**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**WASHINGTON, D.C. 20549

**FORM 10-K**

| **x**                                                | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
| **For the fiscal year ended December 30, 2005** |
| **OR**                                               |
| **o**                                                | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Forthe transition period from                to                **

Commission file number: **001-32380**

**INTERLINE BRANDS, INC.**

**(Exact name of registrant asspecified in its charter)**

| **Delaware**                                   |   | **03-0542659**       |
|------------------------------------------------|--------|----------------------|
| (State or other  jurisdiction of               |   | (I.R.S. Employer     |
| incorporation or  organization)                |   | Identification  No.) |
| **801 West Bay Street, Jacksonville, Florida** |   | **32204**            |
| (Address of  principal executive offices)      |   | (Zip Code)           |

**(904) 421 1400**

(Registrant’s telephonenumber, including area code)

**None**

(Former name, former address and former fiscal year, ifchanged since last report)

Securities registered pursuant to Section 12(b) ofthe Act:

| Title of each class                     | ** ** | **Name of each exchange on  which registered** |
|-----------------------------------------|------------|------------------------------------------------|
| Common Stock, $.01  par value per share |       | New York Stock  Exchange, Inc.            |

Securities registered pursuantto Section 12(g) of the Act: None

Indicate by check mark if theregistrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.****Yes x No o

Indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Exchange Act. Yes o No x

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

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. x

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct.

| Large accelerated filer o |   | Accelerated  filer x |   | Non-accelerated  filer o |
|--------------------------------|--------|---------------------------|--------|-------------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of July 1, 2005, theaggregate market value of the registrant’s common stock held by non-affiliatesof the registrant was $434.1 million based on the closing sale price asreported on the New York Stock Exchange.

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of the latest practicable date.

| Class                                   | ** ** | **Outstanding at March 3,  2006** |
|-----------------------------------------|------------|----------------------------------------|
| Common Stock, $.01  par value per share |       | 32,220,669 shares                      |

 

**DOCUMENTSINCORPORATED BY REFERENCE**

| Document                                                                                               | ** ** | **Parts Into Which Incorporated** |
|--------------------------------------------------------------------------------------------------------|------------|-----------------------------------|
| Proxy Statement for the Annual Meeting of  Stockholders to be held May 11, 2006 (Proxy Statement) |       | Part III                     |

 

 

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**TABLE OF CONTENTS**

| ITEM   | ** **                                                                                  | **Page** |
|--------|---------------------------------------------------------------------------------------------|----------|
|   | **PART I**                                                                             |     |
| 1.     | Business                                                                                    | 1        |
| 1A.    | Risk  Factors                                                                               | 14       |
| 1B.    | Unresolved Staff  Comments                                                                  | 21       |
| 2.     | Properties                                                                                  | 22       |
| 3.     | Legal  Proceedings                                                                          | 23       |
| 4.     | Submission of  Matters to a Vote of Security Holders                                        | 23       |
|   | **PART II**                                                                            |     |
| 5.     | Market for  Registrant’s Common Equity and Related Stockholder Matters                 | 24       |
| 6.     | Selected Financial  Data                                                                    | 25       |
| 7.     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 27       |
| 7A.    | Quantitative  and Qualitative Disclosures About Market Risk                                 | 38       |
| 8.     | Financial  Statements and Supplementary Data                                                | 40       |
| 9.     | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure       | 40       |
| 9A.    | Controls and  Procedures                                                                    | 40       |
| 9B.    | Other Information                                                                           | 41       |
|   | **PART III**                                                                           |     |
| 10.    | Directors and  Executive Officers of the Registrant                                         | 41       |
| 11.    | Executive  Compensation                                                                     | 42       |
| 12.    | Security  Ownership of Certain Beneficial Owners and Management and                         |     |
|   | Related  Stockholder Matters                                                                | 42       |
| 13.    | Certain  Relationships and Related Transactions                                             | 42       |
| 14.    | Principal  Accountant Fees and Services                                                     | 42       |
|   | **PART IV**                                                                            |     |
| 15.    | Exhibits and  Financial Statement Schedules                                                 | 43       |
| 16.    | Signatures                                                                                  | 44       |

 

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**PART I**

**ITEM 1.**                Business

***OurBackground***

We originally conducted our business through WilmarIndustries, Inc., a New Jersey corporation incorporated in 1978, andinitially focused on marketing and distributing maintenance, repair andoperations, or MRO, products to multi-family housing facilities. In January 1996,Wilmar Industries successfully completed an initial public offering. From 1996through 1999, it acquired several MRO distribution companies, including theSexauer Group.

In May 2000, an investor group consisting ofaffiliates of Parthenon Capital, Chase Capital Partners (now known as J.P.Morgan Partners, LLC, or JPMorgan Partners), The Chase Manhattan Bank (nowknown as JPMorgan Chase Bank) as trustee for First Plaza Group Trust (a GeneralMotors Pension Fund), Sterling Investment Partners, L.P., and certain otherinvestors, including members of management, acquired Wilmar in a buy-out of thepublic shareholders of Wilmar pursuant to a going-private merger andrecapitalization transaction, which we refer to as “the Going-PrivateTransaction”.

In September 2000, we completed our acquisitionof Barnett Inc., which we refer to as the “Barnett Acquisition”, and in June 2001,we were renamed Interline Brands, Inc. In November 2003, we acquiredFlorida Lighting, a direct marketer and distributor of lighting and electricalproducts based in Pompano Beach, Florida. In December 2004, as a result ofa reincorporation merger in connection with our Initial Public Offering, orIPO, Interline Brands, Inc., a Delaware corporation and the reportingentity for purposes of this Annual Report on Form 10-K, became thesole shareholder of Interline Brands, Inc., a New Jersey corporation, anentity through which we conduct our business. The reincorporation merger isdescribed in more detail below under “Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Liquidity and CapitalResources—The Initial Public Offering and Related Transactions.”  In July 2005, as part of our acquisitionstrategy, we acquired CCS Enterprises, Inc., which we refer to as “Copperfield.”  Copperfield is a national distributor anddirect marketer of specialty ventilation and chimney maintenance products andis headquartered in Fairfield, Iowa. (See “Significant Transactions” in theaccompanying notes to the audited consolidated financial statements.)

In this document, unlessotherwise indicated, “we” refers to Interline Brands, Inc., a Delawarecorporation, and its consolidated subsidiaries; and “Interline Opco” or “InterlineNew Jersey” refers to Interline Brands, Inc., a New Jersey corporationthrough which we conduct our business.

**Our Company**

We are a leading national distributor and directmarketer of specialty MRO products. We stock over 50,000 plumbing, electrical,hardware, security hardware, heating, ventilation and air conditioning andother MRO products and sell to approximately 160,000 active customer accounts. Ourproducts are primarily used for the repair, maintenance, remodeling andrefurbishment of properties and non-industrial facilities. We are able torealize higher operating margins by focusing on repair, maintenance, remodelingand refurbishment customers, who generally make smaller, more frequentpurchases and require high levels of service. Our diverse customer baseincludes facilities maintenance customers, which consist of multi-familyhousing, educational, lodging and health care facilities; professionalcontractors who primarily repair and maintain properties and non-industrialfacilities; and specialty distributors, including plumbing and hardwareretailers. Our customers range in size from individual contractors andindependent hardware stores to apartment management companies and nationalpurchasing groups.

We market and sell our products primarily through ninedistinct and targeted brands, each of which is nationally recognized in themarkets we serve for providing premium products at competitive prices withreliable same-day or next-day delivery. Wilmar, Sexauer and Maintenance USAbrands generally serve our 

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facilities maintenancecustomers; Barnett, U.S. Lock, Sun Star and Copperfield brands generally serveour professional contractor customers; Hardware Express and AF Lighting brandsgenerally serve our specialty distributors customers. Our multi-brand operatingmodel, which we believe is unique in the industry, allows us to use a singleplatform to deliver tailored products and services to meet the individual needsof each respective customer group served. We reach our markets using a varietyof sales channels, including a sales force of approximately 400 field salesrepresentatives, over 370 telesales and customer service representatives, adirect marketing program of approximately five million pieces annually, brand-specificwebsites and a national accounts sales program. We deliver our products throughour network of 53 regional distribution centers, 21 professional contractorshowrooms located throughout the United States and Canada, a nationaldistribution center, or NDC, in Nashville, Tennessee, 13 vendor managedinventory locations at large professional contractor customer locations and adedicated fleet of trucks. Our broad distribution network allows us the abilityto provide reliable, same-day or next-day delivery service to 98% of the U.S.population.

Our common informationtechnology and logistics platform supports our major business functions,allowing us to market and sell our products at varying price points dependingon the customer’s service requirements. While we market our products under avariety of branded catalogs, generally our brands draw from the same inventorywithin common distribution centers and share associated employee andtransportation costs. In addition, we have centralized marketing, purchasingand catalog production operations to support our brands. We believe that ourcommon information technology and logistics platform also benefits ourcustomers by allowing us to offer a broad product selection at highlycompetitive prices while maintaining the unique customer appeal of each of ourtargeted brands. Overall, our common operating platform has enabled us toimprove customer service, maintain lower operating costs, efficiently manageworking capital and support our growth initiatives.

**Strategy**

Our objective is tobecome the leading supplier of MRO products to our three principal end markets:facilities maintenance, professional contractor and specialty distributor. Inpursuing this objective, we plan to increase our net sales, earnings and returnon invested capital by capitalizing on our information technology and logisticsplatform to successfully execute our organic growth, geographic expansion,operating efficiency and strategic acquisition initiatives.

·       *Organic Growth Initiatives.* We seek tofurther penetrate the markets we serve and expand into new product areas byutilizing and expanding a number of our already successful marketingstrategies, including: expanding our national accounts program, increasingcustomer use of our supply chain management services, continuing to developproprietary products under our private label brands, and selectively adding newproducts and new categories to our various brand offerings.

·       *Geographic Expansion Opportunities*. Webelieve we can further penetrate the markets we serve and expand into newmarkets, including through increasing the number of our field sales andtelesales territories to serve additional sales regions and other initiatives.

·       *Increased Operating Efficiencies*. We willcontinue to focus on enhancing our operating efficiency, which will increaseprofitability, improve our cash conversion cycle and increase our return oninvested capital.

·       *Strategic Acquisitions*. We will continue to maintain adisciplined acquisition strategy of adding new customers in currently servedmarkets and pursuing acquisitions of established brands in new markets in aneffort to leverage our operating infrastructure.

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**Industry and Market Overview**

The MRO distribution industry is approximately $300billion in size according to a U.S. Bancorp—Piper Jaffray Research Report andencompasses the supply of a wide range of products, including plumbing andelectrical supplies, hand-tools, janitorial supplies, safety equipment and manyother categories. Customers served by the MRO distribution industry includeheavy industrial manufacturers that use MRO supplies for the repair andoverhaul of production equipment and machinery; owners and managers offacilities such as apartment complexes, office buildings, schools, hotels andhospitals that use MRO supplies largely for maintenance, repair andrefurbishment; and professional contractors.

Within the MRO distribution industry, we focus onserving customers in three principal end markets: facilities maintenance,professional contractors and specialty distributors. Our customers areprimarily engaged in the repair, maintenance, remodeling and refurbishment ofproperties and non-industrial facilities, as opposed to new constructionprojects or the maintenance of heavy industrial facilities and machinery. Ourfacilities maintenance customers are individuals and entities responsible forthe maintenance and repair of various commercial properties, includingapartment buildings, schools, hotels and health care facilities. Ourprofessional contractor customers buy our products to provide plumbing,electrical, heating, ventilation and air conditioning (“HVAC”), and mechanicalservices to their residential and commercial customers. Our specialtydistributor customers consist primarily of hardware stores and small plumbingand electrical distributors that purchase our products for resale.

As MRO customers grow insize and sophistication, they continue to seek new ways to generate additionalefficiencies. The application of information technology to supply chain managementhas become increasingly important for this purpose. We believe that our supplychain management solutions result in material savings for our MRO customers.For example, we offer our customers the option of receiving invoiceselectronically. For customers that place frequent orders and have the abilityto receive electronic invoices, this program can dramatically reduce orderingcosts by eliminating invoice handling and automating the matching and paymentprocess. We believe that by offering services such as electronic purchasing andinvoicing, which remove transaction costs from the supply chain, we encourageour customers to use us as their single source for MRO supplies.

**Our Products**

We distribute over 50,000standard and specialty MRO products in a number of product categories,including plumbing, electrical, hardware, HVAC, security hardware, appliancesand parts, janitorial chemicals and sanitary supplies, window and floorcoverings and paint and paint accessories. We offer a broad range of brand nameand private label products.

*Product Categories*

Theapproximate percentages of our net sales for the twelve months ended December 30,2005 by product category were as follows: 

| **Product Category**                  | ** ** | ** ** | ** ** | **Percentage of  Net Sales** | ** ** |
|--------------------------------------------|------------|------------|------------|----------------------------------------|------------|
| Plumbing                                   |       |       | 42         | %                                      |       |
| Electrical                                 |       |       | 14         | %                                      |       |
| Heating,  Ventilation and Air Conditioning |       |       | 12         | %                                      |       |
| Security                                   |       |       | 6          | %                                      |       |
| Hardware                                   |       |       | 6          | %                                      |       |
| Appliances                                 |       |       | 6          | %                                      |       |
| Other                                      |       |       | 14         | %                                      |       |
| Total                                      |       |       | 100        | %                                      |       |

 

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The following is a discussion of our principal productcategories:

*PlumbingProducts.**  *We sella broad range of plumbing products, from individual faucet parts to completebathroom renovation kits. We sell a number of brand name products of leadingplumbing supply manufacturers, including Delta, Moen and Price Pfister. We alsosell a number of private label plumbing products under various proprietarytrademarks, including Premier faucets and water heaters, DuraPro tubularproducts and ProPlus retail plumbing accessories.

*ElectricalProducts.**  *Ourcomprehensive selection of electrical products range from items such as ceilingfans to light fixtures and light bulbs. We offer a number of brand nameproducts of leading electrical supply manufacturers, including Philips,Westinghouse, Honeywell and General Electric, as well as a number of privatelabel electrical products, such as Powerworks switches and Lumina light bulbs.

*Heating,Ventilation and Air Conditioning Products.**  *We offer a variety of HVACproducts, including condenser units, thermostats, fans and motors. Some ofthese are brand name products of manufacturers such as York and Janitrol andsome are our own private label products, such as Centurion air conditioners andCopperfield specialty ventilation and chimney maintenance products.

*SecurityProducts.**  *Wesell a broad range of security hardware products, from individual lock-sets tocomputerized master-key systems. We sell a number of brand name products ofleading security hardware manufacturers, including Kwikset and Schlage. We alsosell a number of private label security hardware products, such as U.S. Lockhardware, Legend locks and Rx master keyways.

*HardwareProducts.**  *We sella variety of hardware products, from power tools to mini blinds. Our brand nameproducts include DAP sealants and caulks, Rustoleum paints and Milwaukee powertools. Our private label hardware products include Legend door and windowhardware and Anvil Mark fasteners.

*Appliances and Parts.**  *Our comprehensive range ofappliances and parts includes washer/dryer components, garbage disposers,refrigerators and range hoods. We sell a number of brand name products ofleading appliance manufacturers, including General Electric and Whirlpool. Wealso sell a number of high-quality generic replacement parts.

*Private LabelProducts*

Our size and reputationhave enabled us to develop and market various lines of private label products,which we believe offer our customers high quality, low-cost alternatives to thebrand name products we sell. Third-party manufacturers, primarily in China andSoutheast Asia, using our proprietary branding and packaging design,manufacture our private label products to our specifications. Our sales force,catalogs and promotional flyers emphasize the comparative value of our privatelabel products. Since our private label products are typically less expensivefor us to purchase from suppliers, we are able to improve our profit marginwith the sale of these products, despite the fact that we sell them to ourcustomers at a discount to our non-private label product offerings. Inaddition, we have found that we develop strong relationships with our privatelabel customers and generate increased repeat business, as private labelcustomers generally return to us for future service and replacement parts onpreviously purchased products.

*New ProductOfferings*

We constantly monitor andevaluate our product offerings both to assess the sales performance of ourexisting products and to discontinue products that fail to meet specified salescriteria. We also create new product offerings in response to customerrequirements by adjusting our product portfolio within existing product linesas well as by establishing new product line categories. Through these efforts,we are able to address our customers’ changing product needs and thereby retainand attract customers. Further, by introducing new product lines, we provideour customers with additional opportunities for cost savings and 

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aone-stop shopping outlet with broad product offerings. We believe thatintroducing new products in existing product lines and creating new productlines are both strategies which enable us to increase penetration of existingcustomer accounts, as well as attract new customers to our brands.

**Our Brands**

We market and sellproducts to our customers primarily through nine distinct and targeted brands:Wilmar®, Sexauer®, Maintenance USA®, Barnett®, Hardware Express®, U.S. Lock®,SunStar®, CopperfieldTM and AF LightingTM. Each of our brands is focused onserving a particular customer group. Wilmar, Sexauer and Maintenance USA brandsgenerally serve facilities maintenance customers; Barnett, U.S. Lock, SunStarand Copperfield brands generally serve our professional contractor customers;Hardware Express and AF Lighting brands generally serve our specialtydistributor customers. Our brands are distinguished not only by the type ofproducts offered, but also by the levels of service provided to customers. Wehave brands that market a wide range of product categories, such as MaintenanceUSA, as well as brands that specialize in a particular group of products, suchas U.S. Lock, SunStar, Copperfield and AF Lighting. We have brands that marketcomplementary services to our customers, including inventory management andtechnical assistance, and brands that offer products without support services.We believe that our mix of brands allows us to effectively compete for a broadrange of customers across our industry, regardless of their productrequirements, preferred sales channels or service needs.

*FacilitiesMaintenance Brands*

We serve our facilities maintenance customers primarilythrough our Wilmar, Sexauer and Maintenance USA brands. Facilities maintenancecustomers buy our products for maintenance, repair and remodeling, and oftenneed to obtain products with minimal delay. In many cases, our facilitiesmaintenance customers also look to us for support services such as inventorymaintenance, management of procurement contracts and technical advice andassistance.

*Wilmar.**  *Our Wilmar brand specializes in sales of maintenanceproducts to the multi-family housing market. Through its master catalog,Wilmar is able to act as a one-stop shopping resource for multi-familyhousing maintenance managers by offering one of the industry’s most extensiveselections of standard and specialty plumbing, hardware, electrical, janitorialand related products. Wilmar provides same-day or next-day delivery in localmarkets served by our distribution centers, and ships by parcel delivery servicesor other carriers to other areas. We sell Wilmar products primarily throughfield sales representatives, as well as through direct marketing and telesales.We have also successfully launched a national accounts program at Wilmar byadding national account managers who market to high level officers at realestate investment trusts, or REITs, and other property management companies.Through this program, we assist large multi-location customers inreducing total supply chain costs.

*Sexauer.**  *Our Sexauer brand markets and sells specialtyplumbing and facility maintenance products to institutional customers,including commercial real estate, education, lodging, health care and otherfacilities maintenance customers. We believe that the catalog of Sexauer productsis well known in the industry as a comprehensive source of specialty plumbingand facility maintenance products. In addition to a broad product portfolio,Sexauer offers customers an extensive selection of service and procurementsolutions, drawing upon our product and supply management expertise.

*Maintenance USA.**  *Through our Maintenance USA brand, we offer a broadportfolio of MRO products to facilities, including multi-family housing,lodging and institutional customers. Since Maintenance USA sells our productsexclusively through telesales and direct marketing, it represents a low costsupply alternative to smaller property managers and more cost-consciouscustomers requiring minimal support services.

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*ProfessionalContractor and Specialty Distributor Brands*

We serve our professional contractor customers throughour Barnett, U.S. Lock, SunStar and Copperfield brands and our specialtydistributor customers through our Hardware Express and AF Lighting brands. Professionalcontractors generally purchase our products for specific job assignments and/orto resell the product to end-customers.

*Barnett.**  *Our Barnett brand markets and sells a broad range ofMRO products to professional contractors, including plumbing, electrical,building and HVAC contractors, typically for repair and remodelingapplications. The Barnett brand also sells its products to specialtydistributors, which are generally smaller and carry fewer products thanBarnett. Sales are made primarily through catalogs, telesales and direct marketing.In addition, Barnett has field sales representatives and regional salesmanagers in select markets throughout the United States. Customers can alsoreceive technical support and assistance in selecting products by calling ourcustomer service centers. In addition to next-day delivery, Barnett also offerscustomers the convenience of a network of local professional contractorshowrooms or Pro Centers.

*U.S.Lock.**  *Our U.S.Lock brand sells security hardware products to professional locksmiths. Ourprimary marketing vehicle for U.S. Lock products is our U.S. Lock dealerprogram, in which professional locksmiths receive incentives such as rebatesand favored pricing on proprietary items in return for paying an annualmembership, guaranteeing annual purchase volume, displaying our U.S. Lock logoin their stores and assisting in other promotional activities. Sales are madeprimarily through catalog, telesales and direct marketing.

*Copperfield.*   OurCopperfield brand markets and sells specialty ventilation and chimneymaintenance products to chimney professionals and hearth retailers, throughdirect marketing, outbound telesales and field sales representatives. Copperfieldoffers more than 5,000 brand name and private label repair and replacementitems including chimney replacement and relining products, specialtyventilation components, hearth products and gas and electrical appliances andan assortment of gas and solid fuel burning appliances.

*HardwareExpress.**  *OurHardware Express brand markets and sells our full range of products primarilyto retail hardware stores. While Hardware Express customers may order ourproducts for general inventory purposes, we also specialize in working withindependent stores to sell our private label brand products through customdesigned retail display sets. We believe that our retail hardware storecustomers prefer our private label products because they are priced morecompetitively than non-private label products. In addition, our retail displayprogram enables our hardware customers to present an entire line of products ina professional and organized manner. Hardware Express sells its productsthrough a catalog, supplemented by direct marketing and telesales personnel,and a specialty display sales program of private label products which iscoordinated by field sales representatives.

*SunStar/AFLighting.**  *OurSunStar and AF Lighting brands sell residential lighting and electricalproducts to electrical contractors, electrical products to electricaldistributors, lighting showrooms and mass merchants through direct marketing,outbound telesales and a network of manufacturer’s representatives.

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**Sales and Marketing**

We market our products nationally and internationallythrough a variety of channels. The majority of our sales to facilitiesmaintenance customers are made through field sales representatives, and themajority of our sales to professional contractors and specialty distributorsare made through telesales supported by catalog and promotional mailings, andfield sales in major metropolitan markets. We also serve our facilitiesmaintenance and professional contractor customers with brand-specificwebsites, though the majority of customer orders are received through the otherchannels discussed above. For a more detailed description of our approach toe-commerce, see “Management Information System.”

Our marketing strategyinvolves targeting our marketing channels and efforts to specific customergroups. As a result of our long-standing relationships with customers, we havebeen able to assemble a database of customer purchasing information, such asend market purchasing trends, product and pricing preferences and supportservice requirements. In addition, we are able to track information such ascustomer retention and reactivation as well as new account acquisition costs.We are also able to track the success of a particular marketing effort once itis implemented by analyzing the purchases of the customers targeted by thateffort. Our information systems allow us to use this data to develop moreeffective sales and marketing programs. For example, our understanding of thepreferences of our large, multi-family housing customers led to ourdevelopment of a national accounts program, through which field salesrepresentatives focus on developing contacts with national accounts. We willcontinue to leverage our customer knowledge and shared brand information systemto develop successful sales and marketing strategies.

*Field SalesRepresentatives*

Our direct sales force markets and sells to all levelsof the customer’s organization, including senior property managementexecutives, local and regional property managers, on-site maintenance managers,and owners and managers of professional plumbing, electrical and HVACcontractors. Our direct sales force marketing efforts are designed to establishand solidify customer relationships through frequent contact, while emphasizingour broad product selection, reliable same-day or next-day delivery, high levelof customer service and competitive pricing.

We maintain one of the largest direct sales forces inour industry, with approximately 400 field sales representatives coveringmarkets throughout the United States, Canada and Central America. We have foundthat we obtain a greater percentage of our customers’ overall spending on MROproducts in markets serviced by local sales representatives, particularly inregions where these representatives are supported by a nearby distributioncenter that enables same-day or next-day delivery of our product line.

Our field salesrepresentatives are expected not only to generate orders, but also to act asproblem solving customer service representatives. Our field salesrepresentatives are trained and qualified to assist customers in shoporganization, special orders, part identification and complaint resolution. Wecompensate our field sales representatives based on a combination of salary andcommission. Increasingly, these representatives target senior management atmulti-location companies in order to acquire long-term customers thatmake large volume purchases. We will continue to seek additional opportunitieswhere we can leverage the strength of our field sales force to generateadditional sales from our customers.

*Telesales*

Our telesales operationhas been designed to make ordering our products as convenient and efficient aspossible. We divide our telesales staff into outbound and inbound groups. Ouroutbound telesales representatives are responsible for maintainingrelationships with existing customers and prospecting for new customers. Theserepresentatives are assigned individual accounts in specified territories and havefrequent contact with existing and prospective customers in order to maketelesales presentations, notify customers of current promotions and encourageadditional purchases. Our inbound telesales 

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representativesare trained to process orders quickly from existing customers, providetechnical support and expedite and process new customer applications, as wellas handle all other customer service requests. We offer our customersnationwide toll-free telephone numbers and brand-specific telesalesrepresentatives who are familiar with a particular brand’s markets, productsand customers. Our call centers are staffed by over 370 telesales, customerservice and technical support personnel, who utilize our proprietary, on-lineorder processing system. This sophisticated software provides the telesalesstaff with detailed customer profiles and information about products, pricing,promotions and competition.

*Catalogs and DirectMarketing*

Our catalogs and direct marketing promotional flyersare key marketing tools that allow us to communicate our product offerings toboth existing and potential customers. We create catalogs, some of which exceed1,000 pages, for most of our brands and mail them on an annual or semi-annualbasis to our existing customers. We often supplement these catalog mailings bysending our customers promotional flyers. Most of our branded catalogs havebeen distributed for over three decades and we believe that these catalogtitles have achieved a high degree of recognition among our customers.

In targeting potential direct marketing customers, wesometimes make our initial contact through promotional flyers, rather than bysending a complete catalog. We obtain mailing lists of prospective customersfrom outside marketing information services and other sources. We are able togauge the effectiveness of our promotional flyer mailings through the use ofproprietary database analysis methods, as well as through our telesalesoperations. Once customers begin to place orders with us, we will send an initialcatalog and include the customer on our periodic mailing list for updatedcatalogs and promotional materials. We believe that this approach is acost-effective way for us to contact large numbers of potential customers andto determine which customers should be targeted for continuous marketing.

We produce the design andlayout for our catalogs and promotional mailings using a sophisticated catalogcontent database and software system. Our catalogs are indexed and illustratedto provide simplified pricing information and to highlight new productofferings. Our promotional mailings introduce new product offerings,sale-promotion items and other periodic offerings. Illustrations, photographsand copy are shared among brand catalogs and mailings or customized for aspecific brand, allowing for fast and efficient production of multi-brandedmedia. In addition, we frequently build custom catalogs designed specificallyfor the needs of our larger customers.

**Operations and Logistics**

*DistributionNetwork*

We have a network of 53 regional distribution centersand 21 professional contractor showrooms strategically located to serve thelargest metropolitan areas throughout the United States and Canada, and anational distribution center in Nashville, Tennessee. In addition, we also have13 vendor managed inventory locations at large professional contractor customerlocations. We also maintain a dedicated fleet of trucks to assist in localdelivery of products. The geographic scope of our distribution network and the efficiencyof our information system enable us to provide reliable, same-day or next-daydelivery service to over 98% of the U.S. population.

Our regional distributioncenters are central to our operations and range in size from approximately7,000 square feet to 127,000 square feet. Our regional distribution centers aretypically maintained under operating leases in commercial or industrialcenters, and primarily consist of warehouse and shipping facilities. We havealso had success with opening professional contractor showrooms in existingdistribution centers and in freestanding locations, which allow customers toobtain products from a fixed location without ordering in advance. We plan tocontinue to open select professional contractor showrooms in geographiclocations with high concentrations of professional contractors.

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*Inbound Logistics*

Historically, ourdistribution centers were decentralized, with most of our suppliers shippingdirectly to individual regional distribution centers. In July 2000, weopened our NDC in Nashville, Tennessee, which we later expanded to 317,000square feet. Our NDC receives the majority of our supplier shipments andefficiently re-distributes products to our regional distribution centers. Someover-sized or seasonal products are directly shipped to regional distributioncenters by suppliers. Our use of the NDC has significantly reduced regionaldistribution center replenishment lead times while simultaneously improving ourcustomer fill rates.

*Outbound Logistics*

Once a telesales orcustomer service representative enters an order into our computer system, itemswithin the order are automatically arranged by warehouse location to facilitateease of picking within the distribution center. For customers located withinthe local delivery radius of a distribution center, our own trucks or third-partycarriers will deliver the products directly to the customer either on the sameday or the next day. For customers located outside the local delivery radius ofa distribution center, we deliver products via UPS or another parcel deliverycompany or, in the case of large orders, by common carriers. We arrange forpick-up of returns at no charge to the customer in the local delivery radius.For customers outside the local delivery radius, we provide parcel servicepick-up of the returns at no charge and also provide a full refund if thereturn is the result of our error. Portions of our sales are delivered directfrom the supplier.

**Suppliers**

We enjoy long-standing relationships with many of oursuppliers. In most cases, we have a number of competitive sources of supply forany particular product that we sell. However, loss of a number of key supplieragreements could materially impair our ability to supply our customers andaccordingly lead to a decrease in sales and earnings. Due to our high volume ofpurchases and use of foreign suppliers, we are able to obtain purchase terms webelieve to be more favorable than those available to most local suppliers ofMRO products. A significant portion of our purchases were from domesticallybased suppliers in 2005. The majority of our foreign based suppliers arelocated in China and South East Asia. If we were to lose a key foreignsupplier, it would disrupt our supply chain for approximately 60 to 90 days, orlonger, by requiring us to procure from another source such as another foreignsupplier or a domestic supplier. If we were to lose our key suppliers from anindividual country—caused by such events as a natural catastrophe, politicalunrest, changes in foreign laws or regulations, changes in local economicconditions, war and other trade issues—we would expect longer disruptions inour supply chain of approximately 120 to 150 days, or longer, as we focus onsourcing the product(s) required in another foreign country ordomestically. See “Management’s Discussion and Analysis of Financial Conditionand Results of Operations—Quantitative and Qualitative Disclosures about MarketRisk.” In addition, uncertainties with respect to the Chinese legal system mayadversely affect us in resolving claims arising from our Chinese suppliers.Because many laws and regulations are relatively new and the Chinese legalsystem is still evolving, the interpretations of many laws, regulations and rules arenot always uniform. Moreover, the relative inexperience of China’s judiciary inmany cases creates additional uncertainty as to the outcome of any litigation,and the interpretation of statutes and regulations may be subject to governmentpolicies reflecting domestic political changes. Enforcement of existing laws orcontracts based on existing equitable enforcement may be uncertain andsporadic, and it may be difficult to obtain swift and equitable enforcement, orto obtain enforcement of a judgment by a court of another jurisdiction.

As a distributor and direct marketer of specialty MROproducts, our business has significant working capital needs. Our principalworking capital need is for inventory and trade accounts receivable, which havegenerally increased with growth in our business. Our principal sources of cashto fund our working capital needs are generated from operating activities andborrowings under our revolving credit facility.

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We aggressively manage ourworking capital need through our common information technology and logisticsplatform. For instance, our purchasing process is driven by an inventorymanagement system that forecasts demand based on customer ordering patterns.This system monitors our inventory and alerts our purchasing managers of itemsapproaching low stocking levels. We balance ordering and carrying costs in aneffort to minimize total inventory costs. Forecasting is automated and is basedon historical demand or seasonally adjusted projected demand. Our systemassists in determining which items fit seasonal demand patterns. Demandforecasts are adjusted by trend factors that reflect changes in expected salesor general business trends. Automated procedures recommend safety stock levelsbased on frequency of item sales. When an item reaches re-order point, oursystem can automatically generate a replenishment purchase, the purchasingmanager can initiate an automatic purchase order or the purchasing manager canmanually build a purchase order.

**ManagementInformation Systems**

We operate a customerservice and inventory management system that allows us to manage customerrelationships and to administer and distribute thousands of products. Oursystems encompass all major business functions for each of our main brands andenable us to receive and process orders, manage inventory, verify credit andpayment history, generate customer invoices, receive payments and manage ourproprietary customer lists. We have consistently invested in our informationtechnology, as we believe that the efficiency and flexibility of ourinformation system are critical to the success of our business.

Our information systemshave been instrumental in our efforts to streamline our inventory managementprocesses. Our information systems track each item of our inventory and itslocation within our distribution network. By monitoring inventory levels, weare able to quickly reorder products or shift inventory through ourdistribution network in order to ensure product availability. Our systems alsoallow us to monitor sales of products, enabling us to eliminate products thatdo not perform to our sales targets. Our information systems have also allowedus to create a more efficient order fulfillment process. All of our localdistribution centers are linked to our information systems, which provide themwith real-time access to inventory availability, order tracking and customercreditworthiness.

We constantly seek newways to generate additional efficiencies, such as by utilizing e-commerce. Withbrand-specific websites, our customers can browse our catalogs and usethe internet to send electronic purchase orders to our order entry system. Ourcustomers can integrate this system into their own purchase order systems,thereby making their supply chain operate more seamlessly. In addition, weoffer our customers the option of receiving invoices electronically. Forcustomers that place frequent orders and have the ability to receive electronicinvoices, this program can dramatically reduce ordering costs by eliminatinginvoice handling and automating the matching and payment process. We believethat by offering services like electronic purchasing and invoicing, whichremove transaction costs from the supply chain, we encourage our customers to useus as their single source for MRO supplies.

**Competition**

The MRO productdistribution industry is highly competitive. Competition in our industry isprimarily based upon product line breadth, product availability, servicecapabilities and price. We face significant competition from national andregional distributors, such as Home Depot Supply, Inc., Hughes Supply andHughes MRO (which have agreed to be acquired by Home Depot), Ferguson and W.W.Grainger, Inc. Each of these competitors markets their products throughthe use of direct sales forces as well as direct marketing and catalogs. Inaddition, we face competition from traditional channels of distribution such asretail outlets, small dealerships and large warehouse stores, including HomeDepot and Lowe’s. We also compete with buying groups formed by smallerdistributors, Internet-based procurement service companies, auctionbusinesses and trade exchanges.

We expect that competitionin our industry will increase in the future. The MRO product distributionindustry is consolidating, as traditional MRO product distributors attempt toachieve economies of scale 

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andincrease efficiency. Furthermore, MRO product customers are continuing to seeklow cost alternatives to replace traditional methods of purchasing and sourcesof supply. We believe that the current trend is for customers to reduce thenumber of suppliers and rely on lower cost alternatives such as directmarketing and/or integrated supply arrangements, which will contribute tocompetition in our industry. Finally, we expect that new competitors willdevelop over time as Internet-based enterprises become more establishedand reliable and refine their service capabilities.

**EnvironmentalMatters**

We are subject to certainfederal, state and local environmental laws and regulations, including thosegoverning the management and disposal of, and exposure to, hazardous materialsand the cleanup of contaminated sites. While we could incur costs as a resultof liabilities under, or violations of, such environmental laws and regulationsor arising out of the presence of hazardous materials in the environment,including the discovery of any such materials resulting from historicaloperations at our sites, we do not believe that we are subject to any such coststhat are material. Furthermore, we believe that we are in compliance in allmaterial respects with all environmental laws and regulations applicable to ourfacilities and operations.

**Trademarksand Other Intellectual Property**

We have registered andnonregistered trade names and trademarks covering the principal brand names andproduct lines under which our products are marketed, including Wilmar®,Sexauer®, Maintenance USA®, Barnett®, Hardware Express®, U.S. Lock®, SunStar®,CopperfieldTM and AF LightingTM. We believe that our trademarks and otherproprietary rights are important to our success and our competitive position.Accordingly, our policy is to pursue and maintain registration of our tradenames and trademarks whenever possible and to oppose vigorously anyinfringement or dilution of our trade names and trademarks.

**Employees**

As of December 30,2005, we had approximately 2,730 employees, of whom 113 were unionized.Currently, we have two labor agreements in place: one for our Mt. Laurel, NewJersey distribution center and one for our Elkridge, Maryland distributioncenter. The Mt. Laurel, New Jersey agreement was renegotiated on October 18,2004 and will expire on October 15, 2007. The total number of employeeswithin this bargaining unit is 66. The Elkridge, Maryland agreement wasrenegotiated on November 1, 2004 and will expire on October 31, 2007.The total number of employees within this bargaining unit is 47. We have notexperienced any work stoppages resulting from management or uniondisagreements and believe that our employee relations are satisfactory.

**AvailableInformation**

Our internet address iswww.interlinebrands.com. We make available, free of charge, through ourinternet site, via a hyperlink to the 10KWizard.com web site, our annual reportson Form 10-K; quarterly reports on Form 10-Q; currentreports on Form 8-K; and any amendments to those reports filed orfurnished pursuant to the Securities Exchange Act of 1934, as amended (the “ExchangeAct”), as soon as reasonably practicable after such material is electronicallyfiled with, or furnished to, the Securities and Exchange Commission (“SEC”).

**Recent Events**

***Board Approval ofAdditional Forms of Non-Employee Director Compensation***

On March 9, 2006, ourBoard of Directors, acting pursuant to the terms of the 2004 Equity IncentivePlan, approved the mechanics by which any non-employee director may elect to bepaid, in lieu of cash, all or any portion of his annual retainer and, ifapplicable, his committee chairmanship fees, in shares of our common stockand/or in deferred stock units, or DSUs. Each non-employee director shall be required to 

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makesuch election by April 8, 2006 and then on an annual basis byDecember 31 in respect of each upcoming year; failure to make an electionwill result in the director receiving the same form of compensation as in theprevious year. Any director who elects to receive compensation in the form ofDSUs shall enter into a Deferred Stock Unit Award Agreement.

In addition, the Board of Directors approved an adjustmentof the amount of equity awards granted to our non-employee directors. Theannual award granted to each director who is not an employee (includingaffiliates of Parthenon Capital) shall be changed from 10,000 options topurchase shares of our common stock to 7,500 such options as well as 1,250DSUs. The first annual grant of such options and DSUs to the non-employeedirectors shall be at the time of our 2006 Annual General Meeting.

All DSUs will be settledin shares of our common stock upon termination of such director’s service.Common shares received upon the settlement of DSUs (other than those DSUs thata director has elected to receive in lieu of cash) may not be transferred forone year after termination.

***Compensation Committee Approval of 2005 ExecutiveBonuses***

On March 9, 2006, based on performance criteriaset by our Board of Directors, our Compensation Committee approved cash bonuspayments to certain executives in excess of the maximum bonus specified underthe terms of such executives’ existing employment contracts. The following isthe specified contractual amount and actual bonus paid, respectively, for eachof our named executive officers: Michael J. Grebe ($509,561; $602,980);William E. Sanford ($436,140; $516,099); Fred M. Bravo ($117,058;$166,222); Thomas J. Tossavainen ($106,500; $151,230) and William R.Pray ($100,000; $142,000).

In conjunction with theapproval of such bonuses, the Compensation Committee recommended, and the Boardof Directors approved, an Executive Cash Incentive Plan designed to provide theCompensation Committee with additional flexibility in creating incentive plansto help maximize our financial performance. Such Executive Cash Incentive Planis subject to shareholder approval and will be put to a vote of shareholders inour 2006 Annual General Meeting.

***Compensation Committee Approval of 2006 ExecutiveBonus Targets***

***On March 9, 2006, our CompensationCommittee approved our cash bonus targets for 2006 through which executiveofficers are eligible to receive a cash bonus in a pre-determined percentage,ranging from 30% to 100% of base salary depending on the individual if certainfinancial targets are met for 2006. A substantial portion of such bonus, 80%,will be determined in relation to an adjusted pro forma earnings per share(EPS) target. The remainder of the bonus, 20%, will be determined in relationto a return on tangible capital (ROTC) target. Both portions of the bonus canbe adjusted upward or downward, including beyond 100% of base salary, on thebasis of pre-determined formulas depending on whether the relevant target ismissed or exceeded.***

***Approval of executive salary increases***

On March 9, 2006, ourCompensation Committee increased salaries of certain executives. No other termsof such executives’ compensation agreements with us were changed. The newsalaries of our named executive officers and certain other executive officersare set forth after the name of each executive as follows: Michael J. Grebe $500,000;William E. Sanford II $381,623; Pamela L. Maxwell $200,000 and Thomas J.Tossavainen $234,300. In each case such increase is retroactively effective toJanuary 1, 2006 with the exception of Mr. Tossavainen whose increaseis retroactive to March 1, 2006.

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**ITEM 1A.**        RiskFactors

**Forward-LookingStatements**

Thisreport contains forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933 and Section 21E of the Exchange Act that aresubject to risks and uncertainties. You should not place undue reliance onthose statements because they are subject to numerous uncertainties and factorsrelating to our operations and business environment, all of which are difficultto predict and many of which are beyond our control. Forward-lookingstatements include information concerning our possible or assumed futureresults of operations, including descriptions of our business strategy. Thesestatements often include words such as “may,” “believe,” “expect,” “anticipate,”“intend,” “plan,” “estimate” or similar expressions. These statements are basedon assumptions that we have made in light of our experience in the industry aswell as our perceptions of historical trends, current conditions, expectedfuture developments and other factors we believe are appropriate under thecircumstances. As you read and consider this report, you should understand thatthese statements are not guarantees of performance or results. They involverisks, uncertainties and assumptions. Although we believe that these forward-lookingstatements are based on reasonable assumptions, you should be aware that manyfactors could affect our actual financial results or results of operations andcould cause actual results to differ materially from those in the forward-lookingstatements. These factors include:

·       materialfacilities and systems disruptions and shutdowns,

·       thehighly competitive nature of the maintenance, repair and operationsdistribution industry,

·       economicslowdowns,

·       generalmarket conditions,

·       ourability to purchase products from suppliers on favorable terms,

·       thelength of our supply chains,

·       fluctuationsin the cost of raw materials and fuel prices,

·       currencyexchange rates,

·       theloss of significant customers,

·       ourability to accurately predict market trends,

·       productcost and price fluctuations due to market conditions,

·       failureto locate, acquire and successfully integrate acquisition candidates,

·       dependenceon key employees,

·       ourinability to protect trademarks,

·       adversepublicity and litigation,

·       ourlevel of debt,

·       interestrate fluctuations,

·       futurecash flows,

·       changesin consumer preferences,

·       laborand benefit costs, and

·       theother factors described under “Risk Factors.”

You should keep in mindthat any forward-looking statement made by us in this report, orelsewhere, speaks only as of the date on which we make it. New risks anduncertainties arise from time to time, and it is impossible for us to predictthese events or how they may affect us. In light of these risks anduncertainties, you should keep in mind that any forward-looking statementmade in this report or 

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elsewheremight not occur. Notwithstanding the foregoing, all information contained inthis report is materially accurate as of the date of this report.

**Risk Factors**

*The following risk factors should be read carefully inconnection with evaluating us and this annual report on Form 10-K. Certainstatements in “Risk Factors” are forward-looking statements. See “Forward-LookingStatements” above.*

**RisksRelating to Our Business**

*Disruption in ourinformation technology system could significantly lower our revenues andprofitability.*   Ouroperations are dependent upon our information technology system thatencompasses all of our major business functions. We rely upon our informationtechnology system to manage and replenish inventory, to fill and ship customerorders on a timely basis and to coordinate our sales and marketing activitiesacross all of our brands. We believe that our information technology systemplays a key role in our ability to achieve operating and financialefficiencies. Any substantial disruption of our information technology systemfor any prolonged time period could result in delays in receiving inventory andsupplies or filling customer orders and, accordingly, could significantly lowerour revenues and profitability.

*Disruption in our nationaldistribution center could significantly lower our revenues and profitability.*   We currently maintain anational distribution center located in Nashville, Tennessee, which isessential to the efficient operation of our national distribution network. Anyserious disruption to this distribution center due to fire, earthquake, act ofterrorism or any other cause could damage a significant portion of ourinventory and could materially impair our ability to distribute our products toour customers. In addition, we could incur significantly higher costs andlonger lead times associated with distributing our products to our customersduring the time that it takes for us to reopen or replace the center. As aresult, any such disruption could significantly lower our revenues and profitability.

*We operate in a highlycompetitive industry and if we are unable to compete successfully we could losecustomers and our sales may decline.*   The MRO product distribution industry is highlycompetitive. We face significant competition from national and regionaldistributors which market their products through the use of direct sales forcesas well as direct marketing and catalogs. In addition, we face competition fromtraditional channels of distribution such as retail outlets, small dealershipsand large warehouse stores and from buying groups formed by smallerdistributors, Internet-based procurement service companies, auctionbusinesses and trade exchanges. We expect that new competitors may develop overtime as Internet-based enterprises become more established and reliableand refine their service capabilities.

*In addition, the MRO product distribution industry isundergoing changes driven by industry consolidation and increased customerdemands. Traditional MRO product distributors are consolidating operations andacquiring or merging with other MRO product distributors to achieve economiesof scale and increase efficiency. For example, two of our competitors, HughesSupply and Hughes MRO, have agreed to be acquired by Home Depot, which is ourcompetitor as well. This consolidation trend could cause the industry to becomemore competitive and make it more difficult for us to maintain our operatingmargins.*

Competition in our industry is primarily based uponproduct line breadth, product availability, service capabilities and price. Tothe extent that existing or future competitors seek to gain or retain marketshare by reducing price or by increasing support service offerings, we may berequired to lower our prices or to make additional expenditures for supportservices, thereby reducing our profitability.

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*Slowdownsin general economic activity and other unforeseen events may detrimentallyimpact our customers and thereby significantly reduce our revenues andprofitability.*   TheMRO product distribution industry is affected by changes in economic conditionsoutside our control, including national, regional and local slowdowns ingeneral economic activity and job markets, which can result in increasedvacancies in the residential rental housing market and a general decrease inproduct demand from professional contractors and specialty distributors. Forexample, the slowdown in economic activity during 2002 and 2003 resulted inless apartment unit refurbishment and renovation which reduced demand for ourproducts and depressed revenue growth. Economic slowdowns, adverse economicconditions or cyclical trends in our customer markets and other unforeseenevents, such as terrorist attacks or armed hostilities, could negatively affectour industry or the industries in which our customers operate and significantlyreduce our revenues and profitability.

*Lossof key suppliers, lack of product availability or loss of delivery sourcescould decrease our revenues and profitability.**  *Webelieve our ability to offer a combination of well recognized product lines andhigh-quality low-priced private label product lines has been a significantfactor in attracting and retaining many of our customers and is one of our corecompetitive strengths. Our ability to offer a wide variety of products to ourcustomers is dependent upon our ability to obtain adequate product supply frommanufacturers or other suppliers. While in many instances we have agreements,including supply chain agreements, with our suppliers, these agreements aregenerally terminable by either party on limited notice. The loss of, or asubstantial decrease in the availability of, products from our suppliers, orthe loss of our key supplier agreements, could cause our revenues andprofitability to decrease. In addition, supply interruptions could arise fromshortages of raw materials, labor disputes or weather conditions affectingproducts or shipments, transportation disruptions or other factors beyond ourcontrol. Loss of a key foreign supplier could disrupt our supply chain forapproximately 60 to 90 days, or longer, and loss of key suppliers from anindividual country could result in disruptions of approximately 120 to150 days, or longer. Short and long term disruptions in our supply chainwould result in higher inventory levels as we replace similar productdomestically, a higher cost of product and ultimately a decrease in ourrevenues and profitability. Although no individual supplier represents morethan 5% of our total purchases, a disruption in the timely availability of ourproduct by our key suppliers could result in a decrease in our revenues andprofitability.

*Ourability to both maintain our existing customer base and to attract newcustomers is dependent in many cases upon our ability to deliver products andfulfill orders in a timely and cost-effective manner.*   To ensure timely delivery of ourproducts to our customers, we frequently rely on third parties, includingcouriers such as UPS and other national shippers as well as various local andregional trucking contractors. Outsourcing this activity generates a number ofrisks, including decreased control over the delivery process and servicetimeliness and quality. Any sustained inability of these third parties to deliverour products to our customers could result in the loss of customers or requireus to seek alternative delivery sources, if they are available, which mayresult in significantly increased costs and delivery delays. Furthermore, theneed to identify and qualify substitute service providers or increase ourinternal capacity could result in unforeseen operations problems and additionalcosts. Moreover, if customer demand for our products increase, we may be unableto secure sufficient additional capacity from our current service providers, orothers, on commercially reasonable terms, if at all.

*Insome cases we are dependent on long supply chains, which may subject us tointerruptions in the supply of many of the products that we distribute.*   Asignificant portion of the products that we distribute is imported from foreigncountries, including China. We are thus dependent on long supply chains for thesuccessful delivery of many of our products. The length and complexity of thesesupply chains make them vulnerable to numerous risks, many of which are beyondour control, which could cause significant interruptions or delays in deliveryof our products. Factors such as labor disputes, currency fluctuations, changesin tariff or import policies, severe weather or terrorist attacks or armedhostilities may disrupt 

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these supply chains. Weexpect more of our name brand and private label products will be imported inthe future, which will further increase these risks. A significant interruptionin our supply chains caused by any of the above factors could result inincreased costs or delivery delays and result in a decrease in our revenues andprofitability.

*Fluctuationsin the cost of raw materials, fuel prices or in currency exchange rates couldsignificantly reduce our revenues and profitability.*   Asa distributor of manufactured products, our profitability is tied to the priceswe pay to the manufacturers from which we purchase our products and to the costof transporting the products to us and our customers. The price that oursuppliers charge us for our products is dependent in part upon the availabilityand cost of the raw materials used to produce those products. Such rawmaterials are often subject to price fluctuations, frequently due to factorsbeyond our control, including changes in supply and demand, general U.S. andinternational economic conditions, labor costs, competition and governmentregulations. Transportation prices are significantly dependent on fuel prices,which generally change due to factors beyond our control, such as changes inworldwide demand, disruptions in supply, changes in the political climate inthe Middle East and other regions and changes in government regulations.Fluctuations in fuel prices may increase our costs and significantly reduce ourrevenues and profitability.

In addition, many of our suppliers price theirproducts in currencies other than the U.S. dollar or incur costs of productionin non-U.S. currencies. Accordingly, depreciation of the U.S. dollar againstforeign currencies could increase the price we pay for these products. Forexample, a substantial portion of our products are sourced from suppliers inChina. On July 21, 2005, the People’s Bank of China announced that theYuan will no longer be pegged to the U.S. dollar, but will be allowed to float ina band (and, to a limited extent, increase in value) against a basket offoreign currencies, a move that increases the risk that Chinese-sourcedproducts could become more expensive for us. Adverse currency fluctuations andincreases in the costs of raw materials, such as copper prices, have occurredin the past and have impacted our operating results. If currency or fuel pricefluctuations or cost increases recurred in the future and were prolonged, ourrevenues and profitability could be significantly diminished.

*Theloss of any of our significant customers could significantly reduce ourrevenues and profitability.**  *Our 10 largest customers generated approximately$68.0 million, or 8.0% of our sales in the year ended December 30,2005, and our largest customer accounted for approximately 4.0% of our sales inthe year ended December 30, 2005. The loss of one or more of oursignificant customers or deterioration in our relations with any of them couldsignificantly reduce our revenues and profitability.

*Wemay not be able to facilitate our growth strategy by identifying or completingtransactions with attractive acquisition candidates, which could impede ourrevenues and profitability.*   Our acquisitions of Barnett in 2000, Florida Lighting in2003, and Copperfield in 2005 have contributed significantly to our growth. Animportant element of our growth strategy is to continue to seek additionalbusinesses to acquire in order to add new customers within our existing marketsand to acquire brands in new markets. We cannot assure you that we will be ableto identify attractive acquisition candidates or complete the acquisition ofany identified candidates at favorable prices and upon advantageous terms andconditions. Furthermore, we believe that our industry is currently in a processof consolidation, and competition for attractive acquisition candidates istherefore likely to escalate, thereby limiting the number of acquisitioncandidates or increasing the overall costs of making acquisitions. Difficultieswe may face in identifying or completing acquisitions could impede our revenuegrowth and profitability.

*Wecannot assure you that we will be able to successfully complete the integrationof future acquisitions or manage other consequences of our acquisitions, whichcould impede our ability to remain competitive and, ultimately, our revenuesand profitability.*   Acquisitions involve significant risks and uncertainties,including difficulties integrating acquired personnel and other corporatecultures into our business, the potential loss of key employees, customers orsuppliers, the assumption of liabilities and exposure to unforeseen 

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liabilities of acquiredcompanies, the difficulties in achieving target synergies and the diversion ofmanagement attention and resources from existing operations. Although we havebeen successful in the past in integrating acquisitions, we may not be able tofully integrate the operations of future acquired businesses with our own in anefficient and cost-effective manner or without significant disruption to ourexisting operations. We may also be required to incur additional debt in orderto consummate acquisitions in the future, such debt may be substantial and maylimit our flexibility in using our cash flow from operations. Our failure tointegrate future acquired businesses effectively or to manage otherconsequences of our acquisitions, including increased indebtedness, couldimpede our ability to remain competitive and, ultimately, our revenues andprofitability.

*Wemay be unable to retain senior executives and attract and retain otherqualified employees which might hinder our growth and could impede our abilityto run our business and potentially reduce our revenues and profitability.*   Our success depends in part onour ability to attract, hire, train and retain qualified managerial, sales andmarketing personnel. We face significant competition for these types ofpersonnel in our industry. We may be unsuccessful in attracting and retainingthe personnel we require to conduct and expand our operations successfully and,in such an event, our revenues and profitability could decline. In addition,key personnel may leave us and compete against us. Our success also depends toa significant extent on the continued service of our senior management team.The loss of any member of our senior management team or other qualifiedemployees could impair our ability to execute our business plan and growthstrategy, cause us to lose customers and reduce our net sales, or lead toemployee morale problems and/or the loss of key employees.

*Wemay not be able to protect our trademarks, which could diminish the strength ofour trademarks or limit our ability to use our trademarks and, accordingly,undermine our competitive position.*   We believe that our trademarksare important to our success and our competitive position. For instance, wemarket and sell products primarily through nine distinct and targeted brands:Wilmar®, Sexauer®, Maintenance USA®, Barnett®, Hardware Express®, U.S. Lock®,SunStar®, CopperfieldTM and AF LightingTM. We believe many of our customers havedeveloped strong consumer loyalty to these targeted brands. Accordingly, wedevote resources to the establishment and protection of our trademarks,including with respect to our brand names and our private product labels.However, the actions we have taken may be inadequate to prevent imitation ofour brands and concepts by others or to prevent others from claiming violationsof their trademarks and proprietary rights by us. In addition, others mayassert rights in our trademarks. Our exclusive rights to our trademarks aresubject to the common law rights of any other person who began using thetrademark (or a confusingly similar mark) prior to the date of federal registration.Future actions by third parties may diminish the strength of our trademarks orlimit our ability to use our trademarks and, accordingly, undermine ourcompetitive position.

*We could face potentialproduct quality and product liability claims relating to the products wedistribute, which could result in a decline in revenues and profitability andnegatively impact customer confidence.*   We relyon manufacturers and other suppliers to provide us with the products we selland distribute. As we do not have direct control over the quality of theproducts manufactured or supplied by such third party suppliers, we are exposedto risks relating to the quality of the products we distribute. It is possiblethat inventory from a manufacturer or supplier could be sold to our customersand later be alleged to have quality problems or to have caused personalinjury, subjecting us to potential claims from customers or third parties. Therisk of claims may be greater with respect to our private label products, asthese products are customarily manufactured by third party suppliers outsidethe United States, particularly in China. We have been subject to claims in thepast, which have been resolved without material financial impact. While wecurrently maintain insurance coverage to address these types of liabilities, wecannot assure you that we will be able to obtain such insurance on acceptableterms in the future, if at all, or that any such insurance will provideadequate coverage against potential claims. Product liability claims can beexpensive to defend and can divert the attention of management and otherpersonnel for significant time periods, regardless of 

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the ultimateoutcome. An unsuccessful product liability defense could be highly costly andaccordingly result in a decline in revenues and profitability. In addition,uncertainties with respect to the Chinese legal system may adversely affect us inresolving claims arising from our private label products manufactured in China.Because many laws and regulations are relatively new and the Chinese legalsystem is still evolving, the interpretations of many laws, regulations and rules arenot always uniform. Finally, even if we are successful in defending any claimrelating to the products we distribute, claims of this nature could negativelyimpact customer confidence in our products and our company.

**Risks Relating to Our Indebtedness**

*Ourindebtedness may limit our cash flow available to invest in the ongoing needsof our business, which could prevent us from fulfilling our obligations.**   As of December 30, 2005,our total indebtedness was $295.6 million, of which $10.6 million wasoutstanding in the form of letters of credit. We had approximately$162.4 million of senior indebtedness outstanding and approximately $86.4million in additional revolving loan availability under our $100.0 millionrevolving loan facility.*

Our indebtednesscould have important consequences, including:

·       ourdebt could limit our ability to obtain additional financing on satisfactoryterms in the future for working capital, capital expenditures, acquisitions andother general corporate purposes;

·       asignificant portion of our cash flow from operations must be dedicated to thepayment of principal and interest on our debt, which will reduce the fundsavailable to us for our operations;

·       someof our debt is, and will continue to be, at variable rates of interest, whichmay result in higher interest expense in the event of increases in interestrates;

·       ourdebt could limit our flexibility in planning for, or reacting to, changes inour business or our industry;

·       ourdebt may potentially place us at a competitive disadvantage to the extent weare more highly leveraged than some of our competitors;

·       ourdebt could make it more difficult for us to satisfy our obligations under ourcredit facility, exposing us to the risk of default on our secured debt, whichcould result in a foreclosure on our assets, and in turn negatively affect ourability to operate as a going concern;

·       ourfailure to comply with the financial and other restrictive covenants in thedocuments governing our indebtedness could result in an event of default that,if not cured or waived, could harm our business or prospects and could resultin our filing for bankruptcy; and

·       ourdebt may make us more vulnerable to a further downturn in the economy, ourindustry or our business.

Our level of indebtedness increases the possibilitythat we may be unable to generate sufficient cash to pay when due the principalof, interest on or other amounts due in respect of our indebtedness. Inaddition, we may incur additional debt from time to time to finance strategicacquisitions, investments or for other purposes, subject to the restrictionscontained in the documents governing our indebtedness. If we incur additionaldebt, the risks associated with our leverage, including our ability to serviceour debt, would increase. We cannot be certain that our earnings will besufficient to allow us to pay principal and interest on our debt and meet ourother obligations. If we do not have sufficient earnings, we may be required torefinance all or part of our existing debt, sell assets, borrow more money orsell more securities, none of which we can guarantee we will be able to do. Ourability to incur additional debt will be limited by the terms and conditions ofour credit facility. In July 2005, we utilized, within the terms of our creditagreement, an incremental $50.0 million term loan to partially fund theCopperfield acquisition. As 

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of December 30, 2005,the amended credit facility provides for an additional incremental term loan inthe aggregate principal amount of up to $50.0 million.

*Despiteour level of indebtedness, we may be able to incur substantially more debt. Thiscould further exacerbate the risks described above.*   We may be able to incur significantadditional indebtedness in the future. Although the indenture governing our 11.5%senior subordinated notes due 2011, or the 11.5% notes, and the creditagreement governing our credit facility contain restrictions on the incurrenceof additional indebtedness, these restrictions are subject to a number ofqualifications and exceptions, and the indebtedness incurred in compliance withthese restrictions could be substantial. Specifically, the indenture permits usto incur all the indebtedness provided for in our new revolving loan facility.Furthermore, these restrictions do not prevent us from incurring obligationsthat do not constitute indebtedness, as defined in the applicable agreement. Tothe extent new debt is added to our current debt levels, the substantialleverage risks described above would increase.

*The terms of our creditfacility and the indenture governing the 11.5% notes may restrict our currentand future operations, particularly our ability to respond to changes in ourbusiness or to take certain actions.*   Ourcredit facility and the indenture governing the 11.5% notes contain, and anyfuture indebtedness of ours would likely contain, a number of restrictivecovenants that impose significant operating and financial restrictions on us,including restrictions on our ability to, among other things:

·       incuradditional debt,

·       paydividends and make other restricted payments,

·       createliens,

·       makeinvestments,

·       engagein sales of assets and subsidiary stock,

·       enterinto sale and leaseback transactions,

·       enterinto transactions with affiliates,

·       transferall or substantially all of our assets or enter into merger or consolidationtransactions and

·       makecapital expenditures.

The credit facility also requires us to maintaincertain financial ratios, which become more restrictive over time. A failure byus to comply with the covenants or financial ratios contained in the creditfacility could result in an event of default under the facility which couldmaterially and adversely affect our operating results and our financialcondition. In the event of any default under our credit facility, the lendersunder our credit facility are not required to lend any additional amounts to usand could elect to declare all borrowings outstanding, together with accruedand unpaid interest and fees, to be due and payable, require us to apply all ofour available cash to repay these borrowings or prevent us from making debtservice payments on the 11.5% notes, any of which could result in an event ofdefault under the 11.5% notes. If the indebtedness under our credit facility orthe 11.5% notes were to be accelerated, there can be no assurance that ourassets would be sufficient to repay such indebtedness in full.

*Wemay not be able to generate sufficient cash flow to meet our debt serviceobligations.*   Ourability to generate sufficient cash flow from operations to make scheduledpayments on our debt obligations will depend on our future financialperformance, which will be affected by a range of economic, competitive,regulatory, and legislative and business factors, many of which are beyond ourcontrol. Our indebtedness under the credit facility bears interest at avariable rate.

Historically, we havefunded our debt service obligations and other capital requirements throughinternally generated cash flow and funds borrowed under our credit agreement. Weexpect our cash flow 

20

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fromoperations and the loan availability under our credit agreement to be ourprimary source of funds in the future. If we do not generate sufficient cashflow from operations to satisfy our debt obligations, including payments on the11.5% notes, we may have to undertake alternative financing plans, such asrefinancing or restructuring our debt, selling assets, reducing or delayingcapital investments or seeking to raise additional capital. We cannot assureyou that any refinancing would be possible, that any assets could be sold, or,if sold, of the timing of the sales and the amount of proceeds realized fromthose sales, or that additional financing could be obtained on acceptableterms, if at all. Our inability to generate sufficient cash flow to satisfy ourdebt obligations, or to refinance our obligations on commercially reasonableterms, would have an adverse effect on our business, financial condition andresults of operations, as well as on our ability to satisfy our obligations inrespect of the 11.5% notes.

**ITEM 1B.**       UnresolvedStaff Comments

None.

21

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**ITEM 2.**                Properties

Our corporate headquarters is located in Jacksonville,Florida.

Weoperate the following distribution facilities and contractor showrooms:
| Distribution Center | ** ** | **Square Footage** | ** ** | ** ** | **Distribution Center** | ** ** | **Square Footage** | ** ** | ** ** |
|---------------------|------------|--------------------|------------|------------|-------------------------|------------|--------------------|------------|------------|
|                |       |               |       |       |                    |       |               |       |       |
| Birmingham, AL      |       | 30,618             |       |       | Farmington Hills, MI    |       | 70,035             |       |       |
| Tempe, AZ           |       | 42,081             |       |       | Minneapolis, MN         |       | 43,937             |       |       |
| Cerritos, CA        |       | 39,455             |       |       | St. Louis, MO           |       | 59,777             |       |       |
| Ontario, CA         |       | 46,200             | (1)        |       | Gulfport, MS            |       | 7,500              | (1)        |       |
| Sacramento, CA      |       | 96,658             |       |       | Aberdeen, NC            |       | 106,500            |       |       |
| San Diego, CA       |       | 24,705             |       |       | Charlotte, NC           |       | 45,600             |       |       |
| Stockton, CA        |       | 30,076             |       |       | Charlotte, NC           |       | 8,128              | (1)        |       |
| Edmonton, CN        |       | 7,557              |       |       | Bridgeport, NJ          |       | 61,500             |       |       |
| Mississauga, CN     |       | 41,790             |       |       | Mt. Laurel, NJ          |       | 70,000             |       |       |
| Aurora, CO          |       | 69,500             |       |       | Pinebrook, NJ           |       | 6,500              | (1)        |       |
| Denver, CO          |       | 5,042              | (1)        |       | Teterboro, NJ           |       | 5,400              | (1)        |       |
| Clearwater, FL      |       | 8,640              | (1)        |       | North Las Vegas, NV     |       | 36,000             |       |       |
| Hollywood, FL       |       | 53,600             |       |       | Las Vegas, NV           |       | 11,277             |       |       |
| Jacksonville, FL    |       | 8,400              |       |       | Brentwood, NY           |       | 42,000             | *****      | ** ** |
| Jacksonville, FL    |       | 47,370             |       |       | Depew, NY               |       | 21,728             |       |       |
| Lakeland, FL        |       | 13,720             | (1)        |       | Cincinnati, OH          |       | 33,711             |       |       |
| Miami, FL           |       | 17,920             | (1)        |       | Cleveland, OH           |       | 81,039             |       |       |
| Orlando, FL         |       | 30,000             |       |       | Columbus, OH            |       | 36,264             |       |       |
| Pompano Beach, FL   |       | 78,000             |       |       | Oklahoma City, OK       |       | 15,340             | (1)        |       |
| Tampa, FL           |       | 40,000             |       |       | Bristol, PA             |       | 55,000             |       |       |
| Doraville, GA       |       | 52,320             |       |       | Leetsdale, PA           |       | 37,000             |       |       |
| Marietta, GA        |       | 10,160             | (1)        |       | Pittsburgh, PA          |       | 26,662             | (1)        |       |
| Carol Stream, IL    |       | 42,106             |       |       | Hato Tejas, PR          |       | 23,657             |       |       |
| Chicago, IL         |       | 45,566             |       |       | Florence, SC            |       | 34,000             |       |       |
| Crestwood, IL       |       | 6,000              | (1)        |       | Fayetville, TN          |       | 40,000             |       |       |
| Elk Grove, IL       |       | 20,000             | (1)        |       | Nashville, TN (NDC)     |       | 317,085            |       |       |
| Fishers, IN         |       | 44,840             |       |       | Memphis, TN             |       | 17,580             |       |       |
| Plainfield, IN      |       | 6,000              | (1)        |       | Nashville, TN           |       | 24,900             |       |       |
| Lenexa, KS          |       | 22,482             |       |       | Dallas, TX              |       | 15,697             | (1)        |       |
| Jeffersontown, KY   |       | 8,700              |       |       | El Paso, TX             |       | 42,837             |       |       |
| Louisville, KY      |       | 38,040             |       |       | Fort Worth, TX          |       | 10,000             | (1)        |       |
| Louisville, KY      |       | 60,000             | *****      |       | Grand Prairie, TX       |       | 106,245            |       |       |
| Harahan, LA         |       | 33,000             |       |       | Houston, TX             |       | 64,000             |       |       |
| Woburn, MA          |       | 5,015              | (1)        |       | San Antonio, TX         |       | 19,200             |       |       |
| Worcester, MA       |       | 60,108             |       |       | Seattle, WA             |       | 38,218             |       |       |
| Baltimore, MD       |       | 5,400              | (1)        |       | Lynwood, WA             |       | 5,472              | (1)        |       |
| Ekridge, MD         |       | 126,504            |       |       | New Berlin, WI          |       | 9,264              | (1)        |       |
| Westminster, MD     |       | 21,525             |       |       |                    |       |               |       |       |

----

*                    Indicates ownedproperties.

(1)          Indicatescontractor showrooms.

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**ITEM 3.**                LegalProceedings

We are involved in variouslegal proceedings in the normal course of our business. In the opinion ofmanagement, none of the proceedings are material in relation to ourconsolidated financial statements.

**ITEM 4.**                Submissionof Matters to a Vote of Security Holders

No matter was submitted to a vote of security holdersduring the fourth quarter of our year ended December 30, 2005,  through the solicitation of proxies orotherwise.

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**PART II**

**ITEM 5.**             Marketfor Registrant’s Common Equity and Related Stockholder Matters

*Market Information*

Our common stock has been publicly traded on the NewYork Stock Exchange, or the “NYSE,” since December 16, 2004.

Thefollowing table sets forth the high and low sale price per share of our commonstock for each of our quarterly reporting periods during the year ended December 30,2005. No data is provided for 2004 because our common stock was publicly tradedfor less than a full quarterly period.

| **2005**               | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------|------------|------------|------------|------------|------------|
| **Quarter Ended** | ** ** | ** ** | ** ** | **High**   | ** ** | **Low** | ** ** |
| April 1           |       | $          | 19.98      |       | $          | 16.60 |   |
| July 1            |       | $          | 20.59      |       | $          | 15.17 |   |
| September 30      |       | $          | 21.78      |       | $          | 18.75 |   |
| December 30       |       | $          | 23.50      |       | $          | 19.10 |   |
|                        |            |            |            |            |            |  |  |  |  |

 

As of March 3, 2006,based upon the number of holders of record, there were approximately 28 holdersof our outstanding common stock.

*Dividends*

We have never declareddividends on our common stock. Our ability to declare and pay dividends on ourcommon stock is subject to the requirements of Delaware law. In addition, weare a parent company with no business operations of our own. Accordingly, oursources of cash are dividends and distributions with respect to our ownershipinterest in Interline New Jersey that are derived from the earnings and cashflow generated by our businesses. The ability of Interline New Jersey to paydividends to us is restricted under certain of its debt and other agreements.

*SecuritiesAuthorized for Issuance Under Equity Compensation Plans*

The following table sets forth information as of December 30,2005 regarding compensation plans under which our equity securities areauthorized for issuance.
|                                                             | ** ** | **(a)**    | ** ** | **(b)**                                                                                                              | ** ** | **(c)**                                                                              | ** ** |
|-------------------------------------------------------------|------------|------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| **Plan Category**                                      | ** ** | ** ** | ** ** | **Number of securities to be  issued upon exercise of  outstanding options** | ** ** | **Weighted-average exercise  price of outstanding options  ($)** | ** ** | **Number of securities remaining  available for future issuance under  equity compensation plans  (excluding securities reflected in  column (a))** | ** ** |
| Equity  compensation plans approved by security holders     |       |       | 2,272,495  |                                                                                                                 |       |                                                                                 | $          | 16.94 |   |   |   | 718,080 | (1) |   |
| Equity  compensation plans not approved by security holders |       |       | —     |                                                                                                                 |       |                                                                                 | —     |   |   |   | — |   |   |
| Total                                                       |       |       | 2,272,495  |                                                                                                                 |       |                                                                                 | $          | 16.94 |   |   |   | 718,080 | (1) |   |
|                                                             |            |            |            |                                                                                                                      |            |                                                                                      |            |  |  |  |  |  |  |  |  |  |  |

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(1)          Reducedby the restricted stock awards granted to management to date pursuant to the2004 Equity Plan and not included in column (a) because they are notoptions.

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**ITEM 6.**                SelectedFinancial Data

Thetable below presents our selected historical consolidated financial data for2005, 2004, 2003, 2002 and 2001. The information presented below should be readin conjunction with “Management’s Discussion and Analysis of FinancialConditions and Results of Operations” and the consolidated financial statementsincluded elsewhere in this report.

| ** **                                           | ** ** | **Fiscal Year Ended**                                                        | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **December 30,**                                                                  | ** ** | **December 31,** | ** ** | **December 26,** | ** ** | **December 27,** | ** ** | **December 28,** | ** ** |
| ** **                                           | ** ** | **2005**                                                                               | ** ** | **2004(4)** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                           | ** ** | **(In thousands, except share and per share data)** | ** ** |
| **Income Statement Data:**                           |       |                                                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net sales                                            |       |                                                                                   | $          | 851,928 |   |   |   | $ | 743,905 |   |   |   | $ | 640,138 |   |   |   | $ | 637,530 |   |   |   | $ | 609,356 |   |   |
| Cost of sales                                        |       |                                                                                   | 526,334    |   |   |   | 458,516 |   |   |   | 395,894 |   |   |   | 401,212 |   |   |   | 384,153 |   |   |
| Gross profit                                         |       |                                                                                   | 325,594    |   |   |   | 285,389 |   |   |   | 244,244 |   |   |   | 236,318 |   |   |   | 225,203 |   |   |
| Selling, general  and administrative expenses        |       |                                                                                   | 229,595    |   |   |   | 202,084 |   |   |   | 171,091 |   |   |   | 164,328 |   |   |   | 157,801 |   |   |
| Depreciation and  amortization                       |       |                                                                                   | 13,049     |   |   |   | 12,600 |   |   |   | 10,949 |   |   |   | 11,282 |   |   |   | 16,526 |   |   |
| Secondary offering  and IPO related expenses(1)      |       |                                                                                   | 932        |   |   |   | 9,215 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Special costs and  expenses(1)                       |       |                                                                                   | —     |   |   |   | — |   |   |   | 607 |   |   |   | 4,893 |   |   |   | 3,061 |   |   |
| Operating income                                     |       |                                                                                   | 82,018     |   |   |   | 61,490 |   |   |   | 61,597 |   |   |   | 55,815 |   |   |   | 47,815 |   |   |
| Interest expense,  net                               |       |                                                                                   | (25,183    | ) |   |   | (39,798 | ) |   |   | (40,317 | ) |   |   | (38,625 | ) |   |   | (40,004 | ) |   |
| Change in fair  value of interest rate swaps         |       |                                                                                   | —     |   |   |   | 8,232 |   |   |   | 5,272 |   |   |   | (5,825 | ) |   |   | (6,874 | ) |   |
| Loss on  extinguishment of debt                      |       |                                                                                   | (10,340    | ) |   |   | (660 | ) |   |   | (14,893 | ) |   |   | — |   |   |   | — |   |   |
| Other income                                         |       |                                                                                   | 639        |   |   |   | 454 |   |   |   | 40 |   |   |   | — |   |   |   | — |   |   |
| Income before  income taxes                          |       |                                                                                   | 47,134     |   |   |   | 29,718 |   |   |   | 11,699 |   |   |   | 11,365 |   |   |   | 937 |   |   |
| Provision for  income taxes                          |       |                                                                                   | 18,335     |   |   |   | 11,617 |   |   |   | 4,547 |   |   |   | 4,219 |   |   |   | 2,595 |   |   |
| Income (loss)  before accounting change              |       |                                                                                   | 28,799     |   |   |   | 18,101 |   |   |   | 7,152 |   |   |   | 7,146 |   |   |   | (1,658 | ) |   |
| Cumulative effect  of change in accounting principle |       |                                                                                   | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 3,221 |   |   |
| Net income (loss)                                    |       |                                                                                   | 28,799     |   |   |   | 18,101 |   |   |   | 7,152 |   |   |   | 7,146 |   |   |   | (4,879 | ) |   |
| Preferred stock  dividends                           |       |                                                                                   | —     |   |   |   | (54,389 | ) |   |   | (48,623 | ) |   |   | (42,470 | ) |   |   | (37,024 | ) |   |
| Net income (loss)  applicable to common stockholders |       |                                                                                   | $          | 28,799 |   |   |   | $ | (36,288 | ) |   |   | $ | (41,471 | ) |   |   | $ | (35,324 | ) |   |   | $ | (41,903 | ) |   |
| Income (loss) per  common  share—basic          |       |                                                                                   | $          | 0.90 |   |   |   | $ | (25.21 | ) |   |   | $ | (632.74 | ) |   |   | $ | (538.55 | ) |   |   | $ | (638.84 | ) |   |
| Income (loss) per  common  share—diluted        |       |                                                                                   | $          | 0.89 |   |   |   | $ | (25.21 | ) |   |   | $ | (632.74 | ) |   |   | $ | (538.55 | ) |   |   | $ | (638.84 | ) |   |
| **Cash Flow and Other Data:**                        |       |                                                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net cash provide by (used in):                       |       |                                                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating activities                                 |       |                                                                                   | $          | 38,838 |   |   |   | $ | (1,403 | ) |   |   | $ | 33,089 |   |   |   | $ | 10,415 |   |   |   | $ | 15,697 |   |   |
| Investing activities                                 |       |                                                                                   | (81,133    | ) |   |   | (7,329 | ) |   |   | (26,795 | ) |   |   | (4,944 | ) |   |   | (8,242 | ) |   |
| Financing activities                                 |       |                                                                                   | (24,062    | ) |   |   | 76,006 |   |   |   | (10,962 | ) |   |   | (3,285 | ) |   |   | (9,852 | ) |   |
| Adjusted EBITDA(2)                                   |       |                                                                                   | 96,638     |   |   |   | 83,759 |   |   |   | 72,586 |   |   |   | 67,097 |   |   |   | 64,341 |   |   |
| Capital expenditures                                 |       |                                                                                   | 7,920      |   |   |   | 6,763 |   |   |   | 4,556 |   |   |   | 4,944 |   |   |   | 8,214 |   |   |
| **Balance Sheet Data (as of end of period):**        |       |                                                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                           |       |                                                                                   | $          | 2,958 |   |   |   | $ | 69,178 |   |   |   | $ | 1,612 |   |   |   | $ | 5,557 |   |   |   | $ | 3,327 |   |   |
| Total assets                                         |       |                                                                                   | 705,769    |   |   |   | 673,380 |   |   |   | 565,282 |   |   |   | 551,718 |   |   |   | 546,308 |   |   |
| Total debt(3)                                        |       |                                                                                   | 285,075    |   |   |   | 303,275 |   |   |   | 341,525 |   |   |   | 326,024 |   |   |   | 326,070 |   |   |

 

25

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(1)          Secondary offering andIPO related expenses consist of expenses related to the secondary stockoffering by certain shareholders of which we received no proceeds andadditional compensation expense for forgiveness of shareholder loans andone-time bonuses that relate to the IPO transaction. Special costs and expensesconsist of costs associated with acquisition and recapitalization activities,including integration and assimilation expenses, severance payments andtransaction fees and expenses.

(2)          AdjustedEBITDA represents net income plus interest expense (income), net, change infair value of interest rate swaps, cumulative effect of change in accountingprinciple, loss on extinguishment of debt, secondary offering and IPO relatedexpenses, provision for income taxes and depreciation and amortization.Adjusted EBITDA differs from earnings before interest, taxes, depreciation andamortization (“EBITDA”) and may not be comparable to EBITDA or Adjusted EBITDAas reported by other companies. The computation of Adjusted EBITDA is asfollows:

| ** **                                           | ** ** | **Fiscal Year Ended**      | ** ** |
|------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                           | ** ** | **December 30,**                | ** ** | **December 31,** | ** ** | **December 26,** | ** ** | **December 27,** | ** ** | **December 28,** | ** ** |
| ** **                                           | ** ** | **2005**                             | ** ** | **2004(4)** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                           | ** ** | **(dollars in thousands)** | ** ** |
| Net income (loss)                                    |       |                                 | $          | 28,799 |   |   |   | $ | 18,101 |   |   |   | $ | 7,152 |   |   |   | $ | 7,146 |   |   |   | $ | (4,879 | ) |   |
| Interest expense  (income), net                      |       |                                 | 25,183     |   |   |   | 39,798 |   |   |   | 40,317 |   |   |   | 38,625 |   |   |   | 40,004 |   |   |
| Change in fair  value of interest rate swaps         |       |                                 | —     |   |   |   | (8,232 | ) |   |   | (5,272 | ) |   |   | 5,825 |   |   |   | 6,874 |   |   |
| Cumulative effect  of change in accounting principle |       |                                 | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 3,221 |   |   |
| Loss on  extinguishment of debt                      |       |                                 | 10,340     |   |   |   | 660 |   |   |   | 14,893 |   |   |   | — |   |   |   | — |   |   |
| Secondary  offering and IPO related expenses         |       |                                 | 932        |   |   |   | 9,215 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Provision for  income taxes                          |       |                                 | 18,335     |   |   |   | 11,617 |   |   |   | 4,547 |   |   |   | 4,219 |   |   |   | 2,595 |   |   |
| Depreciation and  amortization                       |       |                                 | 13,049     |   |   |   | 12,600 |   |   |   | 10,949 |   |   |   | 11,282 |   |   |   | 16,526 |   |   |
| Adjusted EBITDA                                      |       |                                 | $          | 96,638 |   |   |   | $ | 83,759 |   |   |   | $ | 72,586 |   |   |   | $ | 67,097 |   |   |   | $ | 64,341 |   |   |

 

Adjusted EBITDA ispresented herein because we believe it to be relevant and useful information toour investors since it is used by our management to evaluate the operatingperformance of our business and compare our operating performance with that ofour competitors. Management also uses Adjusted EBITDA for planning purposes,including the preparation of annual operating budgets, to determine appropriatelevels of operating and capital investments. Adjusted EBITDA excludes certainitems, including change in fair value of interest rate swaps, cumulative effectof change in accounting principle, loss on extinguishment of debt, and IPOrelated expenses such as additional compensation expense for forgiveness ofshareholder loans and one-time bonuses that relate to financing transactionsand which we believe are not indicative of our core operating results. Wetherefore utilize Adjusted EBITDA as a useful alternative to net income as anindicator of our operating performance. However, Adjusted EBITDA is not a measureof financial performance under GAAP and Adjusted EBITDA should be considered inaddition to, but not as a substitute for, other measures of financialperformance reported in accordance with GAAP, such as net income. While webelieve that some of the items excluded in the calculation of Adjusted EBITDAare not indicative of our core operating results, these items do impact ourincome statement, and management therefore utilizes Adjusted EBITDA as anoperating performance measure in conjunction with GAAP measures such as netincome and gross margin.

(3)          Total debt representsthe amount of our short-term debt and long-term debt.

(4)          Fiscal year ended December 2004was a 53 week year. All other years contain 52 weeks.

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**Reconciliationof Average Organic Daily Sales to Net Sales**

Averageorganic daily sales are defined as sales for a period of time divided by thenumber of shipping days in that period of time excluding any sales fromacquisitions made subsequent to the beginning of the prior year period. Thecomputation of average organic daily sales is as follows:
|                                 | ** ** | **Quarter Ended** | ** **               | **Fiscal Year Ended** | ** ** |
|---------------------------------|------------|------------------------|--------------------------|---------------------------------|------------|
| ** **                      | ** ** | **December 30,**  | ** **               | **December 31,**           | ** ** | ** ** | ** ** | **December 30,** | ** ** | **December 31,** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | **2005**               | ** **               | **2004**                        | ** ** | **% Variance** | ** ** | **2005** | ** ** | **2004** | ** ** | **% Variance** | ** ** |
| Net sales                       |       |                   | $ 225,960           |                            |       |   | $ 195,522 |   |   |   | 15.6 | % |   |   | $ 851,928 |   |   |   | $ 743,905 |   |   |   | 14.5 | % |   |
| Less :  Copperfield             |       |                   | (22,544                  | )                               |       |   | — |   |   |   |   |   |   |   | (34,250 | ) |   |   | — |   |   |   |   |   |   |
| Organic sales                   |       |                   | $ 203,416           |                            |       |   | $ 195,522 |   |   |   | 4.0 | % |   |   | $ 817,678 |   |   |   | $ 743,905 |   |   |   | 9.9 | % |   |
| Daily sales:                    |       |                   |                     |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Ship days                       |       |                   | 61                       |                            |       |   | 65 |   |   |   |   |   |   |   | 253 |   |   |   | 256 |   |   |   |   |   |   |
| Average daily  sales(1)         |       |                   | $   3,704 |                            |       |   | $   3,008 |   |   |   | 23.1 | % |   |   | $   3,367 |   |   |   | $   2,906 |   |   |   | 15.9 | % |   |
| Average organic daily  sales(2) |       |                   | $   3,335 |                            |       |   | $   3,008 |   |   |   | 10.9 | % |   |   | $   3,232 |   |   |   | $   2,906 |   |   |   | 11.2 | % |   |

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(1)          Average daily sales aredefined as sales for a period of time divided by the number of shipping days inthat period of time.

(2)          Average organic dailysales are defined as sales for a period of time divided by the number ofshipping days in that period of time excluding any sales from acquisitions madesubsequent to the beginning of the prior year period.

Average organic dailysales is presented herein because we believe it to be relevant and usefulinformation to our investors since it is used by our management to evaluate theoperating performance of our business, as adjusted to exclude the impact of theCopperfield acquisition, and compare our organic operating performance withthat of our competitors. However, average organic daily sales is not a measureof financial performance under GAAP and it should be considered in addition to,but not as a substitute for, other measures of financial performance reportedin accordance with GAAP, such as net sales. Management utilizes average organicdaily sales as an operating performance measure in conjunction with GAAPmeasures such as net sales.

**ITEM 7.**                Management’sDiscussion and Analysis of Financial Condition and Results of Operations

*You should read the following discussion inconjunction with “Selected Financial Data” and our consolidated financialstatements included elsewhere in this report. Some of the statements in thefollowing discussion are forward-looking statements. See “Risk Factors—Forward-LookingStatements” above.*

**Overview**

As a leading national distributor and direct marketerof over 50,000 specialty MRO products, we sell to approximately 160,000 activecustomer accounts. Our highly diversecustomer base includes facilities maintenance customers, professionalcontractors and specialty distributors. Our customers range in size fromindividual contractors and independent hardware stores to apartment managementcompanies and national purchasing groups. No single customer accounted for morethan 4% of our sales during 2005.

The MRO distribution industry is approximately$300 billion in size, and encompasses the supply of a wide range ofplumbing, electrical, hardware, security hardware, HVAC and other products. Ourindustry is composed of small, local, regional and national competitors. Withinour industry, we focus on serving customers in three principal end-markets:facilities maintenance, professional contractors and specialty distributors.

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Wemarket and sell our products primarily through nine distinct and targetedbrands. Our multi-brand operating model, which we believe is unique inthe industry, allows us to use a single platform to deliver tailored productsand services to meet the individual needs of each respective customer groupserved. We reach our markets using a variety of sales channels.

**Critical Accounting Policies**

In preparing theconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America, management is required tomake certain estimates, judgments and assumptions. These estimates, judgmentsand assumptions affect the reported amounts of assets and liabilities,including the disclosure of contingent assets and liabilities, at the date ofthe financial statements and the reported amounts of revenues and expenses duringthe periods presented. On an ongoing basis, management evaluates theseestimates and assumptions. Management bases its estimates and assumptions onhistorical experience and on various other factors that are believed to bereasonable at the time the estimates and assumptions are made. Actual resultsmay differ from these estimates and assumptions under different circumstancesor conditions. The significant accounting policies that management believes arethe most critical in order to fully understand and evaluate our financialposition and results of operations include the following policies.

*Revenue Recognition*

While our recognition ofrevenue is predominantly derived from routine transactions and does not involvesignificant judgment, revenue recognition represents an important accountingpolicy for us. We recognize a sale when the product has been shipped and riskof loss has passed to the customer, collection of the resulting receivable isprobable, persuasive evidence of an arrangement exists, and the price is fixedor determinable. Sales are recorded net of estimated discounts, rebates andreturns. A portion of our sales is delivered directly from the supplier to ourcustomers. These direct-shipment sales are recorded on a gross basis, with thecorresponding cost of goods sold, in accordance with the guidance in Emerging IssuesTask Force (“EITF”) No. 99-19, *Reporting Revenues Grossas a Principal versus Net as an Agent*. We provide limited productreturn and protection rights to certain customers. We accrue product returnreserves and warranty obligations. A provision is made for estimated productreturns based on sales volumes and our experience. Actual returns have notvaried materially from amounts provided historically.

*Allowances forDoubtful Accounts*

We maintain allowances fordoubtful accounts for estimated losses resulting from the inability to collectoutstanding amounts from customers. The allowances include specific amounts forthose accounts that are likely to be uncollectible, such as accounts ofcustomers in bankruptcy and general allowances for those accounts thatmanagement currently believes to be collectible but may later becomeuncollectible. Estimates are used to determine the allowances for bad debts andare based on historical collection experience, current economic trends, creditworthiness of customers and changes in customer payment terms. Adjustments tocredit limits are made based upon payment history and our customers’ currentcredit worthiness. If the financial condition of our customers were todeteriorate, allowances may be needed that will increase selling, general andadministrative expenses and decrease accounts receivable. At December 30,2005, the allowance for doubtful accounts totaled $8.2 million.

*Write-Offs forExcess and Obsolete Inventory*

Inventories are valued atthe lower of cost or market. We determine inventory cost using the average costmethod. We adjust inventory for excess and obsolete inventory and for thedifference by which the cost of the inventory exceeds the estimated marketvalue. In order to determine the adjustments, management reviews inventoryquantities on hand, slow movement reports and sales history reports. 

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Managementestimates the required adjustment based on estimated demand for products andmarket conditions. To the extent historical results are not indicative offuture results and if events occur that affect our relationships with suppliersor the salability of our products, additional write-offs may be needed thatwill increase our cost of sales and decrease inventory.

*Goodwill,Intangibles and Other Long-Lived Assets*

Management assesses therecoverability of our goodwill, identifiable intangibles and other long-livedassets whenever events or changes in circumstances indicate that the carryingvalue may not be recoverable. The following factors, if present, may trigger animpairment review: (1) significant underperformance relative to expectedhistorical or projected future operating results; (2) significant negativeindustry or economic trends; (3) a significant increase in competition;and (4) a significant increase in interest rates on debt. If therecoverability of these assets is unlikely because of the existence of one ormore of the above-mentioned factors, an impairment analysis is performedusing a projected discounted cash flow method. Management must make assumptionsregarding estimated future cash flows and other factors to determine the fairvalue of these respective assets. If these estimates or related assumptionschange in the future, we may be required to record an impairment charge.Impairment charges would be included in our statements of operations, and wouldresult in reduced carrying amounts of the related assets in our balance sheets.

*Legal Contingencies*

From time to time, in thecourse of our business, we become involved in legal proceedings. In accordancewith Statement of Financial Accounting Standards (“SFAS”) No. 5, *Accounting for Contingencies,* if it is probable that, as aresult of a pending legal claim, an asset had been impaired or a liability hadbeen incurred at the date of the financial statements and the amount of theloss is estimable, an accrual for the costs to resolve the claim is recorded inaccrued expenses in our balance sheets. Professional fees related to legalclaims are included in selling, general and administrative expenses in ourstatements of operations. Management, with the assistance of outside counsel,determines whether it is probable that a liability from a legal claim has beenincurred and estimates the amount of loss. The analysis is based upon potentialresults, assuming a combination of litigation and settlement strategies. Asdiscussed in Note 11 to our audited consolidated financial statementsincluded in this report, management does not believe that currently pendingproceedings will have a material adverse effect on our consolidated financialposition. It is possible, however, that future results of operations for anyparticular period could be materially affected by changes in our assumptionsrelated to these proceedings.

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**Results of Operations**

Thefollowing table sets forth each of the line items of our statement ofoperations in dollar amounts and as a percentage of net sales for the periodsindicated.

| ** **                                    | ** ** | **Fiscal Year Ended**      | ** ** |
|-----------------------------------------------|------------|--------------------------------------|------------|
| ** **                                    | ** ** | **December 30,**                | ** ** | **December 31,** | ** ** | **December 26,** | ** ** |
| ** **                                    | ** ** | **2005**                             | ** ** | **2004(1)** | ** ** | **2003** | ** ** |
| ** **                                    | ** ** | **$**                                | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                    | ** ** | **(Dollars in thousands)** | ** ** |
| Net sales                                     |       | $ 851,928                       |       | 100.0% |   | $ 743,905 |   | 100.0% |   | $ 640,138 |   | 100.0% |   |
| Cost of sales                                 |       | 526,334                              |       | 61.8% |   | 458,516 |   | 61.6% |   | 395,894 |   | 61.8% |   |
| Gross profit                                  |       | 325,594                              |       | 38.2% |   | 285,389 |   | 38.4% |   | 244,244 |   | 38.2% |   |
| Selling, general  and administrative expenses |       | 229,595                              |       | 27.0% |   | 202,084 |   | 27.2% |   | 171,091 |   | 26.7% |   |
| Depreciation and  amortization                |       | 13,049                               |       | 1.5% |   | 12,600 |   | 1.7% |   | 10,949 |   | 1.7% |   |
| Secondary  offering and IPO Related Expenses  |       | 932                                  |       | 0.1% |   | 9,215 |   | 1.2% |   | — |   | 0.0% |   |
| Special costs and  expenses                   |       | —                               |       | 0.0% |   | — |   | 0.0% |   | 607 |   | 0.1% |   |
| Operating income                              |       | 82,018                               |       | 9.6% |   | 61,490 |   | 8.3% |   | 61,597 |   | 9.6% |   |
| Change in fair  value of interest rate swaps  |       | —                               |       | 0.0% |   | 8,232 |   | 1.1% |   | 5,272 |   | 0.8% |   |
| Loss on  extinguishment of debt               |       | (10,340)                             |       | -1.2% |   | (660) |   | -0.1% |   | (14,893) |   | -2.3% |   |
| Interest expense,  net                        |       | (25,183)                             |       | -3.0% |   | (39,798) |   | -5.3% |   | (40,317) |   | -6.3% |   |
| Other income                                  |       | 639                                  |       | 0.1% |   | 454 |   | 0.1% |   | 40 |   | 0.0% |   |
|                                          |       |                                 |       | 0.0% |   |   |   |   |   |   |   |   |   |
| Income before  income taxes                   |       | 47,134                               |       | 5.5% |   | 29,718 |   | 4.0% |   | 11,699 |   | 1.8% |   |
| Provision for  income taxes                   |       | 18,335                               |       | 2.2% |   | 11,617 |   | 1.6% |   | 4,547 |   | 0.7% |   |
| Net income                                    |       | $  28,799                  |       | 3.4% |   | $  18,101 |   | 2.4% |   | $    7,152 |   | 1.1% |   |

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(1)          Fiscal year endedDecember 2004 was a 53 week year. All other years presented were 52 weekyears.

The following discussionrefers to the term average daily sales and average organic daily sales. Averagedaily sales are defined as sales for a period of time divided by the number ofshipping days in that period of time. Average organic daily sales are definedas sales for a period of time divided by the number of shipping days in thatperiod of time excluding any sales from acquisitions made subsequent to thebeginning of the prior year period. For a reconciliation of average organicdaily sales growth to GAAP-based financial measures, see “Item 6. SelectedFinancial Data—Reconciliation of Average Organic Daily Sales.”

*Fiscal Year Ended December 30,2005 Compared to Fiscal Year Ended December 31, 2004*

*Overview.**  *Net sales for 2005 increased $108.0million, or 14.5%, to a record $851.9 million in the year ended December 2005from $743.9 million in the year ended December 2004. On an average dailysales basis, net sales for 2005 increased 15.9%. The increase of net sales wasas a result of the strong execution of our strategic growth initiatives and theacquisition of Copperfield in July 2005. Average organic daily sales,which exclude $34.3 million in net sales in the second half of the year fromCopperfield, grew 11.2% as we continued to invest in proven growth drivers ineach of our facilities maintenance, professional contractor and specialtydistributor end-markets. Our most significant area of growth was in theprofessional contractor markets that we serve as we effectively deployedmultiple sales channels including field sales, telesales, national accounts anddirect marketing efforts. In 2005, we expanded our outbound telesales force byover 20% and established 11 vendor managed inventory locations at large contractorsacross the country. New product initiatives, which included the sale of largeequipment, such as 

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appliances, HVAC equipmentand water heaters, resulted in a sales increase of 55% in 2005 on theseproducts. The selling of these products, while generally at lower gross marginpercentages, provide an opportunity for us to sell more to our customers andleverage our distribution and delivery systems.

Selling, general and administrative (“SG&A”)expenses in 2005 decreased as a percentage of sales to 27.0% of sales in 2005from 27.2% of sales in 2004 as we continued to obtain leverage on our sales. Operatingincome increased $20.5 million, or 33.4%, over the prior year period to $82.0million in 2005 from $61.5 million in 2004. Adjusted EBITDA increased $12.8million, or 15.3%, to $96.6 million in 2005 from $83.8 million in 2004. AdjustedEBITDA is not a measure of financial performance under GAAP. For areconciliation of EBITDA to GAAP-based financial measures, see “Item 6.Selected Financial Data—Reconciliation of Adjusted EBITDA to Net Income (Loss).”

As a result of our strong sales performance, operatingexpense control, focus on efficiently managing working capital, and netreduction of debt, we generated $38.8 million in cash from operations and continuedto provide improving year-over-year returns on capital.

*NetSales.**  *Netsales increased by $108.0 million, or 14.5%, to $851.9 million in theyear ended December 2005 from $743.9 million in the year ended December2004. During 2005, we had 3 less shipping days than the prior year period. Averagedaily sales were $3.4 million in the year ended December 2005 and$2.9 million in the year ended December 2004, a 15.9% increase. The$108.0 million sales increase included $34.3 million from our Copperfieldacquisition referenced above. The remaining increase was attributable toimproved demand for our products, new sales and growth initiatives and priceincreases.

*GrossProfit.**  *Grossprofit increased by $40.2 million, or 14.1%, to $325.6 million in theyear ended December 2005 from $285.4 million in the year ended December 2004.Gross profit margins decreased to 38.2% for the year ended December 2005from 38.4% for the year ended December 2004. This decrease in our grossprofit margins is primarily related to product mix associated with higher salesof large equipment, such as appliances, HVAC equipment and water heaters, whichgenerally carry lower gross margins.

*Selling,General and Administrative Expenses.**  *SG&A expenses increased by$27.5 million, or 13.6%, to $229.6 million in the year ended December 2005from $202.1 million in the year ended December 2004. IncreasedSG&A expenses were related in part to our Copperfield acquisition, whichaccounted for $8.0 million of the $27.5 million increase and $1.0million in stock related compensation expense. Certain expenses withinSG&A, such as the costs of running our regional distribution centers, procontractor showrooms, delivery expenses and selling expenses fluctuate withsales volume, and these items along with increased investment in new sales andmarketing initiatives accounted for the remainder of the increase. Despite theincrease, SG&A expenses decreased as a percentage of sales to 27.0% ofsales in 2005 from 27.2% of sales in 2004 as we continued to obtain leverage onour sales.

*Depreciationand Amortization.**  *Depreciationand amortization expense increased by $0.4 million, or 3.6%, to$13.0 million in the year ended December 2005 from $12.6 millionin the year ended December 2004. This was primarily due to thedepreciation and amortization associated with our Copperfield acquisition.

*Secondaryoffering and IPO Related Expenses.**  *Weincurred secondary offering related expenses of $0.9 million during the yearended December 2005 as a result of a secondary offering by certain of ourstockholders in August 2005. During 2004, we incurred IPO related expensesof $9.2 million which consisted of $2.9 million for forgiveness of shareholderloans and $6.2 million for one-time bonuses to senior employees.

*OperatingIncome.**  *Asa result of the foregoing, operating income increased by $20.5 million, or33.4%, to $82.0 million in the year ended December 2005 from$61.5 million in the year ended December 2004. Excluding the effectof secondary offering and IPO related expenses, operating income increased by$12.2 million, or 17.3%, over the prior year period.

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*Changein Fair Value of Interest Rate Swaps.**  *Our interest rate swaps wereterminated at the time of our IPO in December 2004. As such, changes infair value of interest rate swaps were zero in the year ended December 2005compared to a gain of $8.2 million in the year ended December 2004. Thesesgains are related to changes in the market value of our interest rate swapinstruments. The non-cash gains were attributable to changes in marketconditions, including but not limited to fluctuations in interest rates,general market volatility, and the remaining tenor of our instruments.

*InterestExpense.**  *Interestexpense decreased by $14.5 million in the year ended December 2005 to$25.4 million from $39.9 million in the year ended December 2004.The net decrease was attributed to lower debt balances associated with theearly extinguishment of $70.0 million of the 11.5% senior subordinated notes ofInterline New Jersey in January 2005 and the pay down of $31.5 million ofour term loan, as well as lower interest expense associated with thetermination of our interest rate swaps and the write-off of deferred financingcosts—all associated with our IPO. This was partially offset by the incurrenceof an additional $50.0 million term loan during 2005, as well as increasedborrowings under our revolving credit facility, to fund the $70.0 millionacquisition of Copperfield.

*Losson Extinguishment of Debt.*   We redeemed $70.0million of the 11.5% senior subordinated notes in January 2005 usingproceeds from our December 2004 IPO. This redemption was made 30 daysafter the closing of our IPO, in accordance with the redemption provision ofthe indenture governing the notes. In connection with the redemption, werecorded a $10.3 million loss on the early extinguishment of debt in the firstquarter of 2005, consisting of an $8.1million redemption premium and $2.3 million write-off of deferred financingcosts. During 2004, in connection with our IPO and amendment of our seniorcredit facility, we recorded an expense of $0.7 million for the earlyextinguishment of debt. This expense resulted from the write-off of the unamortizedloan fees on our former credit facility.

*Provision for Income Taxes.**  *The provision for income taxes was $18.3 million inthe year ended December 2005 compared to a provision of $11.6 million inthe year ended December 2004. The effective tax rate for the year ended December 2005was 38.9% compared to 39.1% for the year ended December 2004. Thisdecrease in the effective tax rate was due primarily to the reduction of $0.4million of our tax reserves to address expected requirements under the mostrecent exposure draft on uncertain tax positions, which is expected to befinalized early in 2006, partially offset by the non-deductible secondaryoffering expenses discussed above.

*Fiscal Year Ended December 31,2004 Compared to Fiscal Year Ended December 26, 2003*

*Overview.**  *Net sales for the year ended December 2004were $743.9 million, an increase of 16.2% over the year ended December 2003.We also experienced market share gains in each of these markets due to thesuccess of the numerous growth initiatives we put in place throughout the year,and due to the Florida Lighting acquisition which we completed in November 2003.Our organic growth initiatives include the expansion of our national accountsprogram, the opening of new contractor showrooms, product line expansion(specifically our appliance and HVAC product lines), and the addition oftelesales and field sales representatives.

Average organic daily sales increased 9.4% for thefull year. Average organic daily sales growth is not a measure of performance underGAAP. For a reconciliation of average organic daily sales growth to GAAP-basedfinancial measures, see “Item 6. Selected Financial Data—Reconciliation ofAverage Organic Daily Sales.”

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The year ended December 2004 also showedimprovement in key profitability metrics. Gross profit margin improved 20 basispoints compared to the year ended December 2003. Excluding one-timeexpenses related to our IPO in December 2004, operating income increased$9.1 million or 14.8% over the prior year period and adjusted EBITDA increasedfrom $72.6 million to $83.8 million or 15.4% over the prior year period.Adjusted EBITDA is not a measure of financial performance under GAAP. For areconciliation of EBITDA to GAAP-based financial measures, see “Item 6.Selected Financial Data—Reconciliation of Adjusted EBITDA to Net Income(Loss).”

*NetSales.**  *Netsales increased by $103.8 million, or 16.2%, to $743.9 million in theyear ended December 2004 from $640.1 million in the year ended December 2003.During 2004, we had 4 more shipping days than the prior year period. Averagedaily sales were $2.9 million in the year ended December 2004 and$2.5 million in the year ended December 2003, a 14.4% increase. The$103.8 million sales increase included $32.3 million from our FloridaLighting acquisition referenced above and $2.7 million in reclassifiedfreight revenues and costs. Prior to July 2003, freight revenue wasrecorded as a reduction of freight costs. During the third quarter of 2003, wereclassified freight revenue from selling, general and administrative expensesto net sales, in order to more properly reflect that these amounts are revenuesearned for our products provided. This reclassification did not have an effecton operating income. However, on a prospective basis, it increases both netsales and selling, general and administrative costs and reduces our operatingmargin percentage. The remaining increase was attributable to improved demandfor our products, new sales and growth initiatives, and price increases.

*GrossProfit.**  *Grossprofit increased by $41.1 million, or 16.8%, to $285.4 million in theyear ended December 2004 from $244.2 million in the year ended December 2003.Gross profit margins increased to 38.4% for the year ended December 2004from 38.2% for the year ended December 2003. This improvement in our grossprofit margins is related to having a full year of higher margin FloridaLighting sales, increased sales in our private label program, and favorablemerchandising offset by higher sales of HVAC equipment and water heaters, whichgenerally carry lower gross margins.

*Selling,General and Administrative Expenses.**  *SG&A expenses increased by$31.0 million, or 18.1%, to $202.1 million in the year ended December 2004from $171.1 million in the year ended December 2003. IncreasedSG&A expenses related to our Florida Lighting acquisition accounted for$11.2 million of the $31.0 million increase, and $2.7 million ofthe increase was attributable to the freight revenue reclassificationpreviously discussed under “Net Sales”. Certain expenses within SG&A, suchas the costs of running distribution centers, delivery expenses and sellingexpenses fluctuate with sales volume, and these items along with increasedinvestment in new sales and marketing initiatives accounted for the remainderof the increase.

*Depreciationand Amortization.**  *Depreciationand amortization expense increased by $1.7 million, or 15.1%, to$12.6 million in the year ended December 2004 from $10.9 millionin the year ended December 2003. This was primarily due to a change inaccounting estimate made in the third quarter of 2003 to change the estimateduseful life of certain acquired customer lists to 17 years from 40 years,and the amortization associated with our Florida Lighting acquisition.

*IPORelated Expenses.**  *IPOrelated expenses incurred in connection with our IPO consist of $2.9 millionfor the forgiveness of shareholder loans and $6.2 million for one-time bonusesto senior employees.

*Special Costs and Expenses.**  *There were no special costs andexpenses during the year ended December 2004 and $0.6 million in theyear ended December 2003. Special costs and expenses in 2003 consisted ofnon-recurring costs incurred in connection with the Barnett Acquisition.

*Operating Income.**  *As a result of the foregoing,operating income decreased by $0.1 million, or 0.2%, to $61.5 millionin the year ended December 2004 from $61.6 million in the year ended December 2003.

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Excluding theeffect of IPO Related Expenses of $9.2 million, operating income increased by$9.1 million, an increase of 14.8% over the prior year period.

*Change in Fair Value ofInterest Rate Swaps.**  *Werecorded a gain of $8.2 million in the year ended December 2004 and$5.3 million in the year ended December 2003 related to changes inthe market value of our interest rate swap instruments. The non-cash gains wereattributable to changes in market conditions, including but not limited tofluctuations in interest rates, general market volatility, and the remainingtenor of our instruments. Our interest rate swaps were terminated at the timeof the IPO.

*Interest Expense.**  *Interest expense decreased by $0.6 millionin the year ended December 2004 to $39.9 million from$40.5 million in the year ended December 2003. This net decrease wasattributable to lower average debt balances, the result of termination of theinterest rate swap agreements, the pay down of $31.3 million of our term loanand the write-off of related deferred financing costs in December 2004.

*Loss on Extinguishment ofDebt.*   In connection with our IPO and amendmentof our senior credit facility, we recorded an expense of $0.7 million for theearly extinguishment of debt. This expense resulted from the write-off of theunamortized loan fees on our former credit facility. As part of our IPO, weredeemed $70.0 million of the 11.5% senior subordinated notes in January 2005.This redemption was made 30 days after the closing of our IPO, in accordancewith the redemption notice and required by the indenture governing the notes. Inconnection with the redemption, we recorded a $10.3 million loss on the earlyextinguishment of debt in the first quarter of 2005.

*Provision for Income Taxes.**  *The provision for income taxes was$11.6 million in the year ended December 2004 compared to a provisionof $4.5 million in the year ended December 2003. The effective taxrate for the year ended December 2004 was 39.1% compared to 39.0% in theyear ended December 2003. The increase in the effective tax rate was dueprimarily to an increase in state income taxes offset by a decrease in foreignincome taxes.

**Liquidityand Capital Resources**

As of December 30,2005, we had approximately $86.4 million of availability under InterlineNew Jersey’s $100.0 million revolving credit facility. Historically, ourcapital requirements have been for debt service obligations, acquisitions, theexpansion and maintenance of our distribution network and upgrades of ourproprietary information systems. We expect this to continue in the foreseeablefuture. Historically, we have funded these requirements through internallygenerated cash flow and funds borrowed under our credit facility. We expect ourcash flow from operations and the loan availability under our credit facilityto be our primary source of funds in the future. Letters of credit, which areissued under the revolving loan facility under our credit facility, are used tosupport payment obligations incurred for our general corporate purposes. As of December 30,2005, we had $10.6 million of letters of credit issued under the creditfacility. Interest on Interline New Jersey’s 11.5% senior subordinated notesdue 2011, or the 11.5% notes, is payable semiannually. With respect toborrowings under our credit facility, we have the option to borrow at anadjusted LIBOR or an alternative base rate. Interest on the credit facility isgenerally payable quarterly, and with respect to any LIBOR borrowings, on thelast day of the interest period applicable to the term of the borrowing.

We are a holding companywhose only asset is the stock of our subsidiaries. We conduct virtually all ofour business operations through Interline New Jersey. Accordingly, our onlymaterial sources of cash are dividends and distributions with respect to ourownership interests in Interline New Jersey that are derived from the earningsand cash flow generated by Interline New Jersey. The debt instruments ofInterline New Jersey, primarily the credit facility and the indenture governingthe terms of the 11.5% notes, contain significant restrictions on the paymentof dividends and distributions to us by Interline New Jersey. In particular,Interline New Jersey’s credit facility prevents it from paying dividends,making distributions to 

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us ormaking investments in us. However, ordinary course distributions for overheadand taxes are permitted, as are annual payments of up to $7.5 million inrespect of our stock option plans and annual payments of up to $40 milliondepending on the pro forma net leverage ratio of the previous quarter. Inaddition, the indenture for the 11.5% notes restricts the ability of InterlineNew Jersey to pay distributions or dividends to us and to make advances to, orinvestments in, us. Dividends, distributions and investments are permitted inan amount generally limited to 50% of the net income of Interline New Jersey,plus an amount equal to the net proceeds from certain equity issuances ifInterline New Jersey is in compliance with a leverage ratio and is not indefault. In addition, there are certain other permitted payments, including anability to make distributions of up to $10 million.

Net cash provided byoperating activities was $38.8 million for the year ended December 2005compared to net cash used in operating activities of $1.4 million in theyear ended December 2004. Net cash provided by operating activities forthe year ended December 2005 was higher than the prior year periodprimarily as a result of our increase in operating income of $20.5 million andchanges in our core working capital partially offset by changes in othercurrent assets and current liabilities. In addition, we had lower cash interestexpense of $17.4 million, resulting from our lower average debt balances, whichwere reduced using proceeds from our IPO, and higher cash taxes of $24.1million, due to higher pretax earnings and the timing of income tax payments.

Net cash used in investingactivities was $81.1 million in the year ended December 2005 comparedto $7.3 million in the year ended December 2004. Net cash used ininvesting activities in the year ended December 2005 were primarilyattributable to capital expenditures made in the ordinary course of businessand costs related to purchases of businesses, consisting of our July 2005$69.5 million acquisition of Copperfield, net of cash acquired, and $3.6 millionrelated to our November 2003 acquisition of Florida Lighting. The paymentsrelated to the acquisition of Florida Lighting include a seller’s note of $2.0million, a deferred payment of $1.0 million and earn out of $0.6 million.

Net cash used in financingactivities totaled $24.1 million for the year ended December 2005compared to net cash provided by financing activities of $76.0 million inthe year ended December 2004. Net cash used in financing activities forthe year ended December 2005 was primarily attributable to our repaymentof $70.0 million of our senior subordinated notes, $8.1 million in relatedredemption premiums, and required amortization payments under our term loanfinancings, partially offset by the incurrence of an additional $50.0 millionterm loan, which was used in our Copperfield acquisition, $2.3 million receivedin January 2005 for the over-allotment shares sold to underwriters, net ofexpenses, in conjunction with our IPO and $1.7 million of proceeds receivedfrom the exercise of stock options.

As of December 30,2005, other than the redemption of $70.0 million of Interline New Jersey’s11.5% senior subordinated notes and the incurrence of an additional $50.0million term loan and incremental revolver borrowings, as described above, ourcontractual obligations and other contractual commitments have not changedmaterially outside the ordinary course of business since December 31,2004.

*The Initial Public Offering and Related Transactions*

In December 2004, wesuccessfully completed our IPO and amended our senior credit facility. A totalof 14,375,000 shares of our common stock were sold, of which 12,667,000 weresold by us and 1,708,000 were sold by our shareholders. We sold 12,500,000shares of our common stock in December 2004 and 167,000 shares in January 2005following the exercise of the underwriters’ over-allotment option. We received$171.8 million in net proceeds including the exercise of the underwriters’over-allotment option, representing $176.9 million of proceeds from the sale ofstock net of underwriting discounts and commissions, less $4.1 million of IPOcosts and $1.1 million of debt issuance costs.

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Immediately prior to theclosing of the IPO, a reincorporation merger occurred and the parent company ofInterline New Jersey became the holding company of the Interline group ofbusinesses. In the reincorporation merger, the holders of the preferred stockof Interline New Jersey received an aggregate of $55.0 million in cash and19,183,321 shares of our common stock and the holders of the common stock ofInterline New Jersey received 0.01218 shares of our common stock per share ofInterline New Jersey common stock, or 66,667 shares of our common stock intotal. In addition, holders of options to purchase shares of the common stockof Interline New Jersey were converted into options to purchase shares of ourcommon stock.

We also used $31.3 millionof the proceeds to partially repay the term loan under our credit facility. Weamended our senior credit facility to allow for the IPO and reduce the interestrate applicable to our term loans. In conjunction with this amendment, weincurred $1.1 million of debt issuance costs. In December 2004, we alsoused $4.6 million of the proceeds to terminate the interest rate swapagreements. In January 2005, we used $70.0 million of the proceeds fromthe IPO transaction to partially redeem our 11.5% senior subordinated notes. Inconnection with the redemption, we paid $8.1 million of premiums for earlyredemption of the senior subordinated notes and recorded a $10.3 million losson the early extinguishment of debt, which included a charge for write-off ofunamortized debt issuance costs in the amount of $2.3 million in January of2005.

*2003 Refinancing Transaction*

During 2003, Interline NewJersey issued $200.0 million aggregate principal amount of 11.5% seniorsubordinated notes due 2011 in May 2003 as part of the RefinancingTransactions as follows. On May 29, 2003, Interline New Jersey enteredinto a new $205.0 million senior secured credit facility which consistedof a $140.0 million term loan facility and a $65.0 million revolvingloan facility. The net proceeds from the offering of the 11.5% notes and therefinancing of Interline New Jersey’s former credit facility with a new creditfacility were used to: (1) repay all outstanding indebtedness underInterline New Jersey’s former credit facility, (2) redeem all of InterlineNew Jersey’s outstanding 16% senior subordinated notes due 2008, (3) payaccrued interest and related redemption premiums on Interline New Jersey’sformer debt and (4) pay transaction fees and expenses related to theoffering and the new credit facility. We refer to these transactionscollectively as the “Refinancing Transactions”. As of December 26, 2003,our total indebtedness was $347.5 million (of which $6.0 million wasoutstanding in the form of letters of credit), and Interline New Jersey’ssenior indebtedness was $144.3 million. On December 19, 2003 weamended our senior credit facility such that with respect to any term loans,the applicable rate was reduced from LIBOR plus 4.5% to LIBOR plus 3.5%.

*Capital Expenditures*

Capital expenditures were$7.9 million in 2005 as compared to $6.8 million in 2004. Capital expendituresas a percentage of sales were 0.9% in year 2005 and 0.9% in 2004.

Acquisition expenditures were$73.2 million in 2005, which consisted of $69.5 million related to ourCopperfield acquisition in July 2005 and $3.6 million related to ourFlorida Lighting acquisition in November 2003, compared to$0.6 million in 2004, which related to our Florida Lighting acquisition.

*Liquidity*

Our principal workingcapital need is for inventory and trade accounts receivable, which havegenerally increased with the growth in our business. Our principal sources ofcash to fund our working capital needs are cash generated from operatingactivities and borrowings under our revolving credit facility.

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*Credit Facility*

InterlineNew Jersey entered into a credit facility on May 29, 2003, which wasamended as of December 19, 2003, and amended again on December 21,2004 in connection with the IPO. Interline New Jersey also amended its creditfacility on July 7, 2005, to permit the incurrence of an additional $50.0million term loan, in connection with the Copperfield acquisition, havingsubstantially the same terms as the existing term loan. On August 8, 2005,Interline New Jersey again amended its credit facility to lower the interestrate spreads applicable to the additional $50.0 million term loan. The amendedcredit facility provides for aggregate commitments of $250.0 million,consisting of (1) a revolving loan facility of $100.0 million, ofwhich a portion not exceeding $20.0 million will be available in the form ofletters of credit, and (2) a term loan facility of $150.0 million. Borrowingsunder the amended term loan facility and revolving loan facility bear interest,at Interline New Jersey’s option, at either adjusted LIBOR or at the alternatebase rate plus a spread. Outstanding letters of credit under the revolving loanfacility are subject to a per annum fee equal to the applicable spread overadjusted LIBOR for revolving loans. The indebtedness under the amended creditfacility is guaranteed by us and by the domestic subsidiaries of Interline NewJersey. The amended term loan facility has a maturity of December 31, 2010,and the revolving loan facility has a maturity of May 31, 2008.

On July 7,2005, we used the proceeds from the additional $50.0 million term loan and$20.0 million of borrowings under the revolving loan facility to fund theCopperfield acquisition. As of December 30, 2005, we had paid down theincremental $20.0 million borrowed for the acquisition and borrowed a net $3.0million on our revolving credit facility to fund normal operating activities.

Duringthe year ended December 2005, we borrowed periodically on our revolvingcredit facility to accommodate our daily working capital needs. The weightedaverage daily outstanding balance during the year ended December 2005 was$8.9 million, with ordinary course borrowings ranging from $0.0 millionto $22.5 million. As of December 30, 2005, Interline New Jersey had$10.6 million of letters of credit issued under the revolving loanfacility and $148.8 million aggregate principal outstanding under the termloan facility.

Webelieve that cash flow from operations and available borrowing capacity underour new credit facility will be adequate to finance our ongoing operationalcash flow needs and debt service obligations for the next twelve months.

**ContractualObligations and Off-Balance Sheet Arrangements**

The following table setsforth our contractual obligations as of December 30, 2005:

| ** **                             | ** ** | ** ** | ** ** | **Less than** | ** ** | **1–3** | ** ** | **4–5** | ** ** | **After 5** | ** ** |
|----------------------------------------|------------|------------|------------|--------------------|------------|--------------|------------|--------------|------------|------------------|------------|
| ** **                             | ** ** | **Total**  | ** ** | **1 year**    | ** ** | **years**    | ** ** | **years**    | ** ** | **years**        | ** ** |
| Long-term debt                         |       | $          | 282,075    |               |       | $            | 1,400      |         |       | $                | 2,800      |   | $ | 147,875 |   | $ | 130,000 |   |
| Revolving credit facility(1)           |       | 3,000      |       |               | 3,000      |         |       | —       |       | —           |       | — |   |
| Operating leases                       |       | 40,405     |       |               | 11,945     |         |       | 16,503       |       | 9,175            |       | 2,782 |   |
| Capital leases                         |       | 1,810      |       |               | 597        |         |       | 687          |       | 526              |       | — |   |
| Non-compete agreement                  |       | 600        |       |               | 200        |         |       | 400          |       | —           |       | — |   |
| Employment agreements                  |       | 4,223      |       |               | 3,222      |         |       | 1,001        |       | —           |       | — |   |
| Total contractual cash  obligations(2) |       | $          | 332,113    |               |       | $            | 20,364     |         |       | $                | 21,391     |   | $ | 157,576 |   | $ | 132,782 |   |

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(1)          Our senior securedcredit facility includes a $100.0 million revolving loan facility. As ofDecember 30, 2005, we had $3.0 million outstanding on this revolvingfacility.

(2)          Trade accounts payableof $69.2 million are excluded from the table but generally payable within 30 to60 days. Accrued interest payable which is currently recorded as a liability isalso excluded from the table. See Item 8 and the accompanying audited financialstatements. 

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As of December 30,2005, except for operating leases or letters of credit, we have no materialoff-balance sheet arrangements.

**Seasonality**

We experience someseasonal fluctuations as sales of our products typically increase in the secondand third fiscal quarters of the year due to increased apartment turnover andrelated maintenance and repairs in the multi-family residential housingsector during these periods. Typically, November, December andJanuary sales are lower across most of our brands because customers maydefer purchases at year-end as their budget limits are met and because of thewinter holiday season between Thanksgiving Day and New Year’s Day. OurCopperfield brand, which we acquired in July 2005, experiencesapproximately 70% of sales between July and December.

**Certifications**

Our Chief ExecutiveOfficer has certified to the New York Stock Exchange that he is not aware ofany violations by the company of NYSE corporate governance listing standards.We have included as exhibits to this Annual Report on Form 10-Kcertificates of our Chief Executive Officer and Chief Financial Officercertifying the quality of our public disclosure.

**ITEM 7A.**        Quantitativeand Qualitative Disclosures About Market Risk

We are aware of the potentially unfavorable effectsinflationary pressures may create through higher asset replacement costs andrelated depreciation, higher interest rates and higher product and materialcosts. In addition, our operating performance is affected by price fluctuationsin stainless steel, copper, aluminum, plastic and other commodities and rawmaterials. We seek to minimize the effects of inflation and changing pricesthrough economies of purchasing and inventory management resulting in costreductions and productivity improvements as well as price increases to maintainreasonable profit margins.

We believe that inflation (which has been moderateover the past few years) did not significantly affect our operating results ormarkets in 2005 or 2004. Our results of operations in 2005 and 2004 werefavorably impacted by increases in the pricing of certain commodity-basedproducts. Such commodity price fluctuations have from time to time createdcyclicality in our financial performance, and could continue to do so in thefuture. In addition, our use of priced catalogs may not allow us to offset suchcost increases quickly, resulting in a decrease in gross margins and profit.

The majority of ourpurchases from foreign-based suppliers are from China and other countries inAsia and are transacted in U.S. dollars.

*DerivativeFinancial Instruments*

Historically, we entered into derivative financialinstruments from time to time, including interest rate exchange agreements, tomanage our exposure to fluctuations in interest rates on our debt. In December 2004,in conjunction with our IPO, we terminated all interest rate exchangeagreements, or swaps. Accordingly, at December 30, 2005, we did not haveany interest rate swap exchange agreements, or swaps. Under our former swapagreements, we paid a fixed rate on the notional amount to a bank and the bankpaid to us a variable rate on the notional amount equal to a base LIBOR rate. Ourderivative activities, all of which are for purposes other than trading, areinitiated within the guidelines of corporate risk-management policies.

We periodically evaluatethe costs and benefits of any changes in our interest rate risk. Based on suchevaluation, we may enter into new interest rate swaps to manage our interest rateexposure.

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*Recent AccountingStandards*

In February 2006, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 155, *Accountingfor Certain Hybrid Financial Instrument—an amendment of FASB StatementsNo. 133 and 140*, which resolves issues addressed in SFASNo. 133, *Accounting for Derivative Instruments andHedging Activities*, Implementation Issue No. D1, *Application of Statement 133 to Beneficial Interests in SecuritizedFinancial Assets*. SFAS No. 155, among other things, permits thefair value remeasurement of any hybrid financial instrument that contains anembedded derivative that otherwise would require bifurcation; clarifies whichinterest-only strips and principal-only strips are not subject to therequirements of SFAS No. 133; and establishes a requirement to evaluateinterests in securitized financial assets to identify interests that arefreestanding derivatives or that are hybrid financial instruments that containan embedded derivative requiring bifurcation. SFAS No. 155 is effective forall financial instruments acquired or issued in a fiscal year beginning afterSeptember 15, 2006. We are currently assessing the impact of SFASNo. 155 will have on our results of operations and financial position.

In December 2004,the FASB issued SFAS No. 123R (revised 2004), *Share-BasedPayment*, which is a revision of SFAS No. 123, *Accounting for Stock-Based Compensation*.  SFASNo. 123R requires all share-based payments to employees, including grantsof employee stock options, to be recognized in the income statement based ontheir fair values. This new standard was to be effective for public companiesin the first interim or annual reporting period beginning after June 15,2005. In April 2005, the Securities and Exchange Commission (“SEC”) adopteda new rule, which changed the compliance date of SFAS No. 123R to thefirst interim or annual reporting period of the first fiscal year beginningafter June 15, 2005. Since our 2005 fiscal year end is December 30,this new rule will not change our scheduled adoption date of December 31,2005, the first day of our 2006 fiscal year. SFAS No. 123R permits publiccompanies to adopt its requirements using one of two methods:

1.                A “modifiedprospective” method in which compensation cost is recognized beginning with theeffective date (a) based on the requirements of SFAS No. 123R for allshare-based payments granted after the effective date and (b) based on therequirements of SFAS No. 123 for all awards granted to employees prior tothe effective date of SFAS No. 123R that remain unvested on the effectivedate.

2.                A “modifiedretrospective” method which includes the requirements of the modifiedprospective method described above, but also permits entities to restate basedon the amounts previously recognized under SFAS No. 123 for purposes ofpro forma disclosures either (a) all prior periods presented or (b) priorinterim periods of the year of adoption.

We plan to use the “modified prospective” method uponadopting the requirements of SFAS 123R. We continue to evaluate technicalimplementation issues relating to the adoption of SFAS No. 123R, includingthe selection and use of an appropriate valuation model.

We have not yet determined the impact the adoption ofSFAS No. 123R will have on our results of operations for future issuancesof share-based payments. The adoption of SFAS No. 123R is expected toresult in compensation expense that will reduce net earnings. The amount ofreduction in net earnings will depend on a number of variables, including, thenumber of options granted, the vesting periods of options granted, our stockprice and volatility at the date of grant, and employee exercise behaviors. Asof December 30, 2005, 2,272,495 stock options are outstanding, of which2,237,740 are vested and 34,755 are not vested. Accordingly, we have determinedthat the adoption of SFAS No. 123R will not have a material effect on ourresults of operations associated with these previously issued options. Had weadopted SFAS No. 123R in prior periods, the impact of that standard wouldhave approximated the impact of SFAS No. 123 as described in thedisclosure of pro forma net income and net income (loss) applicable to commonshareholders in “Summary of Significant Accounting Policies” in theaccompanying notes to the audited consolidated financial statements.

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In March 2004, the FASB issued Interpretation(“FIN”) No. 46(R)-5, *Implicit VariableInterests under FASB Interpretation No. 46 (revised December 2003),Consolidation of Variable Interest Entities.* FIN No. 46 (R)-5is effective for the first reporting period beginning after March 3, 2005;however, earlier application is permitted for periods for which financialstatements have not yet been issued. We have evaluated the impact of FIN No. 46(R)-5and determined that the impact is immaterial to the consolidated financialstatements.

In November 2004, the FASB issued SFASNo. 151, *Amendment of ARB No. 43,Chapter 4*. This statement amends the guidance in Accounting ResearchBulletin No. 43, Chapter 4, *InventoryPricing*, to clarify the accounting for abnormal amounts of idlefacility expense, freight, handling costs, and wasted material (spoilage). Thisstatement requires that those items be recognized as current-period charges. Inaddition, this statement requires that allocation of fixed production overheadto the costs of conversion be based on the normal capacity of the production facilities.SFAS No. 151 is effective for inventory costs incurred during fiscal yearsbeginning after June 15, 2005. We have evaluated the impact of SFASNo. 151 and determined that the impact will be immaterial to theconsolidated financial statements.

In March 2005, the FASB issued FIN No. 47, *Accounting for Conditional Asset RetirementObligations*. This interpretation states that the term “conditionalasset retirement obligation” as used in paragraph A23 of SFAS No. 143, *Accounting for Asset Retirement Obligations*, refers to alegal obligation to perform an asset retirement in which the timing and (or)method of settlement are conditional on a future event that may or may not bewithin the control of the entity. The obligation to perform the asset retirementobligation is unconditional even though uncertainty exists about the timing and(or) method of settlement. The effective date for adopting this interpretationis no later than the end of fiscal years ending after December 15, 2005.Our financial condition, results of operations and cash flows were not impactedby the adoption of FIN No. 47 in 2005.

In May 2005, the FASBissued Statement No. 154, *Accounting Changes and Error Corrections—a replacement of APB OpinionNo. 20 and FASB Statement No. 3*. SFAS No. 154replaces APB Opinion No. 20, *Accounting Changes*,and SFAS No. 3, *Reporting AccountingChanges in Interim Financial Statements—an amendment of APB Opinion No. 28*,and changes the requirements for the accounting for and reporting of a changein accounting principle. SFAS No. 154 requires retrospectiveapplication to prior periods’ financial statements of changes in accountingprinciple, unless it is impracticable to do so, in which case otheralternatives are required. SFAS No. 154 is effective for accountingchanges and corrections of errors made in fiscal years beginning afterDecember 15, 2005, or for our fiscal 2006 year end. We have evaluatedthe requirements of SFAS No. 154 and have determined that there is noimpact on the consolidated financial statements.

**ITEM 8.**                FinancialStatements and Supplementary Data

Our consolidated financialstatements are provided in part IV, Item 15 of this filing.

**ITEM 9.**                Changesin and Disagreements with Accountants on Accounting and Financial Disclosure

None.

**ITEM 9A.**        Controlsand Procedures

*Evaluation ofDisclosure Controls and Procedures*

Our management, with theparticipation of our Chief Executive Officer and Chief Financial Officer (ourprincipal executive officer and principal financial officer), evaluated theeffectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act) as of December 30, 2005.Based on this evaluation, our Chief Executive Officer and Chief Financial 

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Officerconcluded that, as of December 30, 2005, our disclosure controls andprocedures were (1) designed to ensure that material information relatingto us, including our consolidated subsidiaries, is made known to our ChiefExecutive Officer and Chief Financial Officer by others within those entities,particularly during the period in which this report was being prepared and (2) effective,in that they provide reasonable assurance that information required to bedisclosed by us in the reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms.

*Internal Controlover Financial Reporting*

Management’s report oninternal control over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) is included on page F-1of this Annual Report on Form 10-K. The report of our independentregistered public accounting firm related to management’s assessment of theeffectiveness of internal control over financial reporting is included on page F-2of this Annual Report on Form 10-K.

*Changes in InternalControl over Financial Reporting*

No change in our internalcontrol over financial reporting occurred during the quarter ended December 30,2005 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

*Limitations on theEffectiveness of Controls*

Our management, includingour Chief Executive Officer and Chief Financial Officer, does not expect thatour disclosure controls and procedures or our internal control over financialreporting will prevent all error and all fraud. A control system, no matter howwell conceived and operated, can provide only reasonable assurance that theobjectives of a control system are met. Further, any control system reflectslimitations on resources, and the benefits of a control system must beconsidered relative to its costs. Because of the inherent limitations in allcontrol systems, no evaluation of controls can provide absolute assurance thatall control issues and instances of fraud, if any, have been detected. Thedesign of a control system is also based upon certain assumptions about thelikelihood of future events, and there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions.Over time, controls may become inadequate because of changes in conditions ordeterioration in the degree of compliance with policies or procedures. Becauseof the inherent limitations in a cost-effective control system, misstatementsdue to error or fraud may occur and may not be detected. Our disclosurecontrols are designed to provide reasonable assurance of achieving theirobjectives.

**ITEM 9B.**    OtherInformation

None.

**PART III**

**ITEM 10.**      Directorsand Executive Officers of the Registrant

The information requiredby this item is incorporated by reference from our definitive proxy statement tobe filed not later than 120 days after the end of the fiscal year covered bythis Annual Report on Form 10-K pursuant to Regulation 14A.

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**ITEM 11.**         ExecutiveCompensation

The information requiredby this item is incorporated by reference from our definitive proxy statementto be filed not later than 120 days after the end of the fiscal year covered bythis Annual Report on Form 10-K pursuant to Regulation 14A.

**ITEM 12.**         SecurityOwnership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information requiredby this item is incorporated by reference from our definitive proxy statementto be filed not later than 120 days after the end of the fiscal year covered bythis Annual Report on Form 10-K pursuant to Regulation 14A.

**ITEM 13.**         CertainRelationships and Related Transactions

The information requiredby this item is incorporated by reference from our definitive proxy statementto be filed not later than 120 days after the end of the fiscal year covered bythis Annual Report on Form 10-K pursuant to Regulation 14A.

**ITEM 14.**         PrincipalAccountants Fees and Services

The information required by this item is incorporatedby reference from our definitive proxy statement to be filed not later than 120days after the end of the fiscal year covered by this Annual Report on Form 10-Kpursuant to Regulation 14A.

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**PART IV**

**ITEM15.**         Exhibits and FinancialStatement Schedules
|        | (a)    | Documents filed as part  of the report. |                                                                   |
|--------|--------|-----------------------------------------|------------------------------------------------------------------------|
|   |   | (1)                                     | Consolidated Financial  Statements                                     |   |
|        |   |                                    | Management’s  Report on Internal Control over Financial Reporting | F-1 |
|   |   |                                    | Reports of  Independent Registered Public Accounting Firm              | F-2 |
|   |   |                                    | Consolidated  Balance Sheets                                           | F-5 |
|   |   |                                    | Consolidated  Statements of Operations                                 | F-6 |
|   |   |                                    | Consolidated  Statements of Stockholders’ Equity (Deficit)        | F-7 |
|   |   |                                    | Consolidated  Statements of Cash Flows                                 | F-8 |
|   |   |                                    | Notes  to Consolidated Financial Statements                            | F-10 to F-29 |
|   |   | (2)                                     | Exhibits                                                               |   |
|   |   |                                    | See Exhibit Index beginning on page 45                       |   |

 

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**ITEM 16.**         Signatures

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized. 

|        | **INTERLINE BRANDS, INC.** |
|--------|----------------------------|
|   |                       | /s/ MICHAEL J. GREBE |
|   |                       | Michael J. Grebe |
|   |                       | *President and Chief Executive Officer* |

 

Date: March 14, 2006

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed by the following persons in the capacities indicated and on the 14thday of March, 2006.

| /s/ ERNEST K. JACQUET     |   |                                             |
|---------------------------|--------|--------------------------------------------------|
| Ernest K. Jacquet         |   | Chairman of the Board and Director               |
| /s/ MICHAEL J. GREBE      |   |                                             |
| Michael J. Grebe          |   | President, Chief Executive Officer  and Director |
|                      |   | (Principal Executive Officer)                    |
| /s/ THOMAS J. TOSSAVAINEN |   |                                             |
| Thomas J.  Tossavainen    |   | Chief Financial Officer                          |
|                      |   | (Principal Accounting Officer and                |
|                      |   | Principal Financial Officer)                     |
| /s/ BARRY J. GOLDSTEIN    |   |                                             |
| Barry J.  Goldstein       |   | Director                                         |
| /s/ JOHN J. GAVIN         |   |                                             |
| John J. Gavin             |   | Director                                         |
| /s/ DREW T. SAWYER        |   |                                             |
| Drew T. Sawyer            |   | Director                                         |
| /s/ MICHAEL E. DEDOMENICO |   |                                             |
| Michael E.  DeDomenico    |   | Director                                         |
| /s/ CHARLES W. SANTORO    |   |                                             |
| Charles W.  Santoro       |   | Director                                         |
| /s/ GIDEON ARGOV          |   |                                             |
| Gideon Argov              |   | Director                                         |

 

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**EXHIBIT INDEX**

| 1.1 |   | Underwriting Agreement dated as of August 3,  2005 among Interline Brands, Inc., the several selling stockholders named on  Schedule A thereto and the several underwriters named on Schedule B  thereto, for whom Credit Suisse First Boston LLC and Lehman Brothers, Inc.  acted as representatives (incorporated by reference to exhibit 1.1 to  Interline Brand, Inc.’s Amendment No. 1 to Registration Statement on  Form S-1 filed on July 22, 2005 (No. 333-126515)). |
|-----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1 |   | Agreement and Plan of  Merger dated December 21, 2004 (incorporated by reference to  Exhibit 2.1 to Interline Brands, Inc.’s Annual Report on  Form 10-K for the fiscal year ended December 31, 2004).                                                                                                                                                                                                                                                                       |
| 2.2 |   | Stock Purchase and Sale  Agreement, dated as of July 7, 2005, by and among Copperfield, the  shareholders listed therein and Interline Opco (incorporated by reference to  Exhibit 10.1 to Interline Brands, Inc.’s Current Report on  Form 8-K filed on July 13, 2005).                                                                                                                                                                                                     |
| 3.1 |   | Amended and Restated  Certificate of Incorporation of Interline Brands, Inc. (incorporated by  reference to Exhibit 3.1 to Interline Brands, Inc.’s Annual Report  on Form 10-K for the fiscal year ended December 31, 2004).                                                                                                                                                                                                                                                |
| 3.2 |   | Amended and Restated  By-Laws of Interline Brands, Inc. (incorporated by reference to  Exhibit 3.2 to Interline Brands, Inc.’s Annual Report on  Form 10-K for the fiscal year ended December 31, 2004).                                                                                                                                                                                                                                                                     |
| 4.1 |   | Indenture, dated as of  May 23, 2003, among Interline Opco, the Subsidiary Guarantors thereto  and The Bank of New York, as Trustee (incorporated by reference to  Exhibit 4.1 to Interline Brands, Inc.’s Amendment No. 5 to  Form S-1 Registration Statement filed on December 14, 2004  (No. 333-116482)).                                                                                                                                                      |
| 4.2 |   | Credit Agreement, dated  as of May 29, 2003, among Interline Opco, the Lender Parties thereto,  Credit Suisse First Boston, as Administrative Agent, and JPMorgan Chase Bank,  as Syndication Agent (incorporated by reference to Exhibit 10.1 to  Interline Brands, Inc.’s Amendment No. 5 to Form S-1  Registration Statement filed on December 14, 2004 (No. 333-116482)).                                                                                      |
| 4.3 |   | Amendment No. 1,  dated as of December 19, 2003, to the Credit Agreement dated as of  May 29, 2003, among Interline Opco, and the lenders party thereto  (incorporated by reference to Exhibit 10.1 to Interline Brands, Inc.’s  Amendment No. 5 to Form S-1 Registration Statement filed on  December 14, 2004 (No. 333-116482)).                                                                                                                       |
| 4.4 |   | Amendment No. 2,  dated as of December 21, 2004, to the Credit Agreement dated as of  May 29, 2003, among Interline Opco and the lenders party thereto, and  the related Amendment and Restatement Agreement dated as of December 21,  2004, among Interline Opco and the lenders party thereto (incorporated by  reference to Exhibit 10.6 to Interline Brands, Inc.’s Annual Report  on Form 10-K for the fiscal year ended December 31, 2004).             |
| 4.5 |   | Form of Specimen  Certificate (incorporated by reference to Exhibit 4.2 to Interline  Brands, Inc.’s Amendment No. 5 to Form S-1 Registration  Statement filed on December 14, 2004 (No. 333-116482)).                                                                                                                                                                                                                                                             |
| 4.6 |   | Supplemental Indenture,  dated as of July 8, 2005, among Interline Opco, CCS  Enterprises, Inc., Copperfield Chimney Supply, Inc., Riverton  Machine & Foundry, Inc., the other subsidiary guarantors  thereto and the Bank of New York, as trustee (incorporated by reference to  Exhibit 10.52 of Interline Brands, Inc.’s Amendment No. 1 to  Form S-1 filed on July 22, 2005 (No. 333-126515)).                                        |

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| 4.7  |   | Incremental Facility  Amendment, dated as of July 7, 2005, among Interline Brands, Inc.,  Interline Opco, the lenders named therein and Credit  Suisse as administrative agent (incorporated by reference to  Exhibit 10.53 of Interline Brands, Inc.’s Amendment No. 1 to  Form S-1 filed on July 22, 2005 (No. 333-126515)).                                                           |
|------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.8  |   | Amendment No. 1,  dated as of August 8, 2005, to the Amended and Restated Credit Agreement  dated as of December 21, 2004, among Interline Brands, Interline Opco,  the lenders party thereto and Credit Suisse, Cayman Islands Branch, as  Administrative Agent, (incorporated by reference to exhibit 10.1 to the Interline  Brands, Inc.’s Quarterly Report on Form 10-Q filed on August 11,  2005). |
| 10.1 |   | Amended and Restated  Shareholders Agreement, dated as of September 29, 2000, among Interline  Opco and certain of its shareholders (incorporated by reference to Exhibit 9.1  to Interline Brands, Inc.’s Amendment No. 5 to Form S-1  Registration Statement filed on December 14, 2004 (No. 333-116482)).                                                                                  |
| 10.2 |   | Amendment No. 1 to  Amended and Restated Shareholders’ Agreement, dated as of March 15,  2004, among Interline Opco and certain of its shareholders (incorporated by  reference to Exhibit 9.2 to Interline Brands, Inc.’s Amendment  No. 5 to Form S-1 Registration Statement filed on  December 14, 2004 (No. 333-116482)).                                                       |
| 10.3 |   | Amendment No. 2 to  Amended and Restated Shareholders’ Agreement dated as of December 21,  2004 among Interline Opco and certain of its shareholders (incorporated by  reference to Exhibit 10.3 to Interline Brands, Inc.’s Annual Report  on Form 10-K for the fiscal year ended December 31, 2004).                                                                                        |
| 10.4 |   | Guarantee and Collateral  Agreement, dated as of May 29, 2003, among Interline Opco, the  Subsidiaries of Interline Brands, Inc. named therein and Credit Suisse  First Boston LLC (incorporated by reference to Exhibit 10.3 to Interline  Brands, Inc.’s Amendment No. 5 to Form S-1 Registration  Statement filed on December 14, 2004 (No. 333-116482)).                             |
| 10.5 |   | Incentive Stock Option  Agreement, dated as of May 16, 2000, by and between Wilmar  Industries, Inc. and William E. Sanford (incorporated by reference to  Exhibit 10.5 to Interline Brands, Inc.’s Amendment No. 5 to  Form S-1 Registration Statement filed on December 14, 2004  (No. 333-116482)).                                                                                   |
| 10.6 |   | Incentive Stock Option  Agreement of Michael J. Grebe, dated as of May 16, 2000 (incorporated by  reference to Exhibit 10.11 to Interline Brands, Inc.’s Amendment  No. 5 to Form S-1 Registration Statement filed on  December 14, 2004 (No. 333-116482)).                                                                                                                                   |
| 10.7 |   | Restricted Stock Award  Agreement under the 2000 Stock Award Plan, dated as of September 29,  2000, between William R. Pray and Wilmar Industries, Inc. (incorporated  by reference to Exhibit 10.23 to Interline Brands, Inc.’s Amendment  No. 5 to Form S-1 Registration Statement filed on  December 14, 2004 (No. 333-116482)).                                                      |
| 10.8 |   | 2000 Stock Award Plan,  as amended and restated July, 2000 (incorporated by reference to  Exhibit 10.24 to Interline Brands, Inc.’s Amendment No. 5 to  Form S-1 Registration Statement filed on December 14, 2004  (No. 333-116482)).                                                                                                                                                             |
| 10.9 |   | Employment Agreement,  dated as of January 7, 2004, by and between Interline Opco and Fred  Bravo (incorporated by reference to Exhibit 10.25 to Interline  Brands, Inc.’s Amendment No. 5 to Form S-1 Registration  Statement filed on December 14, 2004 (No. 333-116482)).                                                                                                                  |

46

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| 10.10 |   | Employment Agreement,  dated as of January 7, 2004, by and between Interline Opco and Pamela L.  Maxwell (incorporated by reference to Exhibit 10.26 to Interline  Brands, Inc.’s Amendment No. 5 to Form S-1 Registration  Statement filed on December 14, 2004 (No. 333-116482)).                          |
|-------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.11 |   | 2004 Equity Incentive  Plan (incorporated by reference to Exhibit 10.27 to Interline  Brands, Inc.’s Amendment No. 5 to Form S-1 Registration  Statement filed on December 14, 2004 (No. 333-116482)).                                                                                                            |
| 10.12 |   | Employment Agreement,  dated as of May 17, 2004, by and between Interline Opco and Laurence  Howard (incorporated by reference to Exhibit 10.28 to Interline Brands, Inc.’s  Amendment No. 5 to Form S-1 Registration Statement filed on  December 14, 2004 (No. 333-116482)).                               |
| 10.13 |   | Employment Agreement,  dated as of June 18, 2004, by and between Interline Brands, Inc.  and Charles Blackmon (incorporated by reference to Exhibit 10.30 to  Interline Brands, Inc.’s Amendment No. 5 to Form S-1  Registration Statement filed on December 14, 2004 (No. 333-116482)).                |
| 10.14 |   | Separation Agreement and  Release of All Claims, dated March 17, 2005, by and between Interline  Brands, Inc. and Charles Blackmon (incorporated by reference to  Exhibit 10.20 to Interline Brands, Inc.’s Annual Report on  Form 10-K for the fiscal year ended December 31, 2004).                             |
| 10.15 |   | Employment Agreement,  dated as of August 13, 2004, by and between Interline Brands, Inc.  and William E. Sanford (incorporated by reference to Exhibit 10.31  to Interline Brands, Inc.’s Amendment No. 5 to Form S-1  Registration Statement filed on December 14, 2004 (No. 333-116482)).       |
| 10.16 |   | Employment Agreement,  dated as of August 13, 2004, by and between Interline Brands, Inc.  and Michael J. Grebe (incorporated by reference to Exhibit 10.32 to  Interline Brands, Inc.’s Amendment No. 5 to Form S-1  Registration Statement filed on December 14, 2004 (No. 333-116482)).         |
| 10.17 |   | Employment Agreement,  dated as of September 23, 2004 by and between Interline  Brands, Inc. and William R. Pray (incorporated by reference to  Exhibit 10.33 to Interline Brands, Inc.’s Amendment No. 5 to  Form S-1 Registration Statement filed on December 14, 2004  (No. 333-116482)).       |
| 10.18 |   | Amendment and Restated  Employment Agreement, dated as of December 15, 2004, by and between  Interline Brands, Inc. and William R. Pray (incorporated by reference to  Exhibit 10.24 to Interline Brands, Inc.’s Annual Report on  Form 10-K for the fiscal year ended December 31, 2004).                        |
| 10.19 |   | Amendment to Employment  Agreement, dated September 27, 2004, by and between Interline  Brands, Inc. and Fred Bravo (incorporated by reference to  Exhibit 10.34 to Interline Brands, Inc.’s Amendment No. 5 to  Form S-1 Registration Statement filed on December 14, 2004  (No. 333-116482)).         |
| 10.20 |   | Amendment to Employment  Agreement, dated September 27, 2004, by and between Interline  Brands, Inc. and Laurence W. Howard (incorporated by reference to  Exhibit 10.35 to Interline Brands, Inc.’s Amendment No. 5 to  Form S-1 Registration Statement filed on December 14, 2004  (No. 333-116482)). |

47

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| 10.21 |   | Amendment to Employment  Agreement, dated as of September 27, 2004, by and between Interline  Brands, Inc. and Pamela L. Maxwell (incorporated by reference to  Exhibit 10.36 to Interline Brands, Inc.’s Amendment No. 5 to  Form S-1 Registration Statement filed on December 14, 2004  (No. 333-116482)).       |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.22 |   | Amendment to Employment Agreement,  dated as of December 2, 2004, by and between Interline Brands, Inc.  and Michael J. Grebe (incorporated by reference to Exhibit 10.37 to  Interline Brands, Inc.’s Amendment No. 5 to Form S-1  Registration Statement filed on December 14, 2004 (No. 333-116482)).           |
| 10.23 |   | Amendment to Employment  Agreement, dated as of December 2, 2004, by and between Interline  Brands, Inc. and William E. Sanford (incorporated by reference to  Exhibit 10.38 to Interline Brands, Inc.’s Amendment No. 5 to  Form S-1 Registration Statement filed on December 14, 2004  (No. 333-116482)).        |
| 10.24 |   | Amendment to Employment  Agreement, dated as of December 2, 2004, by and between Interline  Brands, Inc. and Pamela L. Maxwell (incorporated by reference to Exhibit 10.37  to Interline Brands, Inc.’s Amendment No. 5 to Form S-1  Registration Statement filed on December 14, 2004 (No. 333-116482)).          |
| 10.25 |   | Amendment to Employment  Agreement, dated as of December 2, 2004, by and between Interline  Brands, Inc. and Fred Bravo (incorporated by reference to  Exhibit 10.40 to Interline Brands, Inc.’s Amendment No. 5 to  Form S-1 Registration Statement filed on December 14, 2004  (No. 333-116482)).                |
| 10.26 |   | Management Agreement,  dated May 16, 2000, by and between Wilmar Industries, Inc. and  Parthenon Capital, Inc. (incorporated by reference to Exhibit 10.41  to Interline Brands, Inc.’s Amendment No. 5 to Form S-1  Registration Statement filed on December 14, 2004 (No. 333-116482)).                     |
| 10.27 |   | Amendment to Management  Agreement, dated September 29, 2000, by and between Wilmar  Industries, Inc. and Parthenon Capital, Inc. (incorporated by  reference to Exhibit 10.42 to Interline Brands, Inc.’s Amendment  No. 5 to Form S-1 Registration Statement filed on  December 14, 2004 (No. 333-116482)). |
| 10.28 |   | Employment Agreement,  dated May 12, 2004 between Interline Opco and Thomas J. Tossavainen  (incorporated by reference to Exhibit 10.34 to Interline  Brands, Inc.’s Annual Report on Form 10-K for the fiscal year  ended December 31, 2004).                                                                               |
| 10.29 |   | Amendment to Employment  Agreement, dated November 10, 2004, between Interline Brands, Inc.  and Thomas J. Tossavainen (incorporated by reference to  Exhibit 10.35 to Interline Brands, Inc.’s Annual Report on  Form 10-K for the fiscal year ended December 31, 2004).                                               |
| 10.30 |   | Employment Agreement,  dated July 25, 2005, between Interline Opco and Thomas J. Tossavainen  (incorporated by reference to Exhibit 10.55 of Interline  Brands, Inc.’s Amendment No. 2 to Form S-1 filed on  August 1, 2005 (No. 333-126515)).                                                                          |
| 10.31 |   | Form of Executive  Stock Option Agreement (incorporated by reference to Exhibit 10.43 to  Interline Brands, Inc.’s Amendment No. 5 to Form S-1  Registration Statement filed on December 14, 2004 (No. 333-116482)).                                                                                                    |
| 10.32 |   | Form of Management  Restricted Stock Agreement (incorporated by reference to Exhibit 10.44  to Interline Brands, Inc.’s Amendment No. 5 to Form S-1  Registration Statement filed on December 14, 2004 (No. 333-116482)).                                                                                               |

48

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| 10.33 |   | Form of  Non-Employee Directors Option Agreement (incorporated by reference to  Exhibit 10.45 to Interline Brands, Inc.’s Amendment No. 5 to  Form S-1 Registration Statement filed on December 14, 2004  (No. 333-116482)).                                                            |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.34 |   | Form of  Non-Employee Directors Restricted Stock Agreement (incorporated by reference  to Exhibit 10.46 to Interline Brands, Inc.’s Amendment No. 5  to Form S-1 Registration Statement filed on December 14, 2004  (No. 333-116482)).                                                  |
| 10.35 |   | Amendment, dated  September 9, 2005, to Employment Agreement, dated as of  December 15, 2004, between Interline Opco and William R. Pray  (incorporated by reference to Exhibit 10.56 to Interline  Brands, Inc.’s Quarterly Report on Form 10-Q for the quarter  ended September 30, 2005). |
| 10.36 |   | Form of Deferred Stock  Unit Agreement and Notice of Election for Non-employee Directors (furnished  herewith).                                                                                                                                                                                                                 |
| 11.1  |   | Computation of earnings  per share information included in Note 2 to Consolidated Financial Statements  (furnished herewith).                                                                                                                                                                                                   |
| 21.1  |   | List of Subsidiaries of  Interline Brands, Inc. (furnished herewith).                                                                                                                                                                                                                                                      |
| 23.1  |   | Consent of  Deloitte & Touche LLP (furnished herewith).                                                                                                                                                                                                                                                                |
| 31.1  |   | Certification of the  Chief Executive Officer pursuant to Rule 13a-14 of the Exchange  Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 (furnished herewith).                                                                                                                               |
| 31.2  |   | Certification of the  Chief Financial Officer pursuant to Rule 13a-14 of the Exchange  Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 (furnished herewith).                                                                                                                               |
| 32.1  |   | Certification of the  Chief Executive Officer pursuant to Rule 13a-14(b) of the  Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).                                                                                       |
| 32.2  |   | Certification of the  Chief Financial Officer pursuant to Rule 13a-14(b) of the  Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).                                                                                       |

 

49

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**MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIALREPORTING**

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting, as such term isdefined in Exchange Act Rules 13a-15(f) and 15d-15(f).Under the supervision and with the participation of our management, includingour Chief Executive Officer and Chief Financial Officer, we conducted anevaluation of the effectiveness of our internal control over financialreporting based on the framework in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.As permitted, we have excluded from our evaluation the acquisition of Copperfield,which is included in the consolidated financial statements and which represents2.3% of consolidated total assets as of December 30, 2005 and 4.0% ofconsolidated net sales for the year ended December 30, 2005. Based on ourevaluation, under the Internal Control—Integrated Framework, our managementconcluded that our internal control over financial reporting was effective asof December 30, 2005. Our management’s assessment of the effectiveness ofour internal control over financial reporting as of December 30, 2005 hasbeen audited by Deloitte & Touche LLP, an independent registeredpublic accounting firm, as stated in their attestation report which is includedherein.

F-1

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the Board of Directors and Stockholders ofInterline Brands, Inc.Jacksonville, Florida

We have audited the accompanying consolidated balancesheets of Interline Brands, Inc. and subsidiaries (the “Company”) as of December 30,2005 and December 31, 2004, and the related consolidated statements ofoperations, stockholders’ equity (deficit), and cash flows for each of thethree years in the period ended December 30, 2005. These financial statementsare the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position of InterlineBrands, Inc. and subsidiaries as of December 30, 2005 and December 31,2004, and the results of their operations and their cash flows for each of thethree years in the period ended December 30, 2005, in conformity withaccounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theeffectiveness of the Company’s internal control over financial reporting as of December 30,2005, based on the criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commissionand our report dated March 14, 2006 expressed an unqualified opinion onmanagement’s assessment of the effectiveness of the Company’s internal controlover financial reporting and an unqualified opinion on the effectiveness of theCompany’s internal control over financial reporting.

/s/ Deloitte & Touche,LLP

Certified Public Accountants

Jacksonville, FloridaMarch 14, 2006

F-2

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the Board of Directors and Stockholders ofInterline Brands, Inc.Jacksonville, Florida

We have audited management’s assessment, included inthe accompanying Management’s Report on Internal Control over FinancialReporting, that Interline Brands, Inc. and subsidiaries (the “Company”)maintained effective internal control over financial reporting as of December 30,2005, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.As described in Managements Report on Internal Control over FinancialReporting, management excluded from their assessment the internal control overfinancial reporting at CCS Enterprises, Inc., which was acquired on July 7,2005 and whose financial statements reflect total assets and revenuesconstituting 2.3% and 4.0%, respectively, of the related consolidated financialstatement amounts as of and for the year ended December 30, 2005. Accordingly,our audit did not include the internal control over financial reporting at CCSEnterprises, Inc. The Company’s management is responsible for maintainingeffective internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting. Ourresponsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the Company’s internal control over financialreporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinions.

A company’s internal control over financial reportingis a process designed by, or under the supervision of, the company’s principalexecutive and principal financial officers, or persons performing similarfunctions, and effected by the company’s board of directors, management, andother personnel to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internalcontrol over financial reporting, including the possibility of collusion orimproper management override of controls, material misstatements due to erroror fraud may not be prevented or detected on a timely basis. Also, projectionsof any evaluation of the effectiveness of the internal control over financialreporting to future periods are subject to the risk that the controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that theCompany maintained effective internal control over financial reporting as of December 30,2005, is fairly stated, in all material respects, based on the criteriaestablished in Internal Control—Integrated Framework issued by the Committee ofSponsoring 

F-3

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Organizations of theTreadway Commission. Also in our opinion, the Company maintained, in allmaterial respects, effective internal control over financial reporting as of December 30,2005, based on the criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated financial statements as of and for the yearended December 30, 2005 of the Company and our report dated March 14,2006 expressed an unqualified opinion on those financial statements.

/s/ Deloitte & Touche, LLP

Certified Public Accountants

Jacksonville, FloridaMarch 14, 2006

F-4

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**INTERLINEBRANDS, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSDECEMBER 30, 2005 AND DECEMBER 31, 2004(In thousands, except share and per share data)**

| ** **                                                                                                                                                                | ** ** | **December 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| ASSETS                                                                                                                                                                    |       |                  |       |                  |       |   |   |   |   |
| CURRENT ASSETS:                                                                                                                                                           |       |                  |       |                  |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                                                 |       |                  | $          | 2,958                 |       |   |   | $ | 69,178 |   |   |
| Accounts receivable—trade (net of allowance for  doubtful accounts of $8,150 and $6,929)                                                                             |       |                  | 113,271    |                  |       |   | 98,511 |   |   |
| Accounts receivable—other                                                                                                                                            |       |                  | 12,163     |                  |       |   | 17,828 |   |   |
| Inventory                                                                                                                                                                 |       |                  | 165,282    |                  |       |   | 145,532 |   |   |
| Prepaid expenses and other current assets                                                                                                                                 |       |                  | 5,498      |                  |       |   | 3,204 |   |   |
| Deferred income taxes                                                                                                                                                     |       |                  | 13,945     |                  |       |   | 12,084 |   |   |
| Total current assets                                                                                                                                                      |       |                  | 313,117    |                  |       |   | 346,337 |   |   |
| PROPERTY AND EQUIPMENT, net                                                                                                                                               |       |                  | 29,865     |                  |       |   | 28,767 |   |   |
| GOODWILL                                                                                                                                                                  |       |                  | 249,574    |                  |       |   | 203,848 |   |   |
| OTHER INTANGIBLE ASSETS, net                                                                                                                                              |       |                  | 104,244    |                  |       |   | 85,361 |   |   |
| OTHER ASSETS                                                                                                                                                              |       |                  | 8,969      |                  |       |   | 9,067 |   |   |
| **TOTAL ASSETS**                                                                                                                                                          |       |                  | $          | 705,769               |       |   |   | $ | 673,380 |   |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY  CURRENT LIABILITIES:                                                                                                          |       |                  |       |                  |       |   |   |   |   |
| Revolver                                                                                                                                                                  |       |                  | $          | 3,000                 |       |   |   | $ | — |   |   |
| Current portion of long-term debt                                                                                                                                         |       |                  | 1,400      |                  |       |   | 1,000 |   |   |
| Accounts payable                                                                                                                                                          |       |                  | 69,182     |                  |       |   | 53,260 |   |   |
| Accrued expenses and other current liabilities                                                                                                                            |       |                  | 22,026     |                  |       |   | 22,180 |   |   |
| Accrued interest payable                                                                                                                                                  |       |                  | 2,152      |                  |       |   | 3,042 |   |   |
| Accrued merger expenses                                                                                                                                                   |       |                  | 5,408      |                  |       |   | 6,131 |   |   |
| Accrued income taxes payable                                                                                                                                              |       |                  | 1,780      |                  |       |   | 7,372 |   |   |
| Total current liabilities                                                                                                                                                 |       |                  | 104,948    |                  |       |   | 92,985 |   |   |
| LONG TERM LIABILITIES:                                                                                                                                                    |       |                  |       |                  |       |   |   |   |   |
| Deferred income taxes                                                                                                                                                     |       |                  | 34,646     |                  |       |   | 25,221 |   |   |
| Long-term debt, net of current portion                                                                                                                                    |       |                  | 280,675    |                  |       |   | 302,275 |   |   |
| Capital lease—long term                                                                                                                                              |       |                  | 958        |                  |       |   | — |   |   |
| TOTAL LIABILITIES                                                                                                                                                         |       |                  | 421,227    |                  |       |   | 420,481 |   |   |
| COMMITMENTS AND  CONTINGENCIES (Note 11)                                                                                                                                  |       |                  |       |                  |       |   |   |   |   |
| SENIOR PREFERRED STOCK, $0.01 par value, 20,000,000  shares authorized, no shares outstanding as of December 30, 2005 and  December 31, 2004                    |       |                  | —     |                  |       |   | — |   |   |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                |       |                  |       |                  |       |   |   |   |   |
| Common stock; $0.01 par value, 100,000,000  authorized; 32,220,669 issued and outstanding as of December 30, 2005  and 32,102,820 as of December 31, 2004  |       |                  | 322        |                  |       |   | 321 |   |   |
| Additional paid-in capital                                                                                                                                                |       |                  | 558,183    |                  |       |   | 556,346 |   |   |
| Accumulated deficit                                                                                                                                                       |       |                  | (273,037   | )                     |       |   | (301,836 | ) |   |
| Deferred compensation                                                                                                                                                     |       |                  | (1,918     | )                     |       |   | (2,787 | ) |   |
| Accumulated other comprehensive income                                                                                                                                    |       |                  | 992        |                  |       |   | 855 |   |   |
| TOTAL STOCKHOLDERS’ EQUITY                                                                                                                                           |       |                  | 284,542    |                  |       |   | 252,899 |   |   |
| **TOTAL  LIABILITIES & STOCKHOLDERS’ EQUITY**                                                                                                               |       |                  | $          | 705,769               |       |   |   | $ | 673,380 |   |   |

 

See accompanying notes to consolidated financial statements.

F-5

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**INTERLINEBRANDS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONSYEARS ENDED DECEMBER 30, 2005, DECEMBER 31, 2004 AND DECEMBER 26, 2003(In thousands, except share and per share data)**

| ** **                                           | ** ** | **2005**   | ** ** | **2004**  | ** ** | **2003** | ** ** |
|------------------------------------------------------|------------|------------|------------|-----------|------------|----------|------------|
| NET SALES                                            |       | $          | 851,928    |      | $          | 743,905  |       | $ | 640,138 |   |
| COST OF SALES                                        |       | 526,334    |       | 458,516   |       | 395,894  |       |
| Gross profit                                         |       | 325,594    |       | 285,389   |       | 244,244  |       |
| OPERATING EXPENSES :                                 |       |       |       |      |       |     |       |
| Selling, general and administrative expenses         |       | 229,595    |       | 202,084   |       | 171,091  |       |
| Depreciation and amortization                        |       | 13,049     |       | 12,600    |       | 10,949   |       |
| Secondary offering and IPO related expenses          |       | 932        |       | 9,215     |       | —   |       |
| Special costs and expenses                           |       | —     |       | —    |       | 607      |       |
| Total operating expense                              |       | 243,576    |       | 223,899   |       | 182,647  |       |
| OPERATING INCOME                                     |       | 82,018     |       | 61,490    |       | 61,597   |       |
| CHANGE IN FAIR  VALUE OF INTEREST RATE SWAPS         |       | —     |       | 8,232     |       | 5,272    |       |
| LOSS ON  EXTINGUISHMENT OF DEBT                      |       | (10,340    | )          | (660      | )          | (14,893  | )          |
| INTEREST EXPENSE                                     |       | (25,419    | )          | (39,933   | )          | (40,516  | )          |
| INTEREST INCOME                                      |       | 236        |       | 135       |       | 199      |       |
| OTHER INCOME                                         |       | 639        |       | 454       |       | 40       |       |
| Income before income taxes                           |       | 47,134     |       | 29,718    |       | 11,699   |       |
| PROVISION FOR  INCOME TAXES                          |       | 18,335     |       | 11,617    |       | 4,547    |       |
| NET INCOME                                           |       | 28,799     |       | 18,101    |       | 7,152    |       |
| PREFERRED STOCK  DIVIDENDS                           |       | —     |       | (54,389   | )          | (48,623  | )          |
| NET INCOME (LOSS)  APPLICABLE TO COMMON STOCKHOLDERS |       | $          | 28,799     |      | $          | (36,288  | )          | $ | (41,471 | ) |
| INCOME (LOSS) PER  COMMON SHARE - BASIC              |       | $          | 0.90       |      | $          | (25.21   | )          | $ | (632.74 | ) |
| INCOME (LOSS) PER  COMMON SHARE - DILUTED            |       | $          | 0.89       |      | $          | (25.21   | )          | $ | (632.74 | ) |
| WEIGHTED AVERAGE  SHARES OUTSTANDING - BASIC    |       | 32,004,007 |       | 1,439,322 |       | 65,540   |       |
| WEIGHTED AVERAGE SHARES  OUTSTANDING - DILUTED       |       | 32,443,772 |       | 1,439,322 |       | 65,540   |       |

 

See accompanying notes to consolidated financial statements.

F-6

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**INTERLINEBRANDS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)YEARS ENDED DECEMBER 30, 2005, DECEMBER 31, 2004 AND DECEMBER 26, 2003(In thousands except share data)**

| ** **                                     | ** ** | ** **            | ** ** | ** **       | ** ** | ** **       | ** ** | ** **      | ** ** | ** **   | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | **Total**              | ** ** |
|------------------------------------------------|------------|-----------------------|------------|------------------|------------|------------------|------------|-----------------|------------|--------------|------------|-------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                     | ** ** | ** **            | ** ** | ** **       | ** ** | **Additional**   | ** ** | ** **      | ** ** | ** **   | ** ** | ** **        | ** ** | **Other**              | ** ** | **Stockholders’** | ** ** |
| ** **                                     | ** ** | **Common Stock** | ** ** | **Paid In** | ** ** | **(Accumulated** | ** ** | **Stockholder** | ** ** | **Deferred** | ** ** | **Comprehensive** | ** ** | **Equity**             | ** ** |
| ** **                                     | ** ** | **Shares**            | ** ** | **Amount**       | ** ** | **Capital**      | ** ** | **Deficit)**    | ** ** | **Loans**    | ** ** | **Compensation**  | ** ** | **Income (Loss)** | ** ** | **(Deficit)**          | ** ** |
| BALANCE, DECEMBER  27, 2002                    |       | 65,592                |       | 1                |       |             | 1,993      |            |       |         | (224,077   | )                 |       |                   | (1,440     | )                      |       |   | — |   |   |   | (160 | ) |   |   | (223,683 | ) |   |
| Preferred stock  dividends                     |       |                  |       |             |       |             |       |            |       |         | (48,623    | )                 |       |                   |       |                   |       |   |   |   |   |   |   |   |   |   | (48,623 | ) |   |
| Retirement of  common stock               |       | (617                  | )          |             |       |             |       |            |       |         |       |              |       |                   |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest accrual  on stockholder loans         |       |                  |       |             |       |             |       |            |       |         |       |              |       |                   | (105       | )                      |       |   |   |   |   |   |   |   |   |   | (105 | ) |   |
| Comprehensive income:                          |       |                  |       |             |       |             |       |            |       |         |       |              |       |                   |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                     |       |                  |       |             |       |             |       |            |       |         | 7,152      |              |       |                   |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Foreign currency  translation             |       |                  |       |             |       |             |       |            |       |         |       |              |       |                   |       |                   |       |   |   |   |   |   | 723 |   |   |   |   |   |   |
| Total  comprehensive income                    |       |                  |       |             |       |             |       |            |       |         |       |              |       |                   |       |                   |       |   |   |   |   |   |   |   |   |   | 7,875 |   |   |
| BALANCE, DECEMBER  26, 2003                    |       | 64,975                |       | 1                |       |             | 1,993      |            |       |         | (265,548   | )                 |       |                   | (1,545     | )                      |       |   | — |   |   |   | 563 |   |   |   | (264,536 | ) |   |
| Preferred stock  dividends                     |       |                  |       |             |       |             |       |            |       |         | (54,389    | )                 |       |                   |       |                   |       |   |   |   |   |   |   |   |   |   | (54,389 | ) |   |
| Issuance of  restricted stock                  |       | 186,614               |       | 2                |       |             | 2,785      |            |       |         |       |              |       |                   |       |                   |       |   | (2,787 | ) |   |   |   |   |   |   | — |   |   |
| Interest accrual  on stockholder loans         |       |                  |       |             |       |             |       |            |       |         |       |              |       |                   | (30        | )                      |       |   |   |   |   |   |   |   |   |   | (30 | ) |   |
| Foregiveness of  stockholder loans             |       |                  |       |             |       |             |       |            |       |         |       |              |       |                   | 1,575      |                   |       |   |   |   |   |   |   |   |   |   | 1,575 |   |   |
| Conversion of  preferred stock to common stock |       | 19,183,321            |       | 191              |       |             | 378,810    |            |       |         |       |              |       |                   |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Exercise of  warrants                          |       | 910                   |       |             |       |             |       |            |       |         |       |              |       |                   |       |                   |       |   |   |   |   |   |   |   |   |   | 379,001 |   |   |
| Proceeds from  issuance of common stock, net   |       | 12,667,000            |       | 127              |       |             | 172,758    |            |       |         |       |              |       |                   |       |                   |       |   |   |   |   |   |   |   |   |   | 172,885 |   |   |
| Comprehensive income:                          |       |                  |       |             |       |             |       |            |       |         |       |              |       |                   |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                     |       |                  |       |             |       |             |       |            |       |         | 18,101     |              |       |                   |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Foreign currency  translation             |       |                  |       |             |       |             |       |            |       |         |       |              |       |                   |       |                   |       |   |   |   |   |   | 292 |   |   |   |   |   |   |
| Total  comprehensive income                    |       |                  |       |             |       |             |       |            |       |         |       |              |       |                   |       |                   |       |   |   |   |   |   |   |   |   |   | 18,393 |   |   |
| BALANCE, DECEMBER  31, 2004                    |       | 32,102,820            |       | 321              |       |             | 556,346    |            |       |         | (301,836   | )                 |       |                   | —     |                   |       |   | (2,787 | ) |   |   | 855 |   |   |   | 252,899 |   |   |
| Stock based  compensation                      |       |                  |       |             |       |             |       |            |       |         |       |              |       |                   |       |                   |       |   | 965 |   |   |   |   |   |   |   | 965 |   |   |
| Offering costs                                 |       |                  |       |             |       |             | (165       | )               |       |         |       |              |       |                   |       |                   |       |   |   |   |   |   |   |   |   |   | (165 | ) |   |
| Issuance of  restricted stock                  |       | 5,000                 |       |             |       |             | 96         |            |       |         |       |              |       |                   |       |                   |       |   | (96 | ) |   |   |   |   |   |   | — |   |   |
| Common stock  issued through stock options     |       | 112,849               |       | 1                |       |             | 1,906      |            |       |         |       |              |       |                   |       |                   |       |   |   |   |   |   |   |   |   |   | 1,907 |   |   |
| Comprehensive income:                          |       |                  |       |             |       |             |       |            |       |         |       |              |       |                   |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                     |       |                  |       |             |       |             |       |            |       |         | 28,799     |              |       |                   |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Foreign currency  translation             |       |                  |       |             |       |             |       |            |       |         |       |              |       |                   |       |                   |       |   |   |   |   |   | 137 |   |   |   |   |   |   |
| Total  comprehensive income                    |       |                  |       |             |       |             |       |            |       |         |       |              |       |                   |       |                   |       |   |   |   |   |   |   |   |   |   | 28,936 |   |   |
| BALANCE, DECEMBER  30, 2005                    |       | 32,220,669            |       | $                | 322        |             |       | $               | 558,183    |         |       |              | $          | (273,037               | )          |                   |       | $ | — |   |   |   | $ | (1,918 | ) |   |   | $ | 992 |   |   |   | $ | 284,542 |   |   |
|                                                |            |                       |            |                  |            |                  |            |                 |            |              |            |                   |            |                        |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanying notes to consolidated financial statements.

F-7

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**INTERLINE BRANDS, INC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 30. 2005, DECEMBER 31, 2004 AND DECEMBER 26, 2003**

| ** **                                                                                   | ** ** | **December 30, 2005** | ** ** | **December 31, 2004** | ** ** | **December 26, 2003** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                                                                   | ** ** | **(In thousands)**              | ** ** |
| OPERATING ACTIVITIES :                                                                       |       |                            |       |                            |       |                            |       |   |   |   |   |   |   |
| Net Income                                                                                   |       |                            | $          | 28,799                          |       |                            |       | $ | 18,101 |   |   |   | $ | 7,152 |   |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |       |                            |       |                            |       |                            |       |   |   |   |   |   |   |
| Depreciation and amortization                                                                |       |                            | 13,049     |                            |       |                            | 12,600     |   |   |   | 10,949 |   |   |
| Amortization and write-off of debt issuance costs                                       |       |                            | 3,900      |                            |       |                            | 2,558      |   |   |   | 8,374 |   |   |
| Redemption premium on 11.5% senior subordinated notes                                        |       |                            | 8,050      |                            |       |                            | —     |   |   |   | — |   |   |
| Stock based compensation                                                                     |       |                            | 965        |                            |       |                            | —     |   |   |   | — |   |   |
| Loss on disposal of property and equipment                                                   |       |                            | 53         |                            |       |                            | 10         |   |   |   | 3 |   |   |
| Deferred income taxes                                                                        |       |                            | (2,364     | )                               |       |                            | 1,709      |   |   |   | 1,024 |   |   |
| Provision for doubtful accounts                                                              |       |                            | 2,828      |                            |       |                            | 2,040      |   |   |   | 2,297 |   |   |
| Income tax effect from exercise of stock options                                             |       |                            | 215        |                            |       |                            | —     |   |   |   | — |   |   |
| Forgiveness of shareholder notes                                                             |       |                            | —     |                            |       |                            | 1,875      |   |   |   | — |   |   |
| Change in fair value of interest rate swaps                                                  |       |                            | —     |                            |       |                            | (12,793    | ) |   |   | (5,272 | ) |   |
| Interest income on shareholder notes                                                         |       |                            | —     |                            |       |                            | (30        | ) |   |   | (105 | ) |   |
| Senior subordinated notes issued for interest due                                       |       |                            | —     |                            |       |                            | —     |   |   |   | 1,674 |   |   |
| Accretion and write-off of discount on 16% senior  subordinated notes                        |       |                            | —     |                            |       |                            | —     |   |   |   | 4,410 |   |   |
| Redemption premium on 16% senior subordinated notes                                          |       |                            | —     |                            |       |                            | —     |   |   |   | 3,879 |   |   |
| Changes in assets  and liabilities which proved (used) cash, net of business acquired:       |       |                            |       |                            |       |                            |       |   |   |   |   |   |   |
| Accounts receivable—trade                                                               |       |                            | (13,874    | )                               |       |                            | (16,866    | ) |   |   | (1,848 | ) |   |
| Accounts receivable—other                                                               |       |                            | 3,521      |                            |       |                            | (2,863     | ) |   |   | 120 |   |   |
| Inventory                                                                                    |       |                            | (10,175    | )                               |       |                            | (26,231    | ) |   |   | 9,050 |   |   |
| Prepaid expenses and other current assets                                                    |       |                            | (1,869     | )                               |       |                            | 1,056      |   |   |   | 1,737 |   |   |
| Other assets                                                                                 |       |                            | 99         |                            |       |                            | 484        |   |   |   | (978 | ) |   |
| Accounts payable                                                                             |       |                            | 11,282     |                            |       |                            | 10,080     |   |   |   | (11,106 | ) |   |
| Accrued expenses and other current liabilities                                               |       |                            | 1,137      |                            |       |                            | 2,846      |   |   |   | 1,718 |   |   |
| Accrued interest payable                                                                     |       |                            | (890       | )                               |       |                            | (2,760     | ) |   |   | 1,394 |   |   |
| Accrued merger expenses                                                                      |       |                            | (428       | )                               |       |                            | (591       | ) |   |   | (1,383 | ) |   |
| Accrued income taxes payable                                                                 |       |                            | (5,460     | )                               |       |                            | 7,372      |   |   |   | — |   |   |
| Net cash provided by (used in) operating activities                                          |       |                            | 38,838     |                            |       |                            | (1,403     | ) |   |   | 33,089 |   |   |
| INVESTING  ACTIVITIES :                                                                      |       |                            |       |                            |       |                            |       |   |   |   |   |   |   |
| Purchase of property and equipment, net                                                      |       |                            | (7,920     | )                               |       |                            | (6,763     | ) |   |   | (4,556 | ) |   |
| Purchase of investment and other asset                                                       |       |                            | —     |                            |       |                            | —     |   |   |   | (3,850 | ) |   |
| Purchase of businesses, net of cash acquired                                                 |       |                            | (73,213    | )                               |       |                            | (566       | ) |   |   | (18,389 | ) |   |
| Net cash used in  investing activities                                                       |       |                            | (81,133    | )                               |       |                            | (7,329     | ) |   |   | (26,795 | ) |   |
|                                                                                              |            |                                 |            |                                 |            |                                 |            |  |  |  |  |  |  |  |  |  |

F-8

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**INTERLINE BRANDS, INC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) YEARS ENDED DECEMBER 30. 2005, DECEMBER 31, 2004 AND DECEMBER 26, 2003**

 

| FINANCINGACTIVITIES :                                                          |   |   |    |   |   |   |    |   |    |   |     |   |   |
|--------------------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|---------|--------|---------|--------|----------|--------|--------|
| Increase (decrease) in revolver, net                                           |   |   | 3,000   |   |   |   | —  |   |    |   | (18,500  | )      |   |
| Repayment of long-term debt                                                    |   |   | (71,200 | )      |   |   | (38,250 | )      |    |   | (319,236 | )      |   |
| Proceeds from financing transaction                                            |   |   | 50,000  |   |   |   | —  |   |    |   | 340,000  |   |   |
| Payment of redemption premium on 11.5% senior subordinated  notes              |   |   | (8,050  | )      |   |   | —  |   |    |   | —   |   |   |
| Payment of debt issuance costs                                                 |   |   | (838    | )      |   |   | (1,296  | )      |    |   | (13,011  | )      |   |
| Proceeds from stock options exercised                                          |   |   | 1,693   |   |   |   | —  |   |    |   | —   |   |   |
| Initial public offering costs                                                  |   |   | (665    | )      |   |   | (4,057  | )      |    |   | —   |   |   |
| Proceeds from exercise of underwriters over-allotment  options                 |   |   | 2,333   |   |   |   | —  |   |    |   | —   |   |   |
| Payments on capital lease obligations                                          |   |   | (335    | )      |   |   | —  |   |    |   | —   |   |   |
| Proceeds from sale of common stock                                             |   |   | —  |   |   |   | 174,609 |   |    |   | —   |   |   |
| Redemption of preferred stock                                                  |   |   | —  |   |   |   | (55,000 | )      |    |   | (215     | )      |   |
| Net cash (used) provided by financing activities                          |   |   | (24,062 | )      |   |   | 76,006  |   |    |   | (10,962  | )      |   |
| EFFECT OF EXCHANGE  RATE CHANGES ON CASH AND CASH EQUIVALENTS                  |   |   | 137     |   |   |   | 292     |   |    |   | 723      |   |   |
| NET (DECREASE)  INCREASE IN CASH AND CASH EQUIVALENTS                          |   |   | (66,220 | )      |   |   | 67,566  |   |    |   | (3,945   | )      |   |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                                |   |   | 69,178  |   |   |   | 1,612   |   |    |   | 5,557    |   |   |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                      |   |   | $       | 2,958  |   |   |    | $      | 69,178  |   |     |   | $      | 1,612 |   |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION                              |   |   |    |   |   |   |    |   |    |   |     |   |   |
| Cash paid during  the period for :                                             |   |   |    |   |   |   |    |   |    |   |     |   |   |
| Interest                                                                       |   |   | $       | 23,363 |   |   |    | $      | 40,726  |   |     |   | $      | 33,258 |   |   |
| Income taxes (net of refunds)                                                  |   |   | $       | 26,003 |   |   |    | $      | 1,937   |   |     |   | $      | 1,353 |   |   |
| SCHEDULE OF  NON-CASH INVESTING AND FINANCING ACTIVITIES                       |   |   |    |   |   |   |    |   |    |   |     |   |   |
| Dividends on preferred stock                                                   |   |   | $       | — |   |   |    | $      | 54,389  |   |     |   | $      | 48,623 |   |   |
| Adjustment to liabilities assumed and goodwill on  businesses acquired         |   |   | $       | 8,443  |   |   |    | $      | 2,193   |   |     |   |   |   |   |
| Exercise of underwriters over-allotment options                                |   |   | $       | — |   |   |    | $      | 2,333   |   |     |   |   |   |   |
| Conversion of preferred stock                                                  |   |   | $       | — |   |   |    | $      | 379,001 |   |     |   |   |   |   |
| Note issued for purchase of business and accrual of  additional purchase price |   |   | $       | — |   |   |    | $      | —  |   |     |   | $      | 4,300 |   |   |
| Note issued for  purchase of investment                                        |   |   | $       | — |   |   |    | $      | —  |   |     |   | $      | 3,275 |   |   |

 

See accompanying notes to consolidated financial statements.

F-9

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**INTERLINE BRANDS,INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSYEARS ENDED DECEMBER 30, 2005, DECEMBER 31, 2004 AND DECEMBER 26, 2003(In thousands, except share data)**

**1.**                 DESCRIPTIONOF THE BUSINESS

Interline Brands, Inc., a Delaware corporation,and its subsidiaries (the “Company”) is a direct marketer and specialtydistributor of maintenance, repair and operations, (“MRO”) products. TheCompany sells plumbing, electrical, hardware, security, heating, ventilationand air conditioning and other MRO products. Interline’s highly diversecustomer base consists of multi-family housing, educational, lodging and healthcare facilities, professional contractors and specialty distributors.

The Company markets and sells its products primarilythrough nine distinct and targeted brands. The Company utilizes a variety ofsales channels, including a direct sales force, telesales representatives, adirect marketing program, brand-specific websites and a national accounts salesprogram. The Company provides same day/next day delivery of its productsthrough its network of regional distribution centers located throughout theUnited States and Canada, a national distribution center in Nashville,Tennessee, vendor managed inventory locations at large professional contractorcustomer locations and its dedicated fleet of trucks.

During December 2004,the Company completed its initial public offering (the “IPO”). Immediatelyprior to the closing of the IPO, a reincorporation merger occurred and theCompany became the parent company of its principal operating subsidiary,Interline Brands, Inc., a New Jersey corporation (“Interline New Jersey”).In the reincorporation merger, the holders of the preferred stock of InterlineNew Jersey received an aggregate of $55 million in cash and 19,183,321 sharesof the Company’s common stock and the holders of the common stock of InterlineNew Jersey received 0.01218 shares of the Company’s common stock per share ofInterline New Jersey common stock, or 66,667 shares of the Company’s commonstock in total. In addition, holders of options to purchase shares of thecommon stock of Interline New Jersey were converted into options to purchaseshares of the Company’s common stock. The Company restated earnings per shareand shares outstanding for all years presented in the accompanying financialstatements to reflect the conversion of the shares.

**2.**                 SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES

***Principles of Consolidation***—The consolidated financialstatements include the accounts of Interline Brands, Inc. and itssubsidiaries. These statements have been prepared in accordance with accountingprinciples generally accepted in the United States of America. Intercompanybalances and transactions have been eliminated in consolidation.

***Fiscal Year***—The Company operates on a 52-53week fiscal year, which ends on the last Friday in December. The fiscal yearended December 30, 2005 was a fifty-two week year. The fiscal years ended December 31,2004 and December 26, 2003 were fifty-three week and fifty-two week years,respectively. References herein to 2005, 2004, and 2003 are for the fiscalyears ended December 30, 2005, December 31, 2004 and December 26,2003, respectively.

***Cash and Cash Equivalents***—Cash and cash equivalents consistof cash and highly liquid investments with an original maturity of three monthsor less.

***Inventories***—Inventories, consistingsubstantially of finished goods, are valued at the lower of cost or market. Inventorycost is determined using the weighted-average cost method. The Company adjusts 

F-10

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***inventory for excess and obsolete inventory and for thedifference by which the cost of the inventory exceeds the estimated marketvalue. In order to determine the adjustments, management reviews inventoryquantities on hand, slow movement reports and sales history reports. Managementestimates the required adjustment based on estimated demand for products andmarket conditions. To the extent historical results are not indicative offuture results and if events occur that affect the Company’s relationships withsuppliers or the salability of their products, additional write-offs may beneeded that will increase cost of sales and decrease inventory.***

***Property and Equipment***—Property and equipment purchasedin the normal course of business is stated at cost, net of accumulateddepreciation and amortization. Expenditures for additions, renewals andbetterments are capitalized. Expenditures for maintenance and repairs arecharged to expense as incurred. Property and equipment acquired in connectionwith acquisitions are recorded at fair market value as of the date of theacquisition. Upon the retirement or disposal of assets, the cost andaccumulated depreciation or amortization is eliminated from the accounts andthe resulting gain or loss is credited or charged to operations. Leaseholdimprovements and assets under capital leases are amortized, using thestraight-line method, over the lesser of the estimated useful lives or the termof the lease. Depreciation and amortization, including assets under capitalleases, is computed using the straight-line method based upon estimated usefullives of the assets as follows:

| Buildings                       |   | 39-40  years |
|---------------------------------|--------|--------------|
| Machinery and equipment         |   | 5-7  years   |
| Office furniture and  equipment |   | 5-7  years   |
| Vehicles                        |   | 5  years     |
| Leasehold improvements          |   | 1-10 years   |

 

***Costs of Computer Software Developed orObtained for Internal Use***—The Company capitalizes costsrelated to internally developed software in accordance with Statement ofPosition (“SOP”) No. 98-1, Accountingfor the Costs of Computer Software Developed or Obtained for Internal Use. Only costs incurred during thedevelopment stage, including design, coding, installation and testing arecapitalized. These capitalized costs primarily represent internal labor costsfor employees directly associated with the software development. Upgrades ormodifications that result in additional functionality are capitalized. Approximately$1.0 million, $0.8 million, and $0.8 million, was capitalized in 2005, 2004,and 2003, respectively.

***Goodwill***—Goodwill represents the excess ofthe costs of acquired companies over the fair value of their net tangibleassets. In accordance with Statement of Financial Accounting Standards(“SFAS”) No. 142, Goodwill andOther Intangible Assets, the Company does not amortize goodwill but isrequired to annually evaluate goodwill for impairment. Goodwill is tested forimpairment at least annually, or whenever events of changes in circumstancesindicate that the carrying amount may not be recoverable. The Company has electedto perform its annual goodwill impairment test as of the last day of each year.No impairment was identified as a result of its impairment test for any yearpresented.

***Other IntangibleAssets***—Other intangible assets include amounts assigned to customer lists,trademarks, deferred debt issuance costs and non-compete agreements. Otherintangibles are amortized on a straight-line basis over their useful lives, 13to 40 years for trademarks and customer lists, and 5 to 10 years for non-competeagreements. Deferred debt issuance costs are amortized as a component ofinterest expense over the term of the related debt using a method thatapproximates the interest method.

***Impairment ofLong-Lived Assets***—The Company evaluates its intangible assets for impairmenton an annual basis or when an event occurs or circumstances change that wouldindicate that the fair value of the intangible asset has reduced below itscarrying amount. Such evaluations include an assessment of customer retention,cash flow projections and other factors the Company believes are relevant. The 

F-11

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***discounted future expected net cash flows of eachidentifiable asset are used to measure impairment losses. The Company has notidentified any impairment losses with respect to long-lived assets for any yearpresented.***

***Foreign CurrencyTranslation***—Assets and liabilities of the Company’s foreign subsidiary, where thefunctional currency is the local currency, are translated into United Statesdollars at the year end exchange rate. The related translation adjustments arerecorded as a component of other comprehensive income. Revenues and expensesare translated using average exchange rates prevailing during the year.

***Risk Insurance***—The Company has a $0.3 millionself-insured retention per occurrence in connection with its workers’compensation policy (“Risk Insurance”). The Company accrues its estimated costin connection with its portion of its Risk Insurance losses using an actuarialmethodology based on claims filed, historical development factors and anestimate of claims incurred but not yet reported. The Company discounted itsworkers compensation reserve at the rate of 6% as of December 30, 2005. Claimspaid are charged against the reserve.

***Estimates***—The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosures ofcontingent liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual resultsmay differ from those estimates and assumptions.

***Concentrations of Credit Risk******—Financial***instruments, which potentially subject the Company to concentration ofcredit risk, consist principally of accounts receivable. The Company’s accountsreceivable are principally from facilities maintenance, professional contractorand specialty distributor customers in the United States and Canada.Concentration of credit risk with respect to accounts receivable, however, islimited due to the large number of customers comprising the Company’s customerbase. The Company performs credit evaluations of its customers; however, theCompany’s policy is not to require collateral. As of December 30, 2005 andDecember 31, 2004, the Company had no significant concentrations of creditrisk.

***Fair Value ofFinancial Instruments***—The carrying value of cash and cash equivalents, accountsreceivable, and accounts payable approximate fair value because of the shortmaturities of these items. The carrying values of notes payable and long-termdebt are reasonable estimates of their fair values. Estimated fair values ofnotes payable and long-term debt are determined by discounting the future cashflows using rates currently available to the Company for similar instruments. Interestrate swaps are carried at fair value, which is determined by quoted marketprices.

***Revenue Recognition***—The Company recognizes revenue inaccordance with Securities and Exchange Commissions (“SEC”) Staff AccountingBulletin (“SAB”) No. 101, RevenueRecognition in Financial Statements, as amended by SAB No. 104, Revenue Recognition, corrected copy. The SEC requires that thefollowing four basic criteria must be met before the Company recognizesrevenue:

·       persuasiveevidence of an arrangement exists;

·       deliveryhas occurred or services have been rendered;

·       theseller’s price to the buyer is fixed or determinable; and

·       collectibilityis reasonably assured.

The Company recognizes a sale when the product hasbeen shipped and risk of loss has passed to the customer. For goods shipped bythird party carriers, the Company recognizes revenue upon shipment since theterms are generally FOB shipping point. Sales are recorded net of estimateddiscounts, rebates and returns. A portion of the Company’s sales are delivereddirect from the suppliers. These direct-shipment sales are recorded on a grossbasis, with the corresponding cost of goods sold, in accordance with the 

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guidance in Emerging IssuesTask Force (“EITF”) No. 99-19, *Reporting Revenues Grossas a Principal verses Net as an Agent*. The Company provides limitedproduct return and protection rights to certain customers. The Company accruesproduct return reserves and warranty obligations. A provision is made forestimated product returns based on sales volumes and our experience. Actualreturns have not varied materially from amounts provided historically.

***Cost of Sales***—Cost of sales includesmerchandise costs, freight-in, and operating costs related to the Company’sNational Distribution Center.

***Shipping and Handling Costs***—Shipping and handling costs havebeen included in selling, general and administrative expenses on theconsolidated statements of operations. Such amounts were approximately $40.6million, $39.0 million, and $32.5 million in 2005, 2004 and 2003, respectively.

***Advertising Costs***—Costs of producing anddistributing sales catalogs and promotional flyers are capitalized and chargedto expense over the life of the related catalog and promotional flyers. Advertisingexpenses, net of co-op advertising, were approximately $2.7 million, $2.1million, and $1.3 million in 2005, 2004 and 2003, respectively.

***Stock-Based Compensation***—The Company accounts for optionplans in accordance with Accounting Principles Board Opinion (“APB”) No. 25,Accounting for Stock Issued toEmployees, underwhich no compensation cost has been recognized for stock option awards. Whilethe Company does not recognize compensation costs for stock options, theCompany does determine what these costs would have been using the methodprescribed by SFAS No. 123, Accountingfor Stock—Based Compensation, for disclosure purposes.

The fair value of each option was estimated on thedate of grant using the Black-Scholes option pricing model with the followingweighted average assumptions used for options granted in 2005 under the 2004Equity Incentive Plan: dividend yield of 0%, volatility of 29%, risk-freeinterest rate of 3.97% and expected life of 5 years. The following weightedaverage assumptions were used for options granted in 2004 and 2003 under the2000 Stock Award Plan. For 2004, dividend yield of 0%, expected volatility of31%, risk-free interest rate of 3.71%, and expected life of 5 years. For 2003,dividend yield of 0%, expected volatility of 0%, risk-free interest rate of4.02%, and expected life of 5 years. The fair value of the 2003 awardsapproximated zero.

Thefollowing table illustrates the effect on net income (loss) and earnings (loss)per common share for 2005 and 2004 as if the Company had applied the fair valuerecognition provisions of SFAS No. 123 to stock-based employee compensation:
|                                                                                                                              | ** ** | **Year Ended**         | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                   | ** ** | **December 30,  2005** | ** ** | **December 31,  2004** | ** ** |
| Net income as reported                                                                                                       |       |                        | $          | 28,799 |   |   |   | $ | 18,101 |   |   |
| Add: Stock-based  employee compensation expense                                                                              |       |                        |       |   |   |   |   |   |   |
| included in reported net income, net of related tax  effects                                                                 |       |                        | 589        |   |   |   | — |   |   |
| Deduct: Total stock-based employee compensation expense  determined under fair value based method for all awards, net of tax |       |                        | (871       | ) |   |   | (6,796 | ) |   |
| Pro forma net income                                                                                                         |       |                        | 28,517     |   |   |   | 11,305 |   |   |
| Preferred stock dividends                                                                                                    |       |                        | —     |   |   |   | (54,389 | ) |   |
| Net income (loss) applicable to common shareholders                                                                          |       |                        | $          | 28,517 |   |   |   | $ | (43,084 | ) |   |
| Earnings (loss)  per common share:                                                                                           |       |                        |       |   |   |   |   |   |   |
| Basic - as reported                                                                                                          |       |                        | $          | 0.90 |   |   |   | $ | (25.21 | ) |   |
| Basic - pro forma                                                                                                            |       |                        | $          | 0.89 |   |   |   | $ | (29.93 | ) |   |
| Diluted - as reported                                                                                                        |       |                        | $          | 0.89 |   |   |   | $ | (25.21 | ) |   |
|                                                                                                                              |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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| Diluted - pro forma |   |   | $ | 0.88 |   |   |   | $ | (29.93 | ) |   |
|---------------------|--------|--------|---|------|--------|--------|--------|---|--------|---|--------|

 

For a discussion of SFAS No. 123R, *Share-Based Payment,* see “Recent Accounting Pronouncements”below.

***Net Income (Loss) per Common Share Data***—Net income (loss) per commonshare for all periods has been computed in accordance with SFAS No. 128, Earnings per Share. Under the provisions of SFAS No. 128, basicnet income (loss) per common share is computed by dividing net income (loss)applicable to common shareholders by the weighted-average number of commonshares outstanding during the year. Diluted net income per common share iscomputed by dividing net income applicable to shareholders by theweighted-average number of shares outstanding during the year, assumingdilution.

Theamounts used in calculating net income (loss) per common share data are asfollows:

| ** **                                           | ** ** | **2005**   | ** ** | **2004**  | ** ** | **2003** | ** ** |
|------------------------------------------------------|------------|------------|------------|-----------|------------|----------|------------|
| Net income                                           |       | $          | 28,799     |      | $          | 18,101   |       | $ | 7,152 |   |
| Preferred stock  dividends                           |       | —     |       | (54,389   | )          | (48,623  | )          |
| Net income (loss)  applicable to common shareholders |       | $          | 28,799     |      | $          | (36,288  | )          | $ | (41,471 | ) |
| Weighted average shares  outstanding - basic         |       | 32,004,007 |       | 1,439,322 |       | 65,540   |       |
| Effect of dilutive stock  options                    |       | 439,765    |       | —-   |       | —   |       |
| Weighted average shares outstanding - diluted        |       | 32,443,772 |       | 1,439,322 |       | 65,540   |       |

 

Options to purchase 452,942 shares, 2,468,009 shares,and 2,284 shares of common stock, which were outstanding during 2005, 2004 and2003 respectively, were not included in the computation of weighted averageshares outstanding-diluted. The shares outstanding during 2005 and 2003 werenot included because the exercise prices of the options are greater than theaverage fair market value of common stock and the effect would be anti-dilutive.The shares outstanding during 2004 were not included because they would havedecreased loss per share.

***Segment Information***—The Company is in one industry—thedistribution of MRO products. In accordance with SFAS No.131, Disclosure about segments of an Enterprise andRelated Information,the Company has one operating segment. The Company’s sales by product categoryare as follows:

| **Product Category**                  | ** ** | ** ** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Plumbing                                   |       | $          | 358,670    |     | $          | 331,200  |       | $        | 300,865    |   |
| Electrical                                 |       | 120,198    |       | 115,359  |       | 76,817   |       |
| Heating,  Ventilation and Air Conditioning |       | 101,519    |       | 46,333   |       | 38,408   |       |
| Security                                   |       | 54,076     |       | 52,073   |       | 51,211   |       |
| Appliances                                 |       | 51,093     |       | 46,493   |       | 38,408   |       |
| Hardware                                   |       | 49,875     |       | 48,300   |       | 44,810   |       |
| Other                                      |       | 116,497    |       | 104,147  |       | 89,619   |       |
| Total                                      |       | $          | 851,928    |     | $          | 743,905  |       | $        | 640,138    |   |

 

The Company’s revenues and assets outside the UnitedStates are not significant.

***Income Taxes***—Taxes on income are providedusing an asset and liability approach to financial accounting and reporting forincome taxes. Deferred income tax assets and liabilities are computed fordifferences between the financial statement carrying values and the tax basesof assets and liabilities that will result in taxable or deductible amounts inthe future. Such deferred income tax asset and liability computations are basedon enacted tax laws and rates applicable to periods in which the differencesare expected to affect taxable income. Valuation allowances are establishedwhen necessary to reduce deferred tax assets to the amounts expected to berealized.

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***Derivative Financial Instruments***—Historically, the Company enteredinto derivative financial instruments from time to time, including interestrate exchange agreements (“Swaps”) to manage its exposure to fluctuations ininterest rates on its debt. Under Swaps the Company held in 2004 and 2003, theCompany paid a fixed rate on the notional amount to its banks and the bankspaid the Company a variable rate on the notional amount equal to a base LIBORrate. The Company’s derivative activities, all of which are for purposes otherthan trading, are initiated within the guidelines of corporate risk-managementpolicies. See Note 7 for further description of the Swaps. The Company recordeda gain of $8,232 in 2004 and $5,272 in 2003, as a result of the change in marketvalue of the Swaps.

***Reclassifications***—Certain prior year amounts in thefinancial statements and the notes have been reclassified to conform to the2005 presentation. The reclassifications had no effect on total stockholders’equity or net income (loss).

***Recent AccountingPronouncements***—In February 2006, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 155, Accounting for CertainHybrid Financial Instrument—an amendment of FASB Statements No. 133 and 140,which resolves issues addressed in SFAS No. 133, Accounting forDerivative Instruments and Hedging Activities, Implementation IssueNo. D1, Application of Statement 133 to Beneficial Interests inSecuritized Financial Assets. SFAS No. 155,among other things, permits the fair value remeasurement of any hybridfinancial instrument that contains an embedded derivative that otherwise wouldrequire bifurcation; clarifies which interest-only strips and principal-onlystrips are not subject to the requirements of SFAS No. 133; and establishes arequirement to evaluate interests in securitized financial assets to identifyinterests that are freestanding derivatives or that are hybrid financialinstruments that contain an embedded derivative requiring bifurcation. SFAS No.155 is effective for all financial instruments acquired or issued in a fiscalyear beginning after September 15, 2006. The Company is currentlyassessing the impact of SFAS No. 155 will have on its results ofoperations and financial position.

***In December 2004, the FASB issued SFAS No. 123R(revised 2004), “***Share-BasedPayment,” which is arevision of SFAS No. 123, “Accounting for Stock-Based Compensation.”  SFAS No. 123R requires all share-based payments toemployees, including grants of employee stock options, to be recognized in theincome statement based on their fair values. This new standard was to beeffective for public companies in the first interim or annual reporting periodbeginning after June 15, 2005. In April 2005, the Securities andExchange Commission (“SEC”) adopted a new rule, which changed thecompliance date of SFAS No. 123R to the first interim or annual reportingperiod of the first fiscal year beginning after June 15, 2005. Since theCompany’s 2005 fiscal year end is December 30, this new rule will notchange the Company’s scheduled adoption date of December 31, 2005, thefirst day of the Company’s 2006 fiscal year. SFAS No. 123R permits publiccompanies to adopt its requirements using one of two methods:

1.                A “modifiedprospective” method in which compensation cost is recognized beginning with theeffective date (a) based on the requirements of SFAS No. 123R for allshare-based payments granted after the effective date and (b) based on therequirements of SFAS No. 123 for all awards granted to employees prior tothe effective date of SFAS No. 123R that remain unvested on the effectivedate.

2.                A “modifiedretrospective” method which includes the requirements of the modifiedprospective method described above, but also permits entities to restate basedon the amounts previously recognized under SFAS No. 123 for purposes ofpro forma disclosures either (a) all prior periods presented or (b) priorinterim periods of the year of adoption.

The Company plans to use the “modified prospective”method upon adopting the requirements of SFAS No. 123R. The Companycontinues to evaluate technical implementation issues relating to the adoptionof SFAS No. 123R, including the selection and use of an appropriatevaluation model.

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The Company has not yet determined the impact theadoption of SFAS No. 123R will have on its results of operations forfuture issuances of share-based payments. The adoption of SFAS No. 123R isexpected to result in compensation expense that will reduce net earnings. Theamount of reduction in net earnings will depend on a number of variables,including, the number of options granted, the vesting periods of optionsgranted, the Company’s stock price and volatility at the date of grant, andemployee exercise behaviors. As of December 30, 2005, 2,272,495 stockoptions are outstanding, of which 2,237,740 are vested and 34,755 are notvested. Accordingly, the Company has determined that the adoption of SFAS No,123R will not have a material effect on its results of operations associatedwith these previously issued options. Had the Company adopted SFASNo. 123R in prior periods, the impact of that standard would haveapproximated the impact of SFAS No. 123 as described in the disclosure ofpro forma net income and net income (loss) applicable to common shareholders in*Stock-Based Compensation*.

In March 2004, the FASB issued Interpretation(“FIN”) No. 46(R)-5, *Implicit VariableInterests under FASB Interpretation No. 46 (revised December 2003),Consolidation of Variable Interest Entities*. FIN No. 46(R)-5is effective for the first reporting period beginning after March 3, 2005;however, earlier application is permitted for periods for which financialstatements have not yet been issued. The Company has evaluated the impact ofFIN No. 46(R)-5 and determined that the impact is immaterial to theconsolidated financial statements.

In November 2004, the FASB issued SFAS No. 151, *Amendment of ARB No. 43, Chapter 4*.This statement amends the guidance in Accounting Research Bulletin No. 43,Chapter 4, *Inventory Pricing*, toclarify the accounting for abnormal amounts of idle facility expense, freight,handling costs, and wasted material (spoilage). This statement requires that those items be recognized as current-periodcharges.  In addition, this statementrequires that allocation of fixed production overhead to the costs ofconversion be based on the normal capacity of the production facilities.  SFAS No. 151 is effective for inventory costsincurred during fiscal years beginning after June 15, 2005.  The Company has evaluated the impact of SFASNo. 151 and determined that the impact will be immaterial to theconsolidated financial statements. 

In March 2005, the FASB issued Interpretation (“FIN”) No. 47,*Accounting for Conditional Asset RetirementObligations*.  Thisinterpretation states that the term “conditional asset retirement obligation”as used in paragraph A23 of SFAS No. 143, *Accountingfor Asset Retirement Obligations*, refers to a legal obligation toperform an asset retirement in which the timing and (or) method of settlementare conditional on a future event that may or may not be within the control ofthe entity.  The obligation to performthe asset retirement obligation is unconditional even though uncertainty existsabout the timing and (or) method of settlement. The effective date for adoptingthis interpretation is no later than the end of fiscal years ending afterDecember 15, 2005. The Company’s financial condition, results of operationsand cash flows were not impacted by the adoption of FIN No. 47 in 2005. 

In May 2005, the FASB issued StatementNo. 154, *Accounting Changes and Error Corrections—a replacement of APB OpinionNo. 20 and FASB Statement No. 3*.  SFAS No. 154 replaces APB OpinionNo. 20, *Accounting Changes*, and FASBStatement No. 3, *Reporting AccountingChanges in Interim Financial Statements—an amendment of APB Opinion No. 28*,and changes the requirements for the accounting for and reporting of a changein accounting principle.  SFAS No. 154requires retrospective application to prior periods' financial statements ofchanges in accounting principle, unless it is impracticable to do so, in whichcase other alternatives are required. SFAS No. 154 is effective foraccounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005, or for the Company's fiscal 2006 yearend.  The Company has evaluated therequirements of SFAS No. 154 and have determined that there is no impacton the consolidated financial statements.

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**3.      GOODWILL AND OTHER INTANGIBLE ASSETS**

Asummary of changes to goodwill for the year ended December 30, 2005 and December 31,2004 follows:

| ** **                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
| Beginning balance                    |       | $        | 203,848    |     | $          | 202,227 |   |
| Acquisitions                         |       | 35,648   |       | —   |       |
| Adjustments to  acquisition accruals |       | 10,078   |       | 1,621    |       |
| Ending Balance                       |       | $        | 249,574    |     | $          | 203,848 |   |

 

The acquisition of goodwill during 2005 relates to theCompany’s July 2005 acquisition of CCS Enterprises, Inc. This isdiscussed in further detail in Note 4. Adjustments to goodwill during 2005 and2004 relate primarily to the establishment of acquisition accruals for the CCSand Florida Lighting acquisitions, of which $9.5 million relates to therecording of deferred taxes on the assets and liabilities acquired in the CCSacquisition. This increase was partially offset by adjustments to acquisitionaccruals established for the Barnett and Florida Lighting acquisitions thatwere settled for less than the estimated amounts accrued.

The gross carrying amountand accumulated amortization of the Company’s intangible assets other thangoodwill as of December 30, 2005 and December 31, 2004 are asfollows:

| ** **                      | ** ** | **Gross**    | ** ** | ** **      | ** ** | **Net**          | ** ** |
|---------------------------------|------------|--------------|------------|-----------------|------------|------------------|------------|
| ** **                      | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | **Book**         | ** ** |
| **December 30, 2005** | ** ** | ** **   | ** ** | **Amount**      | ** ** | **Amortization** | ** ** | **Value** | ** ** |
| Customer lists                  |       | $            | 70,362     |            |       | $                | 11,545     |   |   | $ | 58,817 |   |
| Trademarks                      |       | 41,721       |       |            | 4,786      |             |       | 36,935 |   |
| Deferred debt  issuance costs   |       | 15,297       |       |            | 7,553      |             |       | 7,744 |   |
| Non-compete  agreements         |       | 2,616        |       |            | 1,868      |             |       | 748 |   |
| Total                           |       | $            | 129,996    |            |       | $                | 25,752     |   |   | $ | 104,244 |   |
| **December 31, 2004** | ** ** | ** **   | ** ** |            |       |             | ** ** | ** ** | ** ** |
| Customer lists                  |       | $            | 49,362     |            |       | $                | 8,229      |   |   | $ | 41,133 |   |
| Trademarks                      |       | 36,221       |       |            | 3,817      |             |       | 32,404 |   |
| Deferred debt  issuance costs   |       | 14,460       |       |            | 3,653      |             |       | 10,807 |   |
| Non-compete agreements          |       | 2,616        |       |            | 1,599      |             |       | 1,017 |   |
| Total                           |       | $            | 102,659    |            |       | $                | 17,298     |   |   | $ | 85,361 |   |
|                                 |            |              |            |                 |            |                  |            |  |  |  |  |  |  |  |

 

Theamortization of deferred debt issuance costs, recorded as a component ofinterest expense, was $1.6 million, $1.9 million, and $1.8 million in 2005,2004 and 2003, respectively and write-off of such costs were $2.3 million, $0.7million and $6.5 million in 2005, 2004 and 2003, respectively. Amortizationexpense on other intangible assets was $4.6 million, $4.0 million, and $2.7million for 2005, 2004 and 2003, respectively. Expected amortization expense onother intangible assets (excluding deferred debt issuance costs which will varydepending upon debt payments) for each of the five succeeding fiscal years isexpected to be as follows:

| **For fiscal year:** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|------------|------------|------------|------------|
| 2006                           |       | $          | 5,194      |       |
| 2007                           |       | $          | 5,177      |       |
| 2008                           |       | $          | 5,160      |       |
| 2009                           |       | $          | 4,928      |       |
| 2010                           |       | $          | 4,928      |       |

 

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***Change in Estimate***—Effective July 1, 2003, theCompany changed the estimated useful life of customer lists acquired in theacquisition of Barnett and Sexauer during September 2000 and November 1999respectively, from 40 years to 17 years. The estimated remaining useful life of17 years was based upon the expected life of the customer accounts acquiredusing the attrition rate experienced for the twelve-month period ended September 26,2003, with no consideration given to new accounts generated during this period.This method is consistent with the guidance provided in SFAS No. 142, whichsuggests that the customer list intangible asset should be amortized based onmanagement’s best estimate of its useful life, following the pattern in whichthe expected benefits will be consumed or otherwise used up. The effect of thischange in the estimated remaining useful life was not material to the Company’sconsolidated financial statements.

**4.**                 SIGNIFICANTTRANSACTIONS

***Secondary Stock Offering Transaction***—On August 9, 2005, certainof the Company’s stockholders sold 7,750,000 shares of the Company’s commonstock in an underwritten offering pursuant to a registration statement on Form S-1filed with the SEC (Commission File No. 333-126515). Theunderwriters of this offering elected to exercise their over-allotment optionwith respect to additional shares held by the selling stockholders. As aresult, on August 22, 2005, certain of the selling stockholders sold anadditional 1,162,500 shares of our common stock in a second closing pursuant tothe same underwritten offering. In connection with this offering, the Companydid not receive any proceeds and incurred approximately $0.9 million ofexpenses during 2005, which amounts were recorded by the Company as an expense.

***Initial Public Offering Transaction***—In December 2004, theCompany successfully completed its IPO and amended its senior credit facility. Atotal of 14,375,000 shares of the Company’s common stock were sold, of which12,667,000 were sold by the Company and 1,708,000 were sold by the Company’sshareholders. The Company sold 12,500,000 shares of its common stock in December 2004and 167,000 shares in January 2005 following the exercise of theunderwriters’ over-allotment option. The Company received $171.8 million in netproceeds including the exercise of the underwriters’ over-allotment option,representing $176.9 million of proceeds from the sale of stock net ofunderwriting discounts and commissions, less $4.1 million of IPO costs and $1.1million of debt issuance costs.

Immediately prior to the closing of the IPO, areincorporation merger occurred and the parent company of Interline New Jerseybecame the holding company of the Interline group of businesses. In thereincorporation merger, the holders of the preferred stock of Interline NewJersey received an aggregate of $55 million in cash and 19,183,321 shares ofthe Company’s common stock and the holders of the common stock of Interline NewJersey received 0.01218 shares of the Company’s common stock per share ofInterline New Jersey common stock, or 66,667 shares of the Company’s commonstock in total. In addition, holders of options to purchase shares of thecommon stock of Interline New Jersey were converted into options to purchaseshares of the Company’s common stock.

The Company also used $31.3 million of the proceeds topartially repay the term loan under its credit facility. The Company amended itssenior credit facility to allow for the IPO and reduce the interest rate applicableto the Company’s term loans. In conjunction with this amendment, the Companyincurred $1.1 million of debt issuance costs. In December 2004, theCompany also used $4.6 million of the proceeds to terminate the interest rateswap agreements. In January 2005, the Company used $70.0 million of theproceeds from the IPO transaction to partially redeem its 11.5% seniorsubordinated notes. In connection with the redemption, the Company paid $8.1million of premiums for early redemption of the senior subordinated notes andrecorded a $10.3 million loss on the early extinguishment of debt, whichincluded a charge for write-off of unamortized debt issuance costs in theamount of $2.3 million in January of 2005.

In connection with the IPO transaction, the Companypaid bonuses totaling $6.2 million and incurred additional compensation expensefor the forgiveness of shareholder loans of $1.9 million and the 

F-18

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reimbursement of taxes of$1.1 million on such loan forgiveness. These costs are reported as IPO relatedexpenses in the Statements of Operations.

***Special Costs and Expenses***—Special costs and expenses for2003 consist of costs associated with distribution center consolidation,relocation, lease termination, severance related costs and other transactionfees. Such costs and expenses were $0.0 million, $0.0 million and $0.6 millionfor years 2005, 2004 and 2003, respectively.

***Barnett Acquisition***—In September 2000, theCompany completed the acquisition of Barnett, Inc. (the “BarnettAcquisition”) for an aggregate purchase price of $220.8 million including costsof acquisition of approximately $7.1 million. The costs of acquisition includea $3.0 million advisory fee paid to a significant stockholder of the Company. Goodwillrecorded in connection with the Barnett Acquisition totaled approximately $89.3million. Other intangible assets recorded in connection with the BarnettAcquisition totaled approximately $53.1 million. During 2001, the Companyfinalized its purchase price of Barnett and as a result recorded an increase ingoodwill of approximately $12.3 million. Theseadditional costs relate to the closure of duplicate Barnett facilities,severance related to these closures and the relocation and integration ofBarnett employees and administrative functions. As of December 30, 2005and December 31, 2004, $2.2 million and $3.1 million were accrued for suchcosts, respectively, in accordance with EITF No. 95-3, Recognitionof Liabilities in Connection with a Purchase Business Combination.

***Florida Lighting Acquisition***—On November 24, 2003, theCompany purchased the net assets of Florida Lighting, Inc. (the “FloridaLighting Acquisition”), which sells residential lighting and electricalproducts to electrical contractors, electrical distributors, lighting,showrooms and mass merchants primarily through direct marketing and outboundtelesales.

The aggregate purchase price was $23.1 millionincluding costs of acquisition of approximately $0.3 million. Goodwill recordedin connection with the acquisition totaled approximately $7.0 million and isnot expected to be deductible for tax purposes. Other intangible assetsrecorded in connection with the Florida Lighting Acquisition totaledapproximately $10.7 million consisting of customer lists of $7.3 million,trademarks of $2.4 million and a non-compete agreement of $1.0 million. Customerlists and trademarks will be amortized over 13 years and 40 years respectively,using the straight line method. The non-compete agreement will be amortizedover 5 years, the term of the agreement. During 2004, the Company finalized itspurchase price of Florida Lighting and as a result recorded an increase ingoodwill of approximately $3.3 million. These additional costs primarily relateto the integration of Florida Lighting systems and operations. As of December 30,2005 and December 31, 2004, $1.9 million and $3.0 million remained accruedfor such costs, respectively, in accordance with EITF No. 95-3.

The purchase price for the Florida LightingAcquisition included $1.0 million transferred to an escrow fund. The transferof the payment to the seller was contingent upon general representations andwarranties of the seller. The Company paid the full amount in escrow to theseller in November 2004.

The Company also agreed to pay contingentconsideration if the acquired business met certain specific operationperformance indicators. The consideration was to be paid upon the delivery ofthe 2004 annual report evidencing such performance, but no later than April 15,2005. During 2005 the Company paid $0.5 million in contingent consideration andrecorded this amount as an addition to the purchase price.

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TheFlorida Lighting acquisition was accounted for under the purchase method ofaccounting, and accordingly, the net assets and results of operations have beenincluded in the accompanying consolidated financial statements since the dateof acquisition. The following table presents the unaudited results ofoperations of the Company for the year ended December 26, 2003 as if theacquisition had been consummated as of the beginning of 2003, and includescertain pro forma adjustments to reflect the amortization of intangible assetsand financing charges on long-term debt:

| ** ** | ** ** | **2003** | ** ** |
|------------|------------|----------|------------|
| Revenues   |       | $        | 666,919    |   |
| Net income |       | 8,308    |       |
|            |            |          |            |  |

 

The unaudited pro forma results of operations areprepared for comparative purposes only and do not necessarily reflect theresults that would have occurred had the acquisition occurred at the datedescribed above or the results which may occur in the future.

***CCS Enterprises, Inc.Acquisition******—On***July 7,2005, the Company acquired all of the common stock of CCS Enterprises, Inc.,also known as Copperfield, under a stock purchase agreement. Copperfield is anational distributor and direct marketer of specialty ventilation and chimneymaintenance products and is headquartered in Fairfield, Iowa. This acquisitionrepresents an expansion of the Company’s professional contractor and specialtydistributor business. Copperfield had net sales of $41.0 million for the yearended November 30, 2004.

Theaggregate purchase price was $70.0 million, including costs of acquisition of$0.7 million, and was funded by borrowings under Interline New Jersey’s creditfacility. Included in the purchase price was $4.0 million deposited in anescrow account to cover the representations, warranties and contingencies ofthe parties to the purchase agreement. The amounts are included in thepreliminary purchase price allocation as they are not considered contingent butrepresent the final payment of the purchase price after finalization of assetspurchased and liabilities assumed. The amount in escrow related to contingenciesis included because the amount will be either paid to the seller or to athird-party claimant. The Company has included the results of operations forCopperfield from the date of acquisition and applied purchase accounting inaccordance with SFAS No. 141, *Business Combinations*asof the date of acquisition, which resulted in recorded estimated goodwill of$35.7 million. The allocation of the purchase price is as follows:

| Net assets              |   | $ | 7.8  |   |
|-------------------------|--------|---|------|--------|
| Customer  relationships |   | $ | 21.0 |   |
| Trademarks              |   | $ | 5.5  |   |
| Goodwill                |   | $ | 35.7 |   |
|                    |   | $ | 70.0 |   |

 

Goodwill recorded in connection with the acquisitionof Copperfield is not expected to be deductible for tax purposes. Theintangible assets are subject to amortization and will be amortized on astraight-line basis over a weighted-average useful life of approximately 22.3years. The Company recorded an addition to goodwill of $9.5 million inconnection with the acquisition of Copperfield, to recognize the book to taxbasis difference on non-goodwill intangibles. Supplemental pro formainformation has not been provided because it is immaterial.

**5.   ACCOUNTSRECEIVABLE**

The Company’s trade receivables are exposed to creditrisk. The majority of the market served by the Company is comprised of numerousindividual accounts, none of which is individually significant. The Companymonitors the creditworthiness of its customers on an ongoing basis and providesa reserve for estimated bad debt losses.

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Theactivity in the allowance for doubtful accounts consisted of the following:

| ** **                       | ** ** | **Balance at** | ** ** | ** **          | ** ** | ** **        | ** ** | **Balance at** | ** ** |
|----------------------------------|------------|---------------------|------------|---------------------|------------|-------------------|------------|---------------------|------------|
| ** **                       | ** ** | **Beginning**       | ** ** | **Charged to** | ** ** | ** **        | ** ** | **End**             | ** ** |
| ** **                       | ** ** | **of Year**    | ** ** | **Expense**         | ** ** | **Deductions(1)** | ** ** | **of Year**    | ** ** |
| Year ended December 26,  2003:   |       |                |       |                |       |              |       |                |       |   |   |   |   |   |   |   |   |
| Allowance for doubtful accounts  |       |                | $          | 5,322               |       |              |       | $                   | 2,240      |   |   |   | $ | (1,246 | ) |   |   | $ | 6,316 |   |   |
| Year ended  December 31, 2004:   |       |                |       |                |       |              |       |                |       |   |   |   |   |   |   |   |   |
| Allowance for doubtful accounts  |       |                | $          | 6,316               |       |              |       | $                   | 2,041      |   |   |   | $ | (1,428 | ) |   |   | $ | 6,929 |   |   |
| Year ended  December 30, 2005:   |       |                |       |                |       |              |       |                |       |   |   |   |   |   |   |   |   |
| Allowance for  doubtful accounts |       |                | $          | 6,929               |       |              |       | $                   | 2,828      |   |   |   | $ | (1,607 | ) |   |   | $ | 8,150 |   |   |

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(1)          Accountsreceivable written off as uncollectible, net of recoveries

**6.**   PROPERTYAND EQUIPMENT

Majorclassifications of property and equipment are as follows:

| ** **                                      | ** ** | **_2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------|------------|-----------|------------|----------|------------|
| Land                                            |       | $         | 400        |     | $          | 400 |   |
| Building                                        |       | 9,536     |       | 9,536    |       |
| Machinery and  equipment                        |       | 55,913    |       | 49,514   |       |
| Office furniture  and equipment                 |       | 6,142     |       | 5,302    |       |
| Vehicles                                        |       | 600       |       | 581      |       |
| Leasehold  improvements                         |       | 8,846     |       | 7,003    |       |
|                                            |       | 81,437    |       | 72,336   |       |
| Less accumulated  depreciation and amortization |       | (51,572   | )          | (43,569  | )          |
|                                            |       | $         | 29,865     |     | $          | 28,767 |   |

 

Depreciation andamortization expense was approximately $8.5 million, $8.6 million, and $8.2 millionfor 2005, 2004 and 2003, respectively.

**7.   DEBT**

Long-termdebt consists of the following:

| ** **                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Term Loans                            |       | $        | 148,800    |     | $          | 100,000 |   |
| Note payable                          |       | 3,275    |       | 3,275    |       |
| Senior  Subordinated Notes—11.5% |       | 130,000  |       | 200,000  |       |
|                                  |       | 282,075  |       | 303,275  |       |
| Less current  portion                 |       | (1,400   | )          | (1,000   | )          |
|                                  |       | $        | 280,675    |     | $          | 302,275 |   |

 

***In***May 2003, Interline NewJersey completed an offering of $200 million of 11.5% senior subordinated notesdue 2011 and entered into a $205.0 million senior secured credit facility whichconsisted of a $140.0 million term loan facility and a $65.0 million revolvingloan facility, a portion of which is available in the form of letters of credit.The net proceeds from the offering of senior subordinated notes and therefinancing of the former credit facility with the new credit facility wereused to: (1) repay all outstanding indebtedness under the Company’s formercredit facility, (2) redeem all the 16% senior 

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subordinated notes, (3) payaccrued interest and related redemption premiums on Interline New Jersey’sformer debt, and (4) pay transaction fees and expenses related to theforegoing transactions, which we refer to as the “Refinancing Transactions”. Debtissuance costs capitalized in connection with the Refinancing Transactions wereapproximately $13.1 million. An expense of approximately $14.9 million in May 2003for the early extinguishment of debt resulted from the write-off of theunamortized loan fees and loan discount relating to Interline New Jersey’sformer credit facility and the redemption premium incurred upon redemption of the16% senior subordinated notes.

The senior subordinated notes pay interest each May 15and November 15, with the first payment made on November 15, 2003. Priorto May 15, 2006, Interline New Jersey had the option to redeem up to 35%of the notes using proceeds of certain equity offerings and Interline NewJersey may redeem all of the notes after May 15, 2007, subject toredemption premiums unless redeemed after May 15, 2009. Interline NewJersey elected to redeem $70.0 million of the 11.5% senior subordinated notesusing proceeds from the Company’s IPO and gave the 30-day notice,required by the indenture, on December 20, 2004. In January 2005, theCompany recorded a loss on extinguishment of debt of $10.3 million, consistingof the write-off of deferred financing costs of $2.3 million and the premium of$8.1 million on the $70.0 million redemption of 11.5% senior subordinatednotes.

In December 2004, Interline New Jersey amendedits term loan facility and revolving loan facility. The term loan was reducedto $100.0 million from $140.0 million and the revolving loan facility wasincreased to $100.0 million from $65.0 million. As part of the amendment in December 2004,Interline New Jersey paid down $31.3 million of the term loan using proceedsfrom the Company’s IPO. Interline New Jersey also amended its credit facilityon July 7, 2005, to permit the incurrence of an additional $50.0 millionterm loan, having substantially the same terms as the existing term loan inconnection with the Copperfield acquisition, discussed below. On August 8,2005, Interline New Jersey again amended its credit facility to lower theinterest rate spreads applicable to the additional $50.0 million term loan. Theamended credit facility provides for aggregate commitments of $250.0 million,consisting of (1) a revolving loan facility of $100.0 million, ofwhich a portion not exceeding $20.0 million will be available in the form ofletters of credit, and (2) a term loan facility of $150.0 million.

Borrowings under the amended term loan facility andrevolving loan facility bear interest, at Interline New Jersey’s option, ateither LIBOR or at the alternate base rate plus a spread. The indebtednessunder the amended credit facility is guaranteed by the Company and by thedomestic subsidiaries of Interline New Jersey. Interest rates in effect onborrowings under the term loan facilities at December 30, 2005 ranged from6.79% for LIBOR based borrowings and 8.5% for prime based borrowings under the$100.0 million tranche B-1 term loan and 6.29% for LIBOR based borrowingsand 8.25% for prime based borrowings under the $50.0 million tranche B-2term loan. Outstanding letters of credit under the revolving loan facility aresubject to a per annum fee equal to the applicable spread over the adjustedLIBOR for revolving loans. The term loan facility matures on December 31,2010 and the revolving loan facility matures on May 31, 2008. Debtissuance costs capitalized in connection with the amended credit facility wereapproximately $1.1 million.

As of December 30, 2005, Interline New Jersey had$86.4 million available under its revolving loan facility. Total letters ofcredit issued under this facility as of December 30, 2005 were $10.6million. There were $3.0 million of borrowings under the revolving loanfacility at December 30, 2005. The credit facility is secured bysubstantially all of the assets of Interline New Jersey.

In conjunction with the IPO and the amended creditfacility, the Company recorded an expense of approximately $0.7 million for earlyextinguishments of debt resulting from the write-off of the unamortized loanfees relating to the Company’s former credit facility in December 2004. InJanuary 2005, the Company recognized a charge of $2.3 million ofunamortized loan fees related to the early extinguishment of $70.0 million ofthe 11.5% senior subordinated notes.

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Historically, the Company entered into derivativefinancial instruments from time to time, including interest rate exchangeagreements, to manage its exposure to fluctuations in interest rates on itsdebt. All interest rate swap agreements were terminated as of December 2004.

The credit facility contains customary affirmative andnegative covenants that limit Interline New Jersey’s ability to incuradditional indebtedness, pay dividends on its common stock or redeem,repurchase or retire its common stock or subordinated indebtedness, makecertain investments, sell assets, and consolidate, merge or transfer assets,and that require Interline New Jersey to maintain a maximum debt to cash flowratio and a minimum interest expense coverage ratio. The Company and InterlineNew Jersey were in compliance with all covenants at December 30, 2005.

We are a holding companywhose only asset is the stock of our subsidiaries. We conduct virtually all ofour business operations through Interline New Jersey. Accordingly, our onlymaterial sources of cash are dividends and distributions with respect to ourownership interests in Interline New Jersey that are derived from the earningsand cash flow generated by Interline New Jersey. The debt instruments ofInterline New Jersey, primarily the credit facility and the indenture governingthe terms of the 11.5% notes, contain significant restrictions on the paymentof dividends and distributions to us by Interline New Jersey. In particular,Interline New Jersey’s credit facility prevents it from paying dividends,making distributions to us or making investments in us. However, ordinarycourse distributions for overhead and taxes are permitted, as are (providedInterline New Jersey is not in default) annual payments of up to $7.5 millionin respect of our stock option plans and annual payments of up to $40 milliondepending on the pro forma net leverage ratio of the previous quarter. In addition,the indenture for the 11.5% notes restricts the ability of Interline New Jerseyto pay distributions or dividends to us and to make advances to, or investmentsin, us. Dividends, distributions and investments are permitted in an amountgenerally limited to 50% of the net income of Interline New Jersey, plus anamount equal to the net proceeds from certain equity issuances if Interline NewJersey is in compliance with a leverage ratio and is not in default. Inaddition, there are certain other permitted payments, including an ability tomake distributions of up to $10 million.

In April 2003,Interline New Jersey issued a non-recourse note payable in the principal amountof $3.3 million for the purchase of an investment. This note, which is securedonly by the investment, bears interest at a rate of 4% per annum, withprincipal due in full in April 2010.

Thematurities of long-term debt subsequent to December 30, 2005 are asfollows:

| 2006       |   | $       | 1,400   |   |
|------------|--------|---------|---------|--------|
| 2007       |   | 1,400   |    |
| 2008       |   | 1,400   |    |
| 2009       |   | 1,400   |    |
| 2010       |   | 146,475 |    |
| Thereafter |   | 130,000 |    |
|       |   | $       | 282,075 |   |

 

**8.   PREFERREDSTOCK**

The Company has theauthority to issue 20,000,000 shares of preferred stock, par value $.01 pershare. At December 30, 2005, and December 31, 2004 there were nopreferred shares issued or outstanding. In connection with the reincorporationmerger and IPO transaction, as described above, the preferred stock ofInterline New Jersey was converted to company common stock.

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**9.   STOCKHOLDERS’EQUITY**

***Common Stock******—During***2004the Company completed its IPO described in Note 4 above. In addition to theshares issued to the public at the IPO in December 2004, the Companyissued 19,250,000 shares of its common stock to existing stockholders andsenior management of Interline New Jersey in connection with thereincorporation merger and the IPO. Existing holders of Interline New Jerseycommon stock received .01218 shares of the Company’s common stock per shareheld or an aggregate of 66,667 shares of common stock. As a result of theconversion, the accompanying consolidated financial statements retroactivelyreflect a decrease in the numbers of outstanding shares of common stock. Theforegoing amount of outstanding shares of common stock excludes 167,000 sharesissued by the Company in January 2005 in connection with the IPOunderwriters’ exercise of their over-allotment option.

***Stockholder Loans******—In***conjunctionwith the IPO transaction described above the Company forgave $1.6 million of stockholderloans included in stockholders’ equity and accordingly took a charge tooperating income for this amount. As of December 16, 2004, the date theloans were forgiven, and December 26, 2003, $375 and $345, respectively,of interest was accrued on the notes and was included as a portion of thestockholder loans in stockholders’ equity. As of December 30, 2005 andDecember 31, 2004, there were no stockholder loans outstanding.

**10.   PROFITSHARING PLAN**

The Company has qualifiedprofit sharing plans under Section 401(k) of the Internal RevenueCode. Contributions to the plans by the Company are made at the discretion ofthe Company’s Board of Directors. Company contributions to the plans wereapproximately $1.2 million, $1.1 million and $0.7 million for 2005, 2004and 2003, respectively.

**11.   COMMITMENTSAND CONTINGENCIES**

***Lease Commitments******—The***Companyleases its facilities under operating and capital leases expiring at variousdates through 2011. Minimum future rental payments under these operating andcapital leases as of December 30, 2005 are as follows:

| ** **                         | ** ** | **Operating** | ** ** | **Capital** | ** ** |
|------------------------------------|------------|---------------|------------|-------------|------------|
| 2006                               |       |          | $          | 11,945      |       |   | $ | 597 |   |
| 2007                               |       |          | 9,571      |        |       | 413 |   |
| 2008                               |       |          | 6,932      |        |       | 274 |   |
| 2009                               |       |          | 5,667      |        |       | 274 |   |
| 2010                               |       |          | 3,508      |        |       | 252 |   |
| Thereafter                         |       |          | 2,782      |        |       | — |   |
| Total payments                     |       |          | $          | 40,405      |       |   | 1,810 |   |
| Less: amount representing interest |       |          |       |        |       | (400 | ) |
| Present value of minimum lease     |       |          |       |        |       | 1,410 |   |
| Less: current portion              |       |          |       |        |       | (452 | ) |
| Long-term portion                  |       |          |       |        |       | $ | 958 |   |

 

In connection with theCopperfield acquisition, the Company leases an office building from an entityin which an employee and his family hold an ownership interest in the property.This lease was amended in November 2005 and will expire on November 30,2010, with an option to extend for one additional five year term. Minimumannual rent payable under this lease is approximately $153, plus all realestate taxes 

F-24

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andassessments, and all operating costs related to the building. The total rentexpense for this lease was approximately $72 in 2005 since the closing of theCopperfield acquisition. The Company believes that the terms of the lease areno less favorable to it than could be obtained from an unaffiliated party.

The Company operates adistribution center, which is leased from an entity, which was partially ownedby a stockholder and former director of the Company. The former officer soldhis ownership interest in the property in September 2002. Minimum annualrent payable under this lease is approximately $308, plus all real estate taxesand assessments, utilities and insurance related to the premises. Total rentexpense for this lease was approximately $308 in both 2005 and 2004 and $289 in2003. This lease expires on May 31, 2006 and does not contain any renewalterms. The Company believes that the terms of the lease are no less favorableto it than could be obtained from an unaffiliated party.

The Company previouslyleased an office building from a stockholder and former director of the Company.As amended in March 1995, under the terms of the lease, the Company wasrequired to pay approximately $137 annually, plus all real estate taxes andassessments, utilities and insurance related to the premises. Total rentalexpense for this lease was $85 for 2004 and $137 for 2003. The lease expired July 31,2004 and the Company did not renew its lease and relocated as of July 2004.The Company believes that the terms of the lease were no less favorable to itthan could be obtained from an unaffiliated party.

Rent expense under alloperating leases was approximately $19.1 million, $17.7 million, and $15.7million for 2005, 2004 and 2003, respectively. Certain of the leases providethat the Company pays taxes, insurance and other operating expenses applicableto the leased premises.

***Employment Agreement******—The***Companyhas employment agreements with certain officers of various dates through 2006,unless terminated earlier by the Company, at combined salaries of $4.2 million,plus bonuses and subject to adjustments.

***Management Agreement******—In***May 2000,the Company entered into an advisory agreement with a significant stockholderof the Company, which provides for an annual advisory fee of $250 plusout-of-pocket expenses of up to $25 per year. The management agreement wasterminated in December 2004 in conjunction with the Company’s IPO.

***Contingent Liabilities******—At***December 30,2005 and December 31, 2004, the Company was contingently liable for unusedletters of credit aggregating approximately $10.6 million and $8.7 million,respectively.

***Legal Proceedings******—The***Companyis involved in various legal proceedings in the ordinary course of its businessthat are not anticipated to have a material adverse effect on the Company’sresults of operations or financial position.

**12.   STOCK-BASEDCOMPENSATION PLANS**

During 2000, Interline NewJersey established a Stock Award Plan, (the “2000 Plan”), under which InterlineNew Jersey may award a total of 6,395 shares of common stock in the form ofincentive stock options (which may be awarded to key employees only),nonqualified stock options, stock appreciation rights, or SARs, and restrictedstock awards, all of which may be awarded to directors, officers, key employeesand consultants. The exercise price per share for an incentive stock option maynot be less than 100% of the fair market value of a share of common stock onthe grant date. The exercise price per share for an incentive stock optiongranted to a person owning stock possessing more than 10% of the total combinedvoting power of all classes of stock may not be less than 110% of the fairmarket value of a share of common stock on the grant date, and may not beexercisable after the expiration of ten years from the 

F-25

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date ofgrant. The Company’s compensation committee will determine in its solediscretion whether a SAR is settled in cash, shares or a combination of cashand shares.

During 2004, the Company adoptedthe 2004 Equity Incentive Plan, (the “2004 Plan”), under which the Company mayaward 3,175,000 shares in the form of incentive stock options, nonqualifiedstock options, stock appreciation rights, or SARs, restricted share units,restricted stock and stock bonus awards, all of which may be awarded to anyemployee, director, officer or consultant of the Company. Under the terms ofthe 2004 plan and unless the compensation committee of the Company determinesotherwise, the exercise price of the options will not be less than the fairmarket value of the common stock at the time of grant.

Upon completion of theCompany’s IPO in December 2004, 175,820 shares of restricted stock wereissued to senior management. The restricted stock awards will vest contingentupon the executive’s continued employment in one-third installments over threeyears provided that certain pre-established annual percentage increases in ourearnings per share are attained. The restricted stock will also vest if theexecutive remains in our employ for seven years on the seventh anniversary ofthe date of grant. In addition, an aggregate of 10,000 shares of restrictedstock were issued to two non-employee directors who are not affiliated with anyof our principal stockholders. Such awards will vest over two years. As aresult of these restricted stock awards, the Company will incur non-cashcharges between $0.4 million and $0.9 million in each of the next two to six yearsdepending upon the acceleration of vesting of restricted stock. These twodirectors also received 20,000 non-qualified stock options with an exerciseprice equal to the IPO price of $15.00 per share. In addition, the Companyissued to management 1,835,218 non-qualified stock options with an exerciseprice equal to the IPO price of $15.00 per share and 590,465 non-qualifiedstock options with a weighted average exercise price of $24.00 per share. Allof these options were fully vested and exercisable when granted. However,management will only be permitted to sell shares acquired upon the exercise ofthe options in 25% increments over four years.

Asummary of the status of the Company’s stock option plans is as follows:

| ** **                             | ** ** | ** **         | ** ** | ** **              | ** **           | **Weighted**                  | ** ** |
|----------------------------------------|------------|--------------------|------------|-------------------------|----------------------|-------------------------------|------------|
| ** **                             | ** ** | **Number**         | ** ** | **Exercise Price** | ** **           | **Average Exercise**     | ** ** |
| ** **                             | ** ** | **of Shares** | ** ** | **Per Share**      | ** **           | **Price Per Share** | ** ** |
| Outstanding at December 26, 2003  |       | 2,284              |       | $                       | 41.05–$1,669.13 |                          |       | $ | 509.20 |   |   |
| Granted                                |       | 2,465,739          |       | $                       | 15.00–$41.05    |                          |       | $ | 17.16 |   |   |
| Cancelled                              |       | (14                | )          | $                       | 41.05                |                          |       | $ | 41.05 |   |   |
| Outstanding at December 31, 2004  |       | 2,468,009          |       | $                       | 15.00–$1,669.13 |                          |       | $ | 17.61 |   |   |
| Granted                                |       | 72,000             |       | $                       | 9.05–$22.91     |                          |       | $ | 19.76 |   |   |
| Exercised                              |       | (112,849           | )          | $                       | 15.00                |                          |       | $ | 15.00 |   |   |
| Cancelled                              |       | (154,665           | )          | $                       | 15.00–$1,669.13 |                          |       | $ | 30.44 |   |   |
| Outstanding at  December 30, 2005 |       | 2,272,495          |       | $                       | 15.00–$41.05    |                          |       | $ | 16.94 |   |   |

 

F-26

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Thefollowing table summarizes information about the stock options outstandingunder the Company’s option plan as of December 30, 2005:

| ** **                              | ** ** | **Outstanding Options** | ** ** | **Exercisable Options** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **Range of  Exercise Prices** | ** ** | ** **                   | ** ** | **Number of  Options**  | ** ** | **Weighed Average  Remaining  Contractual Life** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number of   Options** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| $15.00–$15.00                      |       | 1,751,053                    |       |                         | 9.0        |   |   |   | $ | 15.00 |   |   | 1,751,053 |   |   | $ | 15.00 |   |   |
| $19.05–$22.91                      |       | 296,416                      |       |                         | 9.1        |   |   |   | $ | 21.27 |   |   | 261,916 |   |   | $ | 21.41 |   |   |
| $26.25–$26.25                      |       | 224,416                      |       |                         | 9.0        |   |   |   | $ | 26.25 |   |   | 224,416 |   |   | $ | 26.25 |   |   |
| $41.05–$41.05                      |       | 610                          |       |                         | 2.1        |   |   |   | $ | 41.05 |   |   | 355 |   |   | $ | 41.05 |   |   |
|                                    |       | 2,272,495                    |       |                         |       |   |   |   |   |   |   | 2,237,740 |   |   |   |   |   |
|                                         |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

**13.**   PROVISIONFOR INCOME TAXES

Theprovision (benefit) for income taxes for the years 2005, 2004 and 2003, is asfollows:

| ** ** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| Current:   |       |     |       |     |       |     |       |
| Federal    |       | $        | 17,686     |     | $          | 8,530    |       | $ | 2,428 |   |
| State      |       | 2,662    |       | 882      |       | 577      |       |
| Foreign    |       | 351      |       | 496      |       | 518      |       |
|       |       | 20,699   |       | 9,908    |       | 3,523    |       |
| Deferred   |       |     |       |     |       |     |       |
| Federal    |       | (2,371   | )          | 908      |       | 1,167    |       |
| State      |       | 4        |       | 871      |       | (143     | )          |
| Foreign    |       | 3        |       | (70      | )          | —   |       |
|       |       | (2,364   | )          | 1,709    |       | 1,024    |       |
|       |       | $        | 18,335     |     | $          | 11,617   |       | $ | 4,547 |   |

 

Thecomponents of income before income taxes were as follows:

| ** **    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------|------------|----------|------------|----------|------------|----------|------------|
| United States |       | $        | 45,984     |     | $          | 28,488   |       | $ | 10,454 |   |
| Foreign       |       | 1,150    |       | 1,230    |       | 1,245    |       |
| Total         |       | $        | 47,134     |     | $          | 29,718   |       | $ | 11,699 |   |

 

Thereconciliation of the provision for income taxes at the federal statutory taxrate to the provision for income taxes is as follows:

| ** **                                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Federal statutory  tax rate                 |       | 35.00    | %          | 35.00    | %          | 35.00    | %          |
| State income  taxes, net of federal benefit |       | 3.68     |       | 3.83     |       | 2.40     |       |
| Non-deductible  expenses                    |       | 1.02     |       | 0.29     |       | 0.50     |       |
| Foreign income  taxes                       |       | —   |       | (0.01    | )          | 0.70     |       |
| Other                                       |       | (0.81    | )          | (0.02    | )          | 0.30     |       |
|                                        |       | 38.89    | %          | 39.09    | %          | 38.90    | %          |

 

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Deferredincome taxes result primarily from temporary differences in the recognition ofcertain expenses for financial and income tax reporting purposes. Thecomponents of the Company’s deferred tax assets and liabilities at December 30,2005 and December 31, 2004 consist of the following:

| ** **                     | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
| Deferred tax  assets:          |       |     |       |     |       |
| Inventory                      |       | $        | 4,250      |     | $          | 4,083 |   |
| Bad debt reserves              |       | 2,842    |       | 2,420    |       |
| State taxes                    |       | 1,340    |       | —   |       |
| Operating lease                |       | 79       |       | —   |       |
| Closing cost accrual           |       | 1,893    |       | 2,160    |       |
| Bonus accrual                  |       | —   |       | 890      |       |
| Vacation accrual               |       | 352      |       | 287      |       |
| Vendor discounts               |       | 1,225    |       | 994      |       |
| Other                          |       | 4,094    |       | 3,381    |       |
| Total deferred tax assets      |       | 16,075   |       | 14,215   |       |
| Deferred tax liabilities:      |       |     |       |     |       |
| Identifiable intangibles       |       | (31,023  | )          | (22,754  | )          |
| Depreciation                   |       | (2,079   | )          | (3,054   | )          |
| State taxes                    |       | (3,584   | )          | (1,235   | )          |
| Swaps constant yield method    |       | —   |       | (103     | )          |
| Other                          |       | (90      | )          | (206     | )          |
| Total deferred tax liabilities |       | (36,776  | )          | (27,352  | )          |
| Net deferred tax  liabilities  |       | $        | (20,701    | )        | $          | (13,137 | ) |

 

**14.   QUARTERLYRESULTS OF OPERATIONS (UNAUDITED)**

Thefollowing is a summary of our quarterly results of operations for the yearsended December 30, 2005 and December 31, 2004. All amounts are inthousands, except per share amounts.

| ** **                                       | ** ** | **Quarter** | ** ** |
|--------------------------------------------------|------------|-------------|------------|
| ** **                                       | ** ** | **First**   | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth (1)** | ** ** |
| **2005**                                         |       |        |       |   |   |   |   |   |   |
| Net Sales                                        |       | $           | 196,491    |   | $ | 203,666 |   | $ | 225,811 |   | $ | 225,960 |   |
| Gross Profit                                     |       | 75,486      |       | 77,255 |   | 86,163 |   | 86,690 |   |
| Net income(2)                                    |       | 1,393       |       | 8,565 |   | 9,718 |   | 9,123 |   |
| Net income  applicable to common stockholders(2) |       | 1,393       |       | 8,565 |   | 9,718 |   | 9,123 |   |
| Basic earnings  per common share(3)              |       | 0.04        |       | 0.27 |   | 0.30 |   | 0.28 |   |
| Diluted earnings  per common share(3)            |       | 0.04        |       | 0.26 |   | 0.30 |   | 0.28 |   |
| **2004**                                         |       |        |       |   |   |   |   |   |   |
| Net Sales                                        |       | $           | 172,604    |   | $ | 185,379 |   | $ | 190,400 |   | $ | 195,522 |   |
| Gross Profit                                     |       | 65,723      |       | 70,945 |   | 73,186 |   | 75,535 |   |
| Net income(4)                                    |       | 3,251       |       | 6,957 |   | 6,927 |   | 966 |   |
| Net loss  applicable to common stockholders(4)   |       | (10,010     | )          | (6,766 | ) | (7,243 | ) | (12,269 | ) |
| Basic loss per  common share(4)                  |       | (153.00     | )          | (102.88 | ) | (110.13 | ) | (2.33 | ) |
| Diluted loss per common  share(4)                |       | (153.00     | )          | (102.88 | ) | (110.13 | ) | (2.33 | ) |

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(1)          The fourth quarter of2005 contains 13 weeks and the fourth quarter of 2004 contains 14 weeks.

F-28

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(2)          During the first quarterof 2005, the Company recorded a $10,340 loss on extinguishment of debt,consisting of the write-off of deferred financing costs of $2.3 million and thepremium of $8.1 million on the $70.0 million partial redemption of the 11.5%senior subordinated notes, using proceeds from the December 2004 IPOtransaction. During the third quarter of 2005, certain of the Company’sstockholders sold 8,912,500 shares of the Company’s common stock. In connectionwith this offering the Company did not receive any proceeds and incurredapproximately $0.9 million in expense, which amounts were recorded by theCompany as an expense.

(3)          Earnings per commonshare for each quarter is computed using the weighted-average number of sharesoutstanding during that quarter while earnings per common share for the fullyear is computed using the weighted-average number of shares outstanding duringthe year. Thus, the sum of the four quarters’ earnings per common share may notequal the full-year earnings per common share.

(4)          During the fourthquarter of 2004, the Company incurred $9,215 in IPO related expenses and a $660loss on extinguishment of debt in conjunction with the IPO transaction in December 2004.Prior to this transaction the Company converted all of its preferred stock tocommon stock. In this conversion, holders of preferred stock received $55.0million in cash and 19,183,321 shares of common stock. The holders of commonstock prior to the IPO transaction received a conversion of 0.01218 shares ofthe new common stock per share held, or an aggregate of 66,667 shares of commonstock. All earnings per share and share data retroactively reflect thisconversion

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