**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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FORM 10-K

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x        Annual Report Pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934

**Forthe fiscal year ended December 31, 2004**

**OR**

**o        Transition Report Pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934**

**Forthe transition period from                        to                        **

**CommissionFile Number: 001-32380**

| INTERLINE  BRANDS, INC.                                                                                 |
|---------------------------------------------------------------------------------------------------------|
| (Exact name of  registrant as specified in its charter)                                                 |
| **Delaware**                                                                                            | **03-0542659** |
| (State or other  jurisdiction  of incorporation or organization)                                        | (I.R.S. Employer  Identification No.) |
| **801 West Bay Street, Jacksonville, Florida 32204**                                                    |
| (Address of  principal executive offices)                                                               |
| Registrant’s  telephone number, including area code: **(904) 421-1400**                            |
| Securities  registered pursuant to Section 12(b) of the Act: **Common Stock, $.01 par value** |
| Name  of exchange on which registered: **New York Stock Exchange,  Inc.**                               |
| Securities  registered pursuant to Section 12(g) of the Act: **None**                         |
| **NOT APPLICABLE**                                                                                      |
| (Former name,  former address and former fiscal year, if changed since last report)                     |

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

Yes x              No o

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K (§229.405 of this chapter) is not contained herein, and will notbe contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.

Yes o              No x

Indicateby check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).

Yes o              No x

Number of shares of CommonStock outstanding as of March 31, 2005: 32,102,820

DOCUMENTSINCORPORATED BY REFERENCE. Portions of the proxy statement for the 2005 AnnualMeeting of Shareholders Part III.

 

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**TABLE OF CONTENTS**
|                   | **ITEM** | ** **                                                                                      | ** ** | ** ** | **Page** | ** ** |
|-------------------|----------|-------------------------------------------------------------------------------------------------|------------|------------|----------|------------|
| **PART I**   |
| 1.                |     | Business                                                                                        |       | 1          |     |
| 2.                |     | Properties                                                                                      |       | 12         |     |
| 3.                |     | Legal Proceedings                                                                               |       | 12         |     |
| 4.                |     | Submission of Matters to a Vote of  Security Holders                                            |       | 12         |     |
| **PART II**  |
| 5.                |     | Market for Registrant’s Common  Equity and Related Stockholder Matters                     |       | 13         |     |
| 6.                |     | Selected Financial Data                                                                         |       | 16         |     |
| 7.                |     | Management’s Discussion and  Analysis of Financial Condition and Results of  Operations    |       | 19         |     |
| 7A.               |     | Quantitative and Qualitative  Disclosures About Market Risk                                     |       | 35         |     |
| 8.                |     | Financial Statements and  Supplementary Data                                                    |       | 36         |     |
| 9.                |     | Changes in and Disagreements With  Accountants on Accounting and Financial  Disclosure          |       | 36         |     |
| 9A.               |     | Controls and Procedures                                                                         |       | 36         |     |
| **PART III** |
| 10.               |     | Directors and Executive Officers  of the Registrant                                             |       | 37         |     |
| 11.               |     | Executive Compensation                                                                          |       | 37         |     |
| 12.               |     | Security Ownership of Certain  Beneficial Owners and Management and Related Stockholder Matters |       | 37         |     |
| 13.               |     | Certain Relationships and Related  Transactions                                                 |       | 37         |     |
| 14.               |     | Principal Accountant Fees and  Services                                                         |       | 37         |     |
| **PART IV**  |
| 15.               |     | Exhibits and Financial Statement  Schedules                                                     |       | 38         |     |
| 16.               |     | Signatures                                                                                      |       | 39         |     |
|                   |          |                                                                                                 |            |            |          |            |  |  |  |  |

 

 

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**PART I**

**ITEM 1.**                *Business*

**Our Background**

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, wecompleted our acquisition of Barnett Inc., which we refer to as the “BarnettAcquisition”, and in June 2001, we were renamed Interline Brands, Inc.In November 2003, we acquired Florida Lighting, a direct marketer anddistributor of lighting and electrical products based in Pompano Beach, Florida.In December 2004, as a result of a reincorporation merger in connectionwith our Initial Public Offering (IPO), Interline Brands, Inc., a Delawarecorporation and the reporting entity for purposes of this Annual Report on Form 10-K,became the sole shareholder of Interline Brands, Inc., the New Jerseycorporation and entity through which we conduct our business. Thereincorporation merger is described in more detail below under “Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations—Liquidity and Capital Resources—The Initial Public Offering andRelated Transactions.” In this document, unless otherwise indicated, “we”refers to Interline Brands, Inc., a Delaware corporation, and itsconsolidated subsidiaries; and “Interline Opco” or “Interline New Jersey”refers to Interline Brands, Inc., a New Jersey corporation through whichour business is conducted. (See “Note 4: Significant Transactions” in theaccompanying notes to the audited consolidated financial statements.)

**Our Company**

We are a leading national distributor and directmarketer of specialty MRO products. We have been in business for over 25 years.We stock over 45,000 plumbing, electrical, hardware, security hardware,heating, ventilation and air conditioning and other MRO products and sell toover 150,000 active customer accounts. Our products are primarily used for therepair, maintenance, remodeling and refurbishment of properties andnon-industrial facilities. We are able to realize higher operating margins byfocusing on repair, maintenance, remodeling and refurbishment customers, whogenerally make smaller, more frequent purchases and require high levels ofservice. Our diverse customer base includes facilities maintenance customers,which consist of multi-family housing, educational, lodging and healthcare facilities; professional contractors who primarily repair and maintainproperties and non-industrial facilities; and specialty distributors, includingplumbing and hardware retailers. Our customers range in size from individualcontractors and independent hardware stores to apartment management companiesand national purchasing groups.

We market and sell our products primarily througheight distinct and targeted brands, each of which is nationally recognized inthe markets we serve for providing premium products at competitive prices withreliable same-day or next-day delivery. Wilmar, Sexauer and Maintenance USAbrands serve our facilities maintenance customers; Barnett, U.S. Lock and SunStar brands serve our professional contractor 

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customers; and AF Lightingand Hardware Express brands serve our specialty distributors customers. Ourmulti-brand operating model, which we believe is unique in the industry, allowsus to use a single platform to deliver tailored products and services to meetthe individual needs of each respective customer group served. We reach ourmarkets using a variety of sales channels, including a sales force ofapproximately 400 field representatives, over 350 telesales and customerservice representatives, a direct mail program of approximately five millionpieces annually, brand-specific websites and a national accounts salesprogram. We deliver our products through our network of 47 regionaldistribution centers, and 17 professional contractor showrooms locatedthroughout the United States and Canada, a state-of-the-art nationaldistribution center (NDC) in Nashville, Tennessee and a dedicated fleet oftrucks. Our broad distribution network allows us to provide reliable, same-dayor 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, our brands draw from the same inventory withincommon distribution centers and share associated employee and transportationcosts. In addition, we have centralized marketing, purchasing and catalogproduction operations to support our brands. We believe that our commoninformation technology and logistics platform also benefits our customers byallowing us to offer a broad product selection at highly competitive priceswhile maintaining the unique customer appeal of each of our targeted brands. Overall,our common operating platform has enabled us to improve customer service,maintain lower operating costs, efficiently manage working capital and supportour 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 seekto further 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*.   Wewill continue to focus on enhancing our operating efficiency, which willincrease profitability, improve our cash conversion cycle and increase ourreturn on invested 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.

**Industry and MarketOverview**

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 

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categories. Customersserved by the MRO distribution industry include heavy industrial manufacturersthat use MRO supplies for the repair and overhaul of production equipment andmachinery; owners and managers of facilities such as apartment complexes,office buildings, schools, hotels and hospitals that use MRO supplies largelyfor maintenance, repair and refurbishment; and professional contractors.

Within the MRO distribution industry, we focus onserving customers in three principal end markets: facilities maintenance,professional contractors and specialty distributors. Pembroke Consulting, in astudy we commissioned, has estimated that the markets we serve areapproximately $80 billion in size in the aggregate. Our customers are primarilyengaged in the repair, maintenance, remodeling and refurbishment of propertiesand non-industrial facilities, as opposed to new construction projects or themaintenance of heavy industrial facilities and machinery. Our facilitiesmaintenance customers are individuals and entities responsible for themaintenance and repair of various commercial properties, including apartmentbuildings, schools, hotels and health care facilities. Our professionalcontractor customers buy our products to provide plumbing, electrical, HVAC,and mechanical services to their residential and commercial customers. Ourspecialty distributor customers consist primarily of hardware stores and smallplumbing and 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 chainmanagement has become increasingly important for this purpose. We believe thatour supply chain management solutions result in material savings for our MROcustomers. 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 of MRO supplies.

**Our Products**

We distribute over 45,000standard 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*

The approximatepercentages of our net sales for the twelve months ended December 31, 2004by product category were as follows:
| **Product Category**                  | ** ** | ** ** | ** ** | **Percentage of Net  Sales** | ** ** |
|--------------------------------------------|------------|------------|------------|----------------------------------------|------------|
| Plumbing                                   |       |       | 45         | %                                      |       |
| Electrical                                 |       |       | 16         | %                                      |       |
| Security Hardware                          |       |       | 7          | %                                      |       |
| Hardware                                   |       |       | 6          | %                                      |       |
| Heating,  Ventilation and Air Conditioning |       |       | 6          | %                                      |       |
| Appliances                                 |       |       | 6          | %                                      |       |
| Other                                      |       |       | 14         | %                                      |       |
| Total                                      |       |       | 100        | %                                      |       |

 

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The following is adiscussion of our principal product categories:

*Plumbing Products.  *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.

*Electrical Products.  *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.

*Security Hardware.  *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.

*Hardware Products.  *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.

*HVAC,Appliances and Parts.  *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.Our comprehensive range of appliances and parts includes washer/dryercomponents, garbage disposers, refrigerators and range hoods. We sell a numberof brand name products of leading appliance manufacturers, including GeneralElectric and Whirlpool. We also sell a number of high-quality genericreplacement parts.

*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 a one-stopshopping outlet with broad product offerings. For example, we have successfullyintroduced products such as water heaters, floor coverings and custom cut miniblinds. We believe that introducing new products in existing product lines andcreating new product lines are both strategies which enable us to increasepenetration of existing customer accounts, as well as attract new customers toour brands.

**Our Brands**

We market and sellproducts to our customers primarily through eight distinct and targeted brands:Wilmar®, Sexauer®, Maintenance USA®, Barnett®, Hardware Express®, U.S. Lock®,SunStar® and AF LightingTM. Each of our brands is focused on serving aparticular customer group. Wilmar, Sexauer and Maintenance USA generally servefacilities maintenance customers, while Barnett, U.S. Lock, SunStar, AFLighting and Hardware Express generally serve professional contractors andother distributors. 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 and AF 

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Lighting.We have brands that market complementary services to our customers, includinginventory management and technical assistance, and brands that offer productswithout support services. We believe that our mix of brands allows us toeffectively compete for a broad range of customers across our industry,regardless of their product requirements, preferred sales channels or serviceneeds.

*FacilitiesMaintenance Brands*

We serve our facilities maintenance customersprimarily through our Wilmar, Sexauer and Maintenance USA brands. Facilitiesmaintenance customers buy our products for maintenance, repair and remodeling,and often need to obtain products with minimal delay. In many cases, ourfacilities maintenance customers also look to us for support services such asinventory maintenance, management of procurement contracts and technical adviceand assistance.

*Wilmar.  *Our Wilmar brandspecializes in sales of maintenance products to the multi-family housingmarket. Through its Wilmar Master Catalog, Wilmar is able to act as a one-stopshopping resource for multi-family housing maintenance managers byoffering one of the industry’s most extensive selections of standard andspecialty plumbing, hardware, electrical, janitorial and related products.Wilmar provides same-day or next-day delivery in local markets served by ourdistribution centers, and ships by parcel delivery services or other carriersto other areas. We sell Wilmar products primarily through field salesrepresentatives, as well as through direct mail and telesales. We have alsosuccessfully launched a national accounts program at Wilmar by adding nationalaccount managers who market to high level officers at real estate investmenttrusts, or REITs, and other property management companies. Through thisprogram, we assist large multi-location customers in reducing totalsupply chain costs.

*Sexauer.  *Our Sexauer brandmarkets and sells specialty plumbing and facility maintenance products toinstitutional customers, including commercial real estate, education, lodging,health care and other facilities maintenance customers. We believe that thecatalog of Sexauer products is well known in the industry as a comprehensivesource of specialty plumbing and facility maintenance products. In addition toa broad product portfolio, Sexauer offers customers an extensive selection ofservice and procurement solutions, drawing upon our product and supplymanagement expertise.

*Maintenance USA.  *Throughour Maintenance USA brand, we offer a broad portfolio of MRO products tofacilities, including multi-family housing, lodging and institutionalcustomers. Since Maintenance USA sells our products exclusively through acatalog, which is supported by direct mail and telesales, it represents a lowcost supply alternative to smaller property managers and more cost-consciouscustomers requiring minimal support services.

*ProfessionalContractor and Other Distributor Brands*

We serve our professional contractor and otherdistributor customers through our Barnett, U.S. Lock, Hardware Express, SunStarand AF Lighting brands. Professional contractors generally purchase ourproducts for specific job assignments and/or to resell the product toend-customers. Our distributor customers, who consist primarily of local andspecialty distributors, hardware stores and other retail outlets, purchase ourproducts to resell to their customers.

*Barnett.  *Our Barnett brandmarkets and sells a broad range of MRO products to professional contractors,including plumbing, electrical, building and HVAC contractors, typically forrepair and remodeling applications. The Barnett brand also sells its productsto other distributors, which are generally smaller and carry fewer productsthan Barnett. Sales are made primarily through catalogs, telesales and directmail. In addition, Barnett has regional sales managers in select marketsthroughout the United States. Customers can also receive technical support andassistance in selecting products by calling our customer service centers. Inaddition to next-day delivery, Barnett also offers customers the convenience ofa network of local professional contractor showrooms or Pro Centers.

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*U.S. Lock.  *Our U.S. Lockbrand sells security hardware products to professional locksmiths. Our primarymarketing vehicle for U.S. Lock products is our U.S. Lock dealer program, inwhich professional locksmiths receive incentives such as rebates and favoredpricing on proprietary items in return for paying an annual membership,guaranteeing annual purchase volume, displaying our U.S. Lock logo in theirstores and assisting in other promotional activities. Sales are made primarilythrough catalog, telesales and direct mail.

*Hardware Express.  *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 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 mail and telesales personnel, and aspecialty display sales program of private label products which is coordinatedby field sales representatives.

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

**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 other distributors aremade through telesales supported by catalog and promotional mailings, andlimited field sales resources in major metropolitan markets. We also serve ourfacilities maintenance 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 our customers, wehave been able to assemble a database of customer purchasing information, suchas end 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.

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*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 and on-site maintenancemanagers. 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 over 400 field sales representatives covering marketsthroughout the United States, Canada and Central America. We have found that weobtain a greater percentage of our customers’ overall spending on MRO productsin markets serviced by local sales representatives, particularly in regionswhere these representatives are supported by a nearby distribution center thatenables same-day or next-day delivery of our product line.

Our field sales representativesare expected not only to generate orders, but also to act as problem solvingcustomer service representatives. Our field sales representatives are trainedand qualified to assist customers in shop organization, special orders, partidentification and complaint resolution. We compensate our field salesrepresentatives based on a combination of salary and commission. Increasingly,these representatives target senior management at multi-locationcompanies in order to acquire long-term customers that make large volumepurchases. We will continue to seek additional opportunities where we canleverage the strength of our field sales force to generate additional salesfrom 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 andhave frequent contact with existing and prospective customers in order to maketelesales presentations, notify customers of current promotions and encourage additionalpurchases. Our inbound telesales representatives are trained to process ordersquickly from existing customers, provide technical support and expedite andprocess new customer applications, as well as handle all other customer servicerequests. We offer our customers nationwide toll-free telephone numbers andbrand-specific telesales representatives who are familiar with aparticular brand’s markets, products and customers. Our call centers arestaffed by over 350 telesales, customer service and technical supportpersonnel, who utilize our proprietary, on-line order processing system. Thissophisticated software provides the telesales staff with detailed customerprofiles and information about products, pricing, promotions and competition.

*Catalogs and DirectMail*

Our catalogs and direct mail promotional flyers arekey marketing tools that allow us to communicate our product offerings to bothexisting and potential customers. We create catalogs, some of which exceed1,000 pages, for each 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 monthly promotional flyers. Most of our branded catalogshave been 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 aninitial catalog and include the customer on our periodic mailing list forupdated catalogs and promotional 

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materials. We believe thatthis approach is a cost-effective way for us to contact large numbers ofpotential customers and to determine which customers should be targeted forcontinuous marketing.

Our in-house artdepartment produces the design and layout for our catalogs and promotionalmailings using a sophisticated catalog content database and software system.Our catalogs are indexed and illustrated to provide simplified pricinginformation and to highlight new product offerings. Our promotional mailingsintroduce new product offerings, sale-promotion items and other periodicofferings. Illustrations, photographs and copy are shared among brand catalogsand mailings or customized for a specific brand, allowing for fast andefficient production of multi-branded media. In addition, we frequentlybuild custom catalogs designed specifically for the needs of our largercustomers.

**Operations andLogistics**

*DistributionNetwork*

We have a network of 47 regional distribution centersand 17 professional contractor showrooms strategically located to serve thelargest metropolitan areas throughout the United States and Canada, and astate-of-the-art national distribution center in Nashville, Tennessee. We alsomaintain a dedicated fleet of trucks to assist in local delivery of products.The geographic scope of our distribution network and the efficiency of ourinformation system enable us to provide reliable, same-day or next-day deliveryservice to over 98% of the U.S. population.

Our regional distributioncenters are central to our operations and range in size from approximately8,000 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 Barnett Pro Centers in existing distributioncenters and in freestanding locations, which allow customers to obtain productsfrom a fixed location without ordering in advance. We plan to continue to openselect Barnett Pro Centers in geographic locations with high concentrations ofprofessional contractors.

*Inbound Logistics*

Historically, ourdistribution centers were decentralized, with most of our vendors 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 vendor shipments andefficiently re-distributes products to our regional distribution centers.Suppliers directly ship some over-sized or seasonal products to regionaldistribution centers by suppliers.

*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 (typically 50 miles), ourown trucks or third-party carriers will deliver the products directly tothe customer either on the same day or the next day. For customers locatedoutside the local delivery radius of a distribution center, we deliver productsvia UPS or another parcel delivery company or, in the case of large orders, bycommon carriers. We arrange for pick-up of returns at no charge to the customerin the local delivery radius. For customers outside the local delivery radius,we provide parcel service pick-up of the returns at no charge and also providea full refund if the return is the result of our error. Portions of our salesare delivered direct from the manufacturer.

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**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 fiscal 2004. The majority of our foreign based suppliers arelocated in China and Taiwan. If we were to lose a key foreign supplier, itwould disrupt our supply chain for approximately 60 to 90 days by requiring usto procure from another source such as another foreign supplier or a domesticsupplier. If we were to lose our key suppliers from an individualcountry—caused by such events as a natural catastrophe, political unrest,changes in foreign laws or regulations, changes in local economic conditions,war and other trade issues—we would expect longer disruptions in our supplychain of 120 to 150 days or longer as we focus on sourcing the product(s) requiredin another foreign country or domestically. See “Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Quantitative andQualitative Disclosures about Market Risk.” In addition, uncertainties withrespect to the Chinese legal system may adversely affect us in resolving claimsarising from our Chinese suppliers. Because many laws and regulations arerelatively new and the Chinese legal system is still evolving, theinterpretations of many laws, regulations and rules are not alwaysuniform. Moreover, the relative inexperience of China’s judiciary in many casescreates additional uncertainty as to the outcome of any litigation, and theinterpretation 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.

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 customer service and inventory managementsystem that allows us to manage customer relationships and to administer anddistribute thousands of products. Our systems encompass all major businessfunctions for each of our main brands and enable us to receive and processorders, manage inventory, verify credit and payment history, generate customerinvoices, receive payments and manage our proprietary mail order customer lists.We have consistently invested in our information technology, as we believe thatthe efficiency and flexibility of our information system are critical to thesuccess of our business.

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Our information systems have been instrumental in ourefforts to streamline our inventory management processes. Our informationsystems track each item of our inventory and its location within ourdistribution network. By monitoring inventory levels, we are able to quicklyreorder products or shift inventory through our distribution network in orderto ensure product availability. Our systems also allow us to monitor sales ofproducts, enabling us to eliminate products that do not perform to our salestargets. Our information systems have also allowed us to create a more efficientorder fulfillment process. All of our local distribution centers are linked toour information systems, which provide them with real-time access to inventoryavailability, order tracking and customer creditworthiness.

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 touse us as their single source of MRO supplies.

**Competition**

The MRO product distribution industry is a large,fragmented industry that 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 Hughes Supply, Hughes MRO, Home Depot Supply, Inc.,Ferguson and W.W. Grainger, Inc. Each of these competitors markets theirproducts through the use of direct sales forces as well as direct mail andcatalogs. In addition, we face competition from traditional channels ofdistribution such as retail outlets, small dealerships and large warehousestores, including Home Depot and Lowe’s. We also compete with buying groupsformed by smaller distributors, Internet-based procurement servicecompanies, auction businesses 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 and increase efficiency. Furthermore, MRO productcustomers are continuing to seek low cost alternatives to replace traditionalmethods of purchasing and sources of supply. We believe that the current trendis for customers to reduce the number of suppliers and rely on lower costalternatives such as direct mail and/or integrated supply arrangements, which willcontribute to competition in our industry. Finally, we expect that newcompetitors will develop over time as Internet-based enterprises becomemore established and 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 suchcosts that are material. Furthermore, we believe that we are in compliance inall material respects with all environmental laws and regulations applicable toour facilities and operations.

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**Trademarks andOther 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®, U.S. Lock®, Hardware Express®, SunStar®and AF LightingTM. We believe that our trademarks and other proprietary rightsare important to our success and our competitive position. Accordingly, ourpolicy is to pursue and maintain registration of our trade names and trademarkswhenever possible and to oppose vigorously any infringement or dilution of ourtrade names and trademarks.

**Employees**

As of December 31, 2004, we had approximately2,350 employees, of whom 108 were unionized. Currently we have two laboragreements in place: one for our Mt. Laurel, New Jersey distribution center andone for our Elkridge, Maryland distribution center. The Mt. Laurel, New Jerseyagreement was renegotiated on October 18, 2004 and will expire on October 15,2007. The total number of employees within this bargaining unit is 65. TheElkridge, Maryland agreement was renegotiated on November 1, 2004 and willexpire on October 31, 2007. The total number of employees within thisbargaining unit is 43. We have not experienced any work stoppages resultingfrom management or union disagreements and believe that our employee relationsare satisfactory.

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**ITEM 2.**                *Properties*

Our corporate headquarters is located in Jacksonville,Florida.

Weoperate the following distribution facilities and contractor showrooms(1):
| **Distribution Center** | ** ** | ** ** | ** ** | **Square Footage** | ** ** | **Distribution Center** | ** ** | ** ** | ** ** | **Square Footage** | ** ** |
|------------------------------|------------|------------|------------|-------------------------|------------|------------------------------|------------|------------|------------|-------------------------|------------|
| Birmingham, AL               |       |       | 30,618     |                    |       | Ekridge, MD                  |       |       | 126,504    |                    |       |
| Tempe, AZ                    |       |       | 42,081     |                    |       | Farmington Hills, MI         |       |       | 70,035     |                    |       |
| Cerritos, CA                 |       |       | 39,455     |                    |       | St. Louis, MO                |       |       | 59,777     |                    |       |
| Hayward, CA                  |       |       | 26,144     |                    |       | Charlotte, NC                |       |       | 45,600     |                    |       |
| Ontario, CA                  |       |       | 46,200     | (1)                     |       | Mt. Laurel, NJ               |       |       | 70,000     |                    |       |
| Sacramento, CA               |       |       | 48,235     |                    |       | Pinebrook, NJ                |       |       | 6,500      | (1)                     |       |
| San Diego, CA                |       |       | 24,705     |                    |       | Teterboro, NJ                |       |       | 5,400      | (1)                     |       |
| Edmonton, CN                 |       |       | 7,557      |                    |       | North Las Vegas, NV          |       |       | 36,000     |                    |       |
| Oakville, CN                 |       |       | 17,069     |                    |       | Las Vegas, NV                |       |       | 11,277     |                    |       |
| Aurora, CO                   |       |       | 69,500     |                    |       | Brentwood, NY                |       |       | 42,000     | *                       |       |
| Denver, CO                   |       |       | 5,042      | (1)                     |       | Depew, NY                    |       |       | 21,728     |                    |       |
| Clearwater, FL               |       |       | 8,640      | (1)                     |       | Cincinnati, OH               |       |       | 33,711     |                    |       |
| Hollywood, FL                |       |       | 53,600     |                    |       | Columbus, OH                 |       |       | 36,264     |                    |       |
| Jacksonville, FL             |       |       | 8,400      |                    |       | Oklahoma City, OK            |       |       | 15,340     | (1)                     |       |
| Jacksonville, FL             |       |       | 47,370     |                    |       | Bristol, PA                  |       |       | 55,000     |                    |       |
| Miami, FL                    |       |       | 17,920     | (1)                     |       | Leetsdale, PA                |       |       | 37,000     |                    |       |
| Orlando, FL                  |       |       | 30,000     |                    |       | Pittsburgh, PA               |       |       | 26,662     | (1)                     |       |
| Pompano Beach, FL            |       |       | 78,000     |                    |       | Hato Tejas, PR               |       |       | 23,657     |                    |       |
| Tampa, FL                    |       |       | 40,000     |                    |       | Florence, SC                 |       |       | 34,000     |                    |       |
| Doraville, GA                |       |       | 52,320     |                    |       | Fayetville, TN               |       |       | 40,000     |                    |       |
| Marietta, GA                 |       |       | 10,160     | (1)                     |       | Nashville, TN (NDC)          |       |       | 317,085    |                    |       |
| Carol Stream, IL             |       |       | 42,106     |                    |       | Memphis, TN                  |       |       | 17,580     |                    |       |
| Crestwood, IL                |       |       | 6,000      | (1)                     |       | Nashville, TN                |       |       | 24,900     |                    |       |
| Wheeling, IL                 |       |       | 5,783      | (1)                     |       | Dallas, TX                   |       |       | 15,697     | (1)                     |       |
| Fishers, IN                  |       |       | 44,840     |                    |       | El Paso, TX                  |       |       | 42,837     |                    |       |
| Lenexa, KS                   |       |       | 22,482     |                    |       | Fort Worth, TX               |       |       | 10,000     | (1)                     |       |
| Jeffersontown, KY            |       |       | 8,700      |                    |       | Grand Prairie, TX            |       |       | 106,245    |                    |       |
| Louisville, KY               |       |       | 38,040     |                    |       | Houston, TX                  |       |       | 64,000     |                    |       |
| Louisville, KY               |       |       | 60,000     | *                       |       | San Antonio, TX              |       |       | 19,200     |                    |       |
| Harahan, LA                  |       |       | 33,000     |                    |       | Seattle, WA                  |       |       | 38,218     |                    |       |
| Woburn, MA                   |       |       | 5,015      | (1)                     |       | Lynwood, WA                  |       |       | 5,472      | (1)                     |       |
| Worcester, MA                |       |       | 60,108     |                    |       | New Berlin, WI               |       |       | 9,264      | (1)                     |       |
| Baltimore, MD                |       |       | 5,400      | (1)                     |       |                         |       |       |       |                    |       |

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*                    Ownedproperties

**ITEM 3.**                *Legal Proceedings*

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.**                *Submission of Matters to a Vote of Security Holders*

On December 10, 2004, our sole shareholder at thetime, Interline New Jersey, by unanimous written consent, approved thereorganization merger that resulted in our becoming the sole shareholder ofInterline New Jersey, approved the 2004 Equity Incentive Plan and also approvedthe other transactions described below under “Item 7. Management’s Discussionand Analysis of Financial Condition and Results of Operations—Liquidity andCapital Resources—The Initial Public Offering and Related Transactions.”

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**PART II**

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

(a)   Our common stock has been publicly traded on the New York StockExchange since December 16, 2004. As of March 9, 2005, basedupon the number of holders on record, there were approximately 47 holders ofour outstanding common stock. We have never declared any dividends on ourcommon stock. The following is a summary oftransactions by us involving sales of securities of Interline Opco and of usthat were not registered under the Securities Act during the last fiscal year:

(a)           On January 9,2004, Interline Opco granted options to purchase an aggregate of 28 shares ofthe common stock of Interline Opco to an employee, each at an exercise price of$41.05 per share.

(b)          On February 17,2004, Interline Opco granted options to purchase an aggregate of 29 shares ofthe common stock of Interline Opco to an employee, each at an exercise price of$41.05 per share.

(c)           Immediately prior tothe consummation of the IPO, we issued 19,250,000 shares of our common stock tothe existing stockholders of Interline Opco, of which 910 shares of our commonstock were issued to existing holders of warrants to purchase Interline Opco’scommon stock, issued options to purchase an aggregate of 2,327 shares of ourcommon stock to existing holders of options to purchase common stock ofInterline Opco, issued additional options to purchase 2,465,682 shares ofcommon stock and granted 175,820 restricted stock awards to our seniormanagement and 10,000 restricted stock awards to certain directors.

The issuances disclosed in paragraphs (a) and (b) andthe grant of restricted stock awards disclosed in paragraph (c) wereexempt from registration in reliance upon Section 4(2) of theSecurities Act of 1933, as amended (the “Securities Act”) or promulgatedthereunder as transactions by an issuer not involving a public offering and/orunder Rule 701 under the Securities Act as exempt offers and sales ofsecurities under a written compensatory benefit plan. The grants of options topurchase Interline Opco common stock disclosed in paragraphs (a) and (b) weremade under Interline Opco’s 2000 Stock Award Plan, and the awards of optionsand grants of restricted stock awards disclosed in paragraph (c) weremade under our 2004 Equity Incentive Plan. All recipients were accredited orsophisticated investors. Appropriate legends were affixed to the sharecertificates and other instruments issued in such transactions. All recipientseither have received adequate information about us or had access, throughemployment or other relationships, to such information.

The issuances disclosed in paragraph (c), otherthan the grant of restricted stock awards, were made in reliance on Section 4(2) ofthe Securities Act. All recipients were accredited or sophisticated investors.Appropriate legends were affixed to the share certificates and otherinstruments issued in such transactions. All recipients either received adequateinformation about us or had access, through employment or other relationships,to such information.

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Thefollowing table sets forth information as of December 31, 2004 regardingcompensation plans under which the Company’s equity securities are authorizedfor 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     |       |       | 2,468,009  |                                                                                                             |       |                                                                             | $          | 17.61 |   |   |   | 527,566 | (1) |   |
| Equity  compensation plans not approved by security holders |       |       | —     |                                                                                                             |       |                                                                             | —     |   |   |   | — |   |   |
| Total                                                       |       |       | 2,468,009  |                                                                                                             |       |                                                                             | $          | 17.61 |   |   |   | 527,566 | (1) |   |
|                                                             |            |            |            |                                                                                                                  |            |                                                                                  |            |  |  |  |  |  |  |  |  |  |

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(1)          Reduced by therestricted stock awards granted to management pursuant to the 2004 Equity Plan andnot included in column (a) because they are not options.

(b)   *Use of proceeds.  *Our Registration Statement on Form S-1(Commission File No. 333-116482) relating to the sale of up to 14,375,000shares of common stock by us and certain selling shareholders in the IPO wasdeclared effective by the Securities and Exchange Commission on December 15,2004 and the offering of all registered shares at $15.00 per share wascompleted by January 10, 2005. The IPO is described in greater detailbelow under “Item 7. Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Liquidity and Capital Resources—the InitialPublic Offering and Related Transactions.” The managing underwriters in theoffering were Credit Suisse First Boston and Lehman Brothers. Of the amountregistered, 1,708,000 shares were sold on behalf of selling shareholders andthe remainder was sold on our behalf. The net proceeds from the sale of sharesof common stock offered by us were $171.8 million after deductingunderwriting discounts and commissions, offering expenses and loan financingexpenses.

We usedthe gross proceeds received by us from this offering for the followingpurposes:
| **Use of Funds:**                           | ** ** | ** **             | ** ** | **Amount ** | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|------------------|------------|
| ** **                                            | ** ** | **(In millions)** | ** ** |
| Redemption of  11.5% senior subordinated notes(1)     |       |                   | $          | 78.1             |       |   |
| Consideration to  holders of preferred stock(2)       |       |                   | 55.0       |             |       |
| Partial repayment  of term loan under credit facility |       |                   | 31.3       |             |       |
| Costs to  terminate interest rate swap agreements(3)  |       |                   | 4.6        |             |       |
| Transaction fees  and expenses(4)                     |       |                   | 18.2       |             |       |
| Other(5)                                              |       |                   | 2.8        |             |       |
|                                                  |       |                   | $          | 190.0            |       |   |

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(1)          Includes $8.1 millionof premiums payable upon early redemption of the 11.5% notes, but does notinclude accrued interest payable.

(2)          Consists of cashconsideration payable to holders of Interline New Jersey preferred stock inconnection with our reincorporation merger, including certain of our executiveofficers and principal stockholders.

(3)          Representsthe costs of terminating the swap agreements on December 21, 2004.

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(4)          Including $13.1 millionof underwriting commissions, of which approximately $1.6 million was paid toJ.P. Morgan Securities Inc., an affiliate of a holder of more than 10% of ouroutstanding common stock, $2.0 million in legal expenses and $3.1 million inother expenses including fees. For further information regarding fees andexpenses, see “Management’s Discussion and Analysis of Financial Condition andResults of Operations—Liquidity and Capital Resources—The Initial PublicOffering and Related Transactions.”

(5)          Appliedtoward interim borrowings made under our revolving credit facility.

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**ITEM 6.**                *Selected Financial Data*

Thetable below presents our selected historical consolidated financial data forfiscal 2004, 2003, 2002, 2001 and 2000. The information presented below shouldbe read in 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 31,**                | ** ** | **December 26,** | ** ** | **December 27,** | ** ** | **December 28,** | ** ** | **December 29,** | ** ** |
| ** **                                           | ** ** | **2004(4)**                          | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                           | ** ** | **(dollars in thousands)** | ** ** |
| **Income Statement Data:**                           |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net sales                                            |       |                                 | $          | 743,905 |   |   |   | $ | 640,138 |   |   |   | $ | 637,530 |   |   |   | $ | 609,356 |   |   |   | $ | 382,108 |   |   |
| Cost of sales                                        |       |                                 | 458,516    |   |   |   | 395,894 |   |   |   | 401,212 |   |   |   | 384,153 |   |   |   | 230,783 |   |   |
| Gross profit                                         |       |                                 | 285,389    |   |   |   | 244,244 |   |   |   | 236,318 |   |   |   | 225,203 |   |   |   | 151,325 |   |   |
| Selling, general and  administrative expenses   |       |                                 | 202,084    |   |   |   | 171,091 |   |   |   | 164,328 |   |   |   | 157,801 |   |   |   | 109,758 |   |   |
| Depreciation and  amortization                       |       |                                 | 12,600     |   |   |   | 10,949 |   |   |   | 11,282 |   |   |   | 16,526 |   |   |   | 8,689 |   |   |
| IPO Related Expenses(1)                              |       |                                 | 9,215      |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Special costs and  expenses(1)                       |       |                                 | —     |   |   |   | 607 |   |   |   | 4,893 |   |   |   | 3,061 |   |   |   | 12,861 |   |   |
| Operating income                                     |       |                                 | 61,490     |   |   |   | 61,597 |   |   |   | 55,815 |   |   |   | 47,815 |   |   |   | 20,017 |   |   |
| Interest expense, net                                |       |                                 | (39,798    | ) |   |   | (40,317 | ) |   |   | (38,625 | ) |   |   | (40,004 | ) |   |   | (19,002 | ) |   |
| Change in fair value of  interest rate  swaps        |       |                                 | 8,232      |   |   |   | 5,272 |   |   |   | (5,825 | ) |   |   | (6,874 | ) |   |   | — |   |   |
| Loss on extinguishment  of debt                      |       |                                 | (660       | ) |   |   | (14,893 | ) |   |   | — |   |   |   | — |   |   |   | (12,095 | ) |   |
| Other income                                         |       |                                 | 454        |   |   |   | 40 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Income before income  taxes                          |       |                                 | 29,718     |   |   |   | 11,699 |   |   |   | 11,365 |   |   |   | 937 |   |   |   | (11,080 | ) |   |
| Provision (benefit) for  income taxes                |       |                                 | 11,617     |   |   |   | 4,547 |   |   |   | 4,219 |   |   |   | 2,595 |   |   |   | (1,607 | ) |   |
| Income (loss) before  accounting change              |       |                                 | 18,101     |   |   |   | 7,152 |   |   |   | 7,146 |   |   |   | (1,658 | ) |   |   | (9,473 | ) |   |
| Cumulative effect on  change in accounting principle |       |                                 | —     |   |   |   | — |   |   |   | — |   |   |   | 3,221 |   |   |   | — |   |   |
| Net income (loss)                                    |       |                                 | 18,101     |   |   |   | 7,152 |   |   |   | 7,146 |   |   |   | (4,879 | ) |   |   | (9,473 | ) |   |
| Preferred Stock  Dividends                           |       |                                 | (54,389    | ) |   |   | (48,623 | ) |   |   | (42,470 | ) |   |   | (37,024 | ) |   |   | (15,509 | ) |   |
| Net (loss) applicable to  common stockholders        |       |                                 | $          | (36,288 | ) |   |   | $ | (41,471 | ) |   |   | $ | (35,324 | ) |   |   | $ | (41,903 | ) |   |   | $ | (24,982 | ) |   |
| Loss per common share—basic                     |       |                                 | $          | (25.21 | ) |   |   | $ | (632.74 | ) |   |   | $ | (538.55 | ) |   |   | $ | (638.84 | ) |   |   | $ | (123.86 | ) |   |
| Loss per common share—diluted                   |       |                                 | $          | (25.21 | ) |   |   | $ | (632.74 | ) |   |   | $ | (538.55 | ) |   |   | $ | (638.84 | ) |   |   | $ | (123.86 | ) |   |
| **Cash Flow and Other Data:**                        |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net cash (used in) provided by:                      |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating activities                                 |       |                                 | $          | (1,403 | ) |   |   | $ | 33,089 |   |   |   | $ | 10,415 |   |   |   | $ | 15,697 |   |   |   | $ | (12,628 | ) |   |
| Investing activities                                 |       |                                 | (7,329     | ) |   |   | (26,795 | ) |   |   | (4,944 | ) |   |   | (8,242 | ) |   |   | (217,872 | ) |   |
| Financing activities                                 |       |                                 | 76,006     |   |   |   | (10,962 | ) |   |   | (3,285 | ) |   |   | (9,852 | ) |   |   | 231,039 |   |   |
| Adjusted EBITDA(2)                                   |       |                                 | 83,759     |   |   |   | 72,586 |   |   |   | 67,097 |   |   |   | 64,341 |   |   |   | 28,706 |   |   |
| Capital expenditures                                 |       |                                 | 6,763      |   |   |   | 4,556 |   |   |   | 4,944 |   |   |   | 8,214 |   |   |   | 5,572 |   |   |
| **Balance Sheet Data (as of end of period):**   |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                           |       |                                 | $          | 69,178 |   |   |   | $ | 1,612 |   |   |   | $ | 5,557 |   |   |   | $ | 3,327 |   |   |   | $ | 5,909 |   |   |
| Total assets                                         |       |                                 | 673,380    |   |   |   | 565,282 |   |   |   | 551,718 |   |   |   | 546,308 |   |   |   | 526,080 |   |   |
| Total debt(3)                                        |       |                                 | 303,275    |   |   |   | 341,525 |   |   |   | 326,024 |   |   |   | 326,070 |   |   |   | 331,793 |   |   |

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(1)          IPO related expensesconsist of additional compensation expense for forgiveness of shareholder loansand one-time bonuses that relate to the IPO Transaction. Special costs andexpenses consist of costs associated with acquisition and recapitalizationactivities, including integration and assimilation expenses, severance paymentsand transaction fees and expenses.

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(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, IPO related expenses, provision (benefit)for income taxes and depreciation and amortization. Adjusted EBITDA differsfrom earnings before interest, taxes, depreciation and amortization (“EBITDA”)and may not be comparable to EBITDA or Adjusted EBITDA as reported by othercompanies. The computation of Adjusted EBITDA is as follows:

**Adjusted EBITDA Reconciliation to Net Income (Loss)**
| ** **                                           | ** ** | **Fiscal Year Ended**      | ** ** |
|------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                           | ** ** | **December 31,**                | ** ** | **December 26,** | ** ** | **December 27,** | ** ** | **December 28,** | ** ** | **December 29,** | ** ** |
| ** **                                           | ** ** | **2004(4)**                          | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                           | ** ** | **(dollars in thousands)** | ** ** |
| Net income (loss)                                    |       |                                 | $          | 18,101 |   |   |   | $ | 7,152 |   |   |   | $ | 7,146 |   |   |   | $ | (4,879 | ) |   |   | $ | (9,473 | ) |   |
| Interest expense  (income), net                      |       |                                 | 39,798     |   |   |   | 40,317 |   |   |   | 38,625 |   |   |   | 40,004 |   |   |   | 19,002 |   |   |
| 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                      |       |                                 | 660        |   |   |   | 14,893 |   |   |   | — |   |   |   | — |   |   |   | 12,095 |   |   |
| IPO related  expenses                                |       |                                 | 9,215      |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Provision  (benefit) for income taxes           |       |                                 | 11,617     |   |   |   | 4,547 |   |   |   | 4,219 |   |   |   | 2,595 |   |   |   | (1,607 | ) |   |
| Depreciation and  amortization                       |       |                                 | 12,600     |   |   |   | 10,949 |   |   |   | 11,282 |   |   |   | 16,526 |   |   |   | 8,689 |   |   |
| Adjusted EBITDA                                      |       |                                 | $          | 83,759 |   |   |   | $ | 72,586 |   |   |   | $ | 67,097 |   |   |   | $ | 64,341 |   |   |   | $ | 28,706 |   |   |

 

                           AdjustedEBITDA 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 and compare our operating performancewith that of our competitors. Management also uses Adjusted EBITDA for planningpurposes, including the preparation of annual operating budgets, to determineappropriate levels of operating and capital investments. Adjusted EBITDAexcludes certain items, including change in fair value of interest rate swaps,cumulative effect of change in accounting principle, loss on extinguishment ofdebt, and IPO related expenses such as additional compensation expense forforgiveness of shareholder loans and one-time bonuses that relateto financing transactions and which we believe are not indicative of our coreoperating results. We therefore utilize Adjusted EBITDA as a useful alternativeto net income as an indicator of our operating performance. However, AdjustedEBITDA is not a measure of financial performance under GAAP and Adjusted EBITDAshould be considered in addition to, but not as a substitute for, othermeasures of financial performance reported in accordance with GAAP, such as netincome. While we believe that some of the items excluded from 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)          Fiscalyear ended December 2004 was a 53 week year. All other years contain 52weeks.

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

Average organic daily sales are defined as sales for aperiod of time divided by the number of shipping days in that period of timeexcluding any sales from acquisitions made subsequent to the beginning of the 

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prior year periodexcluding the effect of the freight reclassification announced in the thirdquarter of 2003. The computation of Average Organic Daily Sales is as follows:
| ** **                        | ** ** | **Quarter Ended** | ** ** | **Fiscal Year Ended** | ** ** |
|-----------------------------------|------------|------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | **December 31,**  | ** ** | **December 26,**           | ** ** | ** ** | ** ** | **December 31,** | ** ** | **December 26,** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **2004**               | ** ** | **2003**                        | ** ** | **% Variance** | ** ** | **2004** | ** ** | **2003** | ** ** | **% Variance** | ** ** |
| Net Sales                         |       |                   | $          | 195,522                         |       |   |   | $ | 158,903 |   |   |   | 23.0 | % |   |   | $ | 743,905 |   |   |   | $ | 640,138 |   |   |   | 16.2 | % |   |
| Less : Florida  Lighting          |       |                   | (6,209     | )                               |       |   | — |   |   |   |   |   |   |   | (32,274 | ) |   |   | — |   |   |   |   |   |   |
| Freight Revenue  Reclassification |       |                   | —     |                            |       |   | — |   |   |   |   |   |   |   | (2,745 | ) |   |   | — |   |   |   |   |   |   |
| Organic Sales                     |       |                   | $          | 189,313                         |       |   |   | $ | 158,903 |   |   |   | 19.1 | % |   |   | $ | 708,885 |   |   |   | $ | 640,138 |   |   |   | 10.7 | % |   |
| Daily Sales:                      |       |                   |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Ship Days                         |       |                   | 65         |                            |       |   | 61 |   |   |   |   |   |   |   | 256 |   |   |   | 252 |   |   |   |   |   |   |
| Average Daily  Sales(1)           |       |                   | $          | 3,008                           |       |   |   | $ | 2,605 |   |   |   | 15.5 | % |   |   | $ | 2,906 |   |   |   | $ | 2,540 |   |   |   | 14.4 | % |   |
| Average Organic Daily  Sales)2)   |       |                   | $          | 2,913                           |       |   |   | $ | 2,605 |   |   |   | 11.8 | % |   |   | $ | 2,769 |   |   |   | $ | 2,540 |   |   |   | 9.0 | % |   |

 

(1)   Averagedaily sales are defined as sales for a period of time divided by the number ofshipping days in that period of time.

(2)   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 andexcluding the effect of the freight reclassification announced in the thirdquarter of 2003.

Average organic daily sales is presented hereinbecause we believe it to be relevant and useful information to our investorssince it is used by our management to evaluate the operating performance of ourbusiness as adjusted to exclude the impact of the Florida Lighting acquisitionand certain changes in accounting principles and compare our organic operatingperformance with that or our competitors. However, average organic daily salesis not a measure of financial performance under GAAP and it should beconsidered in addition to, but not as a substitute for, other measures offinancial performance reported in accordance with GAAP, such as net sales. Managementutilizes Adjust Organic Daily Sales as an operating performance measure inconjunction with GAAP measures such as net sales.

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**ITEM 7.**                *Management’s Discussion and Analysis of Financial Condition and Resultsof 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 “—Forward-LookingStatements,” below.*

**Overview**

As a leading national distributor and direct marketerof over 45,000 specialty MRO products, we sell to over 150,000 active customeraccounts. Our highly diverse customer baseincludes facilities maintenance customers, professional contractors andspecialty distributors. Our customers range in size from individual contractorsand independent hardware stores to apartment management companies and nationalpurchasing groups. No single customer accounted for more than 5% of our salesduring fiscal 2004.

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 highly fragmented and composed of small, local and regionalcompanies. Within our industry, we focus on serving customers in threeprincipal end markets: facilities maintenance, professional contractors andspecialty distributors. We estimate that the markets we serve are approximately$80 billion in size in the aggregate.

Wemarket and sell our products primarily through eight 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 AccountingPolicies**

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 expensesduring the 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 believe arethe most critical in order to fully understand and evaluate our financialposition and results of operations include the following policies.

*EstimatingAllowances for Doubtful 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 later become uncollectible.Estimates are used to determine the allowances for bad debts and are based onhistorical collection experience, current economic trends, credit worthiness ofcustomers and changes in customer payment terms. Adjustments to credit limitsare made based upon payment history and our customers’ current creditworthiness. If the financial condition of our customers were to deteriorate,allowances may be needed that will increase selling, general and administrativeexpenses and decrease accounts receivable. At December 31, 2004, theallowance for doubtful accounts totaled $6.9 million.

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*EstimatingWrite-Offs for Excess and Obsolete Inventory*

Inventories are valued atthe lower of cost or market. We determined inventory cost using the averagecost method. 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. 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 vendorsor the salability of our products, additional write-offs may be needed thatwill increase our cost of sales and decrease inventory.

*Impairment ofGoodwill, 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 corporate general and administrativeexpenses in our statements of operations, and would result in reduced carryingamounts 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 SFAS 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 the lossis 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 general and administrative expenses in our statements ofoperations. Management, with the assistance of outside counsel, determineswhether it is probable that a liability from a legal claim has been incurredand estimates the amount of loss. The analysis is based upon potential results,assuming a combination of litigation and settlement strategies. As discussed inNote 11 to our audited consolidated financial statements included in thisreport, management does not believe that currently pending proceedings willhave a material adverse effect on our consolidated financial position. It ispossible, however, that future results of operations for any particular periodcould be materially affected by changes in our assumptions related to theseproceedings.

*DerivativeFinancial Instruments*

We periodically enter intoderivative financial instruments, including interest rate exchange agreements,or swaps, to manage exposure to fluctuations in interest rates on our debt. In December 2004,in conjunction with our initial public offering, we terminated all interestrate exchange agreements, or swaps. Under our former swap agreements we paid afixed rate on the notional amount to a bank and the bank paid us a variablerate on the notional amount equal to a base LIBOR rate. These interest rateswaps did not qualify for hedge accounting under SFAS 133 “Accounting forDerivative Statements and Hedging Activities,” and were recorded at fair valuein our balance sheet with changes in the fair value reflected in 

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non-operatingexpense. The fair market value of these instruments is determined by quotes obtainedfrom the related counter parties.

**Results ofOperations**

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 31,**                | ** ** | **December 26,** | ** ** | **December 27,** | ** ** |
| ** **                                   | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                   | ** ** | **$**                                | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                   | ** ** | **(dollars in thousands)** | ** ** |
| Net sales                                    |       | $                                    | 743,905    |   | 100.0 | % | $ | 640,138 |   | 100.0 | % | $ | 637,530 |   | 100.0 | % |
| Cost of sales                                |       | 458,516                              |       | 61.6 | % | 395,894 |   | 61.8 | % | 401,212 |   | 62.9 | % |
| Gross profit                                 |       | 285,389                              |       | 38.4 | % | 244,244 |   | 38.2 | % | 236,318 |   | 37.1 | % |
| Selling, general and administrative expenses |       | 202,084                              |       | 27.2 | % | 171,091 |   | 26.7 | % | 164,328 |   | 25.8 | % |
| Depreciation and  amortization               |       | 12,600                               |       | 1.7 | % | 10,949 |   | 1.7 | % | 11,282 |   | 1.8 | % |
| IPO Related  Expenses                        |       | 9,215                                |       | 1.2 | % | — |   | 0.0 | % | — |   | 0.0 | % |
| Special costs and  expenses                  |       | —                               |       | 0.0 | % | 607 |   | 0.1 | % | 4,893 |   | 0.8 | % |
| Operating income                             |       | 61,490                               |       | 8.3 | % | 61,597 |   | 9.6 | % | 55,815 |   | 8.8 | % |
| Change in fair value of interest rate swaps  |       | 8,232                                |       | 1.1 | % | 5,272 |   | 0.8 | % | (5,825 | ) | -0.9 | % |
| Loss on  extinguishment of debt              |       | (660                                 | )          | -0.1 | % | (14,893 | ) | -2.3 | % | — |   | 0.0 | % |
| Interest expense,  net                       |       | (39,798                              | )          | -5.3 | % | (40,317 | ) | -6.3 | % | (38,625 | ) | -6.1 | % |
| Other income                                 |       | 454                                  |       | 0.1 | % | 40 |   | 0.0 | % | — |   | 0.0 | % |
| Income before income taxes                   |       | 29,718                               |       | 4.0 | % | 11,699 |   | 1.8 | % | 11,365 |   | 1.8 | % |
| Provision for  income taxes                  |       | 11,617                               |       | 1.6 | % | 4,547 |   | 0.7 | % | 4,219 |   | 0.7 | % |
| Net income                                   |       | $                                    | 18,101     |   | 2.4 | % | $ | 7,152 |   | 1.1 | % | $ | 7,146 |   | 1.1 | % |

 

The following discussionrefers to the term average daily sales. Average daily sales are defined assales for a period of time divided by the number of shipping days in thatperiod of time.

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

*Overview.  *Netsales for 2004 were $743.9 million, an increase of 16.2% over 2003. As theeconomy strengthened throughout the year, we saw improvement in our facilitiesmaintenance, professional contractor, and specialty distributors markets. Wealso experienced market share gains in each of these markets due to the successof the numerous growth initiatives we put in place throughout the year, and dueto the Florida Lighting acquisition which we completed in November, 2003. Ourorganic 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.

Interline’s average organic daily sales, which is ourmeasure of comparable period revenue growth without acquisitions increased11.8% for the fourth quarter of 2004 and 9% for the full fiscal year. Thismeasurement indicates that Interline is growing at a faster rate than theeconomy, and that our growth rate has continued to improve throughout the year.Average organic daily sales growth is not a measure of performance under GAAP. Fora reconciliation of average organic daily sales growth to GAAP-based financialmeasures, see “Item 6. Selected Financial Data—Reconciliation of AverageOrganic Daily Sales.”

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2004 also showed improvement in key profitabilitymetrics. Gross profit margin improved 20 basis points compared to 2003. Excludingone-time expenses related to our initial public offering in December, operatingincome increased $9.1 million or 14.8% over the prior year period and adjustedEBITDA increased from $72.6 million to $83.8 million or 15.4% over the prioryear period. Adjusted EBITDA is not a measure of financial performance underGAAP. For a reconciliation of EBITDA to GAAP-based financial measures, see “Item6. Selected Financial Data—Reconciliation of Adjusted EBITDA to Net Income(Loss).

*Net Sales.  *Ournet sales increased by $103.8 million, or 16.2%, to $743.9 million inthe fiscal year ended December 31, 2004 from $640.1 million in thefiscal year ended December 26, 2003. During 2004 we had 4 moreshipping days than the prior year period. Average daily sales were$2.9 million in the fiscal year ended December 2004 and$2.5 million in the fiscal year ended December 2003, a 14.4%increase. The $103.8 million sales increase included $32.3 millionfrom our Florida Lighting acquisition referenced above and $2.7 million inreclassified freight revenues and costs. Prior to July 2003, freightrevenue was recorded as a reduction of freight costs. The remaining increasewas attributable to improved demand for our products, new sales and growthinitiatives, and price increases. 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.

*Gross Profit.  *Grossprofit increased by $41.1 million, or 16.8%, to $285.4 million in thefiscal year ended December 2004 from $244.2 million in the fiscalyear ended December 2003. Gross profit margins increased to 38.4% for thefiscal year ended December 2004 from 38.2% for the fiscal year ended December 2003.This improvement in our gross profit margins is related to having a full yearof higher margin Florida Lighting sales, increased sales in our private labelprogram, and favorable merchandising offset by higher sales of HVAC equipmentand water heaters, which generally carry lower gross margins.

*Selling, General and AdministrativeExpenses.  *SG&A expenses increased by$31.0 million, or 18.1%, to $202.1 million in the fiscal year ended December 2004from $171.1 million in the fiscal 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.

*Depreciation and Amortization.  *Depreciationand amortization expense increased by $1.7 million, or 15.1%, to$12.6 million in the fiscal year ended December 2004 from$10.9 million in the fiscal year ended December 2003. This wasprimarily due to a change in accounting estimate made in the third quarter of2003 to change the estimated useful life of certain acquired customer lists to17 years from 40 years, and the amortization associated with our FloridaLighting acquisition.

*IPO Related Expenses.  *Theseexpenses consist of $2.9 million for forgiveness of shareholder loans and $6.2million for one-time bonuses to senior employees in connection with our InitialPublic Offering transaction discussed below.

*Special Costs and Expenses.  *Therewere no special costs and expenses during the fiscal year ended December 2004and $0.6 million in the fiscal year ended December 2003. Specialcosts and expenses in 2003 consisted of non-recurring costs incurred inconnection with the Barnett Acquisition.

*OperatingIncome.  *As a result of the foregoing, operating incomedecreased by $0.1 million, or 0.2%, to $61.5 million in the fiscalyear ended December 2004 from $61.6 million in the fiscal year ended 

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December 2003.Excluding the effect of IPO Related Expenses of $9.2 million, operating incomeincreased by $9.1 million, an increase of 14.8% over the prior year period.

*Changein Fair Value of Interest Rate Swaps.  *We recorded again of $8.2 million in the fiscal year ended December 2004 and$5.3 million in the fiscal year ended December 2003 related tochanges in the market value of our interest rate swap instruments. The non-cashgains were attributable to changes in market conditions, including but notlimited to fluctuations in interest rates, general market volatility, and theremaining tenor of our instruments. Our interest rate swaps were terminated atthe time of the Initial Public Offering.

*InterestExpense.  *Interest expense decreased by$0.6 million in the fiscal year ended December 2004 to$39.9 million from $40.5 million in the fiscal year ended December 2003.This net decrease was attributable to lower average debt balances, the resultof termination of the interest rate swap agreements and the pay down of $31.3million of our term loan and the write-off of related deferred financing costsin December 2004.

*Loss onExtinguishment of Debt*.   In connection with our InitialPublic Offering and amendment of our senior credit facility, we recorded anexpense of $0.7 million for the early extinguishment of debt. This expenseresulted from the write-off of the unamortized loan fees on our former creditfacility. As part of our Initial Public Offering, we redeemed $70.0 million ofthe 11.5% senior subordinated notes in January 2005. This redemption wasmade 30 days after the closing of our Initial Public Offering, 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.

*Provisionfor Income Taxes.  *The provision for income taxes was$11.6 million in the fiscal year ended December 2004 compared to aprovision of $4.5 million in the fiscal year ended December 2003. Theeffective tax rate for the fiscal year ended December 2004 was 39.1%compared to 39.0% in the fiscal year ended December 2003. The increase inthe effective tax rate was due primarily to an increase in state income taxesoffset by a decrease in foreign income taxes.

*Fiscal Year Ended December 26,2003 Compared to Fiscal Year Ended December 27, 2002*

*Overview.  *Netsales in fiscal year 2003 of $640.1 million compared to $637.5 million infiscal year 2002. Given the political and economic uncertainties we faced atthe beginning of fiscal year 2003, we approached the year with a strongemphasis on customer retention, cost control and working capital management.Our two primary markets, facilities maintenance and professional contractors,both experienced declining sales for the first two fiscal quarters. Havingcompleted the integration of Barnett (acquired in 2000) onto our commoninformation and logistics platform, we focused our efforts on eliminating costand gaining efficiencies by standardizing our common products for all of ourbrands, eliminating redundant operating expenses and maximizing the scaleefficiencies of our common fulfillment platform. Completing the Barnettintegration also allowed us to focus heavily on working capital management, andwe successfully reduced our inventory investment by $9.2 million by the end of2003, excluding the Florida Lighting transaction described below. By thebeginning of the fourth fiscal quarter, several of our key markets began torecover. Stronger revenue growth in the fourth quarter allowed us to finishfiscal 2003 with revenues even with 2002 levels. Despite flat sales, operatingincome increased 10.4% for the year. In November 2003, we acquired FloridaLighting, a direct marketer and distributor of lighting and electrical productsbased in Pompano Beach, Florida, in an asset purchase. Through its SunStar andAF Lighting catalog brands, Florida Lighting distributes its products to over6,000 electrical contractors, lighting showrooms and retailers throughout NorthAmerica. During 2003 we consolidated distribution centers in Denver and NewYork. We also made additional investments to expand our successful nationalaccounts program beyond the multi-family housing industry to other facilitiesmarkets, such as healthcare, lodging and commercial office owners.

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*Net Sales.  *Our net salesgrew by $2.6 million, or 0.4%, to $640.1 million in fiscal 2003 from$637.5 million in fiscal 2002. Average daily sales were $2.5 million bothin fiscal 2003 and 2002. During the third quarter of 2003, we reclassifiedfreight revenue from selling, general and administrative costs to net sales. Thisreclassification did not have an effect on operating income. However, on aprospective basis it increases both net sales and selling, general andadministrative costs. The effect of this reclassification in fiscal 2003 was$2.3 million. After adjusting for the effect of this freight reclassificationand the Florida Lighting acquisition, which occurred at the end of November 2003,and represents less than 0.5% of our sales in 2003, sales were relatively levelcompared with the prior year.

*Gross Profit.  *Gross profitincreased by $7.9 million, or 3.4%, to $244.2 million in fiscal 2003from $236.3 million in fiscal 2002. As a percentage of net sales, grossprofit increased by 110 basis points to 38.2% in fiscal 2003 compared to 37.1%in fiscal 2002. This improvement is due to several factors including changes inproduct mix, the expansion of our private label programs, and thereclassification of freight revenue.

*Selling, General and Administrative Expenses.  *SG&Aexpenses increased by $6.8 million, or 4.1%, to $171.1 million infiscal 2003 from $164.3 million in fiscal 2002. As a percentage of netsales, these expenses represented 26.7% in fiscal 2003 compared to 25.8% infiscal 2002. SG&A expenses were increased during the period by the effectof the $2.3 million freight reclassification referred to above. On a comparablebasis, excluding the effect of this reclassification, SG&A expensesincreased $4.5 million, or 2.8%, in fiscal 2003. This increase is primarilyassociated with higher freight costs, increases in health care costs, and anincremental investment in our national accounts program.

*Depreciation and Amortization.  *Depreciationand amortization expense decreased $0.4 million to $10.9 million infiscal 2003 from $11.3 million in fiscal 2002. This was primarily due tothe net effect of the roll off of fully depreciated assets and a change inaccounting estimate made in the third quarter of 2003 to decrease the estimateduseful life of certain acquired customer lists to 17 years, as described inNote 3 to the financial statements contained in this report.

*Special Costs and Expenses.  *Specialcosts and expenses were $0.6 million during fiscal 2003 compared to$4.9 million in fiscal 2002. Special costs and expenses in both of theseperiods consisted of non-recurring costs incurred in connection with ouracquisition of Barnett. These costs included the termination of leases for realproperty, write off of inventory associated with our planned vendorconsolidation efforts, relocation of executive and administrative functions,payment of employee severance, integration of management information systems,physical relocation of inventory and related consulting costs. The significantdecrease from fiscal 2002 was due to the fact that the consolidation of theBarnett Acquisition was substantially completed in fiscal year 2002.

*Operating Income.  *As aresult of the foregoing, operating income increased by $5.8 million, or10.4%, to $61.6 million in fiscal 2003 from $55.8 million in fiscal2002.

*Change in Fair Value of Interest Rate Swaps.  *Werecorded a gain of $5.3 million in fiscal 2003 and a loss of $5.8 millionin fiscal 2002 related to changes in the market value of our interest rate swapinstruments. The non-cash gain and loss recorded were attributable to changesin market conditions including but not limited to fluctuations in interestrates, general market volatility, and the remaining tenor of our instruments.

*Interest Expense.  *Interestexpense increased by $1.7 million in fiscal 2003 to $40.5 million from$38.8 million in fiscal 2002. This increase was attributable to higheraverage debt balances and incrementally higher interest costs associated withour entry into a new credit facility and issuance of $200.0 million aggregateprincipal amount 11.5% senior subordinated notes due 2008, or the 11.5% notes,in May 2003 as part of the Refinancing Transactions (described inLiquidity and Capital Resources).

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*Loss on Extinguishment of Debt*.   Inconnection with our Refinancing Transactions, we recorded an expense of $14.9million for the early extinguishment of debt. This expense resulted from thewrite-off of the unamortized loan fees and discount relating to our formercredit facility and the redemption premium incurred upon redemption of our 16%senior subordinated notes due September 29, 2008, as part of theRefinancing Transactions.

*Provision for Income Taxes.  *Theprovision for income taxes was $4.5 million and $4.2 million infiscal 2003 and 2002, respectively. The effective tax rate for fiscal 2003 was39%.

**Liquidity andCapital Resources**

As of December 31, 2004, we had approximately$91.3 million of availability under our $100.0 million revolvingcredit facility. Historically, our capital requirements have been for debtservice obligations, acquisitions, the expansion and maintenance of ourdistribution network, upgrades of our proprietary information systems andworking capital requirements. We expect this to continue in the foreseeable future.Historically, we have funded these requirements through internally generatedcash flow and funds borrowed under our credit facility. We expect our cash flowfrom operations and the loan availability under our credit facility to be ourprimary source of funds in the future. Letters of credit, which are issuedunder the revolving loan facility under our credit facility, are used tosupport payment obligations incurred for our general corporate purposes. As of December 31,2004, we had $8.7 million of letters of credit issued under the creditfacility. Interest on our 11.5% senior subordinated notes due 2011, or the11.5% notes, is payable semiannually. With respect to borrowings under ourcredit facility, we have the option to borrow at an adjusted LIBOR or analternative base rate. Interest on the credit facility is generally payablequarterly, and with respect to any LIBOR borrowings, on the last day of theinterest period applicable to the term of the borrowing.

We are a holding company with no material businessoperations of our own. Our most significant asset is the capital stock ofInterline New Jersey. We conduct virtually all of our business operationsthrough Interline New Jersey. Accordingly, our only material sources of cashare dividends and distributions with respect to our ownership interests inInterline New Jersey that are derived from the earnings and cash flow generatedby Interline New Jersey. Interline New Jersey might not generate sufficientearnings and cash flow to pay dividends or distributions in the future.Indebtedness under Interline New Jersey’s credit facility and 11.5% notes maylimit or prohibit the payment of dividends or other distributions to us.

Net cash used in operating activities was$1.4 million for fiscal year 2004 compared to net cash provided byoperating activities of $33.1 million in the comparable period for theprior year. Net cash provided by operating activities for fiscal year 2004was lower than the prior year period as a result of our increased investment ininventory associated with our sales growth and an increase in trade accountsreceivable associated with this sales growth. During 2004 inventory increased$26.2 million versus a decrease of $9.1 million in 2003 due to our higher salesvolume and an incremental investment of approximately $6.0 million in inventoryfor new product initiatives and opportunistic year-end purchases. The increasefor the period ending December 2004 was approximately 22.0% and was inline with our sales growth.

Net cash used in investing activities was$7.3 million in the fiscal year ended December 2004 compared to$26.8 million in the fiscal year ended December 2003. Net cash usedin investing activities in the fiscal year ended December 2004 wasprimarily attributable to capital expenditures made in the ordinary course ofbusiness. For the fiscal year ended December 2003, cash used in investingactivities was attributable to purchases of businesses of $22.2 million andcapital expenditures made in the ordinary course of business.

Net cash provided byfinancing activities totaled $76.0 million for fiscal year 2004compared to net cash used in financing activities of $11.0 million in thecomparable period for the prior year. Net cash 

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providedby financing activities for fiscal year 2004 was attributable to our InitialPublic Offering, described below, and partially offset by scheduledamortization payments on our senior credit facility of $7.0 million during theyear ended December 2004. Net cash used in financing activities for fiscalyear 2003 was primarily attributable to our Refinancing Transactionsdescribed below.

*The Initial PublicOffering and Related Transactions*

In December 2004, we successfully completed ourInitial Public Offering and amended our senior credit facility. A total of14,375,000 shares of our common stock were sold, of which 12,667,000 were soldby us and 1,708,000 were sold by our shareholders. We sold 12,500,000 shares ofour 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 ofinitial public offering costs and $1.1 million of debt issuance costs.

Immediately prior to the closing of the Initial PublicOffering, a reincorporation merger occurred and the parent company of InterlineNew Jersey became the holding company of the Interline group of businesses. Inthe reincorporation merger, the holders of the preferred stock of Interline NewJersey received an aggregate of $55 million in cash and 19,183,321 shares ofour common stock and the holders of the common stock of Interline New Jerseyreceived 0.01218 shares of our common stock per share of Interline New Jerseycommon stock, or 66,667 shares of our common stock in total. In addition,holders of options to purchase shares of the common stock of Interline NewJersey were converted into options to purchase shares of our common stock.

We also used $31.3 million of the proceeds topartially repay the term loan under our credit facility. We amended our seniorcredit facility to allow for the Initial Public Offering and reduce ourapplicable rate in respect to any term loans from LIBOR plus 3.50% to LIBORplus 2.25%. In conjunction with this amendment, we incurred $1.1 million ofdebt issuance costs. In December 2004, we also used $4.6 million of theproceeds to terminate the interest rate swap agreements. In January 2005,we used $70.0 million of the proceeds from the IPO transaction to partiallyredeem our 11.5% senior subordinated notes. In connection with the redemption,we paid $8.1 million of premiums for early redemption of the seniorsubordinated notes and recorded a $10.3 million loss on the earlyextinguishment of debt, which included a charge for write-off of unamortizeddebt issuance costs in the amount of $2.3 million in January of 2005.

We refer to thetransactions described in this section collectively as the “IPO Transactions”.

*2003 RefinancingTransaction*

During 2003, Interline Opcoissued $200.0 million aggregate principal amount of 11.5% seniorsubordinated notes due 2011 (the “11.5% Notes’’) in May 2003 as part ofthe Refinancing Transactions as follows. On May 29, 2003, Interline Opcoentered into a new $205.0 million senior secured credit facility whichconsists of a $140.0 million term loan facility and a $65.0 millionrevolving loan facility. The net proceeds from the offering of the 11.5% notesand the refinancing of Interline Opco’s former credit facility with a newcredit facility were used to: (1) repay all outstanding indebtedness underInterline Opco’s former credit facility, (2) redeem all of Interline Opco’soutstanding 16% senior subordinated notes due 2008, (3) pay accruedinterest and related redemption premiums on Interline Opco’s former debt and (4) paytransaction fees and expenses related to the offering and the new creditfacility. We refer to these transactions collectively as the “RefinancingTransactions.” As of December 26, 2003, our total indebtedness was$347.5 million (of which $6.0 million was outstanding in the form ofletters of credit), and Interline Opco’s senior indebtedness was$144.3 million. On December 19, 2003 we amended our senior 

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creditfacility such that with respect to any term loans, the applicable rate wasreduced from LIBOR plus 4.5% to LIBOR plus 3.5%.

*CapitalExpenditures*

Capital expenditures were $6.8 million in fiscal 2004as compared to $4.6 million in fiscal 2003. Capital expenditures as apercentage of sales were 0.9% in fiscal year 2004 and 0.7% in fiscal 2003.

Acquisition expenditureswere $0.7 million in fiscal 2004 compared to $18.4 million in fiscal 2003.These expenditures were attributable to our acquisition of Florida Lighting November 2003.Purchase of investment and other assets were $0 in fiscal 2004 compared to $3.9million in fiscal 2003.

*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.

*Credit Facility*

Interline Opco entered into a credit facility on May 29,2003, which was amended as of December 19, 2003, and amended again on December 21,2004 in connection with the IPO Transactions. The amended credit facilityprovides for aggregate commitments of $200.0 million, consisting of (i) arevolving loan facility of $100.0 million, of which a portion notexceeding $20.0 million will be available in the form of letters of credit, and(ii) a term loan facility of $100.0 million. Borrowings under theamended term loan facility and revolving loan facility bear interest, atInterline Opco’s option, at either adjusted LIBOR or at the alternate base rateplus a spread. Outstanding letters of credit under the revolving loan facilityare subject to a per annum fee equal to the applicable spread over adjustedLIBOR for revolving loans. The indebtedness under the amended credit facilityis guaranteed by us and by the domestic subsidiaries of Interline Opco. Theamended term loan facility has a maturity of December 31, 2010, and therevolving loan facility has a maturity of May 31, 2008.

During the year ended December 31, 2004, weborrowed periodically on our revolving credit facility to accommodate our dailyworking capital needs. The weighted average daily outstanding balance duringthe twelve-month period was $5.3 million, with ordinary courseborrowings ranging from $0.0 million to $14.5 million. As of December 31,2004, Interline Opco had $8.7 million of letters of credit issued underthe revolving loan facility and $100.0 million aggregate principaloutstanding under the term loan facility.

We believe that cash flow from operations andavailable borrowing capacity under our new credit facility will be adequate tofinance our ongoing operational cash flow needs and debt service obligationsfor the next twelve months.

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**ContractualObligations and Off-Balance Sheet Arrangements**

Thefollowing table sets forth our contractual obligations as of December 31,2004:
| ** **                             | ** ** | ** ** | ** ** | **Less than** | ** ** | **1 - 3** | ** ** | **4 - 5** | ** ** | **After 5** | ** ** |
|----------------------------------------|------------|------------|------------|--------------------|------------|---------------------|------------|---------------------|------------|------------------|------------|
| ** **                             | ** ** | **Total**  | ** ** | **1 year**    | ** ** | **years**           | ** ** | **years**           | ** ** | **years**        | ** ** |
| Long-term debt(1)                      |       | $          | 303,275    |               | $          | 1,000               |       | $                   | 2,000      |             | $          | 2,000 |   | $ | 298,275 |   |
| Revolving credit  facility(2)          |       | —     |       | —             |       | —              |       | —              |       | —           |       |
| Operating leases                       |       | 40,741     |       | 11,311             |       | 16,531              |       | 9,475               |       | 3,424            |       |
| Non-compete  agreement                 |       | 800        |       | 200                |       | 400                 |       | 200                 |       | —           |       |
| Employment  agreements                 |       | 3,823      |       | 3,091              |       | 732                 |       | —              |       | —           |       |
| Total contractual cash  obligations(3) |       | $          | 348,639    |               | $          | 15,602              |       | $                   | 19,663     |             | $          | 11,675 |   | $ | 301,699 |   |

(1)   In January 2005,we redeemed $70.0 million of our senior subordinated notes using proceeds fromthe initial public offering transaction.For additional information on this transaction see The Initial Public Offeringin Item 7 under Liquidity and Capital Resources.

(2)          Our senior securedcredit facility includes a $100.0 million revolving loan facility. As of December 31,2004, we did not have any amounts outstanding on this revolving facility.

(3)          Trade accounts payableof $53.3 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.

As of December 31,2004, 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. In addition, November, December and January salestend to be lower across most of our brands because customers may deferpurchases at year-end as their budget limits are met and because of the winterholiday season between Thanksgiving Day and New Year’s Day.

**Certifications**

Our CEO has certified tothe New York Stock Exchange that he is not aware of any violation by thecompany of NYSE corporate governance listed standards. We have included asexhibits to this Annual Report on Form 10-K certificates of our Chief ExecutiveOfficer and Acting Chief Financial Officer certifying the quality of our publicdisclosure.

***Forward-LookingStatements***

This report contains forward-looking statementswithin the meaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934 that are subject to risks anduncertainties. You should not place undue reliance on those statements becausethey are subject to numerous uncertainties and factors relating to ouroperations and business environment, all of which are difficult to predict andmany of which are beyond our control. Forward-looking statements includeinformation concerning our possible or assumed future results of operations,including descriptions of our business strategy. These statements often includewords such as “may,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate”or similar expressions. These statements are based on assumptions that we havemade in light of our experience in the industry as well as our perceptions ofhistorical trends, current conditions, 

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expected future developments and other factors webelieve are appropriate under the circumstances. As you read and consider thisreport, you should understand that these statements are not guarantees ofperformance or results. They involve risks, uncertainties and assumptions.Although we believe that these forward-looking statements are based onreasonable assumptions, you should be aware that many factors could affect ouractual financial results or results of operations and could cause actualresults to differ materially from those in the forward-lookingstatements. These factors include:

·       materialfacilities and systems disruptions and shutdowns,

·       ourability to purchase products from suppliers on favorable terms,

·       ourability to accurately predict market trends,

·       productcost and price fluctuations due to market conditions,

·       dependenceon key employees,

·       failureto locate and acquire acquisition candidates,

·       ourlevel of debt,

·       interestrate fluctuations,

·       futurecash flows,

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

·       generalmarket conditions,

·       changesin consumer preferences,

·       adversepublicity and litigation,

·       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 elsewhere might not occur. Notwithstanding theforegoing, all information contained in this prospectus is materially accurateas 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.*

**Risks Relating toOur Business**

*Loss ofkey suppliers, lack of product availability or loss of delivery sources coulddecrease our revenues and profitability.  *We believe ourability to offer a combination of well recognized product lines and ourhigh-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 

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agreements, with oursuppliers, these agreements are generally terminable by either party on limitednotice. The loss of, or a substantial decrease in the availability of, productsfrom our suppliers, or the loss of our key supplier agreements, could cause ourrevenues and profitability to decrease. In addition, supply interruptions couldarise from shortages of raw materials, labor disputes or weather conditionsaffecting products or shipments, transportation disruptions or other factorsbeyond our control. Loss of a key foreign supplier could disrupt our supplychain for approximately 60 to 90 days and loss of key suppliers from anindividual country could result in disruptions of 120 to 150 days orlonger. Short and long term disruptions in our supply chain would result inhigher inventory levels as we replace similar product domestically, a highercost of product and ultimately a decrease in our revenues and profitability.Although no individual supplier represents more than 5% of our total purchases,a disruption in the timely availability of our product by our key supplierscould result in a decrease in our revenues and profitability.

Our ability to both maintain our existing customerbase and to attract new customers is dependent in many cases upon our abilityto deliver products and fulfill 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 todeliver our products to our customers could result in the loss of customers orrequire us to seek alternative delivery sources, if they are available, whichmay result in significantly increased costs and delivery delays. Furthermore,the need 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.

*We operate in a highly competitive industry and ifwe are unable to compete successfully we could lose customers and our sales maydecline.*   TheMRO product distribution industry is a large, fragmented industry that ishighly competitive. We face significant competition from national and regionaldistributors which market their products through the use of direct sales forcesas well as direct mail 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. This consolidation trend could cause theindustry to become more competitive and make it more difficult for us tomaintain our operating margins.

Competition in our industry is primarily based uponproduct line breadth, product availability, service capabilities and price*.*To the extent that existing or future competitors seek togain or retain market share by reducing price or by increasing support serviceofferings, we may be required to lower our prices or to make additionalexpenditures for support services, thereby reducing profitability.

*Slowdowns in general economic activity and otherunforeseen events may detrimentally impact our customers and therebysignificantly reduce our revenues and profitability.*   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 fiscal 2003 

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and 2002 resulted in lessapartment 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.

*Disruption in our informationtechnology system could significantly lower our revenues and profitability.  *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.

*Disruptionin our national distribution center could significantly lower our revenues andprofitability.*   Wecurrently maintain a national distribution center located in Nashville,Tennessee, which is essential to the efficient operation of our nationaldistribution network. Any serious disruption to this distribution center due tofire, earthquake, act of terrorism or any other cause could damage asignificant portion of our inventory and could materially impair our ability todistribute our products to customers. In addition, we could incur significantlyhigher costs and longer lead times associated with distributing our products toour customers during the time that it takes for us to reopen or replace thecenter. As a result, any such disruption could significantly lower our revenuesand profitability.

*The lossof any of our significant customers could significantly reduce our revenues andprofitability.  *Our 10 largest customers generatedapproximately $64.1 million, or 8.6% of our sales in the year ended December 31,2004, and our largest customer accounted for approximately 4.5% of our sales inthe year ended December 31, 2004. The loss of one or more of oursignificant customers or deterioration in our relations with any of them couldsignificantly reduce our sales and profitability.

*We may not be able to facilitateour growth strategy by identifying or completing transactions with attractiveacquisition candidates, which could impede our revenues and profitability.*   Ouracquisitions of Barnett in 2000 and Florida Lighting in 2003 have contributedsignificantly to our growth. An important element of our growth strategy is tocontinue to seek additional businesses to acquire in order to add new customerswithin our existing markets and to acquire brands in new markets. We cannotassure you that we will be able to identify attractive acquisition candidatesor complete the acquisition of any identified candidates at favorable pricesand upon advantageous terms and conditions. Furthermore, we believe that ourindustry is currently in a process of consolidation, and competition forattractive acquisition candidates is therefore likely to escalate, therebylimiting the number of acquisition candidates or increasing the overall costsof making acquisitions. Difficulties we may face in identifying or completingacquisitions could impede our revenue growth and profitability.

*We cannot assure you that we willbe able to successfully complete the integration of future acquisitions ormanage other consequences of our acquisitions, and this could impede ourability to remain competitive and, ultimately, our revenues and profitability.*   Acquisitionsinvolve significant risks and uncertainties, including difficulties integratingacquired personnel and other corporate cultures into our business, thepotential loss of key employees, customers or suppliers, the assumption ofliabilities and exposure to unforeseen liabilities of acquired companies, thedifficulties in achieving target synergies and the diversion of managementattention and resources from existing operations. Although we have beensuccessful in the past in integrating acquisitions, we may not be able to fullyintegrate 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, which debt may be substantial and maylimit our flexibility in using our cash flow from 

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operations. Ourfailure to integrate 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.

*If we are unable to retain seniorexecutives and attract and retain other qualified employees our growth might behindered, which could impede our ability to run our business and potentiallyreduce our revenues and profitability.*   Our successdepends in part on our ability to attract, hire, train and retain qualifiedmanagerial, sales and marketing personnel. We face significant competition forthese types of personnel in our industry. We may be unsuccessful in attractingand retaining the personnel we require to conduct and expand our operationssuccessfully and, in such an event, our revenues and profitability could decline.In addition, key personnel may leave us and compete against us. Our successalso depends to a significant extent on the continued service of our seniormanagement team. The loss of any member of our senior management team or otherqualified employees could impair our ability to execute our business plan andgrowth strategy, cause us to lose customers and reduce our net sales, or leadto employee morale problems and/or the loss of key employees.

*We may not be able to protect ourtrademarks which could diminish the strength of our trademarks or limit ourability to use our trademarks and, accordingly, undermine our competitiveposition.*   We believe that our trademarks are importantto our success and our competitive position. For instance, we market and sellproducts primarily through eight distinct and targeted brands: Wilmar®,Sexauer®, Maintenance USA®, Barnett®, Hardware Express®, U.S. Lock®, SunStar®and AF LightingTM. We believe many of our customers have developed strongconsumer loyalty to these targeted brands. Accordingly, we devote resources tothe establishment and protection of our trademarks, including with respect toour brand names and our private product labels. However, the actions we havetaken may be inadequate to prevent imitation of our brands and concepts byothers or to prevent others from claiming violations of their trademarks andproprietary rights by us. In addition, others may assert rights in ourtrademarks. Our exclusive rights to our trademarks are subject to the commonlaw rights of any other person who began using the trademark (or a confusinglysimilar mark) prior to the date of federal registration. Future actions bythird parties may diminish the strength of our trademarks or limit our abilityto use our trademarks and, accordingly, undermine our competitive position.

*We couldface potential product quality and product liability claims relating to theproducts we distribute, which could result in a decline in revenues andprofitability and negatively impact customer confidence.*   Werely on manufacturers and other suppliers to provide us with the products wesell and 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 the ultimate outcome. Anunsuccessful product liability defense could be highly costly and accordinglyresult in a decline in revenues and profitability. In addition, uncertaintieswith respect to the Chinese legal system may adversely affect us in resolvingclaims arising from our private label products manufactured in China. Becausemany laws and regulations are relatively new and the Chinese legal system isstill 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.

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**Risks Relating toOur Indebtedness**

Our indebtedness may limit our cash flow available toinvest in the ongoing needs of our business, which could prevent us fromfulfilling our obligations. As of December 31, 2004, our totalindebtedness was $312.0 million, of which $8.7 million was outstanding in theform of letters of credit. We had approximately $108.7 million of seniorindebtedness outstanding and approximately $91.3 million in additionalrevolving loan availability under our $100.0 million revolving loanfacility.

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. The amended credit facility provides for incremental termloans in the aggregate principal amount of up to $100.0 million. Eachincremental term loan must be in a minimum principal amount of $50.0 million.

*Despite our level of indebtedness, we may be ableto incur substantially more debt. This could further exacerbate the risksdescribed above.  *Wemay be able to incur significant additional indebtedness in the future.Although the indenture governing the 11.5% notes and the credit agreementgoverning our credit facility contain restrictions on the incurrence ofadditional 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 

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incurringobligations that do not constitute indebtedness, as defined in the applicableagreement. To the extent new debt is added to our current debt levels, thesubstantial leverage risks described above would increase.

*The termsof our credit facility and the indenture governing the 11.5% notes may restrictour current and future operations, particularly our ability to respond tochanges in our business 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.

*We may not be able togenerate sufficient cash flow to meet our debt service obligations.*   Our ability to generatesufficient cash flow from operations to make scheduled payments on our debtobligations will depend on our future financial performance, which will beaffected by a range of economic, competitive, regulatory, legislative andbusiness factors, many of which are beyond our control. Our indebtedness underthe credit facility bears interest at a variable 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 from operations and the loan availability under our creditagreement to be our primary source of funds in the future. If we do notgenerate sufficient cash flow from operations to satisfy our debt obligations,including payments on the 11.5% notes, we may have to undertake alternativefinancing plans, such as refinancing or restructuring our debt, selling assets,reducing or delaying capital investments or seeking to raise additionalcapital. We cannot assure you that any refinancing would be possible, that anyassets could be sold, or, if sold, of the timing of the sales and the amount ofproceeds realized from those sales, or that additional financing could be obtainedon acceptable terms, if at all. Our inability to generate sufficient cash flowto satisfy our debt obligations, or to refinance our obligations oncommercially reasonable terms, 

34

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wouldhave an adverse effect on our business, financial condition and results ofoperations, as well as on our ability to satisfy our obligations in respect ofthe 11.5% notes.

**ITEM 7A.   *Quantitative and 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.

Management believes that inflation (which has beenmoderate over the past few years) did not significantly affect our operatingresults or markets in fiscal 2004, 2003, or 2002. Our results of operations infiscal 2004 and 2003 were favorably and unfavorably impacted, respectively, byincreases and decreases in the pricing of certain commodity-based products. Suchcommodity price fluctuations have from time to time created cyclicality in ourfinancial performance, and could continue to do so in the future. In addition,our use of priced catalogs may not allow us to offset such cost 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. Accordingly, we have low foreigncurrency risk related to suppliers.

*DerivativeFinancial Instruments*

Periodically, we enter into derivative financialinstruments, including interest rate exchange agreements, to manage ourexposure to fluctuations in interest rates on our debt. At December 31,2004 we did not have any interest rate swap exchange agreements, or swaps. Underour former swap agreements, we paid a fixed rate on the notional amount to abank and the bank paid to us a variable rate on the notional amount equal to abase LIBOR rate. Our derivative activities, all of which are for purposes otherthan trading, are initiated within the guidelines of corporate risk-managementpolicies.

For fiscal 2004, we have recognized a gain of$8.2 million from the interest rate swaps. This increase in the value ofthe interest swaps is a direct result of changes in interest rates, changes inmarket volatility and early termination of the interest rate swaps.

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 interestrate exposure.

*Recent AccountingStandards*

In December 2004, the FASBissued SFAS No. 153, *Exchanges of NonmonetaryAssets-Amendment of APB Opinion NO. 29, Accounting for Nonmonetary Transactions*(“SFAS153”) The statement is effective for nonmonetary assetexchanges occurring in fiscal periods beginning after June 15, 2005. Earlierapplication is permitted for nonmonetary asset exchanges occurring in fiscalperiods beginning after the date of issuance. The provisions of this statementshall be applied prospectively. We do not expect the adoption of SFAS 153 willhave a material impact on our financial position, results of operations or cashflows.

In December 2004, the FASBissued SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123R).SFAS No. 123R requires that the cost resulting from all share-basedcompensation payment transactions be recognized in the financial statements. Thestandard also requires that entities apply a fair-value-based measurementmethod to account for share-based payment transactions with employees(excluding equity instruments held by employee share ownership plans). SFAS No. 123Ris effective as of the beginning of the first interim period that begins after June 15,2005. As the majority of the Company’s 

35

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outstandingstock options are vested as of December 31, 2004 and there is no change onthe measurement or accounting for the compensation expense associated with theCompany’s outstanding restricted stock, the Company does not expect that theadoption of SFAS No. 123R will have a material impact on our financialposition, results of operations or cash flows.

In September 2004,the FASB issued EITF 04-10, *Applying Paragraph 19 ofFASB Statement No. 131, “Disclosures about Segments of an Enterprise andRelated Information” in Determining Whether to Aggregate Operating Segmentsthat Do Not Meet the Quantitative Thresholds.* The Company hasevaluated this EITF and has determined that there is no effect on the reportablesegment included in our consolidated financial statements.

**ITEM 8.**                *Financial Statements andSupplementary Data*

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

**ITEM 9.**                *Changes in andDisagreements With Accountants on Accounting and Financial Disclosure*

None.

**ITEM 9A.   *Controls and Procedures***

*Evaluation ofDisclosure Controls and Procedures*

Our management, with theparticipation of our Chief Executive Officer and acting Chief Financial Officer(our principal executive officer and principal financial officer), evaluatedthe effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act) as of December 31, 2004.Based on this evaluation, our Chief Executive Officer and acting ChiefFinancial Officer concluded that, as of December 31, 2004, our disclosurecontrols and procedures were (1) designed to ensure that materialinformation relating to us, including our consolidated subsidiaries, is made knownto our Chief Executive Officer and acting Chief Financial Officer by otherswithin those entities, particularly during the period in which this report wasbeing prepared and (2) effective, in that they provide reasonableassurance that information required to be disclosed by us in the reports thatwe file or submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms.

*Changes in InternalControl over Financial Reporting*

No change in our internal control over financialreporting (as defined in Rules 13a-15(f) and 15d-15(f) underthe Exchange Act) occurred during the quarter ended December 31, 2004 thathas materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

36

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**PART III**

**ITEM 10.**   *Directors and Executive Officers of the Registrant*

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 11.**   *Executive Compensation*

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.

**ITEM12.**   *Security Ownership ofCertain 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.**   *Certain Relationships 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.**   *Principal Accountants 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.

37

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**PART IV**

**ITEM 15.**         *Exhibits andFinancial Statement Schedules*

(a)          Documents filed as partof the report.

(1)          ConsolidatedFinancial Statements
| Report of Independent  Registered Public Accounting Firm           | F-1         |
|--------------------------------------------------------------------|-------------|
| Consolidated  Balance Sheets                                       | F-2         |
| Consolidated  Statements of Operations                             | F-3         |
| Consolidated  Statements of Stockholders’ Equity (Deficiency) | F-4         |
| Consolidated  Statements of Cash Flows                             | F-5         |
| Notes to Consolidated Financial  Statements                        | F-7 to F-23 |

 

(2)          Exhibits

See Exhibit Index beginning on page 40

38

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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 31, 2005 | * *                                |

 

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 31stday of March, 2005.
| /s/ ERNEST K. JACQUET                             |   | /s/ DREW T.  SAWYER        |
|---------------------------------------------------|--------|----------------------------|
| Ernest K. Jacquet                                 |   | Drew T. Sawyer             |
| *Chairman of the Board and Director*              |   | *Director*                 |
| /s/ MICHAEL J. GREBE                              |   | /s/ CHRISTOPHER C. BEHRENS |
| Michael J. Grebe                                  |   | Christopher C. Behrens     |
| *President, Chief Executive Officer and Director* |   | *Director*                 |
| *(Principal Executive Officer)*                   |   |                       |
| /s/ THOMAS J. TOSSAVAINEN                         |   | /s/ CHARLES W. SANTORO     |
| Thomas J. Tossavainen                             |   | Charles W. Santoro         |
| *Acting Chief Financial Officer*                  |   | *Director*                 |
| *(Principal Accounting Officer and*               |   |                       |
| *Principal Financial Officer)*                    |   |                       |
| /s/ BARRY J. GOLDSTEIN                            |   | /s/ GIDEON ARGOV           |
| Barry J. Goldstein                                |   | Gideon Argov               |
| *Director*                                        |   | *Director*                 |
| /s/ JOHN J. GAVIN                                 |   |                       |
| John J. Gavin                                     |   |                       |
| *Director*                                        |   |                       |

 

39

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**EXHIBITINDEX**
| 2.1  |   | Agreement and Plan of Merger dated December 21,  2004 (furnished herewith).                                                                                                                                                                                                                                                                                                                                       |
|------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1  |   | Amended and  Restated Certificate of Incorporation of Interline Brands, Inc.  (furnished herewith).                                                                                                                                                                                                                                                                                                               |
| 3.2  |   | Amended and  Restated By-Laws of Interline Brands, Inc. (furnished herewith).                                                                                                                                                                                                                                                                                                                                     |
| 4.1  |   | Indenture, dated  as of May 23, 2003, among Interline Brands, Inc., 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)).                                                     |
| 4.3  |   | 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)).                                                                                                                                                                        |
| 10.1 |   | Amended and  Restated Shareholders Agreement, dated as of September 29, 2000, among  the Company 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 (furnished  herewith).                                                                                                                                                                                                                             |
| 10.4 |   | 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)). |
| 10.5 |   | 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)).                                    |
| 10.6 |   | 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 (furnished herewith).                                                                                   |
| 10.7 |   | 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)).             |
| 10.8 |   | 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)).                                                                    |

40

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| 10.9  |   | 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)).                                                                            |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.10 |   | Restricted Stock  Award Agreement under the 2000 Stock Award Plan, dated as of  September 29, 2000, between Wilmar Industries, Inc. and William  Green (incorporated by reference to Exhibit 10.18 to Interline  Brands, Inc.’s Amendment No. 5 to Form S-1 Registration  Statement filed on December 14, 2004 (No. 333-116482)). |
| 10.11 |   | Separation  Agreement and Release of All Claims, dated December 31, 2001, by and  between Interline Opco and William Green (incorporated by reference to  Exhibit 10.22 to Interline Brands, Inc.’s Amendment No. 5 to  Form S-1 Registration Statement filed on December 14, 2004  (No. 333-116482)).                                 |
| 10.12 |   | 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 Exhibit10.23 to Interline  Brands, Inc.’s Amendment No. 5 to Form S-1 Registration  Statement filed on December 14, 2004 (No. 333-116482)).     |
| 10.13 |   | 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)).                                                                                                      |
| 10.14 |   | 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)).                                                           |
| 10.15 |   | 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)).                                                    |
| 10.16 |   | 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)).                                                                                                                                      |
| 10.17 |   | 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)).                                                         |
| 10.18 |   | Amendment to  Separation Agreement, dated as of June 11, 2004 by and between Interline  Opco and William S. Green (incorporated by reference to Exhibit 10.29  to Interline Brands, Inc.’s Amendment No. 5 to Form S-1  Registration Statement filed on December 14, 2004  (No. 333-116482)).                                     |
| 10.19 |   | 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)).                                         |
| 10.20 |   | Separation  Agreement and Release of All Claims, dated March 17, 2005, by and  between Interline Brands, Inc. and Charles Blackmon (furnished herewith).                                                                                                                                                                                                             |

41

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| 10.21 |   | 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)).           |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.22 |   | 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)).             |
| 10.23 |   | 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)).            |
| 10.24 |   | Amendment and  Restated Employment Agreement, dated as of December 15, 2004, by and between  Interline Brands, Inc. and William R. Pray (furnished herewith).                                                                                                                                                                                   |
| 10.25 |   | 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)).              |
| 10.26 |   | 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)).      |
| 10.27 |   | 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)). |
| 10.28 |   | 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)).    |
| 10.29 |   | 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)).  |
| 10.30 |   | 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)).   |
| 10.31 |   | 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)).          |

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| 10.32 |   | 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)).                    |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.33 |   | 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)). |
| 10.34 |   | Employment  Agreement, dated May 12, 2004 between Interline Brands, Inc. and  Thomas J. Tossavainen (furnished herewith).                                                                                                                                                                                                                        |
| 10.35 |   | Amendment to  Employment Agreement, dated November 10, 2004, between Interline  Brands, Inc. and Thomas J. Tossavainen (furnished herewith).                                                                                                                                                                                                     |
| 10.36 |   | 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)).                                                                                                   |
| 10.37 |   | 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)).                                                                                              |
| 10.38 |   | 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)).                                                                                            |
| 10.39 |   | 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)).                                                                                  |
| 11.1  |   | Computation of  earnings per share information included in Note 1 to Consolidated Financial  Statements                                                                                                                                                                                                                                                         |
| 21.1  |   | List of  Subsidiaries of Interline Brands, Inc. (incorporated by reference to  Exhibit 21.1 to Interline Brands, Inc.’s Amendment No. 5 to  Form S-1 Registration Statement filed on December 14, 2004  (No. 333-116482)).                                                                                              |
| 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 acting 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 acting 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).                                                                                                                |
| 99.1  |   | Consent of  Pembroke Consulting (furnished herewith).                                                                                                                                                                                                                                                                                                           |

 

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**REPORT** OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balancesheets of Interline Brands, Inc. and its subsidiaries (the “Company”) asof December 31, 2004 and December 26, 2003, and the relatedconsolidated statements of operations, stockholders’ equity (deficiency) andcash flows for each of the three years in the period ended December 31,2004. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements 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. The Company is not required to have, nor were we engaged toperform, an audit of its internal control over financial reporting. Our auditsincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

In our opinion, such consolidatedfinancial statements referred to above present fairly, in all materialrespects, the financial position of the Company as of December 31, 2004and December 26, 2003, and the results of its operations and its cashflows for each of the three years in the period ended December 31, 2004,in conformity with accounting principles generally accepted in the UnitedStates of America.

/s/ Deloitte & Touche, LLP

Certified PublicAccountants

March 23, 2005

Jacksonville, Florida

F-1

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**INTERLINE BRANDS,INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSDECEMBER 31, 2004 AND DECEMBER 26, 2003(In thousands, except share and per share data)**
| ** **                                                                                                                                                                                                                                              | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **ASSETS**                                                                                                                                                                                                                                              |       |     |       |     |       |
| CURRENT ASSETS:                                                                                                                                                                                                                                         |       |     |       |     |       |
| Cash and cash equivalents                                                                                                                                                                                                                               |       | $        | 69,178     |     | $          | 1,612 |   |
| Cash—restricted                                                                                                                                                                                                                                    |       | —   |       | 1,000    |       |
| Accounts receivable—trade (net of allowance for  doubtful accounts of $6,929 and $6,316)                                                                                                                                                           |       | 98,511   |       | 83,684   |       |
| Accounts receivable—other                                                                                                                                                                                                                          |       | 17,828   |       | 12,932   |       |
| Inventory                                                                                                                                                                                                                                               |       | 145,532  |       | 119,301  |       |
| Prepaid expenses and other current assets                                                                                                                                                                                                               |       | 3,204    |       | 4,260    |       |
| Deferred income taxes                                                                                                                                                                                                                                   |       | 12,084   |       | 10,318   |       |
| Total current assets                                                                                                                                                                                                                                    |       | 346,337  |       | 233,107  |       |
| PROPERTY AND EQUIPMENT, net                                                                                                                                                                                                                             |       | 28,767   |       | 30,605   |       |
| GOODWILL                                                                                                                                                                                                                                                |       | 203,848  |       | 202,227  |       |
| OTHER INTANGIBLE ASSETS, net                                                                                                                                                                                                                            |       | 85,361   |       | 90,632   |       |
| OTHER ASSETS                                                                                                                                                                                                                                            |       | 9,067    |       | 8,711    |       |
| TOTAL ASSETS                                                                                                                                                                                                                                            |       | $        | 673,380    |     | $          | 565,282 |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY (DEFICIENCY)**                                                                                                                                                                                             |       |     |       |     |       |
| CURRENT  LIABILITIES:                                                                                                                                                                                                                                   |       |     |       |     |       |
| Current portion of long-term debt                                                                                                                                                                                                                       |       | $        | 1,000      |     | $          | 7,000 |   |
| Accounts payable                                                                                                                                                                                                                                        |       | 53,260   |       | 43,180   |       |
| Accrued expenses and other current liabilities                                                                                                                                                                                                          |       | 22,180   |       | 19,623   |       |
| Accrued interest payable                                                                                                                                                                                                                                |       | 3,042    |       | 5,803    |       |
| Accrued merger expenses                                                                                                                                                                                                                                 |       | 6,131    |       | 4,739    |       |
| Income taxes payable                                                                                                                                                                                                                                    |       | 7,372    |       | —   |       |
| Total current liabilities                                                                                                                                                                                                                               |       | 92,985   |       | 80,345   |       |
| LONG-TERM  LIABILITIES:                                                                                                                                                                                                                                 |       |     |       |     |       |
| Deferred income taxes                                                                                                                                                                                                                                   |       | 25,221   |       | 22,543   |       |
| Interest rate swaps                                                                                                                                                                                                                                     |       | —   |       | 12,793   |       |
| Long-term debt, net of current portion                                                                                                                                                                                                                  |       | 302,275  |       | 334,525  |       |
| TOTAL LIABILITIES                                                                                                                                                                                                                                       |       | 420,481  |       | 450,206  |       |
| COMMITMENTS AND  CONTINGENCIES (Note 11)                                                                                                                                                                                                                |       |     |       |     |       |
| SENIOR PREFERRED STOCK, $0.01 par value, 20,000,000  shares authorized, no shares outstanding as of December 31, 2004;  27,000,000 shares authorized, 23,600,014 shares issued and outstanding, at  liquidation value as of December 26, 2003 |       | —   |       | 379,612  |       |
| STOCKHOLDERS’  EQUITY (DEFICIENCY):                                                                                                                                                                                                                |       |     |       |     |       |
| Common stock; $0.01 par value, 100,000,000 shares  authorized; 31,917,000 issued and outstanding as of December 31, 2004;  91,350 shares authorized; 64,975 shares issued and outstanding as of  December 26, 2003                            |       | 319      |       | 1        |       |
| Accumulated deficit                                                                                                                                                                                                                                     |       | (301,836 | )          | (265,548 | )          |
| Additional paid-in capital                                                                                                                                                                                                                              |       | 553,561  |       | 1,993    |       |
| Stockholder loans                                                                                                                                                                                                                                       |       | —   |       | (1,545   | )          |
| Accumulated other comprehensive income                                                                                                                                                                                                                  |       | 855      |       | 563      |       |
| TOTAL STOCKHOLDERS’ EQUITY (DEFICIENCY)                                                                                                                                                                                                            |       | 252,899  |       | (264,536 | )          |
| TOTAL  LIABILITIES & STOCKHOLDERS’ EQUITY                                                                                                                                                                                                 |       | $        | 673,380    |     | $          | 565,282 |   |

 

See accompanying notes to consolidated financial statements.

F-2

----

**INTERLINE BRANDS,INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONSYEARS ENDED DECEMBER 31, 2004, DECEMBER 26, 2003 AND DECEMBER 27, 2002(In thousands except share and per share data)**
| ** **                                        | ** ** | **2004**  | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------------------|------------|-----------|------------|----------|------------|----------|------------|
| NET SALES                                         |       | $         | 743,905    |     | $          | 640,138  |       | $ | 637,530 |   |
| COST OF SALES                                     |       | 458,516   |       | 395,894  |       | 401,212  |       |
| Gross profit                                      |       | 285,389   |       | 244,244  |       | 236,318  |       |
| OPERATING EXPENSES :                              |       |      |       |     |       |     |       |
| Selling, general and administrative expenses      |       | 202,084   |       | 171,091  |       | 164,328  |       |
| Depreciation and amortization                     |       | 12,600    |       | 10,949   |       | 11,282   |       |
| IPO related expenses                              |       | 9,215     |       | —   |       | —   |       |
| Special costs and expenses                        |       | —    |       | 607      |       | 4,893    |       |
| Total operating expense                           |       | 223,899   |       | 182,647  |       | 180,503  |       |
| OPERATING INCOME                                  |       | 61,490    |       | 61,597   |       | 55,815   |       |
| CHANGE IN FAIR  VALUE OF INTEREST RATE SWAPS      |       | 8,232     |       | 5,272    |       | (5,825   | )          |
| LOSS ON  EXTINGUISHMENT OF DEBT                   |       | (660      | )          | (14,893  | )          | —   |       |
| INTEREST EXPENSE                                  |       | (39,933   | )          | (40,516  | )          | (38,778  | )          |
| INTEREST INCOME                                   |       | 135       |       | 199      |       | 153      |       |
| OTHER INCOME                                      |       | 454       |       | 40       |       | —   |       |
| Income before income taxes                        |       | 29,718    |       | 11,699   |       | 11,365   |       |
| PROVISION FOR  INCOME TAXES                       |       | 11,617    |       | 4,547    |       | 4,219    |       |
| NET INCOME                                        |       | 18,101    |       | 7,152    |       | 7,146    |       |
| PREFERRED STOCK  DIVIDENDS                        |       | (54,389   | )          | (48,623  | )          | (42,470  | )          |
| NET LOSS APPLICABLE TO COMMON  STOCKHOLDERS       |       | $         | (36,288    | )        | $          | (41,471  | )          | $ | (35,324 | ) |
| LOSS PER COMMON SHARE—BASIC                  |       | $         | (25.21     | )        | $          | (632.74  | )          | $ | (538.55 | ) |
| LOSS PER COMMON SHARE—DILUTED                |       | $         | (25.21     | )        | $          | (632.74  | )          | $ | (538.55 | ) |
| WEIGHTED AVERAGE SHARES OUTSTANDING—  BASIC  |       | 1,439,322 |       | 65,540   |       | 65,592   |       |
| WEIGHTED AVERAGE  SHARES OUTSTANDING—DILUTED |       | 1,439,322 |       | 65,540   |       | 65,592   |       |

 

See accompanying notes to consolidated financial statements.

F-3

----

**INTERLINE BRANDS,INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(DEFICIENCY)YEARS ENDED DECEMBER 31, 2004, DECEMBER 26, 2003 AND DECEMBER 27, 2002(In thousands except share data)**
| ** **                                    | ** ** | ** **            | ** ** | ** **       | ** ** | ** **      | ** ** | ** **   | ** ** | ** **       | ** ** | ** **     | ** ** | **Accumulated  Other** | ** ** | **Total**              | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|------------------|------------|-----------------|------------|--------------|------------|------------------|------------|----------------|------------|------------------------|------------|------------------------|------------|
| ** **                                    | ** ** | ** **            | ** ** | ** **       | ** ** | ** **      | ** ** | ** **   | ** ** | ** **       | ** ** | **Additional** | ** ** | **Comprehensive**      | ** ** | **Stockholders’** | ** ** |
| ** **                                    | ** ** | **Common Stock** | ** ** | **(Accumulated** | ** ** | **Stockholder** | ** ** | **Deferred** | ** ** | **Paid In** | ** ** | **Income**     | ** ** | **Equity**             | ** ** |
| ** **                                    | ** ** | **Shares**            | ** ** | **Amount**       | ** ** | **Deficit)**    | ** ** | **Loans**    | ** ** | **Compensation** | ** ** | **Capital**    | ** ** | **(Loss)**             | ** ** | **(Deficiency)**       | ** ** |
| BALANCE, DECEMBER 28, 2001                    |       | 65,592                |       |             | $          | 1               |       |         |       | $                | (188,753   | )              |       |                   | $          | (1,364                 | )          |   |   | $ | (765 | ) |   |   | $ | 1,993 |   |   |   | $ | (204 | ) |   |   | $ | (189,092 | ) |   |
| Preferred stock dividends                     |       |                  |       |             |       |            |       |         | (42,470    | )                |       |           |       |                   |       |                   |       |   |   |   |   |   |   |   |   |   |   |   | (42,470 | ) |   |
| Interest accrual on stockholder loans         |       |                  |       |             |       |            |       |         |       |             |       |           | (76        | )                      |       |                   |       |   |   |   |   |   |   |   |   |   |   |   | (76 | ) |   |
| Deferred compensation expense                 |       |                  |       |             |       |            |       |         |       |             |       |           |       |                   |       |                   | 765        |   |   |   |   |   |   |   |   |   |   |   | 765 |   |   |
| Comprehensive  income:                        |       |                  |       |             |       |            |       |         |       |             |       |           |       |                   |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                    |       |                  |       |             |       |            |       |         | 7,146      |             |       |           |       |                   |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Foreign currency translation                  |       |                  |       |             |       |            |       |         |       |             |       |           |       |                   |       |                   |       |   |   |   |   |   |   |   | 44 |   |   |   |   |   |   |
| Total comprehensive income                    |       |                  |       |             |       |            |       |         |       |             |       |           |       |                   |       |                   |       |   |   |   |   |   |   |   |   |   |   |   | 7,190 |   |   |
| BALANCE, DECEMBER 27, 2002                    |       | 65,592                |       |             | 1          |            |       |         | (224,077   | )                |       |           | (1,440     | )                      |       |                   | —     |   |   |   | 1,993 |   |   |   | (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          |            |       |         | (265,548   | )                |       |           | (1,545     | )                      |       |                   | —     |   |   |   | 1,993 |   |   |   | 563 |   |   |   | (264,536 | ) |   |
| Preferred stock dividends                     |       |                  |       |             |       |            |       |         | (54,389    | )                |       |           |       |                   |       |                   |       |   |   |   |   |   |   |   |   |   |   |   | (54,389 | ) |   |
| Issuance of restricted  stock                 |       | 794                   |       |             |       |            |       |         |       |             |       |           |       |                   |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest accrual on stockholder loans         |       |                  |       |             |       |            |       |         |       |             |       |           | (30        | )                      |       |                   |       |   |   |   |   |   |   |   |   |   |   |   | (30 | ) |   |
| Forgiveness of stockholder loans              |       |                  |       |             |       |            |       |         |       |             |       |           | 1,575      |                   |       |                   |       |   |   |   |   |   |   |   |   |   |   |   | 1,575 |   |   |
| Conversion of preferred stock to common stock |       | 19,183,321            |       |             | 191        |            |       |         |       |             |       |           |       |                   |       |                   |       |   |   |   | 378,810 |   |   |   |   |   |   |   | 379,001 |   |   |
| Exercise of warrants                          |       | 910                   |       |             |       |            |       |         |       |             |       |           |       |                   |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 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                   |       | 31,917,000            |       |             | $          | 319             |       |         |       | $                | (301,836   | )              |       |                   | $          | —                 |       |   |   | $ | — |   |   |   | $ | 553,561 |   |   |   | $ | 855 |   |   |   | $ | 252,899 |   |   |

 

See accompanying notes to consolidated financial statements.

F-4

----

**INTERLINE BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2004, DECEMBER 26, 2003 AND DECEMBER 27, 2002 (In thousands)**
| ** **                                                                                     | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| OPERATING ACTIVITIES:                                                                          |       |     |       |     |       |     |       |
| Net income                                                                                     |       | $        | 18,101     |     | $          | 7,152    |       | $ | 7,146 |   |
| Adjustments to reconcile  net income to net cash (used in) provided by operating  activities:  |       |     |       |     |       |     |       |
| Depreciation and  amortization                                                                 |       | 12,600   |       | 10,949   |       | 11,282   |       |
| Amortization and  write-off of debt issuance costs                                             |       | 2,558    |       | 8,374    |       | 1,669    |       |
| Accretion and  write-off of discount on 16% senior subordinated notes                          |       | —   |       | 4,410    |       | 391      |       |
| Redemption premium  on 16% senior subordinated notes                                           |       | —   |       | 3,879    |       | —   |       |
| Deferred  compensation                                                                         |       | —   |       | —   |       | 765      |       |
| Change in fair  value and termination of interest rate swaps                                   |       | (12,793  | )          | (5,272   | )          | 5,825    |       |
| Loss (gain) on  disposal of property and equipment                                             |       | 10       |       | 3        |       | 438      |       |
| Interest income on  stockholder loans                                                          |       | (30      | )          | (105     | )          | (76      | )          |
| Forgiveness of stockholder  notes                                                              |       | 1,875    |       | —   |       | —   |       |
| Deferred income tax  provision                                                                 |       | 1,709    |       | 1,024    |       | 420      |       |
| Senior  subordinated notes issued for interest due                                             |       | —   |       | 1,674    |       | 2,813    |       |
| Changes in assets and  liabilities which provided (used) cash, net of effects of  acquisition: |       |     |       |     |       |     |       |
| Cash—restricted                                                                           |       | 1,000    |       | (671     | )          | —   |       |
| Accounts  receivable—trade                                                                |       | (14,826  | )          | 449      |       | 2,074    |       |
| Accounts  receivable—other                                                                |       | (2,863   | )          | 120      |       | (4,293   | )          |
| Inventory                                                                                      |       | (26,231  | )          | 9,050    |       | (7,329   | )          |
| Prepaid expenses  and other current assets                                                     |       | 1,056    |       | 1,737    |       | (2,462   | )          |
| Other assets                                                                                   |       | (516     | )          | (307     | )          | (6       | )          |
| Accrued interest  payable                                                                      |       | (2,760   | )          | 1,394    |       | (1,187   | )          |
| Accounts payable                                                                               |       | 10,080   |       | (11,106  | )          | (610     | )          |
| Accrued expenses  and other current liabilities                                                |       | 2,846    |       | 1,718    |       | (1,351   | )          |
| Accrued merger  expenses                                                                       |       | (591     | )          | (1,383   | )          | (3,074   | )          |
| Income taxes payable                                                                           |       | 7,372    |       | —   |       | (2,020   | )          |
| Net cash (used in)  provided by operating activities                                           |       | (1,403   | )          | 33,089   |       | 10,415   |       |
| INVESTING ACTIVITIES:                                                                          |       |     |       |     |       |     |       |
| Purchase of  property and equipment                                                            |       | (6,763   | )          | (4,556   | )          | (4,944   | )          |
| Purchase of  investment and other assets                                                       |       | —   |       | (3,850   | )          | —   |       |
| Dividend from  equity investment                                                               |       | 158      |       | —   |       | —   |       |
| Acquisition of  businesses, net of cash acquired                                               |       | (724     | )          | (18,389  | )          | —   |       |
| Net cash used in  investing activities                                                         |       | (7,329   | )          | (26,795  | )          | (4,944   | )          |
| FINANCING ACTIVITIES:                                                                          |       |     |       |     |       |     |       |
| (Decrease)  increase in revolving credit facility, net                                         |       | —   |       | (18,500  | )          | 14,500   |       |
| Repayment of  long-term debt                                                                   |       | (38,250  | )          | (319,236 | )          | (17,750  | )          |
| Payment of debt  issuance costs                                                                |       | (1,296   | )          | (13,011  | )          | (35      | )          |
| Proceeds from sale  of common stock                                                            |       | 174,609  |       | —   |       | —   |       |
| Initial public  offering costs                                                                 |       | (4,057   | )          | —   |       | —   |       |
| Redemption of  preferred stock                                                                 |       | (55,000  | )          | (215     | )          | —   |       |
| Proceeds from  refinancing transaction                                                         |       | —   |       | 340,000  |       | —   |       |
| Net cash provided  by (used in) financing activities                                           |       | 76,006   |       | (10,962  | )          | (3,285   | )          |
| EFFECT OF EXCHANGE  RATE CHANGES ON CASH AND CASH  EQUIVALENTS                                 |       | 292      |       | 723      |       | 44       |       |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                                          |       | 67,566   |       | (3,945   | )          | 2,230    |       |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF YEAR                                                  |       | 1,612    |       | 5,557    |       | 3,327    |       |
| CASH AND CASH  EQUIVALENTS, END OF YEAR                                                        |       | $        | 69,178     |     | $          | 1,612    |       | $ | 5,557 |   |

 

F-5

----

**INTERLINE BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) YEARS ENDED DECEMBER 31, 2004, DECEMBER 26, 2003 AND DECEMBER 27, 2002 (In thousands)**

 
| ** **                                                                     | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| SUPPLEMENTAL DISCLOSURE  OF CASH FLOW INFORMATION:                             |       |     |       |     |       |     |       |
| Cash  paid during the year for:                                                |       |     |       |     |       |     |       |
| Interest                                                                       |       | $        | 40,726     |     | $          | 33,258   |       | $ | 35,105 |   |
| Income taxes (net of refunds)                                                  |       | $        | 1,937      |     | $          | 1,353    |       | $ | 7,989 |   |
| SCHEDULE OF  NON-CASH INVESTING AND FINANCING ACTIVITIES:                      |       |     |       |     |       |     |       |
| Dividends on preferred stock                                                   |       | $        | 54,389     |     | $          | 48,623   |       | $ | 42,470 |   |
| Note issued for purchase of business and accrual of  additional purchase price |       | $        | —     |     | $          | 4,300    |       | $ | — |   |
| Note issued for purchase of investment                                         |       | $        | —     |     | $          | 3,275    |       | $ | — |   |
| Exercise of underwriters over-allotment options                                |       | $        | 2,333      |     | $          | —   |       | $ | — |   |
| Conversion of preferred stock to common stock                                  |       | $        | 379,001    |     | $          | —   |       | $ | — |   |
| Adjustment to liabilities assumed and goodwill on  businesses acquired         |       | $        | 2,193      |     | $          | —   |       | $ | — |   |

 

See notes to consolidated financial statements.

F-6

----

**INTERLINE BRANDS,INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSYEARS ENDED DECEMBER 31, 2004, DECEMBER 26, 2003 AND DECEMBER 27, 2002(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, or MRO products. The Companysells plumbing, electrical, hardware, security hardware, 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 other distributors.

The Company markets and sells its products primarily througheight distinct and targeted brands. The Company utilizes a variety of saleschannels, including a direct sales force, telesales representatives, a directmail program, brand-specific websites and a national accounts sales program. TheCompany provides same day/next day delivery of its products through its networkof regional distribution centers located throughout the United States andCanada, a national distribution center in Nashville, Tennessee and itsdedicated 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 the commonstock of Interline New Jersey were converted into options to purchase shares ofthe Company’s common stock. The Company restated earnings per share and sharesoutstanding for all years presented in the accompanying financial statements toreflect the conversion of the shares.

**2.   SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

***Principles ofConsolidation***—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***—TheCompany operates on a 52-53 week fiscal year, which ends on the lastFriday in December. The fiscal year ended December 31, 2004 was afifty-three week year. The fiscal years ended December 26, 2003 and December 27,2002 were fifty-two week years. References herein to 2004, 2003, and 2002 arefor the fiscal years ended December 31, 2004, December 26, 2003 and December 27,2002, respectively.

***Cash and CashEquivalents***—Cash and cash equivalents consist ofcash and highly liquid investments with an original maturity of three months orless.

***Inventory***—Inventoryis stated at the lower of cost or market. Inventory cost is determined usingthe average cost method. The Company provides an adjustment to inventory basedon slow-moving and 

F-7

----

discontinued inventory. Thisimpairment adjustment establishes a new cost basis for such inventory and isnot subsequently recovered through income

***Property and Equipment***—Propertyand equipment is stated at cost, net of accumulated depreciation andamortization. Expenditures for additions, renewals and betterments arecapitalized; expenditures for maintenance and repairs are charged to expense asincurred. Upon the retirement or disposal of assets, the cost and accumulateddepreciation or amortization is eliminated from the accounts and the resultinggain or loss is credited or charged to operations. Leasehold improvements areamortized, using the straight-line method, over the lesser of the estimateduseful lives or the term of the lease. Depreciation is computed using thestraight-line method based upon estimated useful lives of the assets asfollows:
| 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 ComputerSoftware Developed or Obtained for Internal Use***—TheCompany capitalizes costs related to internally developed software inaccordance with Statement of Position (“SOP”) 98-1, “Accounting for theCosts of Computer Software Developed or Obtained for Internal Use”. Only costsincurred during the development stage, including design, coding, installationand testing are capitalized. These capitalized costs primarily representinternal labor costs for employees directly associated with the softwaredevelopment. Upgrades or modifications that result in additional functionalityare capitalized. Approximately $0.8 million, $0.8 million, and $1.1 million,was capitalized in 2004, 2003, and 2002, respectively.

***Goodwill***—Goodwillrepresents the excess of the costs of acquired companies over the fair value oftheir net tangible assets. In accordance with Statement of Financial Accounting Standards (“SFAS”) 142, “Goodwilland Other Intangible Assets”, theCompany does not amortize goodwill but is required to annually evaluategoodwill for impairment. Goodwill is tested for impairment at least annually, orwhenever events of changes in circumstances indicate that the carrying amountmay not be recoverable. The Company has elected to perform its annual goodwillimpairment test as of the last day of each fiscal year. No impairment wasidentified as a result of its impairment test during 2004, 2003 or 2002.

***Other IntangibleAssets***—Other intangible assets include amountsassigned to customer lists, trademarks, deferred debt issuance costs andnon-compete agreements. Other intangibles are amortized on a straight-linebasis over their useful lives, 13 to 40 years for trademarks and customerlists, and 5 to 10 years for non-compete agreements. Deferred debt issuancecosts are amortized as a component of interest expense over the term of therelated debt using a method that approximates the interest method.

***Impairment ofLong-Lived Assets***—The Company evaluates itsintangible assets for impairment on an annual basis or when an event occurs orcircumstances change that would indicate that the fair value of the intangiblehas reduced below its carrying amount. Such evaluations include an assessmentof customer retention, cash flow projections and other factors the Companybelieves are relevant. The discounted future expected net cash flows of eachidentifiable asset is used to measure impairment losses. The Company has notidentified any impairment losses with respect to long-lived assets for anyfiscal years presented.

***Foreign CurrencyTranslation***—Assets and liabilities of the Company’sforeign subsidiary, where the functional currency is the local currency, aretranslated into United States dollars at the fiscal year end exchange rate. Therelated translation adjustments are recorded as a component of othercomprehensive income. Revenues and expenses are translated using averageexchange rates prevailing during the year.

F-8

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***Risk Insurance***—TheCompany has a $250 self-insured retention per occurrence in connection with itsworkers’ compensation policy (“Risk Insurance”). The Company accrues itsestimated cost in connection with its portion of its Risk Insurance losses. Claimspaid are charged against the reserve. Additionally, the Company maintains areserve for incurred but not reported claims based on past experience.

***Estimates***—Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosures of contingent liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting period. Actual results may differ from those estimates andassumptions.

***Fair Value ofFinancial Instruments***—The carrying value of cashand cash equivalents, restricted cash, accounts receivable, and accountspayable approximate fair value because of the short maturities of these items. Thecarrying values of notes payable and long-term debt are reasonable estimates oftheir fair values. Estimated fair values of notes payable and long-term debtare determined by discounting the future cash flows using rates currentlyavailable to the Company for similar instruments. Interest rate swaps arecarried at fair value, which is determined by quoted market prices.

***Revenue Recognition***—TheCompany recognizes a sale when the product has been delivered and risk of losshas passed to the customer, collection of the resulting receivable is probable,persuasive evidence of an arrangement exists, and the fee is fixed ordeterminable. Sales are recorded net of estimated discounts, rebates andreturns. A portion of the Company’s sales are delivered direct from themanufacturer. These direct-shipment sales are recorded on a gross basis, withthe corresponding cost of goods sold, in accordance with the guidance in EITF 99-19,*Reporting Revenues Gross as a Principal verses Netas an Agent*. The Company provides limited product return andprotection rights to certain customers. The Company accrues product returnreserves and warranty obligations at the time of sale.

***Cost of Sales***—Costof sales includes merchandise costs, freight-in, and operating costs related tothe Company’s National Distribution Center.

***Shipping andHandling Costs***—Shipping and handling costs havebeen included in selling, general and administrative expenses on theconsolidated statements of operations. Such amounts were approximately $39.0million, $32.5 million, and $30.1 million in 2004, 2003 and 2002, respectively.

***Advertising Costs***—Costsof producing and distributing sales catalogs and promotional flyers arecapitalized and charged to expense over the life of the related catalog andpromotional flyers. Advertising expenses, net, were approximately $2.1 million,$1.3 million, and $2.0 million in 2004, 2003 and 2002, respectively.

***Stock-BasedCompensation***—The Company accounts for stock-basedcompensation using the intrinsic value method. Accordingly, compensation costfor stock options issued to employees is measured as the excess, if any, of thequoted market price of the Company’s stock at the date of the grant over theamount an employee must pay to acquire the stock. Compensation cost forrestricted stock issued to employees and directors is measured at the fairvalue on the grant date and is recognized over the vesting or performanceperiod.

***Net Income perShare Data***—Net income per share for all periodshas been computed in accordance with SFAS No. 128, “Earnings per Share”. Basicnet income per share is computed by dividing net income by the weighted-averagenumber of shares outstanding during the year. Diluted net income per share iscomputed by dividing net income by the weighted-average number of sharesoutstanding during the year, assuming dilution.

F-9

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Theamounts used in calculating net income (loss) per share data are as follows:
| ** **                                        | ** ** | **2004**  | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------------------|------------|-----------|------------|----------|------------|----------|------------|
| Net income                                        |       | $         | 18,101     |     | $          | 7,152    |       | $ | 7,146 |   |
| Preferred stock  dividends                        |       | (54,389   | )          | (48,623  | )          | (42,470  | )          |
| Net loss  applicable to common shareholders       |       | $         | (36,288    | )        | $          | (41,471  | )          | $ | (35,324 | ) |
| Weighted average shares outstanding—basic    |       | 1,439,322 |       | 65,540   |       | 65,592   |       |
| Effect of  dilutive stock options                 |       | —    |       | —   |       | —   |       |
| Weighted average  shares outstanding—diluted |       | 1,439,322 |       | 65,540   |       | 65,592   |       |

 

Options to purchase 2,468,009 shares that wereoutstanding during 2004 were not included in the computation of weightedaverage shares outstanding-diluted because they would have decreased loss pershare. Options to purchase 2,284 and 1,532 shares of common stock which wereoutstanding during 2003 and 2002, respectively, were not included in thecomputation of weighted average shares outstanding-diluted because the options’exercise prices were greater than the average market price of common stock andthe effect would be antidilutive.

Thefollowing table illustrates the effect on net earnings (loss) and earnings(loss) per share for the year ended December 31, 2004 as if the Companyhad applied the fair value recognition provisions of SFAS 123, “Accounting forStock-Based Compensation,” to stock-based employee compensation (in thousands, except per share amounts):
| ** **                                                                                                                   | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| Net income as  reported                                                                                                      |       | $        | 18,101     |   |
| Add: Stock-based employee compensation expense  included in reported net income, net of related tax effects                  |       | —   |       |
| Deduct: Total stock-based employee compensation  expense determined under fair value based method for all awards, net of tax |       | 6,796    |       |
| Pro forma net income                                                                                                         |       | 11,305   |       |
| Preferred stock dividends                                                                                                    |       | (54,389  | )          |
| Net loss applicable to common shareholders                                                                                   |       | $        | (43,084    | ) |
| Earnings per  share:                                                                                                         |       |     |       |
| Basic—as reported                                                                                                       |       | $        | (25.21     | ) |
| Basic—proforma                                                                                                          |       | $        | (29.93     | ) |
| Diluted—as reported                                                                                                     |       | $        | (25.21     | ) |
| Diluted—pro forma                                                                                                       |       | $        | (29.93     | ) |

 

The fair value of each option was estimated on thedate of grant using the Black-Scholes option pricing model, with the followingassumptions used for options granted in 2004: dividend yield of 0%, volatilityof 31%, risk-free interest rate of 3.71% and expected life of 5 years.Compensation cost for options granted in 2003, determined based on theBlack-Scholes option pricing model value at the grant date did not have amaterial effect on net income, using the following assumptions for thoseoptions granted in 2003: dividend yield of 0%, expected volatility of 0%,risk-free interest rate of 4.02% and expected life of 5 years. No options weregranted in 2002.

F-10

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***Segment Information***—TheCompany is in one industry—the distribution of MRO products. In accordance withSFAS 131, “Disclosure about segments of an Enterprise and Related Information,”the Company has one operating segment. The Company’s sales by product categoryare as follows:
| **Product Category** | ** ** | ** ** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Plumbing                  |       | $          | 331,200    |     | $          | 300,865  |       | $        | 306,014    |   |
| Electrical                |       | 115,359    |       | 76,817   |       | 76,504   |       |
| Security Hardware         |       | 52,073     |       | 51,211   |       | 51,002   |       |
| Hardware                  |       | 48,300     |       | 44,810   |       | 44,627   |       |
| Appliances and  Parts     |       | 46,493     |       | 38,408   |       | 38,252   |       |
| HVAC                      |       | 46,333     |       | 38,408   |       | 38,252   |       |
| Other                     |       | 104,147    |       | 89,619   |       | 82,879   |       |
| Total                     |       | $          | 743,905    |     | $          | 640,138  |       | $        | 637,530    |   |

 

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

***Income Taxes***—Taxeson income are provided using an asset and liability approach to financialaccounting and reporting for income taxes. Deferred income tax assets andliabilities are computed for differences between the financial statementcarrying values and the tax bases of assets and liabilities that will result intaxable or deductible amounts in the future. Such deferred income tax asset andliability computations are based on enacted tax laws and rates applicable toperiods in which the differences are expected to affect taxable income. Valuationallowances are established when necessary to reduce deferred tax assets to theamounts expected to be realized.

***DerivativeFinancial Instruments***—Periodically, the Companyenters into derivative financial instruments, including interest rate exchangeagreements (“Swaps”) to manage its exposure to fluctuations in interest rateson its debt. Under Swaps the Company held in 2004, 2003 and 2002, the Companypaid a fixed rate on the notional amount to its banks and the banks paid theCompany a variable rate on the notional amount equal to a base LIBOR rate. TheCompany’s derivative activities, all of which are for purposes other thantrading, 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 and a loss of $5,825 in 2002, as aresult of the change in market value of the Swaps.

***Recent AccountingStandards***—In December 2004,the FASB issued SFAS No. 153, *Exchanges of NonmonetaryAssets—Amendment of APB Opinion No. 29, Accounting for NonmonetaryTransactions*(“SFAS153”). The statement is effective for nonmonetaryasset exchanges occurring in fiscal periods beginning after June 15, 2005.Earlier application is permitted for nonmonetary asset exchanges occurring infiscal periods beginning after the date of issuance. The provisions of thisstatement shall be applied prospectively. The Company does not expect theadoption of SFAS 153 to have a material impact on the Company’s financialposition, results of operations or cash flows.

In December 2004, the FASBissued SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123R).SFAS No. 123R requires that the costs resulting from all share-basedcompensation payment transactions be recognized in the financial statements. Thestandard also requires that entities apply a fair-value-based measurementmethod to account for share-based payment transactions with employees(excluding equity instruments held by employee share ownership plans). SFAS No. 123Ris effective as of the beginning of the first interim period that begins after June 15,2005. As the majority of the Company’s outstanding stock options are vested asof December 31, 2004 and there is no change on the measurement oraccounting for the compensation expense associated with the Company’soutstanding restricted stock, the Company does not expect the adoption of SFAS No. 123Rwill have a material impact on the Company’s financial position, results ofoperations or cash flows.

F-11

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In September 2004,the FASB issued EITF 04-10,*Applying Paragraph 19 ofFASB Statement No. 131, “Disclosures about Segments of an Enterprise andRelated Information” in Determining Whether to Aggregate Operating Segmentsthat Do Not Meet the Quantitative Thresholds.* The Company hasevaluated this EITF and has determined that there is no effect on thereportable segment included in the Company’s consolidated financial statements.

**3.   GOODWILLAND OTHER INTANGIBLE ASSETS**

Asummary of changes to goodwill for the year ended December 31, 2004 and December 26,2003 follows:
| ** **                           | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
| Beginning balance                    |       | $        | 202,227    |     | $          | 195,669 |   |
| Acquisitions                         |       | —   |       | 6,982    |       |
| Adjustments to  acquisition accruals |       | 1,621    |       | (424     | )          |
| Ending balance                       |       | $        | 203,848    |     | $          | 202,227 |   |

 

The adjustments to goodwill during 2004 relateprimarily to the establishment of an acquisition accrual for the FloridaLighting acquisition as well as an adjustment of an acquisition accrual establishedfor the Barnett acquisition that was settled for less than the amount accrued. Theadjustment to goodwill during 2003 relates primarily to the adjustment of anacquisition accrual established for the Barnett acquisition that was settledfor less than the amount accrued. There were no changes to goodwill for theyear ended December 27, 2002.

Thegross carrying amount and accumulated amortization of the Company’s intangibleassets other than goodwill as of December 31, 2004 and December 26,2003 are as follows:
| ** **                    | ** ** | **Gross**    | ** ** | ** **       | ** ** | **Net**   | ** ** |
|-------------------------------|------------|--------------|------------|------------------|------------|-----------|------------|
| ** **                    | ** ** | **Carrying** | ** ** | **Accumulated**  | ** ** | **Book**  | ** ** |
| ** **                    | ** ** | **Amount**   | ** ** | **Amortization** | ** ** | **Value** | ** ** |
| **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 |   |
| **December 26, 2003**    |       |         |       |             |       |      |       |   |   |
| Customer lists                |       | $            | 49,362     |             |       | $         | 5,403      |   |   | $ | 43,959 |   |
| Trademarks                    |       | 36,221       |       |             | 2,912      |      |       | 33,309 |   |
| Deferred debt  issuance costs |       | 13,149       |       |             | 1,079      |      |       | 12,070 |   |
| Non-compete  agreements       |       | 2,616        |       |             | 1,322      |      |       | 1,294 |   |
| Total                         |       | $            | 101,348    |             |       | $         | 10,716     |   |   | $ | 90,632 |   |

 

F-12

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Theamortization of deferred debt issuance costs, recorded as a component ofinterest expense, was $1.9 million, $1.8 million, and $1.7 million in 2004,2003 and 2002, respectively, and write-off of such costs were $0.7 million and$6.5 million in 2004 and 2003, respectively. Amortization expense on otherintangible assets was $4.0 million, $2.7 million, and $2.0 million for 2004,2003 and 2002, respectively. Expected amortization expense on other intangibleassets (excluding deferred debt issuance costs which will vary depending upondebt payments) for each of the five succeeding fiscal years is as follows:
| **For fiscal year:** |   |   |   |
|----------------------|--------|--------|--------|
| 2005                 |   | $      | 4,009  |   |
| 2006                 |   | $      | 4,007  |   |
| 2007                 |   | $      | 3,989  |   |
| 2008                 |   | $      | 3,973  |   |
| 2009                 |   | $      | 3,740  |   |

 

***Change in Estimate***—EffectiveJuly 1, 2003, the Company changed the estimated useful life of customerlists acquired in the acquisition of Barnett and Sexauer during September 2000and November 1999 respectively, from 40 years to 17 years. The estimatedremaining useful life of 17 years was based upon the expected life of thecustomer accounts acquired using the attrition rate experienced for thetwelve-month period ended September 26, 2003, with no consideration givento new accounts generated during this period. This method is consistent withthe guidance provided in the Statement of Financial Accounting Standards 142,which suggests that the customer list intangible asset should be amortizedbased on management’s best estimate of its useful life, following the patternin which the expected benefits will be consumed or otherwise used up. Theeffect of this change in the estimated remaining useful life was not materialto the Company’s consolidated financial statements.

**4.   SIGNIFICANT TRANSACTIONS**

***Initial PublicOffering Transaction***—In December 2004, theCompany successfully completed its Initial Public Offering and amended itssenior credit facility. A total of 14,375,000 shares of the Company’s commonstock were sold, of which 12,667,000 were sold by the Company and 1,708,000were sold by the Company’s shareholders. The Company sold 12,500,000 shares ofits common stock in December 2004 and 167,000 shares in January 2005following the exercise of the underwriters’ over-allotment option. The Companyreceived $171.8 million in net proceeds including the exercise of theunderwriters’ over-allotment option, representing $176.9 million of proceedsfrom the sale of stock net of underwriting discounts and commissions, less $4.1million of initial public offering costs and $1.1 million of debt issuancecosts.

Immediately prior to the closing of the Initial PublicOffering, a reincorporation merger occurred and the parent company of InterlineNew Jersey became the holding company of the Interline group of businesses. Inthe reincorporation 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 amendedits senior credit facility to allow for the Initial Public Offering and reduceits applicable rate in respect to any term loans from LIBOR plus 3.50% to LIBORplus 2.25%. In conjunction with this amendment, the Company incurred $1.1million of debt issuance costs. In December 2004, the Company also used$4.6 million of the proceeds to terminate the interest rate swap agreements. InJanuary 2005, the Company used $70.0 million of the proceeds from the IPOtransaction to partially redeem its 11.5% senior subordinated notes. Inconnection with the redemption, the Company 

F-13

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paid $8.1 million ofpremiums for early redemption of the senior subordinated notes and recorded a$10.3 million loss on the early extinguishment of debt, which included a chargefor write-off of unamortized debt issuance costs in the amount of $2.3 millionin 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 reimbursementof taxes of $1.1 million on such loan forgiveness. These costs are reported asIPO related expenses in the statements of operations.

***Special Costs andExpenses***—Special costs and expenses for 2003 and2002 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, $0.6 million and $4.9 millionfor fiscal years 2004, 2003 and 2002, respectively.

***Barnett Acquisition****—*In September 2000, the Company completed theacquisition of Barnett, Inc. (the “Barnett Acquisition”) for an aggregatepurchase price of $220.8 million including costs of acquisition ofapproximately $7.1 million. The costs ofacquisition include a $3.0 million advisory fee paid to a significantstockholder of the Company. Goodwill recorded in connection with theBarnett Acquisition totaled approximately $89.3 million. Other intangibleassets recorded in connection with the Barnett Acquisition totaledapproximately $53.1 million. During2001, the Company finalized its purchase price of Barnett and as a resultrecorded an increase in goodwill of approximately $12.3 million. These additionalcosts relate to the closure of duplicate Barnett facilities, severance relatedto these closures and the relocation and integration of Barnett employees andadministrative functions. As of December 31, 2004 and December 26,2003, $3.1 million and $4.7 million was accrued for such costs.

***Florida LightingAcquisition***—On November 24, 2003, the Companypurchased the net assets of Florida Lighting, Inc. (the “Florida LightingAcquisition”), which sells residential lighting and electrical products toelectrical contractors, electrical distributors, lighting, showrooms and massmerchants primarily through direct mail and outbound telesales.

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 31,2004, $3.0 million was accrued for such costs.

The following tablesummarizes the estimated fair values of the assets acquired and liabilitiesassumed at the date of acquisition.
| **At  November 24, 2003**             | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------|------------|
| Cash                                       |       | $          | 481        |   |
| Accounts  receivable                       |       | 1,046      |       |
| Inventory                                  |       | 3,872      |       |
| Prepaid expenses  and other current assets |       | 182        |       |
| Property and  equipment                    |       | 713        |       |
| Goodwill                                   |       | 6,982      |       |
| Other intangible  assets                   |       | 10,700     |       |
| Accounts payable                           |       | (868       | )          |
| Total purchase price                       |       | $          | 23,108     |   |

 

F-14

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The purchase price for the Florida LightingAcquisition includes $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 is to be paid upon the delivery ofthe 2004 annual report but no later than April 15, 2005 evidencing suchperformance. If payment is required, the Company will record such amount as anaddition to the purchase price.

The Florida Lightingacquisition was accounted for under the purchase method of accounting, and accordingly,the net assets and results of operations have been included in the accompanyingconsolidated financial statements since the date of acquisition. The followingtable presents the unaudited results of operations of the Company for thefiscal years ended December 26, 2003 and December 27, 2002 as if theacquisition had been consummated as of the beginning of 2002, and includescertain pro forma adjustments to reflect the amortization of intangible assetsand financing charges on long-term debt:
| ** ** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------|------------|----------|------------|----------|------------|
| Revenues   |       | $        | 666,919    |     | $          | 666,769 |   |
| Net income |       | 8,308    |       | 8,370    |       |
|            |            |          |            |          |            |  |  |

 

The unaudited pro formaresults of operations are prepared for comparative purposes only and do notnecessarily reflect the results that would have occurred had the acquisitionoccurred at the date described above or the results which may occur in thefuture.

**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.
| ** **                          | ** ** | **Balance at** | ** ** | ** **          | ** ** | ** **        | ** ** | **Balance at** | ** ** |
|-------------------------------------|------------|---------------------|------------|---------------------|------------|-------------------|------------|---------------------|------------|
| ** **                          | ** ** | **Beginning**       | ** ** | **Charged to** | ** ** | ** **        | ** ** | **End**             | ** ** |
| ** **                          | ** ** | **of Year**    | ** ** | **Expense**         | ** ** | **Deductions(1)** | ** ** | **of Year**    | ** ** |
| Year ended  December 27, 2002: |       |                |       |                |       |              |       |                |       |   |   |   |   |   |   |   |   |
| Allowance for doubtful accounts     |       |                | $5,142     |                |       |              | $1,937     |                |       |   | $(1,757 | ) |   |   | $5,322 |   |   |
| 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 |   |   |

----

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

F-15

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**6.   PROPERTY AND EQUIPMENT**

Majorclassifications of property and equipment are as follows:
| ** **                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Land                                            |       | $        | 400        |     | $          | 400 |   |
| Building                                        |       | 9,536    |       | 9,536    |       |
| Machinery and  equipment                        |       | 49,514   |       | 44,092   |       |
| Office furniture  and equipment                 |       | 5,302    |       | 4,709    |       |
| Vehicles                                        |       | 581      |       | 581      |       |
| Leasehold  improvements                         |       | 7,003    |       | 6,512    |       |
|                                            |       | 72,336   |       | 65,830   |       |
| Less accumulated  depreciation and amortization |       | (43,569  | )          | (35,225  | )          |
|                                            |       | $        | 28,767     |     | $          | 30,605 |   |

 

Depreciation andamortization expense was approximately $8.6 million, $8.2 million, and $9.3 millionfor 2004, 2003 and 2002, respectively.

**7.**   DEBT

Long-termdebt consists of the following:
| ** **                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Term Loan                             |       | $        | 100,000    |     | $          | 138,250 |   |
| Note payable                          |       | 3,275    |       | 3,275    |       |
| Senior  Subordinated Notes—11.5% |       | 200,000  |       | 200,000  |       |
|                                  |       | 303,275  |       | 341,525  |       |
| Less current portion                  |       | (1,000   | )          | (7,000   | )          |
|                                  |       | $        | 302,275    |     | $          | 334,525 |   |

 

***Debt****—*In May 2003, the Company completed an offering of $200million of 11.5% senior subordinated notes due 2011 and entered into a new$205.0 million senior secured credit facility which consists of a $140.0million term loan facility and a $65.0 million revolving loan facility, aportion of which is available in the form of letters of credit. The netproceeds from the offering of senior subordinated notes and the refinancing ofthe former credit facility with the new credit facility were used to: (1) repayall outstanding indebtedness under the Company’s former credit facility, (2) redeemall of the 16% senior subordinated notes, (3) pay accrued interest andrelated redemption premiums on the Company’s former debt and (4) paytransaction fees and expenses related to the Refinancing Transactions.

The $200 million principal amount 11.5% seniorsubordinated notes due 2011 pay interest each May 15 and November 15,with the first payment made on November 15, 2003. Prior to May 15,2006, the Company may redeem up to 35% of the notes using proceeds of certainequity offerings and the Company may redeem all of the notes after May 15,2007, subject to redemption premiums unless redeemed after May 15, 2009. TheCompany elected to redeem $70.0 million of the 11.5% senior subordinated notesusing proceeds from the IPO transaction and gave the 30-day notice, required bythe indenture agreement, 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 the Company amended its termloan facility and revolving loan facility. The term loan was reduced to $100.0million from $140.0 million and the revolving loan facility was increased to 

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$100.0 million from $65.0million. As part of the amendment in December 2004, the Company paid down$31.3 million of the term loan using proceeds from the IPO transaction. Borrowingsunder the amended term loan facility and revolving loan facility bear interest,at the Company’s option, at either LIBOR plus a spread or at the alternate baserate plus a spread. Interest rates in effect on borrowings under the term loanfacility at December 31, 2004 ranged from 4.80% for LIBOR based borrowingsand 6.50% for prime based borrowings. Outstanding letters of credit under therevolving loan facility are subject to a per annum fee equal to the applicable spreadover the adjusted LIBOR for revolving loans. The term loan facility matures on December 31,2010 and the revolving loan facility matures on May 31, 2008.

As of December 31, 2004, the Company had $91.3million available under its revolving loan facility. Total letters of creditissued under this facility as of December 31, 2004 was $8.7 million. Therewere no borrowings under the revolving loan facility at December 31, 2004.The credit facility is secured by substantially all of the assets of the Company.

Debt issuance costs capitalized in connection with theRefinancing Transactions were approximately $13.1 million. An expense ofapproximately $14.9 million for the early extinguishment of debt resulted fromthe write-off of the unamortized loan fees and loan discount relating to theCompany’s former credit facility and the redemption premium incurred uponredemption of the 16% Senior Subordinated Notes, as part of the RefinancingTransactions. Debt issuance costs capitalized in connection with the amendedcredit facility were approximately $1.1 million. An expense of approximately$0.7 million for early extinguishments of debt resulted from the write-off ofthe unamortized loan fees relating to the Company’s former credit facility.

Periodically, the Company enters into derivativefinancial instruments, including interest rate exchange agreements, to manageits exposure to fluctuations in interest rates on its debt. At December 26,2003, the Company had interest rate exchange agreements, or swaps, outstandingwith a total notional amount of $151.0 million. These agreements wereterminated as of December 2004.

The credit facility contains customary affirmative andnegative covenants that limit the Company’s ability to incur additionalindebtedness, pay dividends on its common stock or redeem, repurchase or retireits common stock or subordinated indebtedness, make certain investments, sellassets, and consolidate, merge or transfer assets, and that require the Companyto maintain a maximum debt to cash flow ratio and a minimum interest expensecoverage ratio. The Company was in compliance with all covenants at December 31,2004.

In April 2003, the Company issued a non-recoursenote payable in the principal amount of $3.3 million for the purchase of aninvestment. This note, which is secured only by the investment, bears interestat a rate of 4% per annum, with principal due in full in April 2010.

Thematurities of long-term debt subsequent to December 31, 2004 are asfollows:
| 2005       |   | $       | 1,000   |   |
|------------|--------|---------|---------|--------|
| 2006       |   | 1,000   |    |
| 2007       |   | 1,000   |    |
| 2008       |   | 1,000   |    |
| 2009       |   | 1,000   |    |
| Thereafter |   | 298,275 |    |
|       |   | $       | 303,275 |   |

 

**8.   PREFERREDSTOCK**

The Company has theauthority to issue 20,000,000 shares of preferred stock, par value $.01 pershare. At December 2004, there were no preferred shares issued oroutstanding. In connection with the 

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reincorporationmerger and IPO transaction, as described above, the preferred stock ofInterline New Jersey was converted to company common stock.

**9.   STOCKHOLDERS’ EQUITY**

***Common Stock***—During2004 the Company completed its IPO described in Note 4 above. In addition tothe shares 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 conjunction withthe IPO transaction described above the Company forgave $1.6 million ofstockholder loans included in stockholders’ equity and accordingly took acharge to operating income for this amount. As of December 16, 2004, thedate the loans were forgiven, and December 26, 2003, $375 and $345,respectively, of interest was accrued on the notes and was included as aportion of the stockholder loans in stockholders’ equity. As of December 2004,there were no stockholder loans outstanding.

**10.   PROFIT SHARING 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 $1.1 million, $0.7 million and $1.3 million for 2004, 2003and 2002, respectively.

**11.**   COMMITMENTSAND CONTINGENCIES

***Lease Commitments***—TheCompany leases its facilities under operating leases expiring at various datesthrough 2011. Minimum future rental payments under these leases as of December 31,2004 are as follows:
| 2005       |   | $     | 11,311 |   |
|------------|--------|-------|--------|--------|
| 2006       |   | 9,077 |   |
| 2007       |   | 7,454 |   |
| 2008       |   | 5,275 |   |
| 2009       |   | 4,200 |   |
| Thereafter |   | 3,424 |   |
| Total      |   | $     | 40,741 |   |

 

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 2004 and $289 in 2003 and 2002.This lease expires on May 31, 2006 and does not contain any renewal terms.The Company believes that the terms of the lease are no less favorable to itthan could be obtained from an unaffiliated party.

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The Company previously leased an office building froma stockholder and former director of the Company. As amended in March 1995,under the terms of the lease, the Company was required to pay approximately$137 annually, plus all real estate taxes and assessments, utilities andinsurance related to the premises. Total rental expense for this lease was $85for 2004, $137 for 2003 and 2002. The lease expired July 31, 2004 and theCompany did not renew its lease and relocated as of July 2004. The Companybelieves that the terms of the lease were no less favorable to it than could beobtained from an unaffiliated party.

Rent expense under all operating leases wasapproximately $17.7 million, $15.7 million, and $14.8 million for 2004, 2003and 2002, respectively. Certain of the leases provide that the Company paystaxes, insurance and other operating expenses applicable to the leasedpremises.

***EmploymentAgreement***—The Company has employment agreementswith certain officers of various dates through 2006, unless terminated earlierby the Company, at combined annual base salaries of $3.8 million, subject toadjustments and plus bonuses.

***ManagementAgreement****—*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 initialpublic offering.

***ContingentLiabilities***—At December 31, 2004 and December 26,2003, the Company was contingently liable for unused letters of creditaggregating approximately $8.7 million and $6.0 million, respectively.

***Legal Proceedings***—TheCompany is involved in various legal proceedings in the ordinary course of itsbusiness that are not anticipated to have a material adverse effect on theCompany’s results of operations or financial position.

***Deferred Compensation Agreements***—EffectiveSeptember 29, 2000, the Company established deferred compensationagreements in the amount of $1.9 million with officers of the Company. Interestis payable on the amounts at the long-term federal rate, compoundedsemi-annually, starting on the date of the initial deferral. The accountsvested ratably over a 24-month period and were fully vested at September 30,2002.

**12.   STOCK-BASED COMPENSATION PLANS**

During 2000, Interline New Jersey established a StockAward Plan, (the “2000 Plan”), under which Interline New Jersey may award atotal of 6,395 shares of common stock in the form of incentive stock options(which may be awarded to key employees only), nonqualified stock options, stockappreciation rights, or SARs, and restricted stock awards, all of which may beawarded to directors, officers, key employees and consultants. The exerciseprice per share for an incentive stock option may not be less than 100% of thefair market value of a share of common stock on the grant date. The exerciseprice per share for an incentive stock option granted to a person owning stockpossessing more than 10% of the total combined voting power of all classes ofstock may not be less than 110% of the fair market value of a share of commonstock on the grant date, and may not be exercisable after the expiration of tenyears from the date of grant. The Company’s compensation committee will determinein its sole discretion whether a SAR is settled in cash, shares or acombination of cash and shares.

During 2004, the Company adopted the 2004 EquityIncentive Plan, (the “2004 Plan”), under which the Company may award 3,175,000shares in the form of incentive stock options, nonqualified stock options,stock appreciation rights, or SARs, restricted share units, restricted stockand stock bonus awards, all of which may be awarded to any employee, director,officer or consultant of the Company. Under the terms of the 2004 plan andunless the compensation committee of the Company determines otherwise, theexercise price of the options will not be less than the fair market value ofthe common stock at the time of grant.

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Upon completion of the Company’s IPO in December 2004,175,820 shares of restricted stock were issued to senior management. Therestricted stock awards will vest contingent upon the executive’s continuedemployment in one-third installments over three years provided that certainpre-established annual percentage increases in our earnings per share areattained. The restricted stock will also vest if the executive remains in ouremploy for seven years on the seventh anniversary of the date of grant. Inaddition, an aggregate of 10,000 shares of restricted stock were issued tonon-employee directors who are not affiliated with any of our principalstockholders. Such awards will vest over two years. As a result of theserestricted stock awards, the Company will incur non-cash charges between $0.4million and $0.9 million in each of the next three to seven years dependingupon the acceleration of vesting of restricted stock. These two directors alsoreceived 20,000 non-qualified stock options with an exercise price equal to theIPO price of $15.00 per share. In addition, the Company issued to management1,835,218 non-qualified stock options with an exercise price equal to the IPOprice of $15.00 per share and 590,465 non-qualified stock options with aweighted average exercise price of $24.00 per share. All of these options werefully vested and exercisable when granted. However, management will only bepermitted to sell shares acquired upon the exercise of the 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 27, 2002  |       | 1,532              |       | $137.11 - $1,669.13     |       |                          | $          | 738.90 |   |   |
| Granted                                |       | 810                |       | $41.05                  |       |                          | $          | 41.05 |   |   |
| Cancelled                              |       | (58                | )          | $41.05                  |       |                          | $          | 41.05 |   |   |
| 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 |   |   |

 

Thefollowing table summarizes information about the stock options outstandingunder the Company’s option plan as of December 31, 2004:
| ** **                | ** ** | **Options**             | ** **                      | **Weighted** | ** **              | **Weighted** | ** **              | **Options**             | ** **                      | **Weighted** | ** **              |
|---------------------------|------------|-------------------------|---------------------------------|--------------|-------------------------|--------------|-------------------------|-------------------------|---------------------------------|--------------|-------------------------|
| ** **                | ** ** | **Outstanding at** | ** **                      | **Average**  | ** **              | **Average**  | ** **              | **Exercisable at** | ** **                      | **Average**  | ** **              |
| **Exercise Price**   | ** ** | ** **              | **December 31, 2004** | ** **   | **Remaining Life** | ** **   | **Exercise Price** | ** **              | **December 31, 2004** | ** **   | **Exercise Price** | ** ** |
| $   137.11 |       |                    |                            | 511          |                    |         |                    | 0.5  years              |                            |         |                    | $ | 137.11 |   |   |   | 409 |   |   |   | $ | 137.11 |   |   |
| 410.51                    |       |                    |                            | 511          |                    |         |                    | 0.5  years              |                            |         |                    | 410.51 |   |   |   | 409 |   |   |   | 410.51 |   |   |
| 1,669.13                  |       |                    |                            | 510          |                    |         |                    | 0.5  years              |                            |         |                    | 1,669.13 |   |   |   | 409 |   |   |   | 1,669.13 |   |   |
| 41.05                     |       |                    |                            | 738          |                    |         |                    | 3  years                |                            |         |                    | 41.05 |   |   |   | 492 |   |   |   | 41.05 |   |   |
| 41.05                     |       |                    |                            | 57           |                    |         |                    | 4  years                |                            |         |                    | 41.05 |   |   |   | 23 |   |   |   | 41.05 |   |   |
| 15.00                     |       |                    |                            | 1,875,218    |                    |         |                    | 10  years               |                            |         |                    | 15.00 |   |   |   | 1,875,218 |   |   |   | 15.00 |   |   |
| 21.75                     |       |                    |                            | 295,232      |                    |         |                    | 10  years               |                            |         |                    | 21.75 |   |   |   | 295,232 |   |   |   | 21.75 |   |   |
| 26.25                     |       |                    |                            | 295,232      |                    |         |                    | 10  years               |                            |         |                    | 26.25 |   |   |   | 295,232 |   |   |   | 26.25 |   |   |
|                      |       |                    | 2,468,009                       |         |                    |         |                    |                    |                            |         |                    |   |   |   | 2,467,424 |   |   |   |   |   |   |
|                           |            |                         |                                 |              |                         |              |                         |                         |                                 |              |                         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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