE>

USE OF ESTIMATES

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

REVENUE RECOGNITION

Revenue is recognized on sales of products at the time of shipment.

COST OF SALES

Cost of sales consists of the cost of materials purchased offset by
discounts and rebates received from suppliers.

NEW ACCOUNTING PRONOUNCEMENTS

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of," to be effective for
fiscal years beginning after December 15, 1995. The adoption of this

F-33
<PAGE> 78
INDUSTRIAL DISTRIBUTION GROUP, INC.
(NOW KNOWN AS THE DISTRIBUTION GROUP, INC.)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

statement as of January 1, 1996 did not have a significant impact on the
Company's financial position or results of operations.

RECLASSIFICATIONS

Certain reclassifications have been made to 1994 and 1995 amounts to
conform to current year presentation.

INTERIM UNAUDITED FINANCIAL INFORMATION

The financial statements as of June 30, 1997 and for the six months ended
June 30, 1996 and 1997 are unaudited; however, in the opinion of management, all
adjustments (consisting solely of normal recurring adjustments) necessary for a
fair presentation of the unaudited financial statements for these interim
periods have been included. The results of interim periods are not necessarily
indicative of the results to be obtained for a full year.

3. PROPERTY AND EQUIPMENT

Property and equipment as of December 31, 1995 and 1996 consist of the
following (in thousands):

<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Land........................................................ $ 238 $ 238
Buildings................................................... 2,141 2,221
Furniture and fixtures...................................... 1,204 1,206
Computer equipment.......................................... 700 735
Trucks...................................................... 352 591
Leasehold improvements...................................... 746 746
------- -------
5,381 5,737
Less accumulated depreciation............................... (3,239) (3,571)
------- -------
Property and equipment, net....................... $ 2,142 $ 2,166
======= =======
</TABLE>

Depreciation expense was $271,000, $320,000, and $357,000 for the years
ended December 31, 1994, 1995, and 1996, respectively.

4. LINE OF CREDIT

The Company obtained a line of credit from a financial institution in
November 1993, which was amended in March 1996. The loan availability under the
line of credit is determined by a formula based on trade accounts receivable and
merchandise inventory, not to exceed $15,000,000. As of December 31, 1996, the
Company had an overadvancement on the line of credit. In accordance with the
loan agreement, the amount of overadvance is payable on demand and is included
in the accompanying balance sheet as a current liability. The line is secured by
trade accounts receivable, merchandise inventory, intangibles, and other assets.

F-34
<PAGE> 79
INDUSTRIAL DISTRIBUTION GROUP, INC.
(NOW KNOWN AS THE DISTRIBUTION GROUP, INC.)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Borrowings outstanding under the line of credit as of December 31, 1995 and
1996 were as follows:

<TABLE>
<CAPTION>
1995 1996
------ -------
(IN THOUSANDS)
<S> <C> <C>
Variable rate line of credit, interest computed at prime
plus .75% (9% as of December 31, 1996).................... $9,368 $ 7,555
Variable rate line of credit, interest computed at LIBOR
plus 3.25% (8.75% as of December 31, 1996)................ 0 7,500
------ -------
Total borrowings under line of credit............. 9,368 15,055
Less current maturities..................................... 0 (1,062)
------ -------
Net long-term borrowings under line of credit............... $9,368 $13,993
====== =======
</TABLE>

The line of credit agreement contains various covenants pertaining to
maintenance of certain financial relationships. These covenants include
requirements on capital expenditures, maintaining a minimum adjusted tangible
net worth, a maximum ratio of debt to adjusted tangible net worth, a minimum
current ratio, a minimum EBITD ratio, and certain other covenants. The Company
was in default of certain of these covenants as of December 31, 1996. The
Company obtained a waiver in May 1997 for certain covenants, while other
covenants were amended on a going-forward basis.

5. LONG-TERM DEBT

Long-term debt as of December 31, 1995 and 1996 consists of the following:

<TABLE>
<CAPTION>
1995 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
9.75% mortgage payable, due in monthly installments of
$15,036, including interest through July 1999, at which
time remaining principal and interest are due; secured by
a building................................................ $1,623 $1,600
8% note payable, due in monthly installments of $553,
including interest through October 1998, at which time
remaining principal and interest are due; secured by a
vehicle and personal guaranty of a shareholder............ 17 11
9% note payable, due in monthly installments of $822,
including interest through March 1999, at which time
remaining principal and interest are due; secured by a
vehicle................................................... 27 20
8.5% note payable, due in monthly installments of $665,
including interest through September 1999, at which time
remaining principal and interest are due; secured by a
vehicle................................................... 25 20
------ ------
Total long-term debt.............................. 1,692 1,651
Less current portion........................................ (42) (47)
------ ------
Total long-term debt, less current portion........ $1,650 $1,604
====== ======
</TABLE>

Future maturities of long-term debt as of December 31, 1996 are as follows
(in thousands):

F-35
<PAGE> 80
INDUSTRIAL DISTRIBUTION GROUP, INC.
(NOW KNOWN AS THE DISTRIBUTION GROUP, INC.)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

6. EMPLOYEE BENEFIT PLAN

During 1994, the Company amended its profit-sharing plan and implemented a
401(k) savings plan (the "Plan") for all eligible employees. Employees of the
Company are eligible to participate in the Plan after satisfying certain
requirements as to age and length of service. The Company, at its discretion,
may make contributions equal to a matching percentage that it deems advisable
based on a tiered formula in relation to the employees' eligible contributions.
In addition, the Company, at its discretion, may contribute an amount which it
designates as a qualified nonelective contribution. For the plan years ended
December 31, 1994, 1995, and 1996, employer contributions to the Plan were $0,
$89,000, and $0, respectively.

7. RELATED-PARTY TRANSACTIONS

The Company leases, at customary terms and market rates, vehicles,
furniture, fixtures, and equipment from a limited partnership in which two
shareholders of the Company are partners. Rental expense paid to this limited
partnership amounted to $96,000, $71,000, and $31,000 during 1994, 1995, and
1996, respectively (Note 8).

The Company purchases business and health insurance through an independent
agency owned by a shareholder of the Company. The amount paid for such insurance
during 1994, 1995, and 1996 was approximately $289,000, $288,000, and $294,000,
respectively.

8. COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

The Company has entered into operating leases for certain office and
warehouse facilities and equipment. The Company also subleases a portion of its
warehouse facilities. Management expects that in the normal course of business,
leases that expire will be renewed or replaced by other leases.

As of December 31, 1996, minimum future rental payments due under
noncancelable operating lease arrangements are as follows (in thousands):

<TABLE>
<S> <C>
1997........................................................ $1,116
1998........................................................ 885
1999........................................................ 673
2000........................................................ 323
2001........................................................ 26
Thereafter.................................................. 0
------
$3,023
======
</TABLE>

Rental expense for all of the operating leases amounted to $1,309,000,
$1,208,000, and $1,258,000 during 1994, 1995, and 1996, respectively. Of these
amounts, $96,000, $71,000, and $31,000 were paid to related parties during 1994,
1995, and 1996, respectively (Note 7).

LITIGATION

In 1993, a shareholder brought suit against the Company and members of
management seeking dissolution of the Company on grounds that there was a
shareholder voting deadlock and that those in control of the Company had acted
in a fraudulent manner in the operation of the Company. The shareholder also
sought certain damages from the Company and management. The court refused to
dissolve the Company and found that management had not acted in a fraudulent
manner in the operation of the Company. In a related judgment, the court ordered
the Company to pay the shareholder's attorneys fees in the amount of $100,000.

F-36
<PAGE> 81
INDUSTRIAL DISTRIBUTION GROUP, INC.
(NOW KNOWN AS THE DISTRIBUTION GROUP, INC.)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The Company has appealed that decision, but has recorded $100,000 as of December
31, 1996 in accrued expenses in the accompanying balance sheet. The parties
submitted certain other claims by the shareholder and counterclaims by the
Company to binding arbitration. Based on the arbitration, the Company was
required to pay the shareholder and a related party approximately $263,000 and
to forgive $68,000 owed the Company by the shareholder. During 1994, 1995, and
1996, the Company charged to expense approximately $165,000, $245,000, and
$621,000, respectively, for legal fees and resolution of the aforementioned case
and arbitration.

On November 18, 1996, Milliken & Company ("Milliken"), a textile
manufacturer and customer of the Company, filed suit against a manufacturer of
an industrial product and the Company in the Superior Court of Troup County,
Georgia. Milliken claims that a product sold to it by the Company as a
distributor of the defendant-manufacturer was defective and caused a fire,
severely damaging Milliken's textile manufacturing plant in LaGrange, Georgia,
and alleges damages of $500 million against the defendants. The Company
maintains insurance coverage under multiple policies in the aggregate amount of
$11 million. The Company has denied any liability, and its insurance carrier is
vigorously defending the lawsuit on its behalf. The litigation is in the early
stages of discovery. While the damages alleged by Milliken are exceptional in
amount, the inclusion of the distributor of a product, along with its
manufacturer, as a defendant in an action for alleged product defectiveness is
unexceptional. The litigation is in the early stages of discovery, and while it
is not possible to predict with accuracy the outcome of any such litigation
matter, the Company believes that its insurance will be adequate to cover any
loss to the Company that might result from the lawsuit.

The Company is subject to various claims and legal actions which arise in
the ordinary course of business. In the opinion of management, the ultimate
resolution of such matters will be adequately covered by insurance or will not
have a material adverse effect on the Company's financial position or results of
operations.

9. SUBSEQUENT EVENT (UNAUDITED)

Effective June 9, 1997, the judgment against the Company related to the
$100,000 of attorneys fees was reversed on appeal (Note 8).

F-37
<PAGE> 82

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Associated Suppliers, Inc. and Subsidiaries:

We have audited the accompanying consolidated balance sheets of ASSOCIATED
SUPPLIERS, INC. (an Oregon corporation) AND SUBSIDIARIES as of December 31, 1995
and 1996 and the related consolidated statements of income, shareholders'
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Associated Suppliers, Inc.
and subsidiaries as of December 31, 1995 and 1996 and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.

/s/ ARTHUR ANDERSEN LLP

Atlanta, Georgia
May 1, 1997

F-38
<PAGE> 83

ASSOCIATED SUPPLIERS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1995 1996 1997
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................... $ 29 $ 18 $ 41
Accounts receivable, less allowance for doubtful
accounts of $46, $51, and $66 in 1995, 1996, and
1997, respectively................................... 2,565 2,327 2,706
Inventories, net........................................ 3,190 2,806 3,192
Prepaid expenses and other.............................. 53 46 144
Deferred tax assets..................................... 52 56 56
------ ------ ------
Total current assets............................ 5,889 5,253 6,139
PROPERTY AND EQUIPMENT, net............................... 342 312 358
OTHER ASSETS.............................................. 39 121 156
------ ------ ------
Total assets.................................... $6,270 $5,686 $6,653
====== ====== ======

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit.......................................... $2,305 $1,921 $2,457
Current portion of long-term debt and capital lease
obligations.......................................... 50 58 119
Current portion of company-guaranteed debt of ESOP...... 223 105 90
Accounts payable........................................ 1,541 1,255 1,410
Accrued expenses........................................ 204 236 110
Income taxes payable.................................... 73 123 53
------ ------ ------
Total current liabilities....................... 4,396 3,698 4,239
------ ------ ------
LONG-TERM DEBT and CAPITAL LEASE OBLIGATIONS, less current
portion................................................. 105 70 266
------ ------ ------
COMPANY-GUARANTEED DEBT OF ESOP, less current portion..... 316 204 156
------ ------ ------
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY:
Common stock, no par value; 500,000 shares authorized,
177,440, 164,420, and 163,672 shares issued and
outstanding in 1995, 1996, and 1997, respectively.... 0 0 0
Additional paid-in capital.............................. 782 587 575
Retained earnings....................................... 1,210 1,436 1,663
------ ------ ------
1,992 2,023 2,238
Unearned compensation under ESOP........................ (539) (309) (246)
------ ------ ------
Total shareholders' equity...................... 1,453 1,714 1,992
------ ------ ------
Total liabilities and shareholders' equity...... $6,270 $5,686 $6,653
====== ====== ======
</TABLE>

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

F-39
<PAGE> 84

ASSOCIATED SUPPLIERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, JUNE 30,
------------------ ------------------
1995 1996 1996 1997
------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES........................................... $24,471 $24,481 $12,265 $12,654
COST OF SALES....................................... 19,554 19,574 9,723 9,954
------- ------- ------- -------
Gross profit...................................... 4,917 4,907 2,542 2,700
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES....... 4,226 4,156 2,372 2,250
------- ------- ------- -------
Income from operations............................ 691 751 170 450
INTEREST EXPENSE.................................... 269 278 127 128
OTHER (INCOME) EXPENSE.............................. (2) 89 (8) 1
------- ------- ------- -------
INCOME BEFORE INCOME TAXES.......................... 424 384 51 321
PROVISION FOR INCOME TAXES.......................... 173 158 17 94
------- ------- ------- -------
NET INCOME.......................................... $ 251 $ 226 $ 34 $ 227
======= ======= ======= =======
</TABLE>

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

F-40
<PAGE> 85

ASSOCIATED SUPPLIERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
UNEARNED
ADDITIONAL COMPENSATION
COMMON PAID-IN RETAINED UNDER
SHARES CAPITAL EARNINGS ESOP TOTAL
------- ---------- -------- ------------ ------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994..................... 180,746 $830 $ 959 $(469) $1,320
Acquisition of common stock from departing
ESOP participants......................... (3,306) (48) 0 (266) (314)
Compensation under ESOP...................... 0 0 0 196 196
Net income................................... 0 0 251 0 251
------- ---- ------ ----- ------
BALANCE, December 31, 1995..................... 177,440 782 1,210 (539) 1,453
Acquisition of common stock from departing
ESOP participants......................... (13,020) (195) 0 0 (195)
Compensation under ESOP...................... 0 0 0 230 230
Net income................................... 0 0 226 0 226
------- ---- ------ ----- ------
BALANCE, December 31, 1996..................... 164,420 587 1,436 (309) 1,714
Acquisition of common stock from departing
ESOP participants......................... (748) (12) 0 0 (12)
Compensation under ESOP...................... 0 0 0 63 63
Net income................................... 0 0 227 0 227
------- ---- ------ ----- ------
BALANCE, June 30, 1997 (unaudited)............. 163,672 $575 $1,663 $(246) $1,992
======= ==== ====== ===== ======
</TABLE>

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

F-41
<PAGE> 86

ASSOCIATED SUPPLIERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, JUNE 30,
------------- -------------
1995 1996 1996 1997
----- ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 251 $ 226 $ 34 $ 227
----- ----- ----- -----
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization.......................... 122 130 72 50
(Gain) loss on sale of equipment....................... (13) 12 0 0
Changes in operating assets and liabilities:
Accounts receivable.................................. (451) 238 (37) (379)
Inventories.......................................... (87) 384 404 (386)
Prepaid expenses and other assets.................... 10 (32) (24) (97)
Deferred tax assets.................................. 1 (4) (4) 0
Accounts payable, accrued expenses, and income taxes
payable........................................... 20 (204) (615) (40)
----- ----- ----- -----
Total adjustments................................. (398) 524 (204) (852)
----- ----- ----- -----
Net cash (used in) provided by operating
activities...................................... (147) 750 (170) (625)
----- ----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net.................. (167) (112) (34) (97)
Change in cash surrender value of officers' life
insurance.............................................. (8) 2 (9) (5)
Investment in joint venture............................... 0 (45) 0 (30)
----- ----- ----- -----
Net cash used in investing activities............. (175) (155) (43) (132)
----- ----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayment) under line of credit........... 397 (384) 231 536
Net (repayments) borrowings of long-term debt and capital
lease obligations...................................... (8) (27) (24) 256
Acquisition of common stock from departing ESOP
participants........................................... (48) (195) 0 (12)
----- ----- ----- -----
Net cash provided by (used in) financing
activities...................................... 341 (606) 207 780
----- ----- ----- -----
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... 19 (11) (6) 23
CASH AND CASH EQUIVALENTS, beginning of period.............. 10 29 29 18
----- ----- ----- -----
CASH AND CASH EQUIVALENTS, end of period.................... $ 29 $ 18 $ 23 $ 41
===== ===== ===== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid.......................................... $ 230 $ 240
===== =====
Income taxes paid -- net of refunds.................... $ 91 $ 116
===== =====
</TABLE>

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

F-42
<PAGE> 87

ASSOCIATED SUPPLIERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

Associated Suppliers, Inc. and its five wholly owned subsidiaries (the
"Company") are engaged in the wholesale distribution of industrial tools and
supplies. The Company is located in Oregon, Washington, and Arizona. MACS
Industrial Supply, Inc., a subsidiary located in New Mexico, was closed during
1995. A new subsidiary, Factory Tool Outlet, Inc., located in Oregon, was formed
and opened during 1996.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the
Associated Suppliers, Inc. and its wholly owned subsidiaries: Davis Industrial
Products, Co. (Oregon), Mining & Construction Suppliers, Inc. (Arizona),
Tri-State Industrial Supply Co. (Washington), Supplies for Industry, Inc.
(Washington), and Factory Tool Outlet, Inc. (Oregon). All significant
intercompany accounts and transactions have been eliminated in consolidation.

CASH EQUIVALENTS

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

ACCOUNTS RECEIVABLE

An allowance for uncollectible accounts has been established based on the
Company's collection experience and an assessment of the collectibility of
specific accounts.

INVENTORIES

Inventories consist primarily of merchandise purchased for resale and are
valued at the lower of the weighted average cost or market value. Cost is
determined on an average cost basis, and market is considered as net realizable
value. Inventories are stated net of an allowance to adjust cost to net
realizable value of $112,000 as of December 31, 1995 and 1996.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost, less accumulated depreciation.
Expenditures for maintenance and repairs 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 expense (income) in the accompanying financial statements.
Depreciation is computed using the straight-line and accelerated methods over
the estimated useful lives of the respective assets as follows:

<TABLE>
<S> <C>
Leasehold improvements...................................... Life of related lease
Machinery and office equipment.............................. Five to seven years
Motor vehicles.............................................. Five to seven years
Rental equipment............................................ One to three years
</TABLE>

OTHER ASSETS

Other assets as of December 31, 1995 and 1996 include the cash surrender
value of executive life insurance policies totaling $39,000 and $37,000,
respectively (face value of $550,000). In addition, during 1995, the Company
entered into a joint venture agreement with Hermientos Y Servicios USAMEX, a
Mexico corporation. The Company contributed capital of $45,000 to this joint
venture in 1996. As it is not expected

F-43
<PAGE> 88
ASSOCIATED SUPPLIERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

that the Company will be able to exercise control over the Mexican company, the
investment is accounted for using the cost method of accounting. There was no
operating activity in this Mexico corporation in either 1995 or 1996.

INCOME TAXES

REVENUE RECOGNITION

Revenue is recognized on sales of products at the time of shipment.

COST OF SALES

Cost of sales includes the cost of merchandise purchased, less any
applicable rebates and volume discounts.

CONCENTRATION OF CREDIT RISK

The Company places its temporary cash investments with qualified financial
institutions and, by policy, limits the amount of credit exposure to one
financial institution. The Company has a broad customer base, representing many
diverse industries doing business in numerous geographic areas. As of December
31, 1996, one customer represented 11% of the Company's accounts receivables.
For the years ended December 31, 1995 and 1996, no one customer represented 10%
of the Company's sales and one supplier represented 20% and 22%, respectively,
of the Company's purchases.

USE OF ESTIMATES

INTERIM UNAUDITED FINANCIAL INFORMATION

F-44
<PAGE> 89
ASSOCIATED SUPPLIERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at December 31, 1995 and
1996 (in thousands):

<TABLE>
<CAPTION>
1995 1996
------- ------
<S> <C> <C>
Leasehold improvements...................................... $ 100 $ 70
Machinery and equipment..................................... 1,044 848
Motor vehicles.............................................. 224 174
Rental equipment............................................ 9 0
------- ------
1,377 1,092
Less accumulated depreciation............................... (1,035) (780)
------- ------
Property and equipment, net....................... $ 342 $ 312
======= ======
</TABLE>

Depreciation expense totaled $117,000 and $130,000 for the years ended
December 31, 1995 and 1996, respectively.

3. LINE OF CREDIT

The Company has a revolving operating line-of-credit agreement with a bank
maturing July 28, 1997. Interest is charged at the bank's prime lending rate
(8.25% as of December 31, 1996) plus .25% and is collateralized by eligible
accounts receivable, inventories, equipment, and other assets of the Company. At
December 31, 1996, the Company's maximum borrowing base is $3,500,000. The
outstanding balance on the line of credit at December 31, 1995 and 1996 is
$2,305,000 and $1,921,000, respectively.

4. LONG-TERM DEBT AND CAPITAL LEASES

At December 31, 1995 and 1996, long-term debt and capital leases consist of
the following:

<TABLE>
<CAPTION>
1995 1996
----- -----
(IN THOUSANDS)
<S> <C> <C>
Prime plus 1% note payable to bank, due in monthly
installments of $546 through June 1998; collateralized by
a vehicle................................................. $ 15 $ 10
8.25% note payable to bank, due in monthly installments of
$419 through October 1998; collateralized by a vehicle.... 13 8
9% note payable to bank, due in monthly installments of $518
through February 1998; collateralized by a vehicle........ 12 7
Capital leases.............................................. 115 103
---- ----
Total long-term debt and capital leases........... 155 128
Less current portion........................................ (50) (58)
---- ----
Long-term debt and capital leases, less current
portion......................................... $105 $ 70
==== ====
</TABLE>

Additionally, a bank has made available to the Company funds for foreign
investment (Note 1) in the amount of $150,000 at a stated interest rate of the
bank's prime lending rate plus 1%. At December 31, 1995 and 1996, no funds had
been borrowed under this agreement.

The capital lease obligations expire at various dates through July 2001,
with estimated residual values totaling approximately $16,000.

F-45
<PAGE> 90
ASSOCIATED SUPPLIERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Maturities of long-term debt and capital leases as of December 31, 1996 are
as follows (in thousands):

<TABLE>
<S> <C>
1997........................................................ $ 66
1998........................................................ 56
1999........................................................ 11
2000........................................................ 6
2001........................................................ 3
----
Total minimum obligations................................... 142
Less amount representing interest on capital leases......... (14)
----
Present value of minimum obligations........................ $128
====
</TABLE>

Additionally, the Company was required to issue a letter of credit for
$63,000 as security for one of the capital lease agreements. The letter of
credit is to be exercised only upon default of the capital lease agreement.

5. EMPLOYEE BENEFIT PLANS

The Company has a leveraged noncontributory employee stock ownership plan
("ESOP") covering substantially all employees meeting certain age and
length-of-service requirements.

Contributions to the ESOP are determined by the Company's management.
Management intends to fund the ESOP in an amount which, when aggregated with the
ESOP plan's dividend and interest earnings, at least equals the annual principal
and interest due on notes payable to former participants. The notes payable to
former participants represent the debt incurred by the ESOP to repurchase shares
held by these departing participants. The Company is contingently liable for
repayment of the notes, and accordingly, the liability is included in the
accompanying balance sheets with a corresponding amount representing unearned
compensation shown as a reduction to shareholders' equity.

Contributions for the years ended December 31, 1995 and 1996 are classified
as follows in thousands:

<TABLE>
<CAPTION>
1995 1996
---- -----
<S> <C> <C>
Compensation expense........................................ $196 $ 88
Interest expense............................................ 39 38
Current employer contribution............................... 17 0
---- -----
Total contribution................................ $252 $ 126
==== =====
</TABLE>

As payments are made on the notes, shares are released from collateral and
the Company recognizes compensation expense equal to the carrying value of the
shares allocated to participant accounts. The ESOP classifies shares which
collateralize the debt as unallocated shares. All other shares of the ESOP are
held in participant accounts and are considered allocated.

At December 31, 1995 and 1996, the unallocated, allocated, and total shares
held by the ESOP and their respective fair market values are as follows (in
thousands except share data):

<TABLE>
<CAPTION>
1995 1996
---------------- ----------------
FAIR FAIR
MARKET MARKET
SHARES VALUE SHARES VALUE
------- ------ ------- ------
<S> <C> <C> <C> <C>
Unallocated......................................... 35,000 $ 530 20,000 $ 303
Allocated........................................... 112,000 1,673 114,000 1,772
------- ------ ------- ------
Total..................................... 147,000 $2,203 134,000 $2,075
======= ====== ======= ======
</TABLE>

F-46
<PAGE> 91
ASSOCIATED SUPPLIERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The market value per share at December 31, 1995 and 1996 was $15.00 and
$15.50, respectively.

During 1996, the board of directors voted to terminate the ESOP. All funds
of nonseparated participants shall be rolled into a 401(k) savings plan.
Separated participants shall be paid out subsequent to year-end (Note 9).

6. PROVISION FOR INCOME TAXES

<TABLE>
<CAPTION>
1995 1996
----- -----
(IN THOUSANDS)
<S> <C> <C>
Current:
Federal................................................... $136 $132
State and local........................................... 31 30
---- ----
167 162
---- ----
Deferred:
Federal................................................... 4 (3)
State and local........................................... 2 (1)
---- ----
6 (4)
---- ----
Total provision................................... $173 $158
==== ====
</TABLE>

The provision for income taxes for the years ended December 31, 1995 and
1996 differs from the amount computed by applying the federal statutory rate of
34% due to the following:

<TABLE>
<CAPTION>
1995 1996
----- -----
(IN THOUSANDS)
<S> <C> <C>
Tax at federal statutory rate............................... $144 $131
State and local income taxes, net of federal benefit........ 20 18
Nondeductible travel and entertainment...................... 9 9
---- ----
Total provision................................... $173 $158
==== ====
</TABLE>

Deferred taxes are recorded 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,
1995 and 1996 are as follows:

<TABLE>
<CAPTION>
1995 1996
----- -----
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts........................... $ 18 $ 20
Inventory allowance....................................... 44 44
Other..................................................... 2 5
---- ----
64 69
Deferred tax liabilities:
Other..................................................... (12) (13)
---- ----
Net deferred tax assets................................... $ 52 $ 56
==== ====
</TABLE>

F-47
<PAGE> 92
ASSOCIATED SUPPLIERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

The Company entered into operating leases for certain office, retail, and
warehouse facilities and equipment. The Company also subleases a portion of its
warehouse facilities. Management expects that in the normal course of business,
leases that expire will be renewed or replaced by other leases.

Future minimum lease payments under all leases as of December 31, 1996 were
as follows (in thousands):

<TABLE>
<S> <C>
1997........................................................ $288
1998........................................................ 334
1999........................................................ 305
2000........................................................ 217
2001........................................................ 183
Thereafter.................................................. 844
</TABLE>

Total rental expense for the years ended December 31, 1995 and 1996 was
approximately $287,000 and $351,000, respectively.

LITIGATION

8. RELATED-PARTY TRANSACTIONS

Davis Industrial Products Co. leased its office and warehouse facilities
from a related party during the years ended December 31, 1995 and 1996. Total
lease payments were $145,000 and $169,000 for the years ended December 31, 1995
and 1996, respectively.

Mining & Construction Suppliers, Inc. leases its office and warehouse
facilities from parties related through common ownership. The operating lease
expires December 31, 1999. Total lease payments were approximately $70,000 for
the years ended December 31, 1995 and 1996.

9. SUBSEQUENT EVENTS

The Company secured a $300,000 commitment from a bank to liquidate all
outstanding debt obligations to separated participants in the ESOP plan (Note
5). Terms of the agreement call for 60 monthly principal payments of $5,000,
plus interest at the bank's prime lending rate plus .75%. The commitment matures
March 2002 and is secured by all assets of the Company.

F-48
<PAGE> 93

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Cramer Industrial Supplies, Inc.

We have audited the accompanying consolidated balance sheet of CRAMER
INDUSTRIAL SUPPLIES, INC. (a New York corporation) AND SUBSIDIARY as of December
31, 1996 and the related consolidated statements of operations, stockholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Cramer Industrial Supplies,
Inc. and subsidiary as of December 31, 1996 and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.

/s/ ARTHUR ANDERSEN LLP

Atlanta, Georgia
June 20, 1997

F-49
<PAGE> 94

CRAMER INDUSTRIAL SUPPLIES, INC.
AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 17 $ 77
Accounts receivable, net of allowance for doubtful
accounts of $115 and $128 in 1996 and 1997............. 1,083 1,261
Inventories, net.......................................... 1,419 1,505
Prepaid expenses.......................................... 40 43
------ ------
Total current assets.............................. 2,559 2,886
------ ------
PROPERTY AND EQUIPMENT:
Land, building, and improvements.......................... 565 565
Furniture and fixtures.................................... 174 175
Machinery and equipment................................... 600 617
------ ------
1,339 1,357
Less accumulated depreciation............................. (818) (873)
------ ------
NET PROPERTY AND EQUIPMENT.................................. 521 484
DEPOSITS AND OTHER ASSETS................................... 16 82
------ ------
Total assets...................................... $3,096 $3,452
====== ======

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit............................................ $1,273 $1,307
Current portion of long-term debt and capital lease
obligations............................................ 40 40
Accounts payable.......................................... 1,029 1,376
Accrued expenses.......................................... 177 69
------ ------
Total current liabilities......................... 2,519 2,792
------ ------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS................ 200 184
------ ------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Common stock, $1 par value; 20,000 shares authorized,
2,412 and 2,567 shares issued and outstanding in 1996
and 1997............................................... 2 3
Additional paid-in capital................................ 1,235 1,298
Accumulated deficit....................................... (860) (825)
------ ------
Total stockholders' equity........................ 377 476
------ ------
Total liabilities and stockholders' equity........ $3,096 $3,452
====== ======
</TABLE>

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

F-50
<PAGE> 95

CRAMER INDUSTRIAL SUPPLIES, INC.
AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX-MONTH
PERIODS ENDED
JUNE 30,
---------------
1996 1996 1997
------- ------ ------
(UNAUDITED)
<S> <C> <C> <C>
NET SALES................................................... $11,467 $5,927 $5,903
COST OF SALES............................................... 9,294 4,699 4,633
------- ------ ------
Gross profit...................................... 2,173 1,228 1,270
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES............... 2,159 1,145 1,143
------- ------ ------
Income from operations............................ 14 83 127
INTEREST EXPENSE............................................ (173) (88) (81)
OTHER INCOME (EXPENSE)...................................... 0 0 (11)
------- ------ ------
(LOSS) INCOME BEFORE INCOME TAXES........................... (159) (5) 35
PROVISION FOR INCOME TAXES.................................. 0 0 0
------- ------ ------
NET (LOSS) INCOME........................................... $ (159) $ (5) $ 35
======= ====== ======
</TABLE>

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

F-51
<PAGE> 96

CRAMER INDUSTRIAL SUPPLIES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995.................. 2,412 $2 $1,235 $(701) $ 536
Net loss.................................... 0 0 0 (159) (159)
----- -- ------ ----- -----
BALANCE AT DECEMBER 31, 1996.................. 2,412 2 1,235 (860) 377
Issuance of common stock.................... 155 1 63 0 64
Net income.................................. 0 0 0 35 35
----- -- ------ ----- -----
BALANCE AT JUNE 30, 1997 (unaudited).......... 2,567 $3 $1,298 $(825) $ 476
===== == ====== ===== =====
</TABLE>

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

F-52
<PAGE> 97

CRAMER INDUSTRIAL SUPPLIES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR SIX-MONTH
ENDED PERIOD ENDED
DECEMBER 31, JUNE 30,
------------ --------------
1996 1996 1997
------------ ----- -----
(UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income......................................... $(159) $ (5) $ 35
----- ----- -----
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization.......................... 92 49 55
Non cash compensation charge........................... 0 0 64
Change in assets and liabilities:
Accounts receivable, net............................. (14) (286) (178)
Inventory, net....................................... (129) 24 (86)
Prepaid expenses..................................... 21 (41) (3)
Other assets......................................... 0 0 (66)
Accounts payable..................................... 243 475 347
Accrued expenses..................................... (77) (128) (108)
----- ----- -----
Total adjustments................................. 136 93 25
----- ----- -----
Net cash (used in) provided by operating
activities...................................... (23) 88 60
----- ----- -----
INVESTING ACTIVITIES:
Capital expenditures...................................... (138) (59) (18)
FINANCING ACTIVITIES:
Net proceeds under line of credit agreement............... 153 103 34
Net issue (repayment) of debt and capital lease
obligations............................................ 3 (27) (16)
----- ----- -----
Net cash provided by financing activities......... 156 76 18
----- ----- -----
NET CHANGE IN CASH.......................................... (5) 105 60
CASH AT BEGINNING OF PERIOD................................. 22 22 17
----- ----- -----
CASH AT END OF PERIOD....................................... $ 17 $ 127 $ 77
===== ===== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid............................................. $ 184
=====
Noncash financing to purchase assets...................... $ 66
=====
</TABLE>

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

F-53
<PAGE> 98

CRAMER INDUSTRIAL SUPPLIES, INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996

1. DESCRIPTION OF BUSINESS

Cramer Industrial Supplies, Inc. and subsidiary (the "Company") is a New
York wholesale industrial distribution company located in Tonawanda, New York.
There are no other significant business segments in which the Company operates.
The Company sells primarily to customers in the Western New York area.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
Cramer Industrial Supplies, Inc. and its majority-owned (99%) subsidiary, Fast
Tool, LLC ("Fast Tool"). All material intercompany accounts, transactions, and
profits have been eliminated in consolidation.

ACCOUNTS RECEIVABLE

An allowance for doubtful accounts has been established based on the
Company's collection experience and an assessment of the collectibility of
specific accounts.

INVENTORIES

Inventories consist primarily of merchandise purchased for resale and are
stated at the lower of cost or market value. Cost of Cramer Industrial Supplies,
Inc. ("Cramer") inventory (89% of total inventory) is determined by the last-in,
first-out ("LIFO") method. The inventory of Fast Tool (11% of total inventory)
is determined by the first-in, first-out ("FIFO") method. If LIFO inventories
were valued at current costs, the inventory amount would have been $95,000
higher than that reported at December 31, 1996.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost, less accumulated depreciation.
Expenditures for repairs and maintenance not considered to substantially
lengthen the asset lives 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
straight-line or accelerated methods over the following estimated useful lives:

<TABLE>
<S> <C>
Buildings and improvements......................... 20 years -- straight line
5 to 8
Furniture and fixtures............................. years -- accelerated
5 to 8
Machinery and equipment............................ years -- accelerated
</TABLE>

INCOME TAXES

REVENUE RECOGNITION

Revenue is recognized on sales of products at the time of shipment.

F-54
<PAGE> 99
CRAMER INDUSTRIAL SUPPLIES, INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

COST OF SALES

Cost of sales consists of the cost of materials purchased, offset by
discounts and rebates received from suppliers.

CONCENTRATION OF CREDIT RISK

The Company has a broad customer base representing many diverse industries
doing business in the Western New York area. For the year ended December 31,
1996, one customer represented 10% of the Company's sales and ten customers
represented 50% of the Company's sales. No one supplier represented 10% of the
Company's purchases.

USE OF ESTIMATES

NEW ACCOUNTING PRONOUNCEMENTS

In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of," effective for fiscal years beginning after December 15, 1995. The
adoption of this statement as of January 1, 1996 did not have a significant
impact on the Company's financial position or results of operations.

INTERIM UNAUDITED FINANCIAL INFORMATION

The consolidated financial statements as of June 30, 1997 and for the six
months ended June 30, 1996 and 1997 are unaudited; however, in the opinion of
management, all adjustments (consisting solely of normal recurring adjustments)
necessary for a fair presentation of the unaudited consolidated financial
statements for these interim periods have been included. The results of interim
periods are not necessarily indicative of the results to be obtained for a full
year.

3. LINE OF CREDIT

The Company has a line of credit with a bank requiring monthly payments of
interest at the prime rate plus 2% (10.25% at December 31, 1996). The Company is
allowed to borrow up to 80% of qualified accounts receivable and 40% of
merchandise inventory up to $1.5 million. The maximum available line of credit
was $1,273,000 at December 31, 1996. The line of credit is secured by inventory
and accounts receivable of the Company. The balance outstanding under the line
of credit was $1,273,000 at December 31, 1996.

F-55
<PAGE> 100
CRAMER INDUSTRIAL SUPPLIES, INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

Long-term debt and capital lease obligations consists of the following at
December 31, 1996 (in thousands):

<TABLE>
<S> <C>
Mortgage payable in monthly installments of $1,944 through
November 1999 plus interest at prime plus 2% (10.25% at
December 31, 1996); secured by the commercial property and
a security interest in the building and fixtures, with a
combined net book value of approximately $335,000 at
December 31, 1996, and a limited guarantee of a
stockholder............................................... $181
Capital lease obligations on equipment; maturing September
1998; bearing interest at approximately 10%; with monthly
principal and interest payments of $2,321................. 59
----
240
Less current portion........................................ 40
----
Long term portion........................................... $200
====
</TABLE>

Minimum payments due subsequent to December 31, 1996 are as follows (in
thousands):

5. INCOME TAXES

The income tax provision (benefit) for the year ended December 31, 1996
includes income taxes deferred because of temporary differences between
financial statement and tax bases of assets and liabilities and differs from the
amount computed by applying the federal statutory rate of 34% due to the
following (in thousands):

<TABLE>
<S> <C>
Tax at federal statutory rate............................... $(54)
State income taxes, net of federal.......................... (6)
Nondeductible expenses...................................... 8
Other....................................................... 5
Change in valuation allowance............................... 47
----
Provision for income taxes.................................. $ 0
====
</TABLE>

<TABLE>
<S> <C>
Deferred tax assets:
Allowance for doubtful accounts........................... $ 46
Net operating loss carryforwards.......................... 244
Inventory................................................. 58
-----
348
Valuation allowance......................................... (348)
-----
Net deferred tax assets........................... $ 0
=====
</TABLE>

F-56
<PAGE> 101
CRAMER INDUSTRIAL SUPPLIES, INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company has net operating loss carryforwards for federal income tax
purposes of approximately $600,000 as of December 31, 1996, which expire in 2008
through 2010. The loss carryforwards were used to offset fiscal 1996 taxable
income. The available deferred tax asset of $348,000 at December 31, 1996 has
been completely offset with a valuation allowance, since ultimate realization of
these benefits is uncertain.

6. RETIREMENT PLANS

The Company maintains a deferred compensation plan for virtually all
employees under Section 401(k) of the Internal Revenue Code. Under terms of the
plan, participants may elect to contribute up to 15% of their defined
compensation. In addition, the Company will contribute 25% of each respective
participant's contributions up to a maximum of 5% of defined compensation. Total
contributions to the plan were approximately $11,000 in 1996.

In addition, the Company maintains a defined contribution, discretionary
profit-sharing plan for all employees. No contributions have been made to the
plan for 1996.

7. RELATED PARTY TRANSACTIONS

The president of the Company has a loan from the Company. The loan was for
$10,500 on December 31, 1996.

Cramer and its 99% subsidiary, Fast Tool, sell a limited amount of
inventory between themselves. This inventory is sold at or near cost.
Intercompany profit is eliminated during consolidation.

8. COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

The Company leases various vehicles from lessors under operating leases
that expire over time through August 1999. Management expects that in the normal
course of business, leases that expire will be renewed or replaced by other
leases.

The minimum future rental payments, under operating leases as of December
31, 1996 were as follows (in thousands):

During the year ended December 31, 1996 rental expense under operating
leases totaled $41,000.

LITIGATION

The Company has been named a third party defendant along with a previous
owner of Fast Tool Supply in a lawsuit filed by another previous owner of Fast
Tool Supply. The Company began purchasing inventory from Fast Tool Supply in
1995. Management will vigorously defend all claims and does not believe that the
results of the lawsuit will have a material adverse effect on the on the
Company's financial position or results of operations.

F-57
<PAGE> 102

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of LD Supply, Inc.:

We have audited the accompanying balance sheet of LD SUPPLY, INC. (a Kansas
corporation) as of April 30, 1998 and the related statements of operations,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of LD Supply, Inc. as of April
30, 1998 and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.

/s/ ARTHUR ANDERSEN LLP

Atlanta, Georgia
July 24, 1998

F-58
<PAGE> 103

LD SUPPLY, INC.

BALANCE SHEET
APRIL 30, 1998

<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 544,348
Accounts receivable, net.................................. 1,428,585
Inventories............................................... 1,508,336
Prepaid and other current assets.......................... 456,579
----------
Total current assets.............................. 3,937,848
PROPERTY AND EQUIPMENT, net................................. 78,956
----------
Total assets...................................... $4,016,804
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit............................................ $ 200,000
Accounts payable.......................................... 496,320
Accrued expenses.......................................... 137,004
Accrued taxes payable..................................... 577,651
----------
Total current liabilities......................... 1,410,975
----------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Common stock, $100 par value per share; 5,000 shares
authorized, 32 shares issued and outstanding........... 3,200
Additional paid-in capital................................ 138,968
Retained earnings......................................... 2,463,661
----------
Total stockholders' equity........................ 2,605,829
----------
Total liabilities and stockholders' equity........ $4,016,804
==========
</TABLE>

The accompanying notes are an integral part of this balance sheet.

F-59
<PAGE> 104

LD SUPPLY, INC.

STATEMENT OF OPERATIONS
FOR THE YEAR ENDED APRIL 30, 1998

<TABLE>
<S> <C>
NET SALES................................................... $16,960,660
COST OF SALES............................................... 13,216,619
-----------
Gross profit.............................................. 3,744,041
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES............... 2,506,670
-----------
Income from operations.................................... 1,237,371
INTEREST EXPENSE............................................ 17,502
INTEREST INCOME............................................. 9,731
OTHER INCOME, net........................................... 10,304
-----------
NET INCOME........................................ $ 1,239,904
===========
</TABLE>

The accompanying notes are an integral part of this statement.

F-60
<PAGE> 105

LD SUPPLY, INC.

STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED APRIL 30, 1998

<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
BALANCE, April 30, 1997............................. $3,200 $138,968 $1,817,625 $1,959,793
Distributions to stockholders..................... 0 0 (593,868) (593,868)
Net income........................................ 0 0 1,239,904 1,239,904
------ -------- ---------- ----------
BALANCE, April 30, 1998............................. $3,200 $138,968 $2,463,661 $2,605,829
====== ======== ========== ==========
</TABLE>

The accompanying notes are an integral of this statement.

F-61
<PAGE> 106

LD SUPPLY, INC.

STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED APRIL 30, 1998

<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $1,239,904
----------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 60,775
Gain on sale of property and equipment................. (9,000)
Changes in operating assets and liabilities:
Accounts receivable, net............................. (248,827)
Inventories, net..................................... (225,913)
Prepaid and other current assets..................... (2,000)
Accounts payable..................................... (83,132)
Accrued expenses..................................... (115,875)
Accrued taxes payable................................ 3,306
----------
Total adjustments................................. (620,666)
----------
Net cash provided by operating activities......... 619,238
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment, net.................. (30,773)
Proceeds from sale of property and equipment.............. 9,000
Sale of short-term investments............................ 32,949
Changes in short-term investments......................... 11,985
Cash surrender value of life insurance policies........... (41,341)
----------
Net cash used in investing activities............. (18,180)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to stockholders............................. (593,868)
----------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... 7,190
CASH AND CASH EQUIVALENTS, beginning of year................ 537,158
----------
CASH AND CASH EQUIVALENTS, end of year...................... $ 544,348
==========
SUPPLEMENTAL DISCLOSURE:
Interest paid............................................. $ 16,665
==========
</TABLE>

The accompanying notes are an integral part of this statement.

F-62
<PAGE> 107

LD SUPPLY, INC.

NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1998

1. BASIS OF PRESENTATION

ORGANIZATION AND BUSINESS

LD Supply, Inc. (the "Company"), a Kansas corporation, was formed on April
11, 1956 and is a distributor that provides procurement solutions, products, and
services to industrial users which have maintenance, repair, operating, and
production supply requirements. The Company conducts business primarily in
Kansas, with customers ranging from small machine shops to major aircraft
companies.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

CASH EQUIVALENTS

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

ACCOUNTS RECEIVABLE

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 allowance amounted to $11,147 as of April 30, 1998, and
the provision for bad debts was $7,000 for the year then ended.

INVENTORIES

Inventories consist primarily of merchandise purchased for resale and are
stated at the lower of cost or market value. Cost is determined using the
first-in-first-out method, and market is considered to be net realizable value.

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 or expense in the statement of operations.

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

<TABLE>
<S> <C>
Office equipment....................................... Three to five years
Automobiles............................................ Three years
</TABLE>

INCOME TAXES

Effective May 1, 1997, the Company elected and was approved by the Internal
Revenue Service to change its tax status from a C corporation to an S
corporation. As an S corporation, the Company is not a taxable entity, and
separately stated items of income, loss, deduction, and credit are passed
through to and

F-63
<PAGE> 108
LD SUPPLY, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

taken into account by the individual stockholder in computing federal and state
individual income tax liabilities. The Company makes cash distributions to its
owners for estimated tax payments.

REVENUE RECOGNITION

Revenue is recognized on sales of products at the time of shipment, offset
by discounts given to customers.

COST OF SALES

Cost of sales consists of the cost of materials purchased, offset by
discounts received from suppliers.

FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK

The Company's carrying value of financial instruments (cash, trade
receivables, accounts payable, accrued liabilities, and debt) approximates fair
value due to the short maturity of those instruments. For the year ended April
30, 1998, the Company had one customer which represented approximately 29% of
the Company's operating revenues and approximately 18% of the Company's accounts
receivable. The Company renewed an existing contract with this customer on May
28, 1998, expiring May 31, 2001, in which the customer guarantees to purchase
certain inventory items as stated in the contract. As part of this agreement,
the Company is obligated to maintain certain levels of inventory for purchase by
the customer.

3. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at April 30, 1998:

<TABLE>
<S> <C>
Office equipment............................................ $219,470
Automobiles................................................. 78,189
--------
297,659
Less accumulated depreciation............................... (218,703)
--------
Property and equipment, net................................. $ 78,956
========
</TABLE>

Depreciation expense totaled $60,775 for the year ended April 30, 1998.

4. DEBT

The Company has a $500,000 revolving line of credit with a bank maturing
March 11, 1999 and bearing interest at prime plus .25%. The interest rate was
8.5% at April 30, 1998 and averaged 8.5% during the year then ended. The
borrowings under the line of credit were $200,000 at April 30, 1998.

Among other restrictive covenants, the revolving line of credit requires
the Company to maintain a minimum current ratio and a minimum tangible net
worth. Additionally, the Company cannot exceed certain capital expenditure
limitations. At April 30, 1998, the Company was in compliance with these
covenants.

5. COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

The Company leases the main warehouse and office facility in which it
conducts business as well as certain office equipment under operating leases.

F-64
<PAGE> 109
LD SUPPLY, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The minimum future rental payments under all leases as of April 30, 1998
are as follows:

<TABLE>
<S> <C>
1999........................................................ $ 35,212
2000........................................................ 34,482
2001........................................................ 33,960
2002........................................................ 33,960
2003........................................................ 33,960
Thereafter.................................................. 166,970
--------
$338,544
========
</TABLE>

During the year ended April 30, 1998, rental expense under operating leases
totaled $31,362.

6. LITIGATION

In August 1997, the Internal Revenue Service concluded its examination of
the Company's income tax returns for the fiscal years ended April 30, 1994,
1995, and 1996 by issuing an examination report proposing additional income
taxes and the imposition of accumulated earnings taxes plus interest totaling
$60,692, $70,717, and $74,447, respectively. The Company intends to vigorously
defend against the proposed additions to income tax and the imposition of
accumulated earnings tax by administrative appeal and/or litigation in the
United States Tax Court or the United States District Court, with such actions
to be commenced soon hereafter.

In June 1995, a former employee of the Company filed a claim against the
Company for discrimination under the Kansas Act Against Discrimination and/or
the Americans With Disabilities Act. The employee claims that the Company
wrongfully terminated him because he was disabled and could not perform job
duties under his job description. The Company has denied any liability and plans
to vigorously defend itself in this matter.

Management believes that the ultimate resolution of these matters will not
materially affect the Company's results of operations or financial position.

7. BENEFIT PLAN

Beginning January 1, 1998, the Company established a 401(k) plan (the
"Plan") for the Company's employees under which participants may contribute up
to 10% of their compensation. Employees over age 21 with more than one year of
service are eligible for participation in the Plan. During 1998, the Company
matched 50% of the first 6% of participants' contributions. The Company's
contributions totaled $5,442 during 1998.

8. POSTEMPLOYMENT HEALTH BENEFITS

In March 1998, the board of directors approved a plan which guarantees
health insurance to certain officers until age 65, regardless of employment
status. As all covered officers are currently employed by the Company, no
provision has been made for such postemployment benefits at April 30, 1998.
Should the employment of the covered officers be terminated, the liability for
such benefits at April 30, 1998 is estimated to be $632,000.

9. EMPLOYEE STOCK OWNERSHIP PLAN

The board of directors approved the termination of the Employee Stock
Ownership Plan in November 1996. Final distributions and transfers to employees
of approximately $1,587,000 were completed as of May 12, 1998.

F-65
<PAGE> 110
LD SUPPLY, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

10. RELATED-PARTY TRANSACTIONS

The Company leases its warehouse and office facility under an operating
lease from Begonia, Inc., in which two stockholders of the Company own a
majority interest. The operating lease was renewed March 31, 1998 and expires
March 31, 2008. Minimum lease payments were $2,480 through March 31, 1998, and
the renewed lease increased the minimum lease payment to $2,830 per month.
Rental expense recognized under this lease was $30,110 for the year ended April
30, 1998.

The Company entered into an agreement with two stockholders dated February
10, 1987 and May 2, 1988 in which the stockholders agreed not to associate
directly or indirectly with any business under any name similar to the Company's
name, without Company consent, for a period of one year after termination.
Further, stockholders agreed not to compete with any competitor of the Company
within a 100-mile radius of Wichita, Kansas, for a period of one year after
termination.

11. SUBSEQUENT EVENTS (UNAUDITED)

At April 30, 1998, the Company was the assigned owner and beneficiary of
key man life insurance policies held for certain stockholders. The Company
recognized cash surrender value on these policies for the year ended April 30,
1998. In May 1998, the policies were canceled, with cash surrender values paid
directly to the insured stockholders and treated as a dividend by the Company.

On June 5, 1998, the Company entered into an agreement with LDS Acquisition
Company, a wholly owned subsidiary of Industrial Distribution Group ("IDG"), to
effect a merger and reorganization. As a result of the business consolidation,
the Company will become a wholly owned subsidiary of IDG. Consideration paid by
IDG consisted of approximately 270,583 shares of IDG common stock, approximately
$5,000,000 cash, and the assumption of certain liabilities.

F-66
<PAGE> 111

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To Shearer Industrial Supply Co.:

We have audited the accompanying consolidated balance sheets of SHEARER
INDUSTRIAL SUPPLY CO. AND SUBSIDIARIES as of December 31, 1995 and 1996 and the
related consolidated statements of earnings, stockholder's equity, and cash
flows for the three years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

In our opinion, the consolidated balance sheets referred to above present
fairly, in all material respects, the consolidated financial position of Shearer
Industrial Supply Co. and Subsidiaries as of December 31, 1995 and 1996, and the
results of their operations and their cash flows for the three years in the
period ended December 31, 1996 in conformity with generally accepted accounting
principles.

/s/ MILLER & CO. LLP

York, Pennsylvania
February 21, 1997

F-67
<PAGE> 112

SHEARER INDUSTRIAL SUPPLY CO. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
--------------- JUNE 30,
1995 1996 1997
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Accounts receivable, less allowance for doubtful accounts
of $0, $0, and $23 in 1995, 1996, and 1997,
respectively........................................... $4,008 $5,311 $4,979
Accounts receivable -- affiliates......................... 8 10 12
Life insurance receivable................................. 77 0 0
Inventories............................................... 3,818 3,515 3,136
Prepaid expenses.......................................... 50 57 289
------ ------ ------
Total current assets.............................. 7,961 8,893 8,416
------ ------ ------
EQUIPMENT AND IMPROVEMENTS
Trucks and automobiles.................................... 403 453 450
Office equipment.......................................... 479 479 479
Store and warehouse equipment............................. 376 376 376
Leasehold improvements.................................... 306 306 306
------ ------ ------
1,564 1,614 1,611
Less accumulated depreciation and amortization............ (839) (1,004) (1,054)
------ ------ ------
Total equipment and improvements, net............. 725 610 557
------ ------ ------
OTHER ASSETS
Cash surrender value of life insurance.................... 105 121 125
Goodwill.................................................. 111 89 78
Investments............................................... 142 149 149
Investments -- other...................................... 27 26 27
------ ------ ------
Total other assets................................ 385 385 379
------ ------ ------
Total assets...................................... $9,071 $9,888 $9,352
====== ====== ======
</TABLE>

The accompanying notes are an integral part of these statements.

F-68
<PAGE> 113
SHEARER INDUSTRIAL SUPPLY CO. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 30,
1995 1996 1997
------ ------- ------------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Cash overdraft............................................ $ 214 $ 797 $ 768
Line of credit............................................ 3,618 3,296 2,311
Current maturities of notes payable....................... 229 127 117
Current maturities of obligations under capital leases.... 24 21 30
Accounts payable.......................................... 2,034 2,297 2,487
Other current liabilities................................. 499 592 601
------ ------- -------
Total current liabilities......................... 6,618 7,130 6,314
NOTES PAYABLE............................................... 827 726 676
OBLIGATIONS UNDER CAPITAL LEASES............................ 31 9 4
DEFERRED COMPENSATION....................................... 31 37 33
DEFERRED INCOME TAXES....................................... 47 52 52
------ ------- -------
Total liabilities................................. 7,554 7,954 7,079
------ ------- -------
COMMITMENTS AND CONTINGENCY
STOCKHOLDER'S EQUITY
Preferred stock -- voting (no par value; 5,000,000 shares
authorized; 17,500 shares issued; 258 shares
outstanding; $10 per share liquidation preference;
$1.40 noncumulative dividend).......................... 62 62 62
Common stock -- nonvoting (no par value; 5,000,000 shares
authorized; 9,500 shares issued; 2,375 shares
outstanding)........................................... 33 33 33
Retained earnings......................................... 1,934 2,347 2,686
Unrealized holding gains.................................. 83 87 87
------ ------- -------
2,112 2,529 2,868
Less treasury stock, at cost
(Preferred -- 17,242 shares)
(Common -- 7,125 shares)............................... 595 595 595
------ ------- -------
Total stockholder's equity........................ 1,517 1,934 2,273
------ ------- -------
Total liabilities and stockholder's equity........ $9,071 $ 9,888 $ 9,352
====== ======= =======
</TABLE>

The accompanying notes are an integral part of these statements.

F-69
<PAGE> 114

SHEARER INDUSTRIAL SUPPLY CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX-MONTH PERIOD
DECEMBER 31, ENDED JUNE 30,
--------------------------- ---------------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES...................................... $32,689 $35,946 $44,184 $21,246 $23,110
COST OF SALES.................................. 25,385 28,222 34,165 16,769 18,291
------- ------- ------- ------- -------
Gross profit................................. 7,304 7,724 10,019 4,477 4,819
OPERATING EXPENSES............................. 1,967 1,900 2,297 1,420 1,393
SELLING EXPENSES............................... 4,885 5,350 6,788 2,684 2,820
------- ------- ------- ------- -------
Earnings from operations..................... 452 474 934 373 606
INTEREST EXPENSE............................... 317 328 437 223 182
OTHER EXPENSES................................. 314 216 266 145 201
OTHER INCOME................................... 446 550 501 386 342
------- ------- ------- ------- -------
Earnings before income taxes................. 267 480 732 391 565
INCOME TAXES................................... 131 179 319 156 226
------- ------- ------- ------- -------
Net earnings......................... $ 136 $ 301 $ 413 $ 235 $ 339
======= ======= ======= ======= =======
</TABLE>

The accompanying notes are an integral part of these statements.

F-70
<PAGE> 115

SHEARER INDUSTRIAL SUPPLY CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)

<TABLE>
<CAPTION>
UNREALIZED TOTAL
PREFERRED COMMON RETAINED HOLDING TREASURY STOCKHOLDER'S
STOCK STOCK EARNINGS GAINS STOCK EQUITY
--------- ------ -------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES -- DECEMBER 31, 1993......... $62 $33 $1,497 $ 0 $595 $ 997
Net earnings........................ 0 0 136 0 0 136
Unrealized holding gains (net of $53
of deferred income taxes)........ 0 0 0 76 0 76
--- --- ------ --- ---- ------
BALANCES -- DECEMBER 31, 1994......... 62 33 1,633 76 595 1,209
Net earnings........................ 0 0 301 0 0 301
Unrealized holding gains (net of $4
of deferred income taxes)........ 0 0 0 7 0 7
--- --- ------ --- ---- ------
BALANCES -- DECEMBER 31, 1995......... 62 33 1,934 83 595 1,517
Net earnings........................ 0 0 413 0 0 413
Unrealized holding gains (net of $3
of deferred income taxes)........ 0 0 0 4 0 4
--- --- ------ --- ---- ------
BALANCES -- DECEMBER 31, 1996......... 62 33 2,347 87 595 1,934
Net earnings........................ 0 0 339 0 0 339
--- --- ------ --- ---- ------
BALANCES -- JUNE 30, 1997
(unaudited)......................... $62 $33 $2,686 $87 $595 $2,273
=== === ====== === ==== ======
</TABLE>

The accompanying notes are an integral part of these statements.

F-71
<PAGE> 116

SHEARER INDUSTRIAL SUPPLY CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX-MONTH PERIOD
DECEMBER 31, ENDED JUNE 30,
------------------------- -----------------
1994 1995 1996 1996 1997
----- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED
BY (USED IN) OPERATING ACTIVITIES:
Net earnings..................................... $ 136 $ 301 $ 413 $ 235 $ 339
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization................. 103 106 168 76 50
Amortization of goodwill...................... 9 0 22 11 11
Bad debts..................................... 131 22 30 0 23
Increase in cash surrender value of life
insurance................................... (11) (18) (16) (2) (4)
Change in LIFO reserve........................ 26 67 44 0 0
Deferred income taxes......................... 28 9 2 3 0
(Increase) decrease in assets:
Accounts receivable......................... (943) 38 (1,333) (1,534) (309)
Accounts receivable -- affiliates........... 26 0 (2) 3 (2)
Life insurance receivable................... 0 (65) 77 77 0
Inventories................................. 97 (172) 259 126 379
Prepaid expenses............................ 51 (13) (7) 2 (237)
Increase (decrease) in liabilities:
Accounts payable............................ 266 94 263 463 190
Other current liabilities and deferred
compensation............................. 207 (56) 99 (245) 9
----- ------- ------- ------- -------
Net cash provided by (used in) operating
activities............................... 126 313 19 (785) 1,067
----- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net........................ (124) (47) (53) (10) 3
Repayment of note receivable..................... 0 38 0 0 0
Cash paid to acquire certain net assets.......... 0 (1,407) 0 0 0
----- ------- ------- ------- -------
Net cash used in investing activities.... (124) (1,416) (53) (10) 3
----- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in line of credit..................... (123) 1,307 (322) (108) (985)
Proceeds from notes payable...................... 44 100 27 0 0
Principal repayments of notes payable............ (131) (151) (230) (199) (60)
Principal (repayments) borrowings of obligations
under capital leases.......................... (7) (5) (24) (55) 4
----- ------- ------- ------- -------
Net cash (used in) provided by financing
activities............................. (217) 1,251 (549) (362) (1,041)
----- ------- ------- ------- -------
Net (decrease) increase in cash.......... (215) 148 (583) (1,157) 29
CASH OVERDRAFT -- BEGINNING........................ (147) (362) (214) (214) (797)
----- ------- ------- ------- -------
CASH OVERDRAFT -- ENDING........................... $(362) $ (214) $ (797) $(1,371) $ (768)
===== ======= ======= ======= =======
</TABLE>

The accompanying notes are an integral part of these statements.

F-72
<PAGE> 117
SHEARER INDUSTRIAL SUPPLY CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(IN THOUSANDS)

SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

IN 1994:

The Company reclassified $38,038 of a related party notes receivable, which
had been previously netted against notes payable, to notes receivable.

The Company recorded unrealized holding gains of $129,211, net of related
deferred income taxes of $53,000 on available-for-sale securities as a direct
increase to equity.

IN 1995:

The Company recorded unrealized holding gains of $11,306 on
available-for-sale securities, less related deferred income taxes of $4,000, as
a direct increase to equity.

The Company's subsidiary, Wm. H. Taylor & Co., Inc. incurred a note payable
of $75,000 for the purchase of goodwill.

The Company's subsidiary, Turner Industries, Inc., purchased the operations
and certain net assets of three companies for $1,406,850. In conjunction with
this acquisition, liabilities were assumed as follows:

<TABLE>
<CAPTION>
LIABILITIES
ASSUMED
--------------
(IN THOUSANDS)
<S> <C>
Fair value of assets acquired............................... $ 1,473
Cash paid for certain net assets............................ (1,407)
-------
$ 66
=======
</TABLE>

IN 1996:

The Company recorded unrealized holding gains of $6,584 on
available-for-sale securities, less related deferred income taxes of $3,000, as
a direct increase to equity.

F-73
<PAGE> 118

SHEARER INDUSTRIAL SUPPLY CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995, AND 1996

1. NATURE OF OPERATIONS

The Company and its subsidiaries are primarily distributors of general line
industrial products with customers located in the Mid-Atlantic states.

2. ESTIMATES AND SUMMARY OF ACCOUNTING POLICIES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and the
disclosure of contingent assets and liabilities, if any, 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.

A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows:

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Shearer
Industrial Supply Co. (the "Company") and its wholly owned subsidiaries,
Wm. H. Taylor & Co., Inc., and Turner Industries, Inc., all of which are
Pennsylvania corporations. All significant intercompany balances and
transactions are eliminated in consolidation.

ACCOUNTS RECEIVABLE

The Companies consider accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required. If amounts
become uncollectible, they will be charged to operations when that
determination is made.

INVENTORIES

Inventories are determined primarily from perpetual records.
Inventories owned by the Company are stated at cost using the last-in,
first-out ("LIFO") method. Inventories owned by the Company's subsidiaries
are stated at the lower of average cost or market.

EQUIPMENT AND IMPROVEMENTS

Equipment and improvements are stated at cost and depreciated or
amortized using the straight-line and accelerated methods over their
estimated average useful lives as follows: trucks and automobiles, 3 to 5
years; office equipment, 5 to 10 years; store and warehouse equipment, 5 to
7 years; and leasehold improvements, 31.5 to 39 years.

GOODWILL

Goodwill represents the excess of the purchase price over the fair
market value of net assets acquired. Goodwill is amortized using the
straight-line method over five years beginning January 1, 1996.

F-74
<PAGE> 119
SHEARER INDUSTRIAL SUPPLY CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

INVESTMENTS

At the date of acquisition and each subsequent balance sheet date,
investments in debt and equity securities are classified into three
categories and accounted for as follows:

1. Debt securities that management has the positive intent and
ability to hold to maturity are classified as held-to-maturity
securities and stated at amortized cost.

2. Debt securities and equity securities having a readily
determinable fair value that are acquired and held principally for the
purpose of selling and benefiting from short-term price fluctuations are
classified as trading securities and stated at fair value. Unrealized
gains and losses are included in operating results.

3. Debt securities and equity securities having a readily
determinable fair value and not classified as held-to-maturity or
trading securities are classified as available-for-sale securities and
stated at fair value. Unrealized gains and losses are excluded from
operating results and are reported, net of tax, as a separate component
of equity.

Realized gains and losses, if any, on the sale or disposal of
investments are computed on a specific identification basis.

INVESTMENTS -- OTHER

Investments -- other represent investments in equity securities and
are stated at the lower of aggregate cost or estimated market value because
no readily determinable fair value is available.

ADVERTISING COSTS

Advertising costs are expensed as incurred.

INCOME TAXES

Income taxes are provided for the tax effects of transactions reported
in the financial statements and consist of taxes currently due plus
deferred taxes. Deferred taxes relate to differences between the bases of
inventories, equipment and improvements, goodwill, investments, and
deferred compensation for financial and income tax reporting. Collectively,
these differences are referred to as temporary differences. Deferred tax
assets and liabilities represent the future tax return consequences of
those differences, which will either be taxable or deductible when the
temporary differences reverse, or when the underlying assets and
liabilities are recovered or settled.

INTERIM UNAUDITED FINANCIAL INFORMATION

The consolidated financial statements as of June 30, 1997 and for the
six months ended June 30, 1996 and 1997 are unaudited; however, in the
opinion of management, all adjustments (consisting solely of normal
recurring adjustments) necessary for a fair presentation of the unaudited
consolidated financial statements for these interim periods have been
included. The results of interim periods are not necessarily indicative of
the results to be obtained for a full year.

F-75
<PAGE> 120
SHEARER INDUSTRIAL SUPPLY CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. INVENTORIES

Inventories consist of the following as of December 31 (in thousands):

<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Inventories owned by Shearer Industrial Supply Co. (at FIFO
costs).................................................... $2,968 $3,317
Less LIFO reserve........................................... 1,102 1,146
------ ------
Inventories owned by Shearer Industrial Supply Co. (at LIFO
costs).................................................... 1,866 2,171
Inventories owned by Wm. H. Taylor & Co., Inc. (at average
costs).................................................... 849 762
Inventories owned by Turner Industries, Inc................. 1,103 582
------ ------
$3,818 $3,515
====== ======
</TABLE>

The LIFO reserve increased by $25,565 in 1994, which caused gross profit to
decrease by $25,565. The LIFO reserve increased by $67,064 in 1995, which caused
gross profit to decrease by $67,064. The LIFO reserve increased $43,806 in 1996,
which caused gross profit to decrease by $43,806.

4. CASH SURRENDER VALUE OF LIFE INSURANCE

The Company is the owner and beneficiary of several life insurance policies
on the lives of its officers and former officers having an aggregate face value
of $2,936,000. As of December 31, 1995 and 1996, the cash surrender value is
stated net of policy loans totaling $41,304 and $40,304, respectively.

Wm. H. Taylor & Co., Inc. is the owner and beneficiary of life insurance
policies having an aggregate face value of $462,600. As of December 31, 1995 and
1996, the cash surrender value is stated net of policy loans totaling $198,544.

5. GOODWILL

Goodwill consists of the following as of December 31 (in thousands):

<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Cost........................................................ $111 $111
Less accumulated amortization..................... 0 22
---- ----
$111 $ 89
==== ====
</TABLE>

6. INVESTMENTS

The cost, gross unrealized gains and losses, and fair value of
available-for-sale securities consist of the following as of December 31 (in
thousands):

<TABLE>
<CAPTION>
GROSS
UNREALIZED
-------------- FAIR
AVAILABLE-FOR-SALE COST GAINS LOSSES VALUE
- ------------------ ---- ----- ------ -----
<S> <C> <C> <C> <C>
1995:
Equity securities........................................... $2 $140 $0 $142
== ==== == ====
1996:
Equity securities........................................... $2 $147 $0 $149
== ==== == ====
</TABLE>

F-76
<PAGE> 121
SHEARER INDUSTRIAL SUPPLY CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Unrealized holding gains on available-for-sale securities included as a
separate component of equity consist of the following as of and for the years
ended December 31 (in thousands):

<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Unrealized holding gains -- beginning (net of cumulative
deferred taxes of $53 and $57, respectively).............. $76 $84
Net unrealized holding gains................................ 11 6
Deferred income tax effect.................................. (4) (3)
--- ---
Unrealized holding gains -- ending (net of cumulative
deferred taxes of $57 and $60, respectively).............. $83 $87
=== ===
</TABLE>

7. INVESTMENTS -- OTHER

The Company's subsidiary, Turner Industries, Inc., owns shares of stock in
ServiStar as follows as of December 31 (in thousands):

<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
8 shares of common stock.................................... $ 1 $ 1
521 shares of preferred stock............................... 26 25
--- ---
$27 $26
=== ===
</TABLE>

Cost is estimated to equal market value.

8. CASH OVERDRAFT

The cash overdraft represents net outstanding checks which have not been
presented to the bank for payment as of December 31, 1995 and 1996. Under the
Companies' cash management arrangement, as checks and deposits are presented to
the bank, they will be applied to the line of credit outstanding balance.

9. LINES OF CREDIT

The Company and its subsidiaries have an authorized $4,500,000 line of
credit with CoreStates Hamilton Bank. The line of credit is subject to a
borrowing base formula. The first $1,315,850 of borrowings on the line of credit
bear interest at the bank's prime rate, or 8.25% as of December 31, 1996.
Advances above $1,315,850 bear interest at the lower of the bank's prime rate or
the bank's money market loan rate, or 8.25% as of December 31, 1996. Total
borrowings outstanding as of December 31, 1995 and 1996 amounted to $3,295,850
and $3,617,850, respectively.

Additionally, in 1996 CoreStates Hamilton Bank has extended the Company an
additional authorized $500,000 line of credit. Borrowings bear interest at the
lower of the bank's prime rate or the bank's money market loan rate. There were
no borrowings against the additional line of credit as of December 31, 1996.

Both lines of credit are collateralized by the Company's assets. The lines
of credit, if not renewed by the bank, expire May 31, 1997. The lines of credit
agreements require the Companies to maintain certain financial covenants. The
agreements also require the Companies to obtain the bank's approval prior to
incurring any other indebtedness, excluding normal trade debt. The agreements
also contain certain other restrictive covenants.

F-77
<PAGE> 122
SHEARER INDUSTRIAL SUPPLY CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. NOTES PAYABLE

Notes payable consist of the following as of December 31, 1995 and 1996 (in
thousands):

<TABLE>
<CAPTION>
1995 1996
------ ----
<S> <C> <C>
Uncollateralized notes payable to former stockholders of Wm.
H. Taylor & Co., Inc.; originating from the purchase of
treasury stock; interest at 7% to 10.4%; payable in
varying installments...................................... $ 392 $369
Uncollateralized notes payable to former stockholders of the
Company; originating from the 1991 purchases of treasury
stock; interest at 8% to 9%; payable in varying
installments.............................................. 401 364
Uncollateralized noninterest bearing note payable to Air
Compressor Services, Inc.; originating from the purchase
of goodwill; payable in equal monthly principal
installments of $2,083; interest at 0%, beginning November
12, 1996; the effect of unrecorded imputed interest is
insignificant............................................. 75 71
Note payable to Navistar Financial; payable in equal monthly
principal and interest installments of $859; interest at
8.75%; collateralized by a truck.......................... 0 25
Note payable to CoreStates Hamilton Bank; payable in equal
monthly principal and interest installments of $1,382;
interest at 8.15%; collateralized by accounts receivable;
inventories and certain equipment......................... 27 12
Note payable to CoreStates Hamilton Bank; payable in equal
monthly principal and interest installments of $480;
interest at 10.65%........................................ 16 11
Note payable to CoreStates Hamilton Bank; payable in equal
monthly principal and interest installments of $673;
interest at 6.15%; collateralized by a truck.............. 8 1
Uncollateralized demand note payable to a related party;
interest at prime less 1%; repaid during 1996............. 100 0
Note payable to Phoenixcor, Inc.; payable in thirty monthly
principal and interest installments of $2,628, and then
thirty additional principal and interest installments of
$1,617; including interest at 11.88%; collateralized by
certain equipment owned by Turner Industries, Inc.; repaid
during 1996............................................... 17 0
Note payable to CoreStates Hamilton Bank; payable in equal
monthly principal and interest installments of $3,187;
interest at 6.5%; collateralized by accounts receivable
inventories and certain equipment; repaid during 1996..... 13 0
Note payable to Clarklift Services, Inc.; payable in equal
monthly principal and interest installments of $348;
interest at 10.74%; collateralized by a truck; repaid
during 1996............................................... 4 0
Note payable to Ford Credit Co.; payable in equal monthly
principal and interest installments of $454; interest at
9.5%; collateralized by a truck; repaid during 1996....... 3 0
------ ----
1,056 853
Less current maturities..................................... 229 127
------ ----
$ 827 $726
====== ====
</TABLE>

F-78
<PAGE> 123
SHEARER INDUSTRIAL SUPPLY CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Aggregate maturities of notes payable, assuming no change in current terms,
consist of the following for the five years ending December 31 (in thousands):

<TABLE>
<CAPTION>
AGGREGATE
MATURITIES
OF NOTES
PAYABLE
----------
<S> <C>
1997........................................................ 127
1998........................................................ 122
1999........................................................ 120
2000........................................................ 92
2001........................................................ 70
</TABLE>

11. OBLIGATIONS UNDER CAPITAL LEASES

The Company's subsidiary, Turner Industries, Inc. entered into a capital
lease agreement in order to finance the purchase of equipment. The lease term
was forty-eight months and required twenty-four payments of $750 and twenty-four
payments of $504, which included interest at 11.014%. The lease was repaid
during 1996.

During 1995, Turner Industries, Inc. also assumed a capital lease agreement
in order to finance the purchase of office equipment. The remaining lease term
is twenty-nine months and requires monthly payments of $1,938, which includes
interest at 8.75%.

Future minimum lease payments consist of the following for the remaining
two years ending December 31:

<TABLE>
<CAPTION>
FUTURE
MINIMUM
LEASE
PAYMENTS
--------
<S> <C>
1997........................................................ $23,253
1998........................................................ 9,689
-------
32,942
Less amount representing interest........................... 2,066
-------
30,876
Less current portion........................................ 21,396
-------
$ 9,480
=======
</TABLE>

The cost, accumulated amortization, net book value, and amortization
expense of the capital lease assets consist of the following as of and for the
years ended December 31 (in thousands):

<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Cost........................................................ $75 $76
Less accumulated amortization............................... 17 30
--- ---
$58 $46
=== ===
Amortization expense........................................ $ 4 $ 3 $12
=== === ===
</TABLE>

F-79
<PAGE> 124
SHEARER INDUSTRIAL SUPPLY CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. OTHER CURRENT LIABILITIES

Other current liabilities consist of the following as of December 31 (in
thousands):

<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Accrued interest............................................ $ 30 $ 16
Accrued payroll and commissions............................. 218 298
Deferred compensation....................................... 7 0
Accrued profit sharing...................................... 60 75
Payroll taxes withheld and accrued.......................... 25 15
Accrued expenses............................................ 34 33
Sales taxes payable......................................... 9 0
Accrued corporate taxes..................................... 116 155
---- ----
$499 $592
==== ====
</TABLE>

13. DEFERRED COMPENSATION AGREEMENTS

The Company's subsidiary, Wm. H. Taylor & Co., Inc., entered into deferred
compensation agreements with certain individuals. These agreements require the
payment of monthly amounts commencing with the retirement of these individuals.
The costs associated with these agreements are being accrued ratably over the
employment period of the individuals.

14. COMMITMENTS

The Company and its subsidiaries lease facilities and certain vehicles
under operating leases which have varying terms and monthly payments.

Future minimum lease payments consist of the following for each of the five
years ending December 31, 2001, and thereafter (in thousands):

<TABLE>
<CAPTION>
VEHICLES BUILDINGS TOTALS
-------- --------- ------
<S> <C> <C> <C>
1997........................................................ $152 $ 401 $ 553
1998........................................................ 79 255 334
1999........................................................ 24 174 198
2000........................................................ 0 151 151
2001........................................................ 0 165 165
Thereafter.................................................. 0 1,545 1,545
---- ------ ------
$255 $2,691 $2,946
==== ====== ======
</TABLE>

The Company also leases certain facilities on a year-to-year basis. Total
rent expense under operating leases for vehicles and buildings amounted to
$402,857, $427,204, and $593,264 for the years ended December 31, 1994, 1995,
and 1996, respectively.

During 1991, the Company entered into a noncompete agreement with its
former majority stockholder. The agreement, as amended, prohibits the former
stockholder from competing with the Company for a ten-year period. The $550,000
cost of the agreement is payable by the Company in monthly payments of $4,583.
Total noncompete agreement expense for the years ended December 31, 1994, 1995,
and 1996 was $55,000. The cost of the agreement is being expensed as paid over
the ten-year noncompete term. As of December 31, 1995 and 1996, future payments
required by the noncompete agreement amount to $293,333 and $238,333,
respectively.

F-80
<PAGE> 125
SHEARER INDUSTRIAL SUPPLY CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

15. CONTINGENCY

The Company self-insures its group health insurance coverage through an
insurance trust. The plan is administered through a third-party administrator
who approves all claims and draws checks from the trust to pay all claims. As
protection for substantial claims, the Company purchased stop-loss insurance,
therefore placing caps on specific and aggregate claims.

Approximate maximum exposure consists of the following as of December 31,
1996:

<TABLE>
<S> <C>
Specific loss (per person/per plan year).................... $ 30,000
Aggregate loss.............................................. 299,000
</TABLE>

No accrual has been made for incurred but unpaid claims as of December 31,
1995 and 1996, because it was determined that the insurance trust has sufficient
assets to provide for such claims. The assets of the insurance trust are not
included in the financial statements of the Company.

16. PROFIT SHARING PLAN

The Companies sponsor a combination profit sharing and 401(k) retirement
savings plan which covers substantially all of their employees. Contributions to
this plan are made at the sole discretion of management, and profit sharing
expense amounted to $55,000, $60,000, and $76,557 for the years ended December
31, 1994, 1995, and 1996, respectively.

17. INCOME TAXES

Income taxes consist of the following for the years ended December 31 (in
thousands):

<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Current expense:
Federal................................................... $ 74 $140 $238
State..................................................... 29 30 79
---- ---- ----
103 170 317
Deferred expense............................................ 28 9 2
---- ---- ----
$131 $179 $319
==== ==== ====
</TABLE>

The federal income tax provision differs from the provision that would
result from applying graduated federal statutory rates to earnings before income
taxes because of the federal benefit of state income taxes and because certain
transactions, such as a portion of meals and entertainment, a portion of
noncompete expense, net life insurance expense, and certain dues, are without
tax consequence.

F-81
<PAGE> 126
SHEARER INDUSTRIAL SUPPLY CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Net deferred income taxes in the accompanying balance sheets consist of the
following as of December 31 (in thousands):

<TABLE>
<CAPTION>
1995 1996
---- -----
<S> <C> <C>
Deferred income tax assets:
Inventories............................................... $ 24 $ 37
Deferred compensation..................................... 16 15
---- -----
40 52
Deferred income tax liabilities:
Equipment and improvements and goodwill................... (32) (45)
Investments............................................... (55) (59)
---- -----
(87) (104)
$(47) $ (52)
==== =====
</TABLE>

The Company and its subsidiaries' effective tax rate varied from the
statutory U.S. federal income tax rate for the years ended December 31:

<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
U.S. federal income tax rate................................ 32.7% 34.0% 34.0%
State income taxes, net of federal benefit.................. 8.0 6.6 6.6
Nondeductible meals and entertainment....................... 4.0 2.8 2.0
Nontaxable life insurance proceeds.......................... 0.0 (5.5) 0.0
Other individually insignificant items...................... 4.3 (0.6) 1.0
---- ---- ----
49.0% 37.3% 43.6%
==== ==== ====
</TABLE>

18. RELATED PARTY TRANSACTIONS

The Company is related to York Penn Machinery Co. through common management
and ownership. The Company receives reimbursements, primarily group insurance,
for payments made on behalf of the affiliates.

The Company also leases certain property used in its operations from
related parties under noncancelable lease agreements. Rent expense for these
properties was $244,602, $256,252, and $265,877 for the years ended December 31,
1994, 1995, and 1996, respectively.

The Company also paid interest to former stockholders of the Company on
uncollateralized notes payable. Total interest expense on these uncollateralized
notes payable is $0, $35,012, and $31,889, for the years ended December 31,
1994, 1995, and 1996, respectively.

19. ADVERTISING COSTS

Advertising costs for the years ended December 31, 1994, 1995, and 1996
amounted to $104,000, $141,710, and $142,228, respectively.

20. CONCENTRATION OF CREDIT RISK

The Company grants normal credit terms to its customers which are
principally manufacturing industries in Pennsylvania and surrounding states.

21. VENDOR DEPENDENCE

The Company purchased approximately 25%, 25%, and 24% of its inventory from
one vendor for the years ended December 31, 1994, 1995, and 1996, respectively.

F-82
<PAGE> 127

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To J. J. Stangel Company:

We have audited the accompanying balance sheet of J. J. STANGEL COMPANY as
of September 30, 1996 and the related statements of income and retained earnings
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of J. J. Stangel Company as of
September 30, 1996 and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.

/s/ SCHENCK & ASSOCIATES, SC

Green Bay, Wisconsin
February 27, 1997

F-83
<PAGE> 128

J. J. STANGEL COMPANY

BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1997
------------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 223 $ 379
Receivables:
Trade, net of allowance of $9 and $12, respectively.... 711 784
Other.................................................. 39 34
Note receivable........................................... 20 0
Inventories............................................... 1,087 988
Prepaid expenses.......................................... 52 106
Refundable income taxes................................... 29 0
------ ------
Total current assets.............................. 2,161 2,291
------ ------
PROPERTY AND EQUIPMENT:
Leasehold improvements.................................... 70 70
Office furniture and fixtures............................. 180 182
Data processing equipment................................. 258 264
Equipment................................................. 200 200
Vehicles.................................................. 221 267
------ ------
929 983
Less accumulated depreciation............................. (588) (666)
------ ------
341 317
Capital lease building, less accumulated amortization of
$251 and $264, respectively............................ 266 253
------ ------
Net property and equipment........................ 607 570
------ ------
OTHER ASSETS:
Deferred charge, net of amortization...................... 9 8
Cash surrender value of life insurance.................... 113 123
Deferred tax benefit...................................... 78 78
------ ------
Total other assets................................ 200 209
------ ------
Total assets...................................... $2,968 $3,070
====== ======
</TABLE>

See notes to financial statements.

F-84
<PAGE> 129
J. J. STANGEL COMPANY

BALANCE SHEETS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1997
------------- -----------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities........................................ $ 20 $ 22
Current maturities of deferred compensation............... 19 20
Accounts payable.......................................... 668 674
Accrued liabilities:
Profit sharing......................................... 67 17
Payroll and payroll taxes.............................. 137 103
Vacation............................................... 19 19
Other.................................................. 33 89
------ ------
Total current liabilities......................... 963 944
LONG-TERM DEBT, less current maturities..................... 645 628
DEFERRED COMPENSATION....................................... 102 88
------ ------
Total liabilities................................. 1,710 1,660
------ ------
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDER'S EQUITY:
Common stock, $100 par value:
Issued, 173 shares..................................... 17 17
Additional paid-in capital................................ 14 14
Retained earnings......................................... 1,528 1,680
------ ------
1,559 1,711
Less treasury stock, at cost, 83 shares................... (301) (301)
------ ------
Total stockholder's equity........................ 1,258 1,410
------ ------
Total liabilities and stockholder's equity........ $2,968 $3,070
====== ======
</TABLE>

See notes to financial statements.

F-85
<PAGE> 130

J. J. STANGEL COMPANY

STATEMENTS OF INCOME AND RETAINED EARNINGS

<TABLE>
<CAPTION>
YEAR ENDED NINE-MONTH PERIOD
SEPTEMBER 30, ENDED JUNE 30,
------------- ------------------
1996 1996 1997
------------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
NET SALES................................................... $11,713 $8,830 $8,951
COST OF SALES............................................... 8,990 6,717 6,783
------- ------ ------
Gross profit.............................................. 2,723 2,113 2,168
OPERATING EXPENSES.......................................... 2,534 1,782 1,840
------- ------ ------
Income from operations.................................... 189 331 328
------- ------ ------
OTHER INCOME (EXPENSE):
Interest and other income (expense)....................... 78 (24) (6)
Interest expense.......................................... (71) (63) (60)
------- ------ ------
OTHER INCOME (EXPENSE), Net................................. 7 (87) (66)
------- ------ ------
INCOME BEFORE INCOME TAXES.................................. 196 244 262
PROVISION FOR INCOME TAXES.................................. 72 99 110
------- ------ ------
NET INCOME.................................................. 124 $ 145 152
======
RETAINED EARNINGS:
Beginning of year......................................... 1,404 1,528
------- ------
End of year............................................... $ 1,528 $1,680
======= ======
</TABLE>

See notes to financial statements.

F-86
<PAGE> 131

J. J. STANGEL COMPANY

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE-MONTH
PERIOD
YEAR ENDED ENDED JUNE 30,
SEPTEMBER 30, --------------
1996 1996 1997
------------- ----- -----
(UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income................................................ $124 $145 $152
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 104 90 90
Amortization........................................... 17 0 0
Increase in cash surrender value of life insurance..... (1) 0 0
Decrease (increase) in:
Receivables.......................................... 30 (34) (67)
Refundable income taxes.............................. (29) 0 0
Inventories.......................................... 105 27 99
Other current assets................................. 21 2 (54)
Deferred tax benefit................................. (2) 0 0
(Decrease) increase in:
Accounts payable..................................... (63) (27) 22
Accrued income taxes................................. (37) (16) 84
Other current liabilities............................ 56 (18) (99)
---- ---- ----
Net cash provided by operating activities......... 325 169 227
---- ---- ----
INVESTING ACTIVITIES:
Purchase of property and equipment........................ (84) (45) (54)
Collection on notes receivable............................ 72 0 20
Issuance of notes receivable.............................. (70) (49) 0
Purchase of cash surrender value of life insurance........ (11) (8) (9)
---- ---- ----
Net cash used for investing activities............ (93) (102) (43)
---- ---- ----
FINANCING ACTIVITIES:
Repayment of deferred compensation obligation............. (19) (15) (13)
Repayment of capital lease obligation..................... (7) (5) (5)
Retirement of long-term debt.............................. (12) (9) (10)
---- ---- ----
Net cash used for financing activities............ (38) (29) (28)
---- ---- ----
CASH AND CASH EQUIVALENTS:
Net increase.............................................. 194 38 156
Beginning of period....................................... 29 28 223
---- ---- ----
End of period............................................. $223 $ 66 $379
==== ==== ====
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid for:
Interest............................................... $ 71
====
Income taxes........................................... $140
====
</TABLE>

See notes to financial statements.

F-87
<PAGE> 132

J. J. STANGEL COMPANY

NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996

1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

A. NATURE OF BUSINESS

J.J. Stangel Company (the "Company") (a Wisconsin corporation) provides
industrial tools and supplies for sale to customers located mainly in
northeastern Wisconsin.

B. ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.

C. CASH EQUIVALENTS

For purposes of reporting cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents. The Company did not have cash equivalents at September 30,
1996.

D. INVENTORIES

Inventories are stated at the lower of cost, determined on the last-in,
first-out ("LIFO") method, or market.

E. PROPERTY, EQUIPMENT, AND RELATED DEPRECIATION

Property and equipment are stated at cost. Expenditures for additions and
improvements are capitalized, while replacements, maintenance, and repairs which
do not improve or extend the lives of the respective assets are expensed
currently as incurred. Properties sold or otherwise disposed of are removed from
the property accounts, with gains or losses on disposal credited or charged to
the results of operations.

Depreciation for financial reporting purposes is provided over the
estimated useful lives of the respective assets, using both straight-line and
accelerated methods as follows:

<TABLE>
<S> <C>
Building and building improvements.......................... 19-31.5 years
Office furniture and fixtures............................... 5-10 years
Data processing equipment................................... 3-10 years
Equipment................................................... 5-15 years
Vehicles.................................................... 5 years
</TABLE>

For income tax purposes, accelerated depreciation methods are used.

F. DEFERRED CHARGE

A deferred charge has been established for a membership fee. The deferred
charge is amortized on the straight-line method over a 15-year period for
financial statement and income tax reporting purposes.

G. INCOME TAXES

Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of property and equipment and
accrued between the basis of property and equipment and accrued liabilities for
financial and income tax reporting. The deferred tax assets and liabilities
represent the future tax return consequences

F-88
<PAGE> 133
J. J. STANGEL COMPANY

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

of those differences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled.

H. ADVERTISING COSTS

Advertising and marketing costs are expensed as incurred. Advertising and
marketing costs amounted to $12,043 for the year ended September 30, 1996.

I. NEW ACCOUNTING PRONOUNCEMENTS

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived
Assets and Long-Lived Assets to Be Disposed Of," to be effective for fiscal
years beginning after December 15, 1995. The Company does not anticipate that
the adoption of this statement will have a significant impact on the Company's
financial position or results of operations.

J. INTERIM UNAUDITED FINANCIAL INFORMATION

The financial statements as of June 30, 1997, and for the nine months ended
June 30, 1996 and 1997 are unaudited; however, in the opinion of management, all
adjustments (consisting solely of normal recurring adjustments) necessary for a
fair presentation of the unaudited financial statements for these interim
periods have been included. The results of interim periods are not necessarily
indicative of the results to be obtained for a full year.

2. CONCENTRATIONS OF CREDIT RISK

The Company maintains its cash in bank deposit accounts which, at times,
may exceed federally insured limits. The Company has not experienced any losses
in such accounts. The Company believes that it is not exposed to any significant
credit risk on cash and cash equivalents.

3. INVENTORIES

Inventories as of September 30, 1996 consist of the following (in
thousands):

<TABLE>
<S> <C>
Inventories at average cost................................. $1,470
Adjustment to LIFO basis.................................... (383)
------
Inventories at LIFO......................................... $1,087
======
</TABLE>

The Company uses the LIFO method of valuing inventories for both financial
reporting and income tax purposes. The use of the LIFO method of inventory
valuation had the effect of decreasing the income before tax of the Company by
approximately $29,000 for the year ended September 30, 1996.

During 1996, inventory quantities were reduced. This reduction resulted in
a liquidation of LIFO inventory quantities carried at lower costs prevailing in
prior years as compared with the cost of 1996 purchases, the effect of which
decreased cost of goods sold by approximately $2,500.

4. NOTE RECEIVABLE

The note receivable of $20,000 at September 30, 1996 was due on demand from
the Company's stockholder at an interest rate of 9.25%.

F-89
<PAGE> 134
J. J. STANGEL COMPANY

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

5. LIFE INSURANCE

The Company is beneficiary of life insurance policies totaling $750,000 on
John J. Zimmer, President of the Company, and $135,000 on Joseph A. Zimmer,
former stockholder of the Company. There are no policy loans outstanding at
September 30, 1996.

6. NOTE PAYABLE

The Company has a $650,000 line of credit with First National Bank in
Manitowoc which provides for interest at 1% over prime (effectively 9.25% at
September 30, 1996). The line is secured by substantially all assets under a
Selective Business Security Agreement. There were no borrowings against the line
of credit at September 30, 1996.

7. LONG-TERM DEBT

Long-term debt at September 30, 1996 consists of the following:

<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Joseph A. Zimmer:
8% note, due in monthly installments of $2,703 through
July 2008, under the terms of a stock redemption
agreement dated August 1, 1991, secured by treasury
stock.................................................. $247
Zimmer Family Trust:
Capital lease obligation due in monthly installments of
$2,887, including interest at 12%, through 2014 (Note
10).................................................... 265
Capital lease obligation due in monthly installments of
$1,668, including interest at 12%, through 2014 (Note
10).................................................... 153
----
665
Less current maturities..................................... 20
----
Long-term debt, less current maturities..................... $645
====
</TABLE>

Maturities of long-term debt for each of the five years succeeding
September 30, 1996 and in total are as follows (in thousands):

<TABLE>
<S> <C>
1997........................................................ $ 20
1998........................................................ 22
1999........................................................ 25
2000........................................................ 27
2001........................................................ 30
Thereafter.................................................. 541
----
$665
====
</TABLE>

8. PROFIT-SHARING PLAN

The Company maintains a defined contribution plan with Section 401(k)
features, which covers substantially all employees. Those covered may elect to
make contributions to the plan's trust fund. The Company may contribute a
discretionary amount based upon the profit of the Company. The Company
contributions under this plan approximated $89,000 for the year ended September
30, 1996.

F-90
<PAGE> 135
J. J. STANGEL COMPANY

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

9. INCOME TAXES

The provision for income taxes for the year ended September 30, 1996
consists of the following (in thousands):

<TABLE>
<S> <C>
Current:
Federal................................................... $57
State..................................................... 17
Deferred.................................................... (2)
---
$72
===
</TABLE>

For tax purposes, the Company has approximately $36,000 of charitable
contribution carryforwards.

The provision for income taxes for the year ended September 30, 1996
differs from the amount computed by applying the federal statutory rate of 34%
due to the following (in thousands):

<TABLE>
<S> <C>
Tax at federal statutory rate............................... $67
State income taxes, net of federal benefit.................. 10
Nondeductible travel and entertainment...................... 4
Other....................................................... (9)
---
Total provision................................... $72
===
</TABLE>

The Company's total deferred tax assets and liabilities at September 30,
1996 are as follows (in thousands):

<TABLE>
<S> <C>
Deferred tax assets:
Allowance for doubtful accounts........................... $ 3
Inventory allowance....................................... 25
Accrued vacation.......................................... 7
Deferred compensation..................................... 44
Charitable contributions carryforward..................... 13
Fixed assets.............................................. 10
----
102
Deferred tax liabilities:
Other..................................................... (24)
----
$ 78
====
</TABLE>

The deferred tax assets have not been offset by a valuation allowance
because the Company believes there is at least a 50% chance that the deferred
tax assets will be realized.

10. CAPITAL LEASES

The Company leases its office and warehouse building from the Zimmer Family
Trust. These leases, which expire in 1999 with 15-year renewal options expiring
in 2014, are accounted for as capital leases.

F-91
<PAGE> 136
J. J. STANGEL COMPANY

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The future minimum lease payments under the capital leases and the net
present value of the future minimum lease payments at September 30, 1996 are as
follows (in thousands):

<TABLE>
<S> <C>
1997........................................................ $ 55
1998........................................................ 55
1999........................................................ 55
2000........................................................ 55
2001........................................................ 54
Thereafter.................................................. 715
----
989
Less amount representing interest........................... 571
----
$418
====
</TABLE>

11. DEFERRED COMPENSATION

The Company has a deferred compensation agreement with one of its former
officers/stockholders. The agreement provides for monthly payments of $3,333
from July 1995 (the "agreed retirement date") to December 1995; $2,500 from
January 1996 through December 1999; and $1,667 from January 2000 through
December 2002. The present value (at 10%) of these payments at September 30,
1996 is $120,840.

12. COMMITMENTS

The Company has an outstanding obligation with a former employee to make
monthly retirement payments of $1,438 for the rest of her life. Based on the
former employee's age and a discount rate of 8.25%, the present value of these
future payments is $54,000. Management has not recorded this liability since
they do not believe it is material to the financial position of the Company.

F-92
<PAGE> 137

INDEPENDENT ACCOUNTANTS' REPORT

To Tri-Star Industrial Supply, Inc.:

We have audited the accompanying balance sheets of TRI-STAR INDUSTRIAL
SUPPLY, INC. as of September 30, 1995 and 1996 and the related statements of
income, retained earnings and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of TRI-STAR INDUSTRIAL SUPPLY,
INC. as of September 30, 1995 and 1996, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.

/s/ BAIRD, KURTZ & DOBSON

April 4, 1997
St. Louis, Missouri

F-93
<PAGE> 138

TRI-STAR INDUSTRIAL SUPPLY, INC.

BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------- JUNE 30,
1995 1996 1997
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 8 $ 60 $ 176
Accounts receivable, less allowance for doubtful accounts;
1995 -- $25, 1996 -- $50, 1997 -- $62.................. 2,796 2,539 3,424
Inventory................................................. 2,543 2,362 4,437
Prepaid expenses.......................................... 67 67 176
Deferred income taxes..................................... 70 92 128
------ ------ ------
Total current assets.............................. 5,484 5,120 8,341
------ ------ ------
PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements.................................... 248 280 310
Machinery and equipment................................... 64 64 71
Furniture and fixtures.................................... 442 495 660
------ ------ ------
754 839 1,041
Less accumulated depreciation............................. 291 437 559
------ ------ ------
Property and equipment, net....................... 463 402 482
------ ------ ------
OTHER ASSETS:
Noncompete agreements, at amortized cost.................. 78 45 20
Deferred income taxes..................................... 32 35 0
------ ------ ------
Total other assets................................ 110 80 20
------ ------ ------
Total assets...................................... $6,057 $5,602 $8,843
====== ====== ======

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks.................................... $1,500 $ 700 $3,300
Current maturities of long-term debt...................... 134 182 182
Accounts payable.......................................... 1,571 1,315 1,495
Accrued expenses.......................................... 325 275 224
Income taxes payable...................................... 132 63 59
------ ------ ------
Total current liabilities......................... 3,662 2,535 5,260
------ ------ ------
LONG-TERM DEBT.............................................. 1,107 1,400 1,277
------ ------ ------
DEFERRED INCOME TAXES....................................... 0 0 263
------ ------ ------
SHAREHOLDERS' EQUITY:
Common stock, $10 par value; authorized 3,000 shares;
issued and outstanding 501 shares...................... 5 5 5
Retained earnings......................................... 1,298 1,677 2,053
------ ------ ------
1,303 1,682 2,058
Treasury stock, 75 shares, at cost........................ (15) (15) (15)
------ ------ ------
Shareholders' equity...................................... 1,288 1,667 2,043
------ ------ ------
Total liabilities and shareholders' equity........ $6,057 $5,602 $8,843
====== ====== ======
</TABLE>

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

F-94
<PAGE> 139

TRI-STAR INDUSTRIAL SUPPLY, INC.

STATEMENTS OF INCOME
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED NINE-MONTH PERIOD
SEPTEMBER 30, ENDED JUNE 30,
----------------- -----------------
1995 1996 1996 1997
------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES................................................. $23,633 $23,588 $17,930 $20,688
COST OF GOODS SOLD........................................ 18,962 18,688 13,970 16,166
------- ------- ------- -------
Gross profit............................................ 4,671 4,900 3,960 4,522
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.............. 3,815 4,051 3,324 3,776
------- ------- ------- -------
Income from operations.................................. 856 849 636 746
------- ------- ------- -------
OTHER EXPENSE (INCOME):
Interest................................................ 199 214 169 147
Other................................................... 0 19 14 (22)
------- ------- ------- -------
199 233 183 125
------- ------- ------- -------
INCOME BEFORE INCOME TAXES................................ 657 616 453 621
PROVISION FOR INCOME TAXES................................ 270 237 175 245
------- ------- ------- -------
NET INCOME................................................ $ 387 $ 379 $ 278 $ 376
======= ======= ======= =======
</TABLE>

The accompanying notes are an integral part of these statements.

F-95
<PAGE> 140

TRI-STAR INDUSTRIAL SUPPLY, INC.

STATEMENTS OF RETAINED EARNINGS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, NINE-MONTH
--------------- PERIOD ENDED
1995 1996 JUNE 30, 1997
------ ------ --------------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE, beginning of period................................ $ 911 $1,298 $1,677
Net income................................................ 387 379 376
------ ------ ------
BALANCE, end of period...................................... $1,298 $1,677 $2,053
====== ====== ======
</TABLE>

The accompanying notes are an integral part of these statements.

F-96
<PAGE> 141

TRI-STAR INDUSTRIAL SUPPLY, INC.

STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
NINE-MONTH
YEAR ENDED PERIOD ENDED
SEPTEMBER 30, JUNE 30,
------------- ---------------
1995 1996 1996 1997
----- ----- ----- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 387 $ 379 $ 278 $ 376
Items not requiring (providing) cash:
Depreciation and amortization.......................... 164 180 105 122
Gain on sale of equipment.............................. (1) 0 0 0
Deferred income taxes.................................. (3) (26) 0 227
Payments on noncompete agreements...................... (33) 0 25 25
Changes in:
Accounts receivable.................................. (827) 257 475 (885)
Inventory............................................ (759) 181 174 (2,075)
Prepaid expenses..................................... (17) 0 0 (73)
Accounts payable..................................... 301 (255) (81) 180
Accrued expenses..................................... 59 (49) (127) (51)
Income taxes payable................................. 66 (70) (209) (4)
----- ----- ----- -------
Net cash (used in) provided by operating
activities...................................... (663) 597 640 (2,158)
----- ----- ----- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment........................... 1 0 0 0
Purchase of property and equipment........................ (133) (86) (79) (202)
----- ----- ----- -------
Net cash used in investing activities............. (132) (86) (79) (202)
----- ----- ----- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under line of credit
agreement.............................................. 925 (800) (950) 2,600
Payments on long-term debt................................ (149) (159) 0 (124)
Long-term debt borrowings................................. 0 500 387 0
----- ----- ----- -------
Net cash provided by (used in) financing
activities...................................... 776 (459) (563) 2,476
----- ----- ----- -------
(DECREASE) INCREASE IN CASH................................. (19) 52 (2) 116
CASH, beginning of period................................... 27 8 8 60
----- ----- ----- -------
CASH, end of period......................................... $ 8 $ 60 $ 6 $ 176
===== ===== ===== =======
</TABLE>

The accompanying notes are an integral part of these statements.

F-97
<PAGE> 142

TRI-STAR INDUSTRIAL SUPPLY, INC.

NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995

1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

Tri-Star Industrial Supply, Inc. ("the Company"), a Missouri corporation,
has sales which are predominately earned as a midwestern distributor of
industrial and construction tools, supplies and equipment. The Company generally
extends unsecured credit to its customers.

USE OF ESTIMATES

INVENTORY PRICING

Inventory is stated at the lower of moving average cost or market.

PROPERTY AND EQUIPMENT

Property and equipment are depreciated over the estimated useful life of
each asset. Leasehold improvements are depreciated over the shorter of the lease
term or the estimated useful lives of the improvements. Annual depreciation is
primarily computed using the straight-line method over the following estimated
useful lives:

<TABLE>
<S> <C>
Furniture and fixtures...................................... 3-5 years
Leasehold improvements...................................... 5 years
Machinery and equipment..................................... 3-5 years
</TABLE>

INCOME TAXES

Deferred tax liabilities and assets are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred tax asset will not be realized.

INTANGIBLE ASSETS

Noncompete agreements are stated at cost, and are being amortized using the
straight-line method over the lives of the contracts.

CONCENTRATION OF RISK

In 1995 and 1996, approximately 15% of the Company's inventory purchases
were from one supplier.

INTERIM UNAUDITED FINANCIAL INFORMATION

F-98
<PAGE> 143
TRI-STAR INDUSTRIAL SUPPLY, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

2. NOTE PAYABLE TO BANK

The Company has a line-of-credit agreement which provides for borrowings up
to $1,500,000. This arrangement expires in February 1997 and is collateralized
by inventory, property and equipment, and accounts receivable. Interest is
charged at the prime rate plus 1/4%. Borrowings, which have been guaranteed by
the shareholders of the Company, aggregated $1,500,000 and $700,000 at September
30, 1995 and 1996, respectively.

3. LONG-TERM DEBT

<TABLE>
<CAPTION>
1995 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Note payable to bank, due February 1998; payable in monthly
installments of $11,500, plus interest at prime plus
1/4%; collateralized by inventory, property and
equipment, and accounts receivable and guaranteed by the
shareholders of the Company............................... $1,039 $1,424
Note payable to bank, due October 1999; payable in monthly
installments of $5,032, including interest at 8 3/4%;
collateralized by equipment............................... 202 158
------ ------
1,241 1,582
Less current maturities..................................... 134 182
------ ------
$1,107 $1,400
====== ======
</TABLE>

Aggregate annual maturities of long-term debt at September 30, 1996, were
as follows (in thousands):

The carrying value of long-term debt and notes payable to bank is
considered to approximate fair value, based upon available terms and rates for
similar bank borrowings. The effective interest rate on all borrowings was 8.89%
and 8.58% in 1995 and 1996, respectively.

4. OPERATING LEASES

The Company has entered into operating leases for office and warehouse
facilities expiring through 2009. These leases generally require the Company to
pay most executory costs (property taxes, maintenance and insurance). Rental
expense was $156,000 in 1995 and 1996. Rental expense to a lessor with common
ownership with the Company was $126,000 in 1995 and 1996.

F-99
<PAGE> 144
TRI-STAR INDUSTRIAL SUPPLY, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Future minimum lease payments at September 30, 1996, were as follows (in
thousands):

<TABLE>
<CAPTION>
RELATED
PARTY OTHER
------- -----
<S> <C> <C>
1997........................................................ $ 120 $26
1998........................................................ 120 12
1999........................................................ 121 0
2000........................................................ 126 0
2001........................................................ 126 0
Thereafter.................................................. 1,017 0
------ ---
$1,630 $38
====== ===
</TABLE>

5. INCOME TAXES

The provision for income taxes includes these components (in thousands):

<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Current tax expense......................................... $273 $263
Deferred tax expense........................................ (3) (26)
---- ----
$270 $237
==== ====
</TABLE>

A reconciliation of income tax expense at the statutory rate to income tax
expense at the Company's effective rate is shown below (in thousands):

<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Computed at the statutory rate (34%)........................ $223 $209
Increase (decrease) in taxes resulting from:
Non-deductible expenses................................... 15 21
State income taxes -- net of federal tax benefits......... 29 28
Change in expected rates.................................. 0 (21)
Change in valuation allowance............................. (2) 1
Other..................................................... 5 (1)
---- ----
$270 $237
==== ====
</TABLE>

F-100
<PAGE> 145
TRI-STAR INDUSTRIAL SUPPLY, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The tax effects of temporary differences related to deferred taxes shown on
the balance sheets were (in thousands):

<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Accumulated depreciation.................................. $ 6 $ 13
Inventory -- uniform capitalization....................... 61 67
Allowance for doubtful accounts........................... 9 20
Straight line rents....................................... 2 5
Net operating loss carryforwards.......................... 24 23
Other..................................................... 10 10
---- ----
Net deferred tax asset before valuation allowance........... 112 138
---- ----
Valuation allowance:
Beginning balance......................................... (12) (10)
Change during the period.................................. 2 (1)
---- ----
Ending balance............................................ (10) (11)
---- ----
Net deferred tax asset...................................... $102 $127
==== ====
</TABLE>

The above net deferred tax assets are presented on the balance sheets as
follows (in thousands):

<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Current asset............................................... $ 70 $ 92
Long-term asset............................................. 32 35
---- ----
$102 $127
==== ====
</TABLE>

For federal income tax purposes, the Company has $58,000 of operating loss
carryforwards which expire through 2002.

6. PROFIT-SHARING PLAN

The Company has a profit-sharing plan covering substantially all employees.
The Company makes matching contributions to the Plan equal to 25% of the first
2% and 5% of the next 4% of employee contributions. Contributions are limited to
15% of total compensation paid participants during the Plan year. Participant
interests are vested over a period from two to six years of service.
Contributions to the Plan were $9,600 and $11,000 for 1995 and 1996,
respectively.

7. ADDITIONAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>
1995 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Additional Cash Information
Interest paid............................................. $199 $214
==== ====
Income taxes paid......................................... $207 $333
==== ====
</TABLE>

8. SUBSEQUENT EVENT (UNAUDITED)

On June 2, 1997, the Company purchased the net assets of a local industrial
supplier for approximately $1,750,000. This transaction was principally financed
through bank borrowings.

F-101
<PAGE> 146

INDUSTRIAL DISTRIBUTION GROUP, INC.

INTRODUCTION TO UNAUDITED PRO FORMA CONDENSED COMBINED

FINANCIAL INFORMATION

The unaudited pro forma condensed combined financial information for the
six months ended June 30, 1998 and for the year ended December 31, 1997 is set
forth on the following pages. The unaudited pro forma financial information has
been prepared utilizing the historical financial statements of the Company and
LD Supply, Inc. ("LDS"). The pro forma financial information also has been
prepared to reflect the historical financial data for certain acquisitions made
by the Company since the beginning of 1997. In September 1997, the Company
completed an initial public offering of its common stock (NYSE: IDG) and,
concurrent with the offering, acquired the following nine industrial
distribution companies: Associated Suppliers, Inc., B&J Industrial Supply
Company, Cramer Industrial Supplies, Grinding Supplies Company, J.J. Stangel
Co., Shearer Industrial Supply Co., Slater Industrial Supply, Inc., The
Distribution Group, Inc. (formerly known as Industrial Distribution Group,
Inc.), and Tri-Star Industrial Supply, Inc. (collectively referred to as the
"Founding Companies"). Accordingly, the pro forma financial information gives
pro forma effect to the above acquisitions as if they had occurred as of January
1, 1997 for the purposes of the statements of operations. Additionally, the
Company completed mergers with Northern Tool & Supply Company, Inc. and
Continental Air Tool, Inc., d.b.a. Continental-McLaughlin Equipment & Supply,
during the first quarter of 1998 and with Hawley Industrial Supplies, Inc.
during the second quarter of 1998 (collectively referred to as the "Pooled
Companies"). These mergers have been accounted for under the pooling of
interests method of accounting, and all historical financial information has
been restated to give effect to these mergers. The LDS historical financial
statements are for the year ended April 30, 1998. They have been recast to a
calendar year pro forma presentation as of December 31, 1997.

The acquisition of LDS was completed on June 5, 1998 and has been accounted
for under the purchase method of accounting. The pro forma financial information
has been prepared on such basis of accounting utilizing estimates and
assumptions as set forth below and in the notes thereto. The pro forma financial
information is presented for informational purposes and is not necessarily
indicative of the future financial position or results of operations of the
combined companies or of the financial position or the results of operations of
the combined companies that would have actually occurred had the acquisition
been consummated on such date or as of the periods described above. The purchase
price allocations reflected in the pro forma financial information have been
based on preliminary estimates of the respective fair values of assets and
liabilities which may differ from the actual allocations and are subject to
revision based on further studies and valuations. Certain amounts in the
historical financial statements of LDS have been reclassified to conform to the
financial presentation of the Company.

P-1
<PAGE> 147

INDUSTRIAL DISTRIBUTION GROUP, INC.

PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 1998

(UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
HISTORICAL IDG, LDS
FOR THE JANUARY 1, 1998 SUBTOTAL
SIX MONTHS ENDED TO PRO FORMA PRO FORMA PRO FORMA
JUNE 30, 1998 JUNE 5, 1998 COMBINED ADJUSTMENTS COMBINED
---------------- --------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
NET SALES...................... $ 196,401 $7,471 $203,872 $ 0 $ 203,872
COST OF SALES.................. 151,560 5,806 157,366 0 157,366
--------- ------ -------- ------- ---------
Gross profit................. 44,841 1,665 46,506 0 46,506
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES...... 40,076 1,019 41,095 (54)(g) 41,111
70(f)
--------- ------ -------- ------- ---------
OPERATING INCOME............... 4,765 646 5,411 (16) 5,395
INTEREST EXPENSE............... 487 30 517 0 517
INTEREST INCOME................ 0 31 31 0 31
OTHER INCOME, net.............. 702 0 702 0 702
--------- ------ -------- ------- ---------
INCOME BEFORE INCOME TAXES..... 4,980 647 5,627 (16) 5,611
PROVISION FOR INCOME TAXES..... 1,904 0 1,904 259(h) 2,163
--------- ------ -------- ------- ---------
NET INCOME..................... $ 3,076 $ 647 $ 3,723 $ (275) $ 3,448
========= ====== ======== ======= =========
EARNINGS PER SHARE:
Basic........................ $ .38 $ .41
========= =========
Diluted...................... $ .38 $ .41
========= =========
WEIGHTED AVERAGE SHARES:
Basic........................ 8,052,006 270,585(e) 8,322,591
========= ======= =========
Diluted...................... 8,110,302 270,585(e) 8,380,887
========= ======= =========
</TABLE>

See accompanying notes to unaudited pro forma condensed combined financial
information.

P-2
<PAGE> 148

INDUSTRIAL DISTRIBUTION GROUP, INC.

PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1997

(UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
FOUNDING
HISTORICAL IDG, COMPANIES
AS RESTATED FOR THROUGH RECAST SUBTOTAL
THE POOLED SEPTEMBER 23, HISTORICAL PRO FORMA PRO FORMA PRO FORMA
COMPANIES 1997 LDS COMBINED ADJUSTMENTS COMBINED
--------------- ------------- ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
NET SALES...................... $153,218 $178,951 $16,037 $348,206 $ 0 $ 348,206
COST OF SALES.................. 117,726 138,051 12,378 268,155 0 268,155
-------- -------- ------- -------- ------- ----------
Gross profit................. 35,492 40,900 3,659 80,051 0 80,051
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES...... 31,595 36,902 2,950 71,447 28(g) 70,879
(1,150)(d)
389(a)
165(f)
-------- -------- ------- -------- ------- ----------
OPERATING INCOME............... 3,897 3,998 709 8,604 568 9,172
INTEREST EXPENSE............... 966 2,020 12 2,998 (1,775)(b) 1,223
INTEREST INCOME................ 461 0 51 512 0 512
OTHER INCOME, net.............. 178 177 0 355 0 355
-------- -------- ------- -------- ------- ----------
INCOME FROM OPERATIONS, before
income taxes................. 3,570 2,155 748 6,473 2,343 8,816
PROVISION FOR INCOME TAXES..... 1,254 854 0 2,108 331(h) 3,637
1,198(c)
-------- -------- ------- -------- ------- ----------
NET INCOME BEFORE EXTRAORDINARY
ITEM......................... 2,316 1,301 748 4,365 814 5,179
-------- -------- ------- -------- ------- ----------
EXTRAORDINARY ITEM DUE TO
CHANGE FROM LIFO, net of
tax.......................... 0 0 79 79 (79)(i) 0
-------- -------- ------- -------- ------- ----------
NET INCOME..................... $ 2,316 $ 1,301 $ 827 $ 4,444 $ 735 $ 5,179
======== ======== ======= ======== ======= ==========
EARNINGS PER SHARE:
Basic........................ $ .71 $ 1.47
======== ==========
Diluted...................... $ .71 $ 1.46
======== ==========
WEIGHTED AVERAGE SHARES:
Basic........................ 3,258,555 270,585(e) 3,529,140
========= ======= ==========
Diluted...................... 3,282,927 270,585(e) 3,553,512
========= ======= ==========
</TABLE>

See accompanying notes to unaudited pro forma condensed combined financial
information.

P-3
<PAGE> 149

INDUSTRIAL DISTRIBUTION GROUP, INC.

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

On June 5, 1998, the Company completed the acquisition of all of the
outstanding capital stock of LDS. LDS is a distributor that provides procurement
solutions, products, and services to industrial users that have maintenance,
repair, operating, and production supply requirements. Consideration paid by the
Company consisted of approximately 270,585 shares of Company common stock,
$5,000,000 in cash, and the assumption of certain liabilities.

The acquisition of LDS was accounted for under the purchase method of
accounting, applying the provisions of Accounting Principles Board ("APB")
Opinion No. 16, and as a result, the Company recorded the assets and liabilities
of LDS at their estimated fair values, with the excess of the purchase price
over this amount being recorded as goodwill. The total amount of goodwill was
approximately $6,594,000, which includes acquisition costs of $73,000.

PRO FORMA ADJUSTMENTS

(a) Records the amortization of goodwill over a 40-year period and other
intangible assets over a 13-year period for the Founding Companies on a
straight-line basis.

(b) Eliminates interest expense from line of credit of the Founding
Companies, which was paid from the proceeds of the acquisition.

(d) Eliminates the one-time compensation expense related to purchases of
common stock in relation to the acquisition.

(e) Records the common stock issued in relation to the acquisition.

(f) Records the amortization of goodwill related to LDS over a 40-year
period on a straight-line basis.

(g) Eliminates the income and expense related to assets not acquired in the
purchase.

(h) Records the tax provision based on the taxable income of LDS using the
Company's effective rate.

(i) Eliminates the extraordinary item related to change from last-in,
first-out inventory method.

P-4
<PAGE> 150
[INDUSTRIAL DISTRIBUTION GROUP LOGO]
[MAP, SHOWING NAMES AND LOCATION
OF NINE FOUNDING COMPANIES]
[TEXT BLOCK]

IDG represents the industry's leading manufacturers of high quality
Maintenance, Repair, Operating and Production (MROP) Supplies. We help our
customers lower Operating Costs by focusing on continous process improvement.
Industrial Distribution Group provides US customers with the products, services,
and in-plant storeroom management systems that keep industrial manufacturing
plants operating 24 hours per day, seven days per week, 365 days per year.
<PAGE> 151

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

(INDUSTRIAL DISTRIBUTION (TM) LOGO)

INDUSTRIAL DISTRIBUTION GROUP, INC.

COMMON STOCK

---------------------------
PROSPECTUS
---------------------------

, 1998

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 152

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

Set forth below is an estimate of the approximate amount of the fees and
expenses (other than underwriting commissions and discounts) payable by the
Company in connection with the issuance and distribution of the shares of Common
Stock.

<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 28,440
Printing Expenses........................................... 35,000
Legal Fees and Expenses..................................... 40,000
Accounting Fees and Expenses................................ 5,000
Miscellaneous............................................... 2,000
-------------
Total............................................. $ 110,440
=============
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Company's Certificate of Incorporation provides that to the fullest
extent permitted by the Delaware General Corporation Law ("DGCL"), a director of
the Company shall not be liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director. Under the DGCL, liability of
a director may not be limited (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or that involve intentional misconduct or a knowing violation of law,
(iii) in respect of certain unlawful dividend payments or stock redemptions or
repurchases, and (iv) for any transaction from which the director derives an
improper personal benefit. The effect of the provisions of the Company's
Certificate of Incorporation is to eliminate the rights of the Company and its
stockholders (through stockholders' derivative suits on behalf of the Company)
to recover monetary damages against a director for breach of the fiduciary duty
of care as a director (including breaches resulting from negligent or grossly
negligent behavior), except in the situations described in clauses (i) through
(iv) above. This provision does not limit or eliminate the rights of the Company
or any stockholder to seek nonmonetary relief such as an injunction or
rescission in the event of a breach of a director's duty of care.

In addition, under the Company's Certificate of Incorporation and Article
Eight of the Company's Bylaws, the Company shall indemnify its directors,
officers, employees, and agents against losses incurred by any such person by
reason of the fact that such person was acting in such capacity or was serving
at the request of the Company as a director, officer, employee, or agent of
another entity. In addition, the Company has entered into indemnification
agreements with its directors and executive officers.

The Company's directors and officers are insured against losses arising
from any claim against them as such for wrongful acts or omissions, subject to
certain limitation.

The Company has obtained directors' and officers' liability insurance
coverage.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

In June 1998, the Company issued 270,583 shares of Common Stock in
connection with the merger of a corporation, in reliance upon the exemptions
contained in Section 4(2) of the Securities Act. In exchange therefor, the
Company acquired all of the outstanding capital stock of the corporation.

In May 1998, the Company issued an aggregate of 379,735 shares of Common
Stock in connection with the merger or acquisition of three corporations and one
limited liability company, in reliance upon the exemption contained in Section
4(2) of the Securities Act. In exchange therefor, the Company acquired all of
the outstanding capital stock of each of the three corporations and the
membership interests of the limited liability company.

II-1
<PAGE> 153

In March 1998, the Company issued an aggregate of 539,747 shares of Common
Stock in connection with the merger or acquisition of three corporations, in
reliance upon the exemption contained in Section 4(2) of the Securities Act. In
exchange therefor, the Company acquired all of the outstanding capital stock of
each of the three corporations.

The Company was incorporated in February 1997 in Georgia and was merged
into a Delaware corporation on July 2, 1997. Simultaneously with the closing of
the Company's initial public offering, an aggregate of 3,330,224 shares of
Common Stock was issued in connection with the merger or acquisition of nine
corporations into the Company, in reliance upon the exemption contained in
Section 4(2) of the Securities Act. In exchange therefor, the Company acquired
all of the outstanding capital stock of each of the nine corporations.

In February and June 1997, an aggregate of 129,749 shares of Common Stock
was issued to officers, directors, and a consultant to the Registrant for an
aggregate of $1,125, in reliance upon the exemption contained in Section 4(2) of
the 1933 Act.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <C> <S>
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) filed with the
Commission, 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)
filed with the Commission, 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
S-1 (File No. 333-36233) filed with the Commission, is
hereby incorporated by reference)
*5.1 -- Opinion of Kilpatrick Stockton LLP
10.1 -- Form of Agreement and Plan of Merger and Reorganization
(reverse merger) (filed as Exhibit 10.1 of the Company's
Registration Statement on Form S-1 (File No. 333-36233)
filed with the Commission, is hereby incorporated by
reference)
10.2 -- Agreement and Plan of Merger and Reorganization among the
Registrant, Industrial Distribution Group, Inc., a Georgia
corporation, IDG Acquisition Company I, Inc. and the
Stockholders named therein (filed as Exhibit 10.2 of the
Company's Registration Statement on Form S-1 (File No.
333-36233) filed with the Commission, is hereby incorporated
by reference)
10.3 -- Agreement and Plan of Reorganization between the Registrant
and the Stockholders named therein (filed as Exhibit 10.3 of
the Company's Registration Statement on Form S-1 (File No.
333-36233) filed with the Commission, is hereby incorporated
by reference)
10.4 -- Uniform Provisions for the Acquisition of Founding Companies
(filed as Exhibit 10.4 of the Company's Registration
Statement on Form S-1 (File No. 333-36233) filed with the
Commission, is hereby incorporated by reference)
10.5 -- 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) filed with the
Commission, is hereby incorporated by reference)
10.6 -- Employment Agreement between the Registrant and Martin S.
Pinson (filed as Exhibit 10.6 of the Company's Registration
Statement on Form S-1 (File No. 333-36233) filed with the
Commission, is hereby incorporated by reference)
10.7(a) -- Employment Agreement between the Registrant and Douglass C.
Smith (filed as Exhibit 10.7 of the Company's Registration
Statement on Form S-1 (File No. 333-36233) filed with the
Commission, is hereby incorporated by reference)
10.7(b) -- Amendment, dated as of August 24, 1998, to Employment
Agreement between the Registrant and Douglass C. Smith
</TABLE>

II-2
<PAGE> 154

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <C> <S>
10.8 -- Employment Agreement between the Registrant and Jack P.
Healey (filed as Exhibit 10.8 of the Company's Registration
Statement on Form S-1 (File No. 333-36233) filed with the
Commission, is hereby incorporated by reference)
10.9 -- Form of Indemnification Agreement entered into between the
Company and each executive officer and director of the
Company (filed as Exhibit 10.9 of the Company's Registration
Statement on Form S-1 (File No. 333-36233), filed with the
Commission, is hereby incorporated by reference)
10.10 -- Form of Escrow Agreement among the Registrant, American
Stock Transfer & Trust Company and the individuals named
therein (filed as Exhibit 10.10 of the Company's
Registration Statement on Form S-1 (File No. 333-36233)
filed with the Commission, is hereby incorporated by
reference)
10.11 -- Letter Agreement dated October 1, 1997, by and between the
Company and Barth Smith Company (filed as Exhibit 10.11 of
the Company's Annual Report on Form 10-K (File No.
001-13195) on March 31, 1998, is hereby incorporated by
reference)
10.12 -- Lease Agreement by and between Andrew B. and Stephanie A.
Shearer and Shearer Industrial Supply Co., dated as of July
30, 1998
21.1 -- Subsidiaries of the Company
23.1 -- Consent of Kilpatrick Stockton LLP (see Exhibit 5.1)
23.2 -- Consent of Arthur Andersen LLP
23.3 -- Consent of Miller & Co. LLP
23.4 -- Consent of Schenck & Associates, SC
23.5 -- Consent of Baird, Kurtz & Dobson
*24.1 -- Powers of Attorney
27.1 -- Restated Financial Data Schedule for the year ended December
31, 1997
27.2 -- Restated Financial Data Schedule for the year ended December
31, 1996
27.3 -- Restated Financial Data Schedule for the year ended December
31, 1995
27.4 -- Restated Financial Data Schedule for the six months ended
June 30, 1997
</TABLE>

- ---------------

* Previously filed

(b) FINANCIAL STATEMENT SCHEDULES

None required.

ITEM 17. UNDERTAKINGS

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit, or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question as to whether such indemnification by it is against
public policy as expressed in the Securities Act, and will be governed by the
final adjudication of such issue.

The undersigned Company hereby undertakes that:

(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Company pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

II-3
<PAGE> 155

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

The undersigned Company hereby undertakes:

(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1993;

(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and

(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

II-4
<PAGE> 156

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Amendment No. 2 to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Atlanta,
State of Georgia, on the 17th day of September, 1998.

INDUSTRIAL DISTRIBUTION GROUP, INC.

By: /s/ MARTIN S. PINSON

------------------------------------

Martin S. Pinson

Chairman, President and Chief
Executive Officer

POWER OF ATTORNEY

Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed by the following persons on
the 17th day of September, 1998, in the capacities indicated.

<TABLE>
<CAPTION>
SIGNATURE POSITION
--------- --------
<C> <S>

* Chairman of the Board, President, and Chief
- ----------------------------------------------------- Executive Officer (Principal Executive
Martin S. Pinson Officer)

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

* Director
- -----------------------------------------------------
David K. Barth

* Director
- -----------------------------------------------------
William J. Burkland

* Director
- -----------------------------------------------------
William R. Fenoglio

* Director
- -----------------------------------------------------
William T. Parr

* Director
- -----------------------------------------------------
George L. Sachs, Jr.

* Director
- -----------------------------------------------------
Richard M. Seigel

* Director
- -----------------------------------------------------
Andrew B. Shearer

/s/ DOUGLASS C. SMITH Director
- -----------------------------------------------------
Douglass C. Smith

*By: /s/ DOUGLASS C. SMITH
------------------------------------------------
as attorney-in-fact
</TABLE>

II-5
<PAGE> 157

EXHIBIT INDEX

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- ------- ---------------------- ------------
<C> <C> <S> <C>
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) filed with the
Commission, 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)
filed with the Commission, 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
S-1 (File No. 333-36233) filed with the Commission, is
hereby incorporated by reference)
*5.1 -- Opinion of Kilpatrick Stockton LLP
10.1 -- Form of Agreement and Plan of Merger and Reorganization
(reverse merger) (filed as Exhibit 10.1 of the Company's
Registration Statement on Form S-1 (File No. 333-36233)
filed with the Commission, is hereby incorporated by
reference)
10.2 -- Agreement and Plan of Merger and Reorganization among the
Registrant, Industrial Distribution Group, Inc., a Georgia
corporation, IDG Acquisition Company I, Inc. and the
Stockholders named therein (filed as Exhibit 10.2 of the
Company's Registration Statement on Form S-1 (File No.
333-36233) filed with the Commission, is hereby incorporated
by reference)
10.3 -- Agreement and Plan of Reorganization between the Registrant
and the Stockholders named therein (filed as Exhibit 10.3 of
the Company's Registration Statement on Form S-1 (File No.
333-36233) filed with the Commission, is hereby incorporated
by reference)
10.4 -- Uniform Provisions for the Acquisition of Founding Companies
(filed as Exhibit 10.4 of the Company's Registration
Statement on Form S-1 (File No. 333-36233) filed with the
Commission, is hereby incorporated by reference)
10.5 -- 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) filed with the
Commission, is hereby incorporated by reference)
10.6 -- Employment Agreement between the Registrant and Martin S.
Pinson (filed as Exhibit 10.6 of the Company's Registration
Statement on Form S-1 (File No. 333-36233) filed with the
Commission, is hereby incorporated by reference)
10.7 (a) -- Employment Agreement between the Registrant and Douglass C.
Smith (filed as Exhibit 10.7 of the Company's Registration
Statement on Form S-1 (File No. 333-36233) filed with the
Commission, is hereby incorporated by reference)
10.7 (b) -- Amendment, dated as of August 24, 1998, to Employment
Agreement between the Registrant and Douglass C. Smith
10.8 -- Employment Agreement between the Registrant and Jack P.
Healey (filed as Exhibit 10.8 of the Company's Registration
Statement on Form S-1 (File No. 333-36233) filed with the
Commission, is hereby incorporated by reference)
10.9 -- Form of Indemnification Agreement entered into between the
Company and each executive officer and director of the
Company (filed as Exhibit 10.9 of the Company's Registration
Statement on Form S-1 (File No. 333-36233), filed with the
Commission, is hereby incorporated by reference)
</TABLE>

<PAGE> 158

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- ------- ---------------------- ------------
<C> <C> <S> <C>
10.10 -- Form of Escrow Agreement among the Registrant, American
Stock Transfer & Trust Company and the individuals named
therein (filed as Exhibit 10.10 of the Company's
Registration Statement on Form S-1 (File No. 333-36233)
filed with the Commission, is hereby incorporated by
reference)
10.11 -- Letter Agreement dated October 1, 1997, by and between the
Company and Barth Smith Company (filed as Exhibit 10.11 of
the Company's Annual Report on Form 10-K (File No.
001-13195) on March 31, 1998, is hereby incorporated by
reference)
10.12 -- Lease Agreement by and between Andrew B. and Stephanie A.
Shearer and Shearer Industrial Supply Co., dated as of July
30, 1998
21.1 -- Subsidiaries of the Company
23.1 -- Consent of Kilpatrick Stockton LLP (See Exhibit 5.1)
23.2 -- Consent of Arthur Andersen LLP
23.3 -- Consent of Miller & Co. LLP
23.4 -- Consent of Schenck & Associates SC
23.5 -- Consent of Baird, Kurtz & Dobson
*24.1 -- Powers of Attorney
27.1 -- Restated Financial Data Schedule for the year ended December
31, 1997
27.2 -- Restated Financial Data Schedule for the year ended December
31, 1996
27.3 -- Restated Financial Data Schedule for the year ended December
31, 1995
27.4 -- Restated Financial Data Schedule for the six months ended
June 30, 1997
</TABLE>

- ---------------

* Previously filed

<PAGE> 1

EXHIBIT 10.7(b)

AMENDMENT TO EMPLOYMENT AGREEMENT

This Amendment, dated as of August 24, 1998 (the "Amendment'), is made
and entered into by and between Douglass C. Smith ("Executive") and Industrial
Distribution Group, Inc. ("IDG") to amend that certain Employment Agreement by
and between them dated as of September 29, 1997 (the "Agreement").

W I T N E S S E T H:

WHEREAS, in order to reflect the implementation of certain
modifications to Executive's employment with IDG established by the Board of
Directors of IDG and consented to by Executive, which modifications affect
certain terms of the Agreement; and

WHEREAS, The Distribution Group, Inc., a Georgia corporation
("Subsidiary"), is a wholly owned subsidiary of IDG and desires to evidence its
acknowledgment and acceptance of the terms of this Amendment and the Agreement.

NOW, THEREFORE, for and in consideration of the premises, the mutual
covenants contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby expressly acknowledged, the parties
hereby covenant and agree as follows:

1. POSITION AND DUTIES. Section 1 of the Agreement is hereby amended to
read in its entirety as follows:

"1. DUTIES AND EXTENT OF SERVICES

1.1 POSITION AND DUTIES. IDG hereby enters into this Agreement
to evidence and provide for the employment of Executive as Chairman and
Chief Executive Officer of Subsidiary. Consistent with the policies,
guidelines, and directives adopted or established by the Board of
Directors of Subsidiary (or by the Board of Directors of IDG with
respect to the operations of Subsidiary), acting pursuant to and in
accordance with lawful authority, Executive shall be in charge of the
development, establishment, and implementation of policy and strategic
initiatives for Subsidiary, with authority and responsibility
consistent with his position as the principal executive officer of
Subsidiary. Executive shall be entitled to serve as a member of IDG's
Board of Directors as well as of the Board of Directors of Subsidiary,
at all times during the term of this Agreement. Executive agrees to
serve, without additional compensation, in a similar executive capacity
with other subsidiaries of IDG and in such other executive capacities
as may be designated by the Board of Directors of

<PAGE> 2

IDG, consistent with the positions, responsibilities, and authority of
Executive hereunder. Neither Executive's employment hereunder nor any
other position referred to in the preceding sentence shall require
Executive to relocate his primary residence from his current location,
and Executive may perform his duties at such geographic locations as he
may determine in his reasonable discretion, giving due regard to the
location of his primary residence, the location of Subsidiary's
principal offices, and the best interest of IDG and Subsidiary.

1.2 EXTENT OF SERVICES. Executive agrees to devote his full
working time, energy, and skill to the business of Subsidiary and its
affiliates and to the promotion of Subsidiary's and IDG's interests and
to discharge Executive's duties in good faith and in a professional
manner. Executive affirms and represents that he is under no obligation
to any former employer or other party that is in any way inconsistent
with, or that imposes any restriction upon, his acceptance of
employment hereunder with Subsidiary, the employment of Executive by
Subsidiary, or Executive's undertakings under this Agreement."

2. INCENTIVE COMPENSATION AND BENEFITS. Section 3.2 and Section 4 are
amended in their entirety read as follows:

"3.2 GENERAL INCENTIVE COMPENSATION AND SAVINGS PROGRAMS. IDG
hereby agrees that Executive shall be entitled to participate, to an
extent consistent with Executive's title and Base Salary, in such
incentive compensation and savings programs, including stock option or
other stock-based compensation plans or profit sharing plans, 401(k)
plans, or other savings programs, as may be established by IDG, or
approved by IDG for the Company, for similarly situated Executives,
other key employees, or employees as a group."

"4. BENEFITS

During Executive's employment hereunder, Executive shall:

(a) be eligible to participate in employee fringe benefits and
any pension or profit sharing plans that may be provided by IDG for its
operating division level executive employees in accordance with the
provisions of any such plans, as the same may be in effect from time to
time;

(b) be eligible to participate in any medical and health plans
or other employee welfare benefit plans that may be provided by IDG for
its operating division level executive employees in accordance with the
provisions of any such plans, as the same may be in effect from time to
time;

2
<PAGE> 3

(c) be entitled to annual paid vacation in accordance with IDG
policy that may be applicable to operating division level executive
employees from time to time;

(d) be entitled to sick leave, sick pay, and disability
benefits in accordance with any IDG policy that may be applicable to
operating division level executive employees from time to time; and

(e) be entitled, without limitation of the foregoing, to the
continuation by IDG or Subsidiary on terms acceptable to Executive of
(and IDG hereby agrees to so continue) the life and disability
insurance policies and related program described on Schedule A to the
Agreement."

3. CONSTRUCTIVE DISCHARGE. Section 7.5 of the Agreement is hereby
amended to read in its entirety as follows:

"7.5 BY EXECUTIVE. If (a) IDG or Subsidiary significantly
reduces Executive's authority or duties as provided for in this
Agreement or Executive's standing within IDG as a function of
Executive's relationships with the Board of Directors of IDG or
Subsidiary, (b) a change of control of IDG occurs that is not consented
to by Executive, (c) Executive, without his consent, is not elected or
retained as a director of IDG or Subsidiary, or (d) Executive is
required by IDG or Subsidiary, without his consent, to relocate his
primary residence from his current location, then, in any such event,
Executive may terminate this Agreement and such termination shall be
treated as if it were a Discharge under Section 7.4; provided that the
Board of Directors of IDG shall have received written notice from
Executive of any reduction described in clause (a) above upon which
Executive proposes to base a termination and IDG shall have failed
within thirty (30) days thereafter to reverse or cure the situation
giving rise to the grounds asserted by Executive. For purposes hereof,
"change of control" shall mean (e) the acquisition by a person or
entity other than Executive or an affiliate of Executive, whether in
one or several transactions, by exchange, merger, consolidation,
assignment, stock spin-off, stock split-up, or other transaction (other
than pursuant to a registered underwritten public offering of voting
stock by IDG), of an amount of the voting stock of IDG, or of the right
to vote or to direct the voting of such amount of voting stock,
sufficient to elect a majority of the Board of Directors of IDG, or (f)
a change in the membership of the Board of Directors of IDG such that a
majority of the members are persons who are not Continuing Directors.
For purposes of this Agreement, a "Continuing Director" is a person who
is a member of the Board of Directors of IDG on the date hereof or a
person who is elected as a director of IDG upon the nomination by or
approval of a majority of the Continuing Directors in office. If
Executive terminates this Agreement due to a change of control, then in
lieu of the payment provided for in Section 7.4(a), Executive shall
receive a cash payment equal to the present value (based on IDG's then
current cost of borrowing) of Executive's Base Salary for the

3
<PAGE> 4

remainder of the Term, or for a period of two years, whichever period
is longer, payable within thirty (30) days of the date of the
occurrence of such event."

4. PERFORMANCE OF CERTAIN IDG OBLIGATIONS BY SUBSIDIARY. Executive and
IDG hereby agree, and Subsidiary acknowledges and accepts, that financial
obligations of IDG to Executive under the Agreement may be performed by
Subsidiary if so directed by the Board of Directors of IDG, or if otherwise
agreed to between Executive and IDG, without requiring any further amendment to
the Agreement, it being understood and agreed that, for purposes of this
Agreement, any such performance shall be tantamount to direct performance by
IDG.

5. CONTINUATION OF OTHER TERMS. Except as expressly set forth in this
Amendment, or as may be required as an inalterable matter of law in light of the
change in Executive's position from that of an officer of IDG to that of an
officer of Subsidiary, all other terms and provisions of the Agreement are
unaffected hereby and remain in full force and effect.

6. FURTHER ACKNOWLEDGMENT OF DUE CONSIDERATION. Executive, IDG, and
Subsidiary hereby expressly acknowledge that the arrangements and agreements
made and entered into in this Amendment are for good and valuable consideration
that each is receiving, and that this Amendment and the Agreement as so amended
are valid and enforceable against each of them in accordance with their
respective terms.

4
<PAGE> 5

IN WITNESS WHEREOF, the parties have executed this Amendment to the
Agreement, as an instrument under seal, as of the day and year first written
above.

[SEAL] "IDG"

Attest: INDUSTRIAL DISTRIBUTION GROUP, INC.

/s/ Jack P. Healey By: /s/ Martin S. Pinson
- ----------------------------------- -------------------------------------
Secretary or Assistant Secretary Martin S. Pinson
Chairman and Chief Executive Officer

"EXECUTIVE"

/s/ Douglass C. Smith (SEAL)
----------------------------------
DOUGLASS C. SMITH

Acknowledged and Accepted,
as of the 25th day of August, 1998:

THE DISTRIBUTION GROUP, INC.

By: /s/ Charles A. Lingenfelter
--------------------------------
Charles A. Lingenfelter
President

<PAGE> 1

EXHIBIT 10.12

LEASE AGREEMENT

THIS LEASE AGREEMENT is made and entered into THIS 30TH DAY OF JULY,
1998, by and between ANDREW B. SHEARER, a Pennsylvania resident, as Landlord
("LANDLORD"), STEPHANIE A. SHEARER, as an additional signatory for Landlord
("ADDITIONAL Signatory") and SHEARER INDUSTRIAL SUPPLY CO., a Pennsylvania
corporation, as Tenant ("TENANT").

W I T N E S S E T H:

1. DEFINITIONS. For purposes of this Lease, the following terms shall
have the following meanings, unless the context requires otherwise:

(a) "COMMENCEMENT DATE" shall mean the date on which the term of this
Lease commences.

(b) "CPI" shall mean the Consumer Price Index For Urban Wage Earners
and Clerical Workers, U.S. City Average (1967 = 100) Unadjusted, all items
index, published by the Bureau of Labor Statistics, United States Department of
Labor.

(d) "HAZARDOUS SUBSTANCES" shall mean those substances as set forth on
EXHIBIT "C", attached hereto and incorporated herein by reference.

(e) "IMPROVEMENTS" shall mean and shall include any and all buildings,
structures, fixtures, driveways, parking areas, paved areas, fences and other
improvements located on, or attached or affixed to, the Land as of the date of
this Lease, or to be constructed, installed or placed on the Land by Landlord
prior to the Commencement Date pursuant to this Lease, and any and all
modifications, alterations and replacements thereof, substitutions therefor and
additions thereto. The term Improvements does not include the Land.

(f) "LAND" shall mean that certain tract or parcel of land located at
the INTERSECTION OF FARMTRAIL ROAD AND SUSQUEHANNA TRAIL, YORK COUNTY,
PENNSYLVANIA, and as more particularly described on EXHIBIT "A" attached hereto,
and incorporated herein by reference, together with all easements and rights
appurtenant thereto, and Landlord's right, title and interest in and to all
streets, public or private alleys and public or private ways adjoining or
crossing said land.

(g) "LAWS" shall mean all federal, state, county, municipal and other
governmental constitutions, statutes, ordinances, codes, regulations,
resolutions, rules, requirements and directives and all decisions, judgments,
writs, injunctions, orders, decrees or demands of courts, administrative bodies
and other authorities construing any of the foregoing. "LAW" shall be the
singular reference to Laws.

(h) "LEASE" shall mean this Lease Agreement, together with any and all
exhibits and attachments which may be part of this Lease Agreement.

(i) "LEASE YEAR" shall mean: (i) if the Commencement Date is the first
day of a calendar month, the TWELVE (12) calendar month period commencing on the
Commencement Date, and ending on the day immediately preceding the first
anniversary of the Commencement Date, and each succeeding such TWELVE (12)
calendar month period during the term of this Lease; or (ii) if the Commencement
Date is not the first day of a calendar month, the TWELVE (12) calendar month
period commencing on the first day of the first calendar month following the
Commencement Date, and ending on the day immediately preceding the first
anniversary of such date, and each succeeding such TWELVE (12)

1
<PAGE> 2

calendar month period during the term of this Lease, PROVIDED, HOWEVER, that, if
the Commencement Date is a day other than the first day of a calendar month, the
First Lease Year shall include the period from the Commencement Date through the
last day of the calendar month during which the Commencement Date occurs.

(j) "MORTGAGE" shall mean any mortgage, deed to secure debt, deed of
trust, trust deed or other conveyance of, or lien or encumbrance against, the
Premises as security for any debt, whether now existing or hereafter arising or
created. "MORTGAGES" shall mean more than one "Mortgage".

(k) "MORTGAGEE" shall mean the holder of any Mortgage, together with
the heirs, legal representatives, successors, transferees and assigns of the
holder. "MORTGAGEES" shall mean more than one "Mortgagee".

(l) "PARTY" shall mean either Landlord or Tenant, as appropriate.
"PARTIES" shall mean both Landlord and Tenant.

(m) "PREMISES" shall mean the Land and the Improvements.

(n) "RENT" shall mean the rental specified and provided for in this
Lease.

(o) "TAXES AND ASSESSMENTS" shall mean real property ad valorem taxes
and assessments levied, assessed or imposed upon, against or with respect to the
Premises at any time during the term of this Lease by a governmental authority.
Taxes and Assessments shall not include any assessments by the Farmbrook
Industrial Park or any other industrial park.

2. TERM; OPTION TO EXTEND.

(a) The initial term of this Lease (the "INITIAL TERM") shall be for
TEN (10) LEASE YEARS, commencing on the earlier of: (i) TEN (10) days after
Landlord achieves Substantial Completion (as defined in the Work Letter); or
(ii) the date Tenant commences its normal business operations on the Premises
(the "COMMENCEMENT DATE"). The Lease shall expire at midnight on the last day of
the Initial Term (the "EXPIRATION DATE"), unless extended or sooner terminated
as hereinafter provided. All references to the term of this Lease shall be
references to the term of this Lease as it may be renewed or extended.

(b) Tenant shall have the right to extend the term of this Lease for an
additional period of FIVE (5) LEASE YEARS, by delivering written notice to
Landlord not less than ONE HUNDRED EIGHTY (180) DAYS prior to the Expiration
Date. If Tenant exercises the foregoing right to extend the term of this Lease,
all terms and conditions of this Lease (other than this option to extend) shall
remain in full force and effect, except that: (i) the Expiration Date shall be
extended by the number of Lease Years set forth in this SUBPARAGRAPH (b); and
(ii) the Rent shall be increased by FIVE PERCENT (5%).

(c) If Tenant exercises the option to extend provided for in
SUBPARAGRAPH (b), above, then Tenant shall have the further right to extend the
term of this Lease for a second additional period of FIVE (5) LEASE YEARS by
delivering written notice to Landlord not less than ONE HUNDRED EIGHTY (180)
DAYS prior to the Expiration Date, as theretofore extended. If Tenant exercises
the foregoing right to extend the term of this Lease, all terms and conditions
of this Lease (other than this option to extend) shall remain in full force and
effect, except that: (i) the Expiration Date shall be extended by the number of
Lease Years set forth in this SUBPARAGRAPH (c); and (ii) the Rent, as increased
by SUBPARAGRAPH (b) above, shall be increased by FIVE PERCENT (5%).

3. OPTION TO TERMINATE. Tenant shall have the right to terminate this
Lease at any time on or after the first day of the SEVENTH (7TH) LEASE YEAR and
before the first day of the NINTH (9TH) LEASE YEAR by providing Landlord with
written notice of Tenant's election to terminate the Lease (the

2
<PAGE> 3

"EARLY TERMINATION NOTICE"). The foregoing termination shall be effective on the
date ONE HUNDRED EIGHTY (180) DAYS following the effective date of Landlord's
receipt of the Early Termination Notice (the "EARLY TERMINATION DATE");
provided, that, on or before the Early Termination Date, Tenant has paid to
Landlord a termination fee ("TERMINATION FEE") in the amount of: (a) TEN
THOUSAND AND NO/100 DOLLARS ($10,000.00) if Tenant gives the Early Termination
Notice on or after the first day of the SEVENTH (7TH) LEASE YEAR and before the
first day of the EIGHTH (8TH) LEASE YEAR; or (b) TWENTY THOUSAND AND NO/100
DOLLARS ($20,000.00) if the Tenant gives the Early Termination Notice on or
after the first day of the EIGHTH (8TH) LEASE YEAR and before the first day of
the NINTH (9TH) LEASE YEAR. If the Early Termination Notice is timely given, and
the Early Termination Fee is timely paid by Tenant to Landlord, then this Lease
shall terminate on the Early Termination Date and the Early Termination Date
shall be the Expiration Date for all purposes herein.

4. RENT. Tenant shall pay to Landlord, at the address specified in this
Lease for the giving of notices to Landlord or at such other place as Landlord
may specify, an annual Rent which shall initially be THREE HUNDRED NINETEEN
THOUSAND TWO HUNDRED FIFTEEN AND NO/100 DOLLARS ($319,215.00) (the "RENT"). The
Rent shall be due and payable initially in equal monthly installments, in
advance, of TWENTY-SIX THOUSAND SIX HUNDRED ONE AND 25/100 DOLLARS ($26,601.25),
beginning on the Commencement Date, and continuing on the first day of each
succeeding month thereafter throughout the term of this Lease; PROVIDED,
HOWEVER, that, if the Commencement Date is a day other than the first day of a
calendar month, the Rent payable for the period from the Commencement Date
through the end of the calendar month during which the Commencement Date occurs
shall be the above-referenced monthly Rent prorated on a daily basis, and shall
be payable, together with the Rent for the first full calendar month of the
Initial Term, on the first day of the first calendar month following the
Commencement Date. All Rent paid more than FIFTEEN (15) DAYS beyond the date it
is due and payable shall accrue interest at the rate of TWELVE PERCENT (12%) per
annum. Notwithstanding the foregoing, no interest shall accrue against Rent that
is paid beyond the date it is due and payable as long as Andrew B. Shearer
remains employed at Landlord.

5. PREMISES; CONSTRUCTION OF IMPROVEMENTS; REPRESENTATIONS, WARRANTIES
AND COVENANTS.

(a) In consideration of the agreements, terms, covenants, conditions,
requirements, provisions and restrictions to be kept, observed, performed,
satisfied and complied with by Tenant, and for the Rent herein provided, and
upon the terms and conditions herein stated, Landlord hereby lets, leases and
demises unto Tenant, and Tenant hereby leases, takes and accepts from Landlord,
the Premises.

(b) Landlord shall complete and install, at its sole cost and expense,
the Improvements on the Land in accordance with the Work Letter attached hereto
as EXHIBIT "B" (hereinafter called the "WORK LETTER"), and incorporated herein
by reference, including but not limited to the construction of 14,061 SQUARE
FEET OF OFFICE SPACE and 49,782 SQUARE FEET OF WAREHOUSE SPACE.

(c) Landlord represents, warrants and covenants to and with Tenant,
knowing that Tenant is relying on each such representation, warranty and
covenant, that: (i) there are no actions, suits or proceedings pending or
threatened against, by or affecting Landlord, which affect title to the Premises
or which question the validity or enforceability of this Lease or of any action
taken by Landlord under this Lease, in any court or before any governmental
authority, domestic or foreign; (ii) the execution of and entry into this Lease,
and the performance by Landlord of Landlord's duties and obligations under this
Lease are consistent with and not in violation of, and will not create any
adverse condition under, any contract, agreement or other instrument to which
Landlord is a party, any judicial order or judgment of any nature by which
Landlord is bound, or the organizational documents of Landlord; (iii) Landlord
has good and marketable fee simple title to the Land and is not subject to any
Mortgage, lien, encroachment, covenant, easement or restriction which would
adversely affect Tenant's use and enjoyment of the Premises, with the exception
of those items ("PERMITTED EXCEPTIONS") set forth on EXHIBIT "A-1" attached
hereto, and incorporated herein by reference; (iv) the Premises does not violate
any applicable Laws and

3
<PAGE> 4

the use and occupancy of the Premises and Improvements by the Tenant
contemplated under this Lease is in compliance with zoning and other applicable
Laws; (v) no portion of the Land is used or has ever been used for the storage,
processing, treatment or disposal of Hazardous Substances; the Improvements do
not and will not contain Hazardous Substances; no Hazardous Substances have been
released, introduced, spilled, discharged or disposed of, nor has there been a
threat of release, introduction, spill, discharge or disposal of Hazardous
Substances, on, in, or under the Land; there are no pending claims,
administrative proceedings, judgments, declarations or orders, whether actual or
threatened, relating to the presence of Hazardous Substances on, in or under the
Land; the Land is in compliance with all federal, state and local laws,
regulations, orders and requirements regarding the regulation of Hazardous
Substances; Landlord will not cause or permit Hazardous Substances to be brought
on, kept or used in or about the Premises; and, no Hazardous Substances have
been released, introduced, spilled, discharged or disposed of on, in or under
any adjacent land; (vi) there are no pending, threatened or contemplated
condemnation actions involving all or any portion of the Land; and there are no
existing, proposed or contemplated plans to widen, modify or realign any public
rights-of-way located adjacent to any portion of the Land; and (vii) all
utilities (including, without limitation, water, storm and sanitary sewer,
electricity, gas, telephone and cable television) are available on the Land in
capacities sufficient to serve and operate the Improvements.

6. USE. Tenant may use and operate the Premises for any lawful business
purpose. Tenant shall not use or occupy the Premises, or permit the Premises to
be used or occupied, for any unlawful purpose, in material violation of any Law,
or in any manner which would violate any certificate of occupancy with respect
to the Premises, which would cause or would be likely to cause material damage
to the Improvements, or which would constitute a public or private nuisance.

7. TAXES AND ASSESSMENTS.

(a) Tenant shall pay as and when they shall become due and payable all
Taxes and Assessments for each calendar year during the term of this Lease.
Tenant may take the benefit of any law permitting any Taxes and Assessments to
be paid over time or in installments.

(b) Taxes and Assessments for the calendar years during which the
Commencement Date and the Expiration Date occur shall be prorated so that Tenant
pays only that portion of the Taxes and Assessments for such calendar years
allocable to periods of time during the term of this Lease. Such proration shall
be computed and made as soon as practicable after the Commencement Date and the
Expiration Date.

(c) Tenant may, at Tenant's sole cost and expense, in Tenant's own name
and on Tenant's own behalf, or in the name and on behalf of Landlord, in good
faith, contest any Taxes and Assessments and, in the event of any such contest,
may permit the Taxes and Assessments so contested to remain unpaid during the
period of such contest and any appeal therefrom; provided, however, that, if the
Premises or any part thereof are subject to imminent danger of loss or
forfeiture by virtue of or by reason of such nonpayment, such Taxes and
Assessments shall be paid forthwith or Tenant shall deposit with Landlord a sum
of money reasonably required by Landlord as security to protect the Premises
from any such loss or forfeiture. Landlord, at the sole cost and expense of
Tenant, shall cooperate fully with Tenant in any such contest. Tenant may, at
Tenant's sole cost and expense, in Tenant's own name and on Tenant's own behalf,
apply for any tax exemption allowed by the state in which the Premises is
located or any political or taxing subdivision thereof under any existing or
future provision of law which grants or may grant any such tax exemption.

8. UTILITIES. Prior to the Commencement Date, Landlord shall make all
arrangements for, and pay or cause to be paid when due all charges for, the
connection and hook-up of all utilities and services to the Premises including,
but not limited to, electricity, gas, fuel, heat, water, sewer, telephone,
power, sanitary services and trash collection. Tenant shall pay or cause to be
paid when due all charges for all such utilities and services consumed at the
Premises during the term of this Lease, excluding the charges to be paid by
Landlord.

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9. REPAIRS BY LANDLORD. Landlord, at Landlord's sole cost and expense,
shall perform all maintenance, replacement or repair of the Premises under the
EIGHTEEN (18) MONTH warranty described at PARAGRAPH 2.06 of the Work Letter.
Landlord, at Landlord's sole cost and expense, shall maintain and repair,
throughout the term of this Lease, the roof, foundations, footings, columns,
exterior walls and other structural components of the Improvements, exterior
glass (except when replacement is made necessary by Tenant's breakage), parking
and other paved areas, landscaping and other exterior areas on the Land, all
utility facilities serving the Premises, plumbing, electrical and other building
systems for the Improvements, and all repairs not required to be performed by
Tenant. Landlord shall also be responsible for paying all costs of any
maintenance and repairs that are to be paid pursuant to paragraph 2 of that
certain Clarification Letter and Agreement as to Confirmatory Deed entered into
between Landlord and Sinking Springs Farms, Inc., dated _____________, 1998.

10. REPAIRS BY TENANT. Tenant, at Tenant's sole cost and expense, shall
perform all maintenance and repair of the interior of the Premises with the
exception of the utility services and building systems. Notwithstanding the
foregoing, Tenant shall pay for a maintenance contract for the HVAC systems
exclusively servicing the Premises. Tenant shall maintain and repair the
interior Premises so that the Premises shall be in good order and repair and
Tenant shall repair any material damage to the roof, foundation, footings,
columns, exterior walls and other structural components of the Improvements
caused by Tenant or Tenant's employees, invitees or licensees, ordinary wear and
tear excepted, unless covered by Landlord's or Tenant's insurance.

11. ALTERATIONS AND ADDITIONS. Tenant may, at Tenant's sole cost and
expense, construct or otherwise make new Improvements on any part or all of the
Land, and may alter, modify, repair or add to the Premises (all or any of the
foregoing being hereinafter collectively called "ALTERATIONS"). Landlord's prior
written consent (which consent shall not be unreasonably withheld, conditioned
or delayed) shall be required before Tenant makes any Alterations; PROVIDED,
HOWEVER, that Landlord's consent shall not be required for any Alterations that:
(i) do not adversely affect either the structural components of the Improvements
or the building systems for the Improvements; or (ii) are anticipated to cost
less than $10,000.00. All Alterations shall be subject to the following:

(a) No Alterations shall be commenced until Tenant shall have obtained
all certificates, licenses, permits, authorizations, consents and approvals
necessary for such Alterations, from all governmental authorities having
jurisdiction with respect to the Premises or such Alterations, and Landlord
shall fully cooperate with Tenant in obtaining any such certificate, license,
permit, authorization, consent or approval.

(b) Tenant shall cause all Alterations to be made and completed in a
good and workmanlike manner, and in compliance with all Laws, and shall cause
all Alterations to be diligently prosecuted to completion.

(c) Tenant shall promptly pay all costs and expenses incurred for any
Alterations, and Tenant shall at all times maintain the Premises free and clear
of all liens for services or labor performed or rendered, or for materials
delivered, supplied or furnished, to or in connection with any Alterations.

12. LEGAL REQUIREMENTS.

(a) Tenant shall, at Tenant's sole cost and expense, promptly comply
with all legal requirements affecting the Premises. The phrase "legal
requirements affecting the Premises", as used in this paragraph, shall mean and
shall include all Laws to the extent the same shall be applicable to Tenant or
Tenant's use or occupancy of the Premises, specifically excluding any zoning
Law, building Law, Law applicable to the construction or installation of the
Improvements, or any other Law requiring construction, modification, or
installation of Improvements (except as a result of or in connection with any
Alterations made by Tenant).

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(b) Tenant may, at Tenant's sole cost and expense, in Tenant's own name
and on Tenant's own behalf or in the name of and on behalf of Landlord, in good
faith, contest any legal requirement affecting the Premises and, in the event of
any such contest, may permit such legal requirement so contested to remain
unsatisfied during the period of such contest and any appeal therefrom;
PROVIDED, HOWEVER, that, if the Premises or any part thereof are subject to loss
or forfeiture by virtue of or by reason of such non-compliance, such legal
requirements shall be complied with forthwith or Tenant shall deposit with
Landlord a sum of money reasonably required by Landlord as security to protect
the Premises from any such loss or forfeiture. Landlord, at the sole cost and
expense of Tenant, shall cooperate fully with Tenant in any such contest.

13. NO LIENS.

(a) Tenant shall not create any lien, encumbrance or charge against the
Premises or any part of the Premises. If any lien, encumbrance or charge is
filed against all or any part of the Premises, Tenant shall cause the same to be
discharged by payment, satisfaction or posting of bond within NINETY (90) DAYS
after demand therefor by Landlord. If Tenant fails to cause any such lien,
encumbrance or charge to be discharged within the permitted time, Landlord may
cause it to be discharged and may pay the amount of such claim of lien in order
to do so. If Landlord makes any such payment, all amounts paid by Landlord shall
be payable by Tenant to Landlord upon demand.

(b) Tenant may, at Tenant's sole cost and expense, in Tenant's own name
and on Tenant's own behalf or in the name of and on behalf of Landlord, in good
faith, contest any claim of lien and, in the event of any such contest, may
permit such claim of lien so contested to remain unpaid, unsatisfied and
undischarged during the period of such contest and any appeal therefrom;
PROVIDED, HOWEVER, that, if the Premises or any part thereof are subject to
imminent danger of loss or forfeiture by virtue of or by reason of such claim of
lien, such claim of lien shall be complied with forthwith or Tenant shall
deposit with Landlord a sum of money reasonably required by Landlord as security
to protect the Premises from any such loss or forfeiture. Landlord, at the sole
cost and expense of Tenant, shall cooperate fully with Tenant in any such
contest.

14. DAMAGE OR DESTRUCTION.

(a) For the purposes of this Lease, the following terms shall have the
following meanings: (i) "CASUALTY" shall mean damage or destruction of the
Premises, or any portion thereof, by fire or other casualty; (ii) the "DATE OF
CASUALTY" shall mean the date on which the Casualty occurs; (iii) "PROCEEDS"
shall mean the amounts recovered or recoverable as compensation or damages for
damage to the Premises on account of a Casualty, including insurance payments;
and (iv) a Casualty affecting a "SUBSTANTIAL PORTION OF THE PREMISES" shall mean
a Casualty which, in Tenant's good faith judgment, renders the Premises
unsuitable for the continued feasible and economic use by Tenant.

(b) If there occurs a Casualty affecting a Substantial Portion of the
Premises, the term of this Lease shall expire on the date of such destruction
with the same effect as if the Date of Casualty were the Expiration Date, and
all Rent and other sums payable by Tenant hereunder shall be apportioned and
paid through and including the Date of Casualty.

(c) If there occurs a Casualty affecting less than a Substantial
Portion of the Premises, then this Lease and all duties and obligations of
Tenant under this Lease shall remain unmodified, unaffected and in full force
and effect; PROVIDED, HOWEVER, that, commencing with the date of any Casualty,
Rent shall abate pro rata to the extent that, and for so long as, any portion of
the Premises is not reasonably usable by Tenant in the ordinary conduct of its
business. Landlord shall promptly proceed to repair, restore, rebuild,
reconstruct or replace the damaged or destroyed portion to a condition at least
as good as the condition which existed immediately prior to the Casualty.
Landlord shall be entitled to apply the Proceeds to the reconstruction,
restoration and repair of the Premises from time to time as such work
progresses. Any portion of the Proceeds remaining after final payment has been
made for such work shall

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be retained by and be the property of Landlord. If the cost of such work exceeds
the Proceeds, Landlord shall pay the excess cost.

15. CONDEMNATION.

(a) For purposes of this Lease, the following terms shall have the
following meanings: (i) "TAKING" shall mean any condemnation or exercise of the
power of eminent domain by any public authority vested with such power, or any
taking in any other manner for public use, including a private purchase, in lieu
of condemnation, by a public authority vested with the power of eminent domain;
(ii) the "DATE OF TAKING" shall mean the earlier of the date upon which title to
the Premises or portion thereof taken is vested in the condemning authority, or
the date upon which possession of the Premises or portion thereof is taken by
the condemning authority; (iii) "AWARD" shall mean any amounts paid, recovered
or recoverable as damages, compensation or proceeds by reason of any taking on
account of a Taking, including all amounts paid pursuant to any agreement with
such entity which has been made in settlement or under threat of any such action
or proceeding, less the reasonable costs and expenses incurred in collecting
such amounts; and (iv) a Taking affecting a "SUBSTANTIAL PORTION OF THE
PREMISES" shall mean a Taking affecting so much of the Premises as, when taken,
leaves the untaken portion unsuitable for the continued feasible and economic
operation of the Premises by Tenant for substantially the same purposes as
immediately prior to such taking.

(b) If there occurs a Taking of all or a Substantial Portion of the
Premises, other than a Taking for temporary use, then this Lease shall
automatically terminate, and the term of this Lease shall automatically expire,
on the Date of Taking, as if such date were the Expiration Date, and all Rent
and other sums payable by Tenant hereunder shall be apportioned and paid through
and including the Date of Taking.

(c) If there occurs a Taking of less than a Substantial Portion of the
Premises, then this Lease and all duties and obligations of Tenant under this
Lease shall remain unmodified, unaffected and in full force and effect;
PROVIDED, HOWEVER, that the Rent payable after the taking shall be reduced to an
amount which bears the same ratio to the Rent payable immediately prior to the
taking as the rental value of the Premises after taking bears to the rental
value of the Premises immediately prior to the taking. Landlord shall promptly
proceed to reconstruct, restore and repair the remaining portion of the Premises
(to the extent possible) to a condition substantially equivalent to the
condition thereof prior to the Taking. Landlord shall be entitled to apply the
Award received by Landlord to the reconstruction, restoration and repair of the
Premises from time to time as such work progresses. If the cost of the repair
work exceeds the Award recovered by Landlord, Landlord shall pay the excess
cost.

(d) If there occurs a Taking of the Premises or any portion thereof,
for temporary use, then this Lease shall remain in full force and effect for the
remainder of the Term, PROVIDED, HOWEVER, that during such time as Tenant shall
be out of possession of the Premises by reason of such Taking, the failure to
keep, observe, perform, satisfy and comply with those terms and conditions of
the Lease which are effectively made impractical or impossible as a result of
Tenant's being out of possession of the Premises (and which shall not include
payment of Rent or additional Rent) shall not be an event of default hereunder.
The Award for any such temporary taking payable for any period prior to the
Expiration Date shall be paid to Tenant and, for any period thereafter, to
Landlord.

(e) Except as may be expressly provided in SUBPARAGRAPH (d), above, and
hereafter in this SUBPARAGRAPH (e), Landlord shall be entitled to all Awards
payable by reason of any taking, and Tenant shall not be entitled to any portion
of, and shall have no claim for, and hereby transfers, assigns, conveys and sets
over unto Landlord all of its right, title and interest, if any, in or to, any
Award payable by reason of any taking. Notwithstanding the foregoing, Tenant
shall have the right to make a separate claim with the condemning authority for:
(i) any moving expenses incurred by Tenant as a result of such condemnation;
(ii) any unamortized costs incurred or paid by Tenant in connection with
Alterations made by Tenant to the Premises; and (iii) the value of any of
Tenant's property taken.

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16. WAIVER OF SUBROGATION; INDEMNITY.

(a) To the extent permitted by law, Landlord and Tenant hereby waive
any and all rights of recovery, claim, action or cause of action against each
other, their respective agents, officers and employees, for any loss or damage
that may occur to the Premises, or to any other property, whether real, personal
or mixed, located in the Premises, by reason of fire, the elements, or any other
cause insured against, or required to be insured against, under the terms of
policies of insurance maintained, or required to be maintained, for the Premises
or such other property, by Landlord or Tenant (as the case may be) under the
terms of this Lease, regardless of cause or origin, including negligence of the
parties hereto, their respective agents and employees.

(b) Subject to the provisions of SUBPARAGRAPH (a), above, Tenant agrees
to indemnify and save Landlord harmless from any and all claims with respect to
bodily injury, personal injury or property damage arising from Tenant's use and
occupancy of the Premises or from Tenant's negligence or intentional acts or the
negligence or intentional acts of any of Tenant's agents or employees, including
all costs, actual and reasonable counsel fees, expenses and liabilities incurred
in connection with any such claim; and if any action or proceeding is brought
against Landlord by reason of any such claim, Tenant upon notice from Landlord
covenants to resist or defend such action or proceeding at its expense.

(c) Subject to the provisions of SUBPARAGRAPH (a), above, Landlord
agrees to indemnify and save Tenant harmless from any and all claims with
respect to bodily injury, personal injury or property damage arising from
Landlord's negligence or intentional acts or the negligence or intentional acts
of any of Landlord's agents or employees, including all costs, actual and
reasonable counsel fees, expenses and liabilities incurred in connection with
any such claim; and if any action or proceeding is brought against Tenant by
reason of any such claim, Landlord upon notice from Tenant covenants to resist
or defend such action or proceedings at its expense.

17. ENVIRONMENTAL COVENANTS

(a) If removal, encapsulation or other remediation is required as to
Hazardous Substances located in, on or under the Land, or the Improvements by
applicable Laws (herein "REMEDIATION"), unless such Hazardous Substances were
released or placed on the Land or Improvements by Tenant, Landlord immediately
and with all due diligence and at no expense to Tenant, shall take all measures
necessary to comply with all applicable Laws, to remove such Hazardous
Substances and to perform such Remediation. Landlord shall repair and restore
the Premises at its expense (herein "RESTORATION"). From the date such Hazardous
Substances are discovered on the Premises to the date such Remediation and
Restoration is complete, the Rent due hereunder shall be reduced by the same
percentage as the percentage of the Premises which, in Tenant's good faith
judgment, cannot be safely, economically or practically used for the operation
of Tenant's business. Notwithstanding anything to the contrary, if in Tenant's
good faith judgment such Remediation and Restoration cannot be completed within
NINETY (90) DAYS following the date such Hazardous Substances are discovered,
Tenant may terminate this Lease by written notice to Landlord which shall be
effective on Landlord's receipt.

(b) Subject to the provisions of PARAGRAPH 16 (a) of this Lease,
Landlord agrees to indemnify and save Tenant harmless from and against any and
all claims, judgments, demands, penalties, fines, losses and costs and expenses
incurred by Tenant during or after the term of this Lease as a result of (i) any
Hazardous Substances that Landlord causes or permits to be brought upon, kept or
used in or about the Premises; and (ii) any Hazardous Substance that exist in or
about Premises as of the Commencement Date.

(c) Subject to the provisions of PARAGRAPH 16 (a) of this Lease, Tenant
agrees to indemnify and save Landlord harmless from and against any and all
claims, judgments, demands, penalties, fines, losses and costs and expenses
incurred by Landlord during or after the term of this Lease as a result

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of any Hazardous Substances that Tenant causes or permits to be brought upon,
kept or used in or about the Premises.

18. INSURANCE

(a) From and after the Commencement Date, Tenant shall procure, and
shall maintain in full force and effect at all times during the term of this
Lease, the following types of insurance with respect to the Premises, paying as
the same become due all premiums therefor:

(i) commercial general public liability insurance insuring against
all liability of Tenant and Tenant's officers, employees, agents, licensees
and invitees arising out of, by reason of or in connection with the use,
occupancy or possession of, or any conduct or activity on, the Premises, in
an amount of not less than $ 1,000,000.00 for injury to or death of one
person or as a result of one occurrence, and not less than $ 5,000,000.00
for injury or death to more than one person as a result of one occurrence,
and for damage to property in the amount of $ 1,000,000.00, or combined
single limit of $ 1,000,000.00 with an umbrella policy of $ 4,000,000.00;
and

(ii) workmen's compensation insurance as required by any Law; and

(iii) insurance in an amount not less than 100% of the fair market
value of the Improvements against direct and indirect loss or damage by
fire and other typical casualties and risks.

(b) Tenant shall pay all premiums for the insurance coverage which
Tenant is required to procure and maintain under this Lease. Each insurance
policy: (i) shall be issued by an insurer authorized under the applicable Laws
to issue the coverage provided by the policy; (ii) shall name Landlord, Tenant
and any lender with an interest in the Premises (provided such lender has
executed an SNDA pursuant to PARAGRAPH 19 of this Lease) as insured parties, as
their respective interests may appear; (iii) shall provide that the policy
cannot be canceled as to Landlord except after the insurer gives Landlord TEN
(10) DAYS written notice of cancellation; (iv) shall not be subject to
invalidation as to Landlord by reason of any act or omission of Tenant or any of
Tenant's officers, employees or agents; and (v) shall contain a provision to the
effect that the policy shall not be invalidated, and shall remain in full force
and effect, if any insured waives in writing prior to a loss any or all rights
of recovery against any party for loss occurring to property covered by that
policy, and a provision whereby the insurer itself waives any claims by way of
subrogation against Landlord. Immediately upon the issuance of each policy
required under this Lease, Tenant shall deliver evidence of coverage to
Landlord, together with evidence that the premiums therefor have been paid for a
period of at least SIX (6) MONTHS from the date of delivery. Not less than TEN
(10) DAYS prior to the expiration date of each policy required, Tenant shall pay
the premium for renewal for a period of not less than SIX (6) MONTHS and deliver
to Landlord evidence of the renewal, together with evidence that the renewal
premium has been paid for a period of not less than SIX (6) MONTHS.

(c) From and after the Commencement Date, Landlord shall procure, and
shall maintain in full force and effect at all times during the term of this
Lease, the following types of insurance with respect to the Premises, paying as
the same become due all premiums therefor: rent insurance insuring Landlord
against loss of Rent in the event of damage to or destruction of the Premises,
in an amount equal to one hundred percent (100%) of the annual Rent from time to
time payable under this Lease.

19. MORTGAGES AND MORTGAGEES. The following provides for the effect of
Mortgages on this Lease and for the rights of Mortgagees:

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(a) This Lease shall be subordinate to any and all Mortgages
encumbering the Premises or any part of the Premises, and to all renewals,
modifications, replacements and extensions of such Mortgages; PROVIDED, HOWEVER,
that, the subordination herein contained shall not be effective unless all
Mortgagees shall execute and deliver a subordination and non-disturbance
agreement ("SNDA") in favor of Tenant substantially in the form attached hereto
as EXHIBIT "D". Notwithstanding anything to the contrary in this Lease, Tenant's
obligations under this Lease shall be contingent upon (and only Tenant shall
have the right to waive such contingency) Tenant and all Mortgagees executing an
SNDA prior to the Commencement Date.

(b) Notwithstanding the foregoing, if any Mortgagee elects to have this
Lease superior to its Mortgage and states its election in its Mortgage or by
separate recorded instrument, then this Lease shall be superior to such
Mortgage.

20. ASSIGNMENT AND SUBLETTING.

(a) Without the prior written consent of Landlord, which consent shall
not be unreasonably withheld, conditioned or delayed, Tenant may not assign this
Lease or any of Tenant's rights hereunder or sublet all or any part of the
Premises; PROVIDED, HOWEVER, that Tenant may assign this Lease or sublet all or
any portion of the Premises, without the requirement of any consent by Landlord,
to any successor corporation to Tenant, by way of merger, consolidation or other
corporate reorganization, or to any parent, subsidiary or affiliate of Tenant,
or to any party acquiring all or substantially all of Tenant's assets, or to any
party acquiring and continuing that portion of Tenant's business operations
conducted at or from the Premises.

(b) Any subtenant of all or any portion of the Premises shall have the
right, at its election, to cure any default by Tenant under this Lease. If any
such subtenant shall cure all curable defaults by Tenant hereunder, such
subtenant's possession and use shall not be disturbed by Landlord so long as the
subtenant performs and satisfies each and every duty and obligation under its
sublease, the subtenant attorns to Landlord, and all subsequent defaults by
Tenant are either cured by such subtenant or are uncurable. If such subtenant
does not cure the defaults of Tenant as described herein, Landlord may exercise
its rights permitted by PARAGRAPH 26 of this Lease.

(c) Landlord may assign its interest under the Lease to any entity
controlled by Landlord or a member of Landlord's immediate family; PROVIDED,
HOWEVER, Landlord shall remain fully liable for the performance of its
obligations under the Lease.

21. ESTOPPEL CERTIFICATES.

(a) Tenant, from time to time upon TEN (10) DAYS prior request by
Landlord, shall execute, acknowledge and deliver to Landlord, or to a person
designated by Landlord, a certificate of Tenant stating that this Lease is
unmodified and in full effect (or, if there have been modifications, that this
Lease is in full effect as modified, and setting forth such modifications) and
the dates to which Rent and other sums payable hereunder have been paid, and
either stating that to the knowledge of the signer of such certificate no
default exists hereunder or specifying each such default of which the signer has
knowledge. Landlord, at Landlord's cost and expense, shall cause such
certificate to be prepared for execution by Tenant. Any such certificate may be
relied upon by any prospective Mortgagee or purchaser of the Premises.

(b) Landlord, from time to time upon TEN (10) DAYS prior request by
Tenant, shall execute, acknowledge and deliver to Tenant, or to a person
designated by Tenant, a certificate of Landlord stating that this Lease is
unmodified and in full effect (or, if there have been modifications, that this
Lease is in full effect as modified and setting forth such modifications) and
the dates to which Rent and other sums payable hereunder have been paid, and
either stating that to the knowledge of the signer of such certificate no
default exists hereunder or specifying each such default of which the signer has
knowledge.

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Tenant, at Tenant's cost and expense, shall cause such certificate to be
prepared for execution by Landlord. Any such certificate may be relied upon by
any prospective Mortgagee, assignee of this Lease, or subtenant of all or any
portion of the Premises.

22. SURRENDER. Upon the expiration of the term of, or earlier
termination of, this Lease, Tenant shall peaceably and quietly leave, yield up
and surrender to Landlord the Premises, in a condition at least as good as the
condition the Premises were in on the Commencement Date, excepting only repairs
and maintenance required to be performed by Landlord, reasonable or ordinary
wear and tear, depreciation and obsolescence, and damage by fire, or other
casualty or condemnation.

23. REMOVAL OF TENANT'S PROPERTY. On or before the Expiration Date, or
within TEN (10) DAYS thereafter, Tenant may remove all personal property, trade
fixtures and fixtures (including, without limitation, explosion-proof wiring
devices and other specialized fixtures), which Tenant has installed on or
affixed or attached to, or otherwise located on, the Premises; PROVIDED,
HOWEVER, that Tenant shall promptly restore the Premises to substantially their
condition immediately preceding the time the property was installed on, affixed
or attached to, or otherwise located on, the Premises.

24. HOLDING OVER. If Tenant remains in possession of the Premises after
expiration of the term of this Lease without any express written agreement by
Landlord (the "HOLDOVER COMMENCEMENT DATE"), Tenant shall be and become a tenant
at will and the Rent payable shall be the Rent that was in effect as of the
Expiration Date; PROVIDED, THAT, every six (6) months following the Holdover
Commencement Date, the Rent shall be adjusted for the next six (6) months to
reflect the increase, if any, in the CPI, as measured from the Holdover
Commencement Date. All of the terms and conditions of this Lease shall continue
to be in full force and effect.

25. RIGHT OF ENTRY. Tenant shall permit Landlord and Landlord's
representatives, agents and employees to enter the Premises, during normal
business hours with FORTY-EIGHT (48) HOURS prior notice, for the purposes of
inspecting the Premises, showing the Premises to prospective purchasers and
Mortgagees, making any repairs or replacements or performing any maintenance on
the Premise. Landlord shall also have the right to place signs, of reasonable
size and in reasonable locations, advertising the Premises or any part of the
Premises "for sale" or "for rent", PROVIDED, HOWEVER, that such signs can only
be placed on the Premises during the SIX (6) MONTH PERIOD prior to the
Expiration Date.

26. DEFAULT.

(a) The following events shall constitute events of default by Tenant
under this Lease:

(i) if Tenant shall fail to pay when due any Rent or other payment of
money to be made by Tenant hereunder and shall not cure such failure within
TEN (10) DAYS after Landlord gives Tenant written notice thereof;

(ii) if Tenant shall violate or breach, or shall fail fully and
completely to observe, keep, satisfy, perform and comply with, any
agreement, term, covenant, condition, requirement, restriction or provision
of this Lease (other than the payment of Rent or any other payment to be
made by Tenant), and shall not cure such failure within THIRTY (30) DAYS
after Landlord gives Tenant written notice thereof, or, if such failure
shall be incapable of cure within THIRTY (30) DAYS, if Tenant shall not
commence to cure such failure within such THIRTY (30) DAY period and
continuously prosecute the performance of the same to completion with due
diligence; or

(iii) if Tenant becomes insolvent as defined in the Uniform Commercial
Code under the Laws applicable to this Lease or makes an assignment for the
benefit of creditors; or if any action is brought by Tenant seeking its
dissolution or liquidation of its assets or seeking the appointment of a
trustee, interim trustee, receiver or other custodian for any of its
property; or if

11
<PAGE> 12

Tenant commences a voluntary proceeding under the Federal Bankruptcy Code;
or if any reorganization or arrangement proceeding is instituted by Tenant
for the settlement, readjustment, composition or extension of any of its
debts upon any terms; or if any action or petition is otherwise brought by
Tenant seeking similar relief or alleging that it is insolvent or unable to
pay its debts as they mature; or if any action is brought against Tenant
seeking its dissolution or liquidation of any of its assets, or seeking the
appointment of a trustee, interim trustee, receiver or other custodian for
any of its property, and any such action is consented to or acquiesced in
by Tenant or is not dismissed within ONE HUNDRED TWENTY (120) DAYS after
the date upon which it was instituted; or if any proceeding under the
Federal Bankruptcy Code is instituted against Tenant and (i) an order for
relief is entered in such proceeding, or (ii) such proceeding is consented
to or acquiesced in by Tenant or is not dismissed within ONE HUNDRED TWENTY
(120) DAYS after the date upon which it was instituted; or if any
reorganization or arrangement proceeding is instituted against Tenant for
the settlement, readjustment, composition or extension of any of its debts
upon any terms, and such proceeding is consented to or acquiesced in by
Tenant or is not dismissed within ONE HUNDRED TWENTY (120) DAYS after the
date upon which it was instituted; or if any action or petition is
otherwise brought against Tenant seeking similar relief or alleging that it
is insolvent, unable to pay its debts as they mature or generally not
paying its debts as they become due, and such action or petition is
consented to or acquiesced in by Tenant or is not dismissed within ONE
HUNDRED TWENTY (120) DAYS after the date upon which it was brought.

(b) Upon the occurrence of any event of default by Tenant, Landlord may
pursue any one or more of the following remedies, separately or concurrently or
in any combination, without any notice (except as specifically provided below)
or demand whatsoever and without prejudice to any other remedy which it may have
for possession of the Premises or for arrearages in Rent or other amounts
payable by Tenant:

(i) Landlord may terminate this Lease by giving Tenant written notice
of termination, in which event Tenant shall immediately quit and vacate the
Premises and deliver and surrender possession of the Premises to Landlord,
and this Lease shall be terminated at the time designated by Landlord in
its notice of termination to Tenant;

(ii) with or without terminating this Lease, Landlord may enter upon
and take possession of the Premises and expel or remove Tenant and any
other person who may be occupying the Premises, by force if necessary,
without being liable for prosecution or any claim for damages;

(iii) Landlord may re-lease the Premises or any part thereof, at
market-rate rent and on such terms and conditions as are customary for
similar leases, in which event Tenant shall pay to Landlord on demand any
deficiency that may arise by reason of such releasing;

(iv) Landlord may do whatever Tenant is obligated to do under the
terms of this Lease, in which event Tenant shall reimburse Landlord on
demand for any reasonable and actual expenses which Landlord may incur in
thus effecting satisfaction and performance of or compliance with Tenant's
duties and obligations under this Lease, and the amounts so expended by
Landlord shall bear interest at the Default Rate from the date expended by
Landlord until paid.

(c) Landlord's pursuit of any one or more of the remedies stated in
SUBPARAGRAPH (b), above shall not preclude pursuit of any other remedy or
remedies provided in this Lease or any other remedy or remedies provided for or
allowed by law or in equity, separately or concurrently or in any combination.
Landlord's pursuit of any one or more of the remedies provided in this Lease
shall not constitute an election of remedies excluding the election of another
remedy or other remedies, or a forfeiture or waiver of any Rent or other amounts
payable under this Lease by Tenant or of any damages or other sums accruing to
Landlord by reason of Tenant's failure to fully and completely keep, observe,

12
<PAGE> 13

perform, satisfy and comply with all of the agreements, terms, covenants,
conditions, requirements, provisions and restrictions of this Lease. No action
taken by or on behalf of Landlord shall be construed to be an acceptance of a
surrender of this Lease. Landlord's forbearance in pursuing or exercising one or
more of its remedies shall not be deemed or construed to constitute a waiver of
any event of default or of any remedy. No waiver by Landlord of any right or
remedy on one occasion shall be construed as a waiver of that right or remedy on
any subsequent occasion or as a waiver of any other right or remedy then or
thereafter existing. No failure of Landlord to pursue or exercise any of
Landlord's powers, rights or remedies or to insist upon strict and exact
compliance by Tenant with any agreement, term, covenant, condition, requirement,
provision or restriction of this Lease, and no custom or practice at variance
with the terms of this Lease, shall constitute a waiver by Landlord of the right
to demand strict and exact compliance with terms and conditions of this Lease.
No termination of this Lease shall affect Landlord's right to collect Rent for
the period prior to termination.

(d) In the event Landlord shall violate or breach, or shall fail fully
and completely to observe, keep, satisfy, perform and comply with, any
agreement, term, covenant, condition, requirement, restriction or provision of
this Lease, and shall not cure such failure within THIRTY (30) DAYS after Tenant
gives Landlord written notice thereof, or, if such failure shall be incapable of
cure within THIRTY (30) DAYS, if Landlord shall not commence to cure such
failure within such THIRTY (30) DAY period and continuously prosecute the
performance of the same to completion with due diligence, then Tenant may
terminate this Lease, pursue any remedy or remedies provided in this Lease, or
pursue any other remedy or remedies provided for or allowed by law or in equity,
separately or concurrently or in any combination. Tenant's pursuit of any one or
more of the remedies provided in this Lease shall not constitute an election of
remedies excluding the election of another remedy or other remedies, or a
forfeiture or waiver of any relief. Tenant's forbearance in pursuing or
exercising one or more of its remedies shall not be deemed or construed to
constitute a waiver of any event of default or of any remedy. No waiver by
Tenant of any right or remedy on one occasion shall be construed as a waiver of
that right or remedy on any subsequent occasion or as a waiver of any other
right or remedy then or thereafter existing. No failure of Tenant to pursue or
exercise any of Tenant's powers, rights or remedies or to insist upon strict and
exact compliance by Landlord with any agreement, term, covenant, condition,
requirement, provision or restriction of this Lease, and no custom or practice
at variance with the terms of this Lease, shall constitute a waiver by Tenant of
the right to demand strict and exact compliance with terms and conditions of
this Lease.

27. ATTORNEYS' FEES. In any action to enforce the rights of either
party hereunder, the prevailing party, as determined by the arbitrator, court or
other tribunal before which such action is brought, shall be entitled to recover
the costs and expenses of such party, plus reasonable attorneys' fees, incurred
in investigating, prosecuting or defending such action. Reasonable attorney's
fees shall be constructed to be the greater of FIFTEEN PERCENT (15%) of any
amount recovered or actual attorney's fees incurred.

28. QUIET ENJOYMENT. Tenant shall, subject to the terms and conditions
of this Lease, peaceably and quietly hold and enjoy the Premises during the term
of this Lease without hindrance or interruption, so long as Tenant fully and
completely keeps, observes, performs, satisfies and complies with all of the
agreements, terms, covenants and conditions, requirements, provisions and
restrictions of this Lease to be kept, observed, performed, satisfied and
complied with by Tenant under this Lease and pays all Rent and other amounts
required to be paid by Tenant under this Lease.

29. NO MERGER. There shall be no merger of this Lease or the leasehold
estate created hereby with the fee simple estate in the Premises or any part
thereof, by reason of the fact that the same person or entity may acquire, own
or hold, directly or indirectly, this Lease or the leasehold estate created
hereby or any interest in this Lease or such leasehold estate, and the fee
simple estate in the Premises or any interest in such fee simple estate; and
this Lease shall not be terminated except as expressly provided herein.

13
<PAGE> 14

30. BROKER AND COMMISSION.

(a) All negotiations relative to this Lease and the leasing of the
Premises contemplated by and provided for in this Lease have been conducted by
and between Landlord and Tenant without the intervention of any person or other
party as agent or broker, with the exception of the following: (i) N/A
who represents Landlord (hereinafter called "LANDLORD'S BROKER"); and (ii)
N/A who represents Tenant (hereinafter called "TENANT'S BROKER").
Landlord's Broker shall be paid a commission of $ N/A by Landlord in
accordance with Landlord's separate agreement with Landlord's Broker. Tenant's
Broker shall be paid a commission of $ N/A by Landlord in accordance
with Landlord's separate agreement with Tenant's Broker.

(b) Landlord and Tenant warrant and represent to each other that there
are and will be no broker's commissions or fees payable in connection with this
Lease or the leasing of the Premises by reason of their respective dealings,
negotiations or communications except the commission payable to Landlord's
Broker and Tenant's Broker as set forth in SUBPARAGRAPH (a) IN THIS PARAGRAPH
30. Landlord and Tenant shall, and do each hereby indemnify, defend and hold
harmless each of the others from and against the claims, demands, actions and
judgments of any and all brokers, agents and other intermediaries alleging a
commission, fee or other payment to be owing by reason of their respective
dealings, negotiations or communications in connection with this Lease or the
leasing of the Premises.

31. MEMORANDUM OF LEASE. Contemporaneously with the execution and
delivery of this Lease, Landlord and Tenant will execute and deliver a
memorandum of this Lease and the options described therein, in recordable form,
to be filed in the York County, Pennsylvania records, substantially in the form
as attached hereto as EXHIBIT "E". Landlord shall cooperate with Tenant and
execute all other documents reasonably necessary to record a memorandum of this
Lease, or otherwise effectuate the intent of this paragraph.

32. RIGHT OF PARTICIPATION. Tenant shall have the right of
participation in any sale, transfer or other conveyance of the Premises as more
particularly described on EXHIBIT "F" attached hereto and incorporated herein.

33. RIGHT OF FIRST REFUSAL; OPTION TO PURCHASE. Tenant shall have the
option to purchase Premises in accordance with the terms, provisions and
conditions of EXHIBIT "G" attached hereto and incorporated herein. Tenant shall
have the further right of first refusal to purchase the Premises in accordance
with the terms, provisions and conditions of EXHIBIT "H" attached hereto and
incorporated herein.

34. ADDITIONAL SIGNATORY. Additional Signatory is the current spouse of
Landlord. Additional Signatory acknowledges that she has a financial interest in
Landlord, and Additional Signatory will benefit from the execution and delivery
of the Lease. Therefore, in consideration of certain agreements made by Tenant
to Landlord in the Lease, and the payment of One Dollar ($1.00) to the
Additional Signatory, the Additional Signatory agrees to execute all documents
and do all things necessary to effectuate the intent of this Lease, including
but not limited to, the execution of any deeds or other closing documents
related to Tenants' Right of Participation, Right of First Refusal or Option to
Purchase described in PARAGRAPHS 32 AND 33.

35. LANDLORD'S DELIVERIES. Within FORTY-FIVE (45) days following the
date of the Lease, Landlord shall deliver to Tenant the following: (i) a SNDA
executed by all Mortgagees and Landlord in favor of Tenant substantially similar
to the form attached hereto as EXHIBIT "D" and recorded (and Landlord shall bear
the cost of such recording) in the property records of the York County, or other
appropriate records; (ii) a title policy on the Property with no exceptions
other than those listed on Schedule B, Section II of the title commitment from
Fidelity National Title Insurance Company of Pennsylvania, Commitment No.
5412-725379, effective date 5/12/98 (the "TITLE COMMITMENT"); (iii)

14
<PAGE> 15

evidence that the taxes and other charges referred to in paragraphs 4, 5 and 15
of Schedule B, Section I of the Title Commitment have been paid in full; (iv) a
copy of the title exception recorded in Deed Book 167, Page 574 and referred to
in paragraph 9 of Schedule B, Section II of the Title Commitment; (v) evidence
that Farmbrook Industrial Park has (1) approved the improvements to be placed on
the portion of the Premises which lies in such park or (2) agreed to remove all
portions of the Premises from lying in such park; (vi) a copy of the subdivision
plan for the Premises signed and approved by Manchester Township; (vii) a fully
executed copy of the "Clarification Letter and Agreement as to Confirmatory
Deed" by and between Landlord and Sinking Springs Farms, Inc. recorded (and
Landlord shall bear the cost of such recording) within seven (7) days of the
date of this Lease in the property records of the York County, or other
appropriate records; (viii) a fully-executed copy of the Memorandum of Lease
attached hereto as EXHIBIT "E" recorded (and Landlord shall bear the cost of
such recording) within seven (7) days of the date of this Lease in the property
records of the York County, or other appropriate records; and (ix) a
fully-executed copy of an "Agreement Modifying Letter Agreement" executed by
Industrial Distribution Group, Inc., Landlord, Tenant, Frederick B. Shearer,
Jr., Ruth Y. Shearer Trust No. 1, and Ruth Y. Shearer Trust No. 2. in a form to
be supplied by Landlord (the items set forth in clause (i), (ii), (iii), (iv),
(v), (vi), (vii), (viii) and (ix) shall be collectively referred to as
"LANDLORD'S DELIVERIES"). If Landlord's Deliveries are not made within the time
period prescribed by this paragraph or if Tenant reasonably objects to the title
exception described in clause (iv) above, then Tenant shall have the right to
terminate this Lease any time prior to the Commencement Date.

36. GUARANTY. Contemporaneously with the execution of the Lease,
Industrial Distribution Group, Inc., a Delaware corporation, shall execute a
guaranty substantially in the form attached as EXHIBIT "I".

37. GENERAL PROVISIONS.

(a) NOTICES. Whenever any notice, demand or request is required or
permitted under this Lease, such notice, demand or request shall be in writing
and shall be delivered by hand, be sent by registered or certified mail, postage
prepaid, return receipt requested, or be sent by nationally recognized
commercial courier for next business day delivery, to the address for each party
set forth below their respective executions hereof, or to such other addresses
as are specified by written notice given in accordance herewith, or shall be
transmitted by facsimile to the number for each party set forth below their
respective executions hereof, or to such other numbers as are specified by
written notice given in accordance herewith. All notices, demands or requests
delivered by hand shall be deemed given upon the date so delivered; those given
by mailing as hereinabove provided shall be deemed given on the date of deposit
in the United States Mail; those given by commercial courier as hereinabove
provided shall be deemed given on the date of deposit with the commercial
courier; and those given by facsimile shall be deemed given on the date of
facsimile transmittal. Tenant designates and appoints, as its agent to receive
notice of all dispossessory or distraint proceedings and all notices required
under this Lease, the person in charge of the Premises at the time such notice
is given.

(b) BINDING EFFECT. This Lease shall be binding upon and enforceable
against, and shall inure to the benefit of, the parties hereto and their
respective heirs, legal representatives, successors and permitted assigns.

(c) HEADINGS. The use of headings, captions and numbers in this Lease
is solely for the convenience of identifying and indexing the various provisions
in this Lease and shall in no event be considered otherwise in construing or
interpreting any provision in this Lease.

(d) EXHIBITS. Each and every exhibit referred to or otherwise mentioned
in this Lease is attached to this Lease and is and shall be construed to be made
a part of this Lease by such reference or other mention at each point at which
such reference or other mention occurs, in the same manner and with the same
effect as if each exhibit were set forth in full and at length every time it is
referred to or otherwise mentioned.

15
<PAGE> 16

(e) DEFINED TERMS. Capitalized terms used in this Lease shall have the
meanings ascribed to them at the point where first defined, irrespective of
where their use occurs, with the same effect as if the definitions of such terms
were set forth in full and at length every time such terms are used.

(f) PRONOUNS. Wherever appropriate in this Lease, personal pronouns
shall be deemed to include the other genders and the singular to include the
plural.

(g) SEVERABILITY. If any term, covenant, condition or provision of this
Lease, or the application thereof to any person or circumstance, shall ever be
held to be invalid or unenforceable, then in each such event the remainder of
this Lease or the application of such term, covenant, condition or provision to
any other person or any other circumstance (other than those as to which it
shall be invalid or unenforceable) shall not be thereby affected, and each term,
covenant, condition and provision hereof shall remain valid and enforceable to
the fullest extent permitted by law.

(h) NON-WAIVER. Failure by any party to complain of any action,
non-action or breach of any other party shall not constitute a waiver of any
aggrieved party's rights hereunder. Waiver by any party of any right arising
from any breach of any other party shall not constitute a waiver of any other
right arising from a subsequent breach of the same obligation or for any other
default, past, present or future.

(i) RIGHTS CUMULATIVE. All rights, remedies, powers and privileges
conferred under this Lease on the parties shall be cumulative of and in addition
to, but not restrictive of or in lieu of, those conferred by law.

(j) TIME OF ESSENCE. Time is of the essence of this Lease. Anywhere a
day certain is stated for payment or for performance of any obligation, the day
certain so stated enters into and becomes a part of the consideration for this
Lease. If any date set forth in this Lease shall fall on, or any time period set
forth in this Lease shall expire on, a day which is a Saturday, Sunday, federal
or state holiday, or other non-business day, such date shall automatically be
extended to, and the expiration of such time period shall automatically be
extended to, the next day which is not a Saturday, Sunday, federal or state
holiday or other non-business day. The final day of any time period under this
Lease or any deadline under this Lease shall be the specified day or date, and
shall include the period of time through and including such specified day or
date.

(k) APPLICABLE LAW AND FORUM SELECTION. This Lease shall be governed by
and construed in accordance with the laws of the State of Georgia.

(l) ENTIRE AGREEMENT. This Lease contains the entire agreement of the
Parties with respect to the subject matter hereof, and all representations,
warranties, inducements, promises or agreements, oral or otherwise, between the
Parties not embodied in this Lease shall be of no force or effect.

(m) MODIFICATIONS. This Lease shall not be modified or amended in any
respect except by a written agreement executed by the parties in the same manner
as this Lease is executed.

(n) COUNTERPARTS. This Lease may be executed in several counterparts,
each of which shall be deemed an original, and all of such counterparts together
shall constitute one and the same instrument.

(o) JOINT AGREEMENT. Landlord and Tenant recognize that this is a joint
agreement drafted by both Parties and no provision shall be construed against a
Party.

(Signatures continued on next page)

16
<PAGE> 17

(Signatures continued from preceding page)

IN WITNESS WHEREOF, Landlord and Tenant have caused this Lease to be
executed and sealed, all effective as of the day and year first written above.

LANDLORD:

ANDREW B. SHEARER

/s/ Andrew B. Shearer (SEAL)

Date of Landlord's Execution:

----------------------------------------

Initial address for notices:

1540 Wyndham Drive South
York, PA 17403

Telephone Number: (717) 848-1994
Telecopy Number:

ADDITIONAL SIGNATORY FOR LANDLORD:

STEPHANIE A. SHEARER

/s/ Stephanie A. Shearer (SEAL)

Date of Additional Signatory's Execution:

----------------------------------------

Initial address for notices:

1540 Wyndham Drive South
York, PA 17403

Telephone Number: (717) 848-1994
Telecopy Number:

(Signatures continued on next page)

17
<PAGE> 18

(Signatures continued from preceding page)

TENANT:

SHEARER INDUSTRIAL SUPPLY CO.

By: /s/ Douglass C. Smith (SEAL)
Name: Douglass C. Smith
Title: President

(CORPORATE SEAL)

Date of Tenant's Execution:

July 28, 1998

Initial address for notices:

2500 Royal Place
Tucker, GA 30084

Telephone Number: (770) 243-9002
Telecopy Number: (770) 243-9040

18
<PAGE> 19

INDEX TO EXHIBITS

EXHIBIT "A" ................................................ Description of Land

EXHIBIT "A-1" ............................................. Permitted Exceptions

EXHIBIT "B" ........................................................ Work Letter

EXHIBIT "C" .............................. Definitions Made a Part of This Lease

EXHIBIT "D" ............ Subordination, Non-Disturbance and Attornment Agreement

EXHIBIT "E" ........... Memorandum of Lease, Options and Rights of First Refusal

EXHIBIT "F" ................................... Right of Participation by Tenant

EXHIBIT "G" ................................................. Option to Purchase

EXHIBIT "H" ............................................. Right of First Refusal

EXHIBIT "I" ........................................................... Guaranty

EXHIBIT "J" ......... Clarification Letter and Agreement as to Confirmatory Deed

<PAGE> 1
EXHIBIT 21.1

Subsidiaries of the Company

<TABLE>
<CAPTION>
Subsidiary State of Incorporation
- ---------- ----------------------
<S> <C>
Associated Suppliers, Inc. Oregon
B & J Industrial Supply Company Washington
Buford Bros., Inc. Tennessee
Cardinal Machinery, Inc. Tennessee
Cramer Industrial Supplies, Inc. New York
Continental Air Tool, Inc. California
E.C. Blackstone Company Georgia
Grinding Supplies Company Michigan
Hawley Industrial Supplies, Inc. Connecticut
Industrial & Tool Suppliers, LLC Maine
J.J. Stangel Co. Wisconsin
JM Tool and Supply, Inc. Michigan
Knox Industrial Supplies, Inc. California
L.D. Supply, Inc. Kansas
Northern Tool & Supply, Inc. Michigan
Petry & Morrow, Inc. Pennsylvania
Shearer Industrial Supply Co. Pennsylvania
Slater Industrial Supplies, Inc. California
The Distribution Group, Inc. Georgia
The New England Group
Industrial Distributors, Inc. Connecticut
Refco, Inc. Massachusetts
Tri-Star Industrial Supply, Inc. Missouri
</TABLE>

<PAGE> 1
EXHIBIT 23.2

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our
reports and to all references to our firm included in or made a part of this
Registration Statement.

/s/ Arthur Andersen LLP

Atlanta, Georgia
September 17, 1998

<PAGE> 1
EXHIBIT 23.3

CONSENT OF MILLER & CO. LLP

As independent certified public accountants, we hereby consent to the
use of our report dated February 21, 1997 included in Industrial Distribution
Group, Inc.'s Amendment No. 2 to the Registration Statement on Form S-1 and to
all references to our Firm included in or made a part of this Registration
Statement.

/s/ Miller & Co. LLP

York, Pennsylvania
September 17, 1998

<PAGE> 1

EXHIBIT 23.4

CONSENT OF SCHENCK & ASSOCIATES, SC

As independent certified public accountants for J.J. Stangel company,
we hereby consent to the use of our report dated February 27, 1997 included in
Industrial Distribution Group, Inc.'s Amendment No. 2 to the Registration
Statement on Form S-1 and to all references to our firm included in or made a
part of this Registration Statement. This consent is specifically restricted to
the September 30, 1996 audited financial statements of J.J. Stangel Company.

/s/ Schenck & Associates, SC

Green Bay, Wisconsin
September 17, 1998

<PAGE> 1

EXHIBIT 23.5

CONSENT OF BAIRD, KURTZ & DOBSON

As independent public accountants, we hereby consent to the use of our
audit report respecting the financial statements of Tri-Star Industrial Supply,
Inc., at and for the years ended September 30, 1996 and 1995, included in
Industrial Distribution Group, Inc.'s Amendment No. 2 to the Registration
Statement on Form S-1 and to the references to our firm in such registration
statement.

/s/ Baird , Kurtz & Dobson

St. Louis, Missouri
September 17, 1998

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF INDUSTRIAL DISTRIBUTION GROUP, INC. FOR THE TWELVE
MONTHS ENDED DECEMBER 31, 1996 (RESTATED) AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,586
<SECURITIES> 0
<RECEIVABLES> 9,539
<ALLOWANCES> (240)
<INVENTORY> 10,674
<CURRENT-ASSETS> 23,303
<PP&E> 5,055
<DEPRECIATION> (2,899)
<TOTAL-ASSETS> 27,252
<CURRENT-LIABILITIES> 13,752
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 11,208
<TOTAL-LIABILITY-AND-EQUITY> 27,252
<SALES> 68,266
<TOTAL-REVENUES> 68,266
<CGS> 52,774
<TOTAL-COSTS> 67,423
<OTHER-EXPENSES> (315)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 667
<INCOME-PRETAX> 491
<INCOME-TAX> 127
<INCOME-CONTINUING> 364
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 364
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25

</TABLE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF INDUSTRIAL DISTRIBUTION GROUP, INC. FOR THE TWELVE
MONTHS ENDED DECEMBER 31, 1995 (RESTATED) AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 59,944
<TOTAL-REVENUES> 59,944
<CGS> 45,763
<TOTAL-COSTS> 59,044
<OTHER-EXPENSES> (93)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 604
<INCOME-PRETAX> 389
<INCOME-TAX> 67
<INCOME-CONTINUING> 322
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 322
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.24

</TABLE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF INDUSTRIAL DISTRIBUTION GROUP, INC. FOR THE TWELVE
MONTHS ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS. (RESTATED)
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 31,534
<SECURITIES> 0
<RECEIVABLES> 37,093
<ALLOWANCES> (994)
<INVENTORY> 42,427
<CURRENT-ASSETS> 114,078
<PP&E> 13,854
<DEPRECIATION> (3,944)
<TOTAL-ASSETS> 146,381
<CURRENT-LIABILITIES> 34,433
<BONDS> 0
0
0
<COMMON> 79
<OTHER-SE> 99,411
<TOTAL-LIABILITY-AND-EQUITY> 146,381
<SALES> 153,218
<TOTAL-REVENUES> 153,218
<CGS> 117,786
<TOTAL-COSTS> 149,321
<OTHER-EXPENSES> (178)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 505
<INCOME-PRETAX> 3,670
<INCOME-TAX> 1,254
<INCOME-CONTINUING> 2,316
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,316
<EPS-PRIMARY> .71
<EPS-DILUTED> .71

</TABLE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF INDUSTRIAL DISTRIBUTION GROUP, INC. FOR THE SIX MONTHS
ENDED JUNE 30, 1997 (RESTATED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 40,113
<TOTAL-REVENUES> 40,113
<CGS> 30,926
<TOTAL-COSTS> 38,785
<OTHER-EXPENSES> (202)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 483
<INCOME-PRETAX> 1,087
<INCOME-TAX> 382
<INCOME-CONTINUING> 705
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 705
<EPS-PRIMARY> 0.47
<EPS-DILUTED> 0.47

</TABLE>