**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

****(Mark One)****

| ****ý**** | **** **** | ****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934****                                                                                                                                                                       |
|----------------|----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|           |           |                                                                                                                                                                                                                                                                            |
| ** **     | ** **     | ****FOR THE QUARTERLY PERIOD ENDED JULY 1, 2005****                                                                                                                                                                                                                        |
|           |           |                                                                                                                                                                                                                                                                            |
| ** **     | ** **     | ****OR****                                                                                                                                                                                                                                                                      |
|           |           |                                                                                                                                                                                                                                                                            |
| ****o****      | **** **** | ****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934****                                                                                                                                                                           |
|           |           |                                                                                                                                                                                                                                                                            |
| ** **     | ** **     | ****FOR THE TRANSITION PERIOD FROM                     TO                    **** |
|           |           |                                                                                                                                                                                                                                                                            |
| ** **     | ** **     | ****COMMISSION FILE NUMBER 001-32378****                                                                                                                                                                                                                                        |

 

**INTERLINE BRANDS, INC.**

(Exact name of registrant as specified in its charter)

 

| ****NEW JERSEY****                                                    | **** **** | ****22-2232386****                          |
|-----------------------------------------------------------------------|----------------|---------------------------------------------|
| ****(State or other jurisdiction ofincorporation or organization)**** | **** **** | ****(I.R.S. EmployerIdentification No.)**** |
|                                                                  |           |                                        |
| ****801 WEST BAY STREET, JACKSONVILLE, FLORIDA****                    | **** **** | ****32204****                               |
| ****(Address of principal executive offices)****                      | **** **** | ****(Zip Code)****                          |

 

**(904) 421-1400**

(Registrant’s telephone number, including area code)

 

**NOT APPLICABLE**

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

 

**The Registrant meets the conditions set forth in General Instruction H(1)(a) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format.**

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes o     No ý

 

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

Yes o     No ý

 

Number of shares of CommonStock outstanding as of August 11, 2005: **None**

Because the registrant is anindirect wholly owned subsidiary of Interline Brands, Inc., a Delawarecorporation, none of the registrant’s outstanding voting stock is held bynon-affiliates of the Registrant.  As ofthe date hereof, 100 shares of the Registrant’s Common Stock were issued andoutstanding and held by Interline Brands, Inc., a Delaware corporation.

 

 

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**TABLE OF CONTENTS**

 
| ****PART I — FINANCIAL INFORMATION**** |           |
|--------------------------------------------------|----------------|
|                                             |           |   |   |   |   |
| ****Item 1.****                                  | **** **** | ****Financial Statements**** |   |
|                                             |           |   |   | ****Unaudited Condensed Consolidated Balance Sheets as of July 1, 2005 and December 31, 2004**** | ****1**** |
|                                             |           |   |   | ****Unaudited Condensed Consolidated Statements of Operationsfor the Three Months and Six Months Ended July 1, 2005 and June 25, 2004**** | 2 |
|                                             |           |   |   | ****Unaudited Condensed Consolidated Statement of Stockholder’sEquity (Deficiency) for the Six Months Ended July 1, 2005**** | 3 |
|                                             |           |   |   | ****Unaudited Condensed Consolidated Statements of Cash Flowsfor the Six Months Ended July 1, 2005 and June 25, 2004**** | 4 |
|                                             |           |   |   | ****Notes to Unaudited Condensed Consolidated Financial Statements**** | 5 |
| ****Item 2.****                                  | **** **** | ****Management’s Discussions and Analysis of Financial Condition and Results of Operations**** | ****19**** |
| ****Item 3.****                                  | **** **** | ****Quantitative and Qualitative Disclosures about Market Risk**** | ****26**** |
| ****Item 4.****                                  | **** **** | ****Controls and Procedures**** | ****26**** |
| **** ****                                   | **** **** | **** **** | **** **** |   |   |
| ****PART II — OTHER INFORMATION****    |           |
|                                             |           |   |   |   |   |
| ****Item 1.****                                  | **** **** | ****Legal Proceedings**** | ****26**** |
| ****Item 5.****                                  | **** **** | ****Other Information**** | ****27**** |
| ****Item 6.****                                  | **** **** | ****Exhibits**** | ****27**** |
|                                             |           |   |   |   |   |
| ****SIGNATURES****                               | ****28****     |

 

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**PART I. FINANCIAL INFORMATION**

 

ITEM 1.  FINANCIALSTATEMENTS.

 

**INTERLINE BRANDS, INC. (A NEW JERSEY CORPORATION) ANDSUBSIDIARIES**

**(A WHOLLY OWNED SUBSIDIARY OF INTERLINE BRANDS, INC., ADELAWARE CORPORATION)**

**CONDENSED CONSOLIDATEDBALANCE SHEETS (UNAUDITED)**

**AS OF JULY 1, 2005 AND DECEMBER 31, 2004**

**(in thousands, except share data)**

 
| ** **                                                                                                                                             | ** ** | **July 1,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                             |       |                   |       |                        |       |
| CURRENT ASSETS:                                                                                                                                        |       |                   |       |                        |       |
| Cash and cash equivalents                                                                                                                              |       | $                      | 253        |                        | $          | 69,178 |   |
| Accounts receivable - trade (net of  allowance for doubtful accounts of $7,277 and $6,929)                                                             |       | 116,039                |       | 98,511                      |       |
| Accounts receivable - other                                                                                                                            |       | 11,976                 |       | 17,828                      |       |
| Inventory                                                                                                                                              |       | 149,939                |       | 145,532                     |       |
| Prepaid expenses and other current assets                                                                                                              |       | 4,606                  |       | 3,204                       |       |
| Deferred income taxes                                                                                                                                  |       | 11,991                 |       | 12,084                      |       |
| Total current assets                                                                                                                                   |       | 294,804                |       | 346,337                     |       |
|                                                                                                                                                   |       |                   |       |                        |       |
| PROPERTY AND EQUIPMENT, net                                                                                                                            |       | 28,333                 |       | 28,767                      |       |
|                                                                                                                                                   |       |                   |       |                        |       |
| GOODWILL                                                                                                                                               |       | 204,381                |       | 203,848                     |       |
|                                                                                                                                                   |       |                   |       |                        |       |
| OTHER INTANGIBLE ASSETS, net                                                                                                                           |       | 80,334                 |       | 85,361                      |       |
|                                                                                                                                                   |       |                   |       |                        |       |
| OTHER ASSETS                                                                                                                                           |       | 9,350                  |       | 9,067                       |       |
| TOTAL ASSETS                                                                                                                                           |       | $                      | 617,202    |                        | $          | 673,380 |   |
|                                                                                                                                                   |       |                   |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                          |       |                   |       |                        |       |
|                                                                                                                                                   |       |                   |       |                        |       |
| CURRENT LIABILITIES:                                                                                                                                   |       |                   |       |                        |       |
| Current portion of long-term debt                                                                                                                      |       | $                      | 1,000      |                        | $          | 1,000 |   |
| Accounts payable                                                                                                                                       |       | 62,455                 |       | 53,260                      |       |
| Accrued expenses and other current liabilities                                                                                                         |       | 20,085                 |       | 22,180                      |       |
| Accrued interest payable                                                                                                                               |       | 2,007                  |       | 3,042                       |       |
| Accrued merger expenses                                                                                                                                |       | 5,900                  |       | 6,131                       |       |
| Accrued income taxes payable                                                                                                                           |       | 4,650                  |       | 7,372                       |       |
| Total current liabilities                                                                                                                              |       | 96,097                 |       | 92,985                      |       |
|                                                                                                                                                   |       |                   |       |                        |       |
| LONG-TERM LIABILITIES:                                                                                                                                 |       |                   |       |                        |       |
| Deferred income taxes                                                                                                                                  |       | 24,273                 |       | 25,221                      |       |
| Long-term debt, net of current portion                                                                                                                 |       | 231,775                |       | 302,275                     |       |
| TOTAL LIABILITIES                                                                                                                                      |       | 352,145                |       | 420,481                     |       |
|                                                                                                                                                   |       |                   |       |                        |       |
| COMMITMENTS AND CONTINGENCIES                                                                                                                          |       |                   |       |                        |       |
|                                                                                                                                                   |       |                   |       |                        |       |
| SENIOR PREFERRED STOCK, $0.01 par value, 1  share authorized and outstanding as of July 1, 2005 and  December 31, 2004; at liquidation value |       | 408,411                |       | 381,327                     |       |
|                                                                                                                                                   |       |                   |       |                        |       |
| STOCKHOLDERS’ EQUITY:                                                                                                                             |       |                   |       |                        |       |
| Common stock; no par value, 100 authorized,  issued and outstanding as of July 1, 2005 and December 31, 2004                                 |       | 177,147                |       | 174,879                     |       |
| Accumulated deficit                                                                                                                                    |       | (321,288               | )          | (304,162                    | )          |
| Accumulated other comprehensive income                                                                                                                 |       | 787                    |       | 855                         |       |
| TOTAL STOCKHOLDERS’ EQUITY                                                                                                                        |       | (143,354               | )          | (128,428                    | )          |
| TOTAL LIABILITIES & STOCKHOLDERS’  EQUITY                                                                                                |       | $                      | 617,202    |                        | $          | 673,380 |   |

 

*See accompanying notes to unaudited condensedconsolidated financial statements.*

 

1

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**INTERLINE BRANDS, INC. (A NEW JERSEY CORPORATION) ANDSUBSIDIARIES**

**(A WHOLLY OWNED SUBSIDIARY OF INTERLINE BRANDS, INC., ADELAWARE CORPORATION)**

**CONDENSEDCONSOLIDATED STATEMENTS OFOPERATIONS (UNAUDITED)**

**THREE MONTHS AND SIX MONTHS ENDED JULY 1, 2005 ANDJUNE 25, 2004**

**(in thousands)**

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**   | ** ** |
|-----------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                    | ** ** | **July 1, 2005**  | ** ** | **June 25, 2004** | ** ** | **July 1, 2005** | ** ** | **June 25, 2004** | ** ** |
|                                          |       |                   |       |                   |       |   |   |   |   |
| NET SALES                                     |       | $                      | 203,666    |                   | $          | 185,379 |   | $ | 400,157 |   | $ | 357,983 |   |
|                                          |       |                   |       |                   |       |   |   |   |   |
| COST OF SALES                                 |       | 126,411                |       | 114,434                |       | 247,416 |   | 221,315 |   |
|                                          |       |                   |       |                   |       |   |   |   |   |
| Gross Profit                                  |       | 77,255                 |       | 70,945                 |       | 152,741 |   | 136,668 |   |
|                                          |       |                   |       |                   |       |   |   |   |   |
| OPERATING EXPENSES :                          |       |                   |       |                   |       |   |   |   |   |
|                                          |       |                   |       |                   |       |   |   |   |   |
| Selling, general and administrative  expenses |       | 54,516                 |       | 50,081                 |       | 108,256 |   | 98,338 |   |
|                                          |       |                   |       |                   |       |   |   |   |   |
| Depreciation and amortization                 |       | 3,222                  |       | 3,443                  |       | 6,338 |   | 6,426 |   |
|                                          |       |                   |       |                   |       |   |   |   |   |
| Total Operating Expense                       |       | 57,738                 |       | 53,524                 |       | 114,594 |   | 104,764 |   |
|                                          |       |                   |       |                   |       |   |   |   |   |
| OPERATING INCOME                              |       | 19,517                 |       | 17,421                 |       | 38,147 |   | 31,904 |   |
|                                          |       |                   |       |                   |       |   |   |   |   |
| CHANGE IN FAIR VALUE OF INTEREST RATE SWAPS   |       | —                 |       | 3,594                  |       | — |   | 4,698 |   |
|                                          |       |                   |       |                   |       |   |   |   |   |
| LOSS ON EXTINGUISHMENT OF DEBT                |       | —                 |       | —                 |       | (10,340 | ) | — |   |
|                                          |       |                   |       |                   |       |   |   |   |   |
| INTEREST EXPENSE                              |       | (5,746                 | )          | (10,100                | )          | (12,015 | ) | (20,294 | ) |
|                                          |       |                   |       |                   |       |   |   |   |   |
| INTEREST INCOME                               |       | 6                      |       | 25                     |       | 126 |   | 33 |   |
|                                          |       |                   |       |                   |       |   |   |   |   |
| OTHER INCOME                                  |       | 119                    |       | 45                     |       | 286 |   | 181 |   |
|                                          |       |                   |       |                   |       |   |   |   |   |
| Income before income taxes                    |       | 13,896                 |       | 10,985                 |       | 16,204 |   | 16,522 |   |
|                                          |       |                   |       |                   |       |   |   |   |   |
| PROVISION FOR INCOME TAXES                    |       | 5,331                  |       | 4,028                  |       | 6,246 |   | 6,314 |   |
|                                          |       |                   |       |                   |       |   |   |   |   |
| NET INCOME                                    |       | 8,565                  |       | 6,957                  |       | 9,958 |   | 10,208 |   |
|                                          |       |                   |       |                   |       |   |   |   |   |
| PREFERRED STOCK DIVIDENDS                     |       | (13,774                | )          | (13,723                | )          | (27,084 | ) | (26,984 | ) |
|                                          |       |                   |       |                   |       |   |   |   |   |
| NET LOSS APPLICABLE TO COMMON STOCKHOLDERS    |       | $                      | (5,209     | )                      | $          | (6,766 | ) | $ | (17,126 | ) | $ | (16,776 | ) |

 

*See accompanying notes to unaudited condensedconsolidated financial statements.*

 

2

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**INTERLINE BRANDS, INC. (A NEW JERSEY CORPORATION) ANDSUBSIDIARIES**

**(A WHOLLY OWNED SUBSIDIARY OF INTERLINE BRANDS, INC., ADELAWARE CORPORATION)**

**CONDENSEDCONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITY (DEFICIENCY) (UNAUDITED)**

**SIX MONTHS ENDED JULY 1, 2005**

**(in thousands except share data)**

 
| ** **                       | ** ** | **Common Stock** | ** ** | **(Accumulated** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Total  Stockholders’** | ** ** |
|----------------------------------|------------|------------------|------------|------------------|------------|---------------------------------------|------------|-------------------------------|------------|
| ** **                       | ** ** | **Shares**       | ** ** | **Amount**       | ** ** | **Deficit)**                          | ** ** | **Income (Loss)**             | ** ** | **Equity (Deficiency)** | ** ** |
| ** **                       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **                            | ** ** | ** **                    | ** ** | ** ** | ** ** |
| BALANCE, DECEMBER 31, 2004  |       | 100              |       | $                | 174,879    |                                  | $          | (304,162                      | )          | $ | 855 |   | $ | (128,428 | ) |
|                             |       |             |       |             |       |                                  |       |                          |       |   |   |
| Preferred stock dividends        |       |             |       |             |       | (27,084                               | )          |                          |       | (27,084 | ) |
|                             |       |             |       |             |       |                                  |       |                          |       |   |   |
| Capital contribution from Parent |       |             |       | 2,268            |       |                                  |       |                          |       | 2,268 |   |
|                             |       |             |       |             |       |                                  |       |                          |       |   |   |
| Comprehensive income:            |       |             |       |             |       |                                  |       |                          |       |   |   |
|                             |       |             |       |             |       |                                  |       |                          |       |   |   |
| Net income                       |       |             |       |             |       | 9,958                                 |       |                          |       |   |   |
|                             |       |             |       |             |       |                                  |       |                          |       |   |   |
| Foreign currency translation     |       |             |       |             |       |                                  |       | (68                           | )          |   |   |
|                             |       |             |       |             |       |                                  |       |                          |       |   |   |
| Total comprehensive income       |       |             |       |             |       |                                  |       |                          |       | 9,890 |   |
|                             |       |             |       |             |       |                                  |       |                          |       |   |   |
| BALANCE, JULY 1, 2005       |       | 100              |       | $                | 177,147    |                                  | $          | (321,288                      | )          | $ | 787 |   | $ | (143,354 | ) |
|                                  |            |                  |            |                  |            |                                       |            |                               |            |  |  |  |  |  |  |  |

 

*See accompanying notes to unaudited condensedconsolidated financial statements.*

**** ****

****3****

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**INTERLINE BRANDS, INC. (A NEW JERSEY CORPORATION) ANDSUBSIDIARIES**

**(A WHOLLY OWNED SUBSIDIARY OF INTERLINE BRANDS, INC., ADELAWARE CORPORATION)**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**

**SIX MONTHS ENDED JULY 1, 2005 AND JUNE 25, 2004**

**(in thousands)**

 
| ** **                                                                         | ** ** | **July 1, 2005** | ** ** | **June 25, 2004** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| OPERATING ACTIVITIES:                                                              |       |                  |       |                   |       |
| Net Income                                                                         |       | $                     | 9,958      |                   | $          | 10,208 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                  |       |                   |       |
| Depreciation and amortization                                                      |       | 6,338                 |       | 6,426                  |       |
| Amortization and write-off of debt issuance  costs                                 |       | 3,064                 |       | 957                    |       |
| Redemption premium on 11.5% senior  subordinated notes                             |       | 8,050                 |       | —                 |       |
| Stock based compensation                                                           |       | 477                   |       | —                 |       |
| Change in fair value of interest rate swaps                                        |       | —                |       | (4,697                 | )          |
| Interest income on shareholder notes                                               |       | —                |       | (6                     | )          |
| Deferred income taxes                                                              |       | (855                  | )          | 4,294                  |       |
| Income tax effect from exercise of stock  options                                  |       | 215                   |       | —                 |       |
|                                                                               |       |                  |       |                   |       |
| Changes in assets and liabilities:                                                 |       |                  |       |                   |       |
| Accounts receivable - trade                                                        |       | (17,529               | )          | (20,339                | )          |
| Accounts receivable - other                                                        |       | 3,519                 |       | 3,646                  |       |
| Inventory                                                                          |       | (4,407                | )          | (14,618                | )          |
| Prepaid expenses and other current assets                                          |       | (1,401                | )          | 141                    |       |
| Other assets                                                                       |       | (281                  | )          | (100                   | )          |
| Accrued interest payable                                                           |       | (1,035                | )          | (334                   | )          |
| Accounts payable                                                                   |       | 9,194                 |       | 18,304                 |       |
| Accrued expenses and other current  liabilities                                    |       | (594                  | )          | 1,369                  |       |
| Accrued merger expenses                                                            |       | (206                  | )          | (183                   | )          |
| Income taxes payable                                                               |       | (2,722                | )          | 742                    |       |
| Net cash provided by operating activities                                          |       | 11,785                |       | 5,810                  |       |
|                                                                               |       |                  |       |                   |       |
| INVESTING ACTIVITIES :                                                             |       |                  |       |                   |       |
| Purchase of property and equipment, net                                            |       | (3,900                | )          | (3,692                 | )          |
| Purchase of business, net of cash acquired                                         |       | (1,602                | )          | (459                   | )          |
| Net cash used in investing activities                                              |       | (5,502                | )          | (4,151                 | )          |
|                                                                               |       |                  |       |                   |       |
| FINANCING ACTIVITIES :                                                             |       |                  |       |                   |       |
| Increase in revolver and swingline, net                                            |       | —                |       | 4,500                  |       |
| Repayment of long-term debt                                                        |       | (70,500               | )          | (3,500                 | )          |
| Payment of redemption on 11.5% senior  subordinated notes                          |       | (8,050                | )          |                   |       |
| Payment of debt issuance costs                                                     |       | —                |       | (307                   | )          |
| Contribution from Parent, net                                                      |       | 3,410                 |       | —                 |       |
| Net cash (used in) provided by financing  activities                               |       | (75,140               | )          | 693                    |       |
|                                                                               |       |                  |       |                   |       |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH AND  CASH EQUIVALENTS                      |       | (68                   | )          | (93                    | )          |
| NET (DECREASE) INCREASE IN CASH AND CASH  EQUIVALENTS                              |       | (68,925               | )          | 2,259                  |       |
| CASH AND CASH EQUIVALENTS, BEGINNING OF  PERIOD                                    |       | 69,178                |       | 1,612                  |       |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                           |       | $                     | 253        |                   | $          | 3,871 |   |
|                                                                               |       |                  |       |                   |       |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION                                  |       |                  |       |                   |       |
| Cash paid during the period for :                                                  |       |                  |       |                   |       |
| Interest                                                                           |       | $                     | 10,842     |                   | $          | 19,444 |   |
| Income taxes (net of refunds)                                                      |       | $                     | 9,708      |                   | $          | 424 |   |
|                                                                               |       |                  |       |                   |       |
| SCHEDULE OF NON-CASH INVESTING AND  FINANCING ACTIVITIES                      |       |                  |       |                   |       |
|                                                                               |       |                  |       |                   |       |
| Dividends on preferred stock                                                       |       | $                     | 27,084     |                   | $          | 26,984 |   |
| Adjustment to goodwill on business acquired                                        |       | $                     | (16        | )                      | $          | — |   |

 

*See accompanying notes to unaudited condensed consolidatedfinancial statements.*

 

4

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** **

**INTERLINEBRANDS, INC. (A NEW JERSEY CORPORATION) AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (UNAUDITED)**

**(in thousands, except share data)**

** **

**1.**              BASISOF PRESENTATION

 

Theaccompanying unaudited interim financial statements of Interline Brands, Inc.,a New Jersey  corporation, and itssubsidiaries (“Interline” or the “Company”) (a wholly owned subsidiary ofInterline Brands, Inc., a Delaware corporation) have been prepared inaccordance with accounting principles generally accepted in the United Statesof America and the rules and regulations of the Securities and ExchangeCommission, which apply to interim financial statements.  These unaudited condensed consolidatedfinancial statements do not include all disclosures provided in the annualfinancial statements and should be read in conjunction with the financialstatements and notes thereto contained in the Annual Report on Form 10-Kfor Interline Brands, Inc. for the year ended December 31, 2004 asfiled with the Securities and Exchange Commission on March 31, 2005.

 

Alladjustments which are in the opinion of management, necessary for a fairstatement of the results for the interim periods presented have beenrecorded.  The results of operations forthe interim periods presented are not necessarily indicative of the results tobe expected for the full year.

 

During December 2004, a reincorporation mergeroccurred and Interline Brands, a Delaware corporation, (“Interline Delaware” orthe “Parent”) became the parent company of the Company, which in turn becamethe Parent’s principal operating subsidiary. Immediately following the reincorporation merger, the Parent completedits initial public offering (the “IPO”).

 

*SegmentInformation*—TheCompany is in one industry, the distribution of maintenance, repair and operations,or MRO, products. In accordance with Statement of Financial AccountingStandards (“SFAS”) No. 131, “Disclosure about Segments of an Enterpriseand Related Information”, the Company has one operating segment.  Our net sales for the three and six-monthperiods ended July 1, 2005 and June 25, 2004 by product category wereapproximately (in millions):

 
| ** **                                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**   | ** ** |
|-------------------------------------------|------------|------------------------|------------|------------------------|------------|
| **Product Category**                      | ** ** | **July 1, 2005**  | ** ** | **June 25, 2004** | ** ** | **July 1, 2005** | ** ** | **June 25, 2004** | ** ** |
| Plumbing                                  |       | $                      | 87.6       |                   | $          | 80.1 |   | $ | 178.0 |   | $ | 159.5 |   |
|                                      |       |                   |       |                   |       |   |   |   |   |
| Electrical                                |       | 29.7                   |       | 27.4                   |       | 59.2 |   | 55.0 |   |
|                                      |       |                   |       |                   |       |   |   |   |   |
| Heating, Ventilation and Air Conditioning |       | 21.0                   |       | 17.1                   |       | 34.6 |   | 27.3 |   |
|                                      |       |                   |       |                   |       |   |   |   |   |
| Security Hardware                         |       | 13.5                   |       | 12.8                   |       | 27.2 |   | 24.9 |   |
|                                      |       |                   |       |                   |       |   |   |   |   |
| Hardware                                  |       | 13.2                   |       | 12.2                   |       | 25.0 |   | 22.6 |   |
|                                      |       |                   |       |                   |       |   |   |   |   |
| Appliances                                |       | 12.5                   |       | 10.8                   |       | 24.3 |   | 21.2 |   |
|                                      |       |                   |       |                   |       |   |   |   |   |
| Other                                     |       | 26.2                   |       | 25.0                   |       | 51.9 |   | 47.5 |   |
|                                      |       |                   |       |                   |       |   |   |   |   |
| Total                                     |       | $                      | 203.7      |                   | $          | 185.4 |   | $ | 400.2 |   | $ | 358.0 |   |

 

*Stock-basedCompensation*—TheCompany and its Parent accounted for option plans in accordance with APBOpinion No. 25, under which no compensation cost has been recognized forstock option awards.  While the Companydoes not recognize compensation costs for stock options, the Company doesdetermine what these costs would have been using the method prescribed by SFASNo, 123 for disclosure purposes.

 

Thefair value of each option was estimated on the date of grant using theBlack-Scholes option pricing model with the following assumptions used foroptions granted in 2005 under the 2004 Equity Incentive Plan: dividend yield of0%, volatility of 22%, risk-free interest rate of 3.85% and expected life of 5years.  The following assumptions wereused for options granted in 2004 under the 2000 Stock Award Plan: dividendyield of 0%, expected volatility of 0%, risk-free interest rate of 4.05%, andexpected life of 5 years.   The fairvalue of these awards approximated zero.

 

5

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Thefollowing table illustrates the effect on net earnings (loss) and earnings(loss) per share for the three and six months ended July 1, 2005 and June 25,2004 as if the Company had applied the fair value recognition provisions ofSFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employeecompensation (in thousands):

 
| ** **                                                                                                                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**    | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                                                                                                                    | ** ** | **July 1,  2005** | ** ** | **June 25,  2004** | ** ** | **July 1,  2005** | ** ** | **June 25,  2004** | ** ** |
|                                                                                                                          |       |                   |       |                    |       |   |   |   |   |
| Net income  as reported                                                                                                       |       | $                      | 8,565      |                    | $          | 6,957 |   | $ | 9,958 |   | $ | 10,208 |   |
|                                                                                                                          |       |                   |       |                    |       |   |   |   |   |
| Add:  Stock-based employee compensation expense included in reported net income,  net of related tax effects                  |       | 147                    |       | —                  |       | 293 |   | — |   |
|                                                                                                                          |       |                   |       |                    |       |   |   |   |   |
| Deduct:  Total stock-based employee compensation expense determined under fair value  based method for all awards, net of tax |       | (246                   | )          | —                  |       | (392 | ) | — |   |
|                                                                                                                          |       |                   |       |                    |       |   |   |   |   |
| Pro forma  net income                                                                                                         |       | 8,466                  |       | 6,957                   |       | 9,859 |   | 10,208 |   |
|                                                                                                                          |       |                   |       |                    |       |   |   |   |   |
| Preferred  stock dividends                                                                                                    |       | (13,774                | )          | (13,723                 | )          | (27,084 | ) | (26,984 | ) |
|                                                                                                                          |       |                   |       |                    |       |   |   |   |   |
| Net loss  applicable to common shareholders                                                                                   |       | $                      | (5,308     | )                       | $          | (6,766 | ) | $ | (17,225 | ) | $ | (16,776 | ) |

 

*NewAccounting Pronouncements*—On December 16, 2004, the FASB issued SFAS No. 123 (revised2004), “Share-Based Payment,” which is a revision of FASB No. 123,“Accounting for Stock-Based Compensation.” SFAS No. 123R supersedes APBOpinion No. 25, “Accounting for Stock Issued to Employees” and amends SFASNo. 95, “Statement of Cash Flows.” Generally, the approach in SFAS No. 123R is similar to the approachdescribed in SFAS No. 123; however, this Statement requires allshare-based payments to employees, including grants of employee stock options,be recognized in the income statement based on their fair values. Pro formadisclosure will no longer be an alternative to financial statement recognition.

 

On April 14,2005, the Securities and Exchange Commission (“SEC”) announced that it wouldprovide for a phased-in implementation process for SFAS No. 123R. The SECnow requires that registrants that are not small business issuers adopt SFAS No. 123R’sfair value method of accounting for share-based payments to employees not laterthan the beginning of the first fiscal quarter in the year beginning after June 15,2005.  As a result, the Company and itsParent will not be required to adopt SFAS No. 123R until December 31,2005, the first day of the company’s 2006 fiscal year.  The Company and its Parent are continuing toevaluate the provisions of this Statement, the impact on its consolidatedfinancial statements and the timing and approach to adoption of this Statement.

 

In March 2004, theFASB issued Interpretation No. 46(R)-5 (“FIN 46(R)-5”), “Implicit VariableInterests under FASB Interpretation No. 46 (revised December 2003),Consolidation of Variable Interest Entities.” FIN 46(R)-5 is effective for thefirst reporting period beginning after March 3, 2005; however, earlierapplication is permitted for periods for which financial statements have notyet been issued. The Company has evaluated the impact of FIN 46(R)-5 anddetermined that the impact is immaterial to the consolidated financial statements.

 

In May 2005,the FASB issued Statement No. 154*, “*AccountingChanges and Error Corrections—a replacement of APB Opinion No. 20 and FASBStatement No. 3” (“SFAS 154”). SFAS 154 replaces APB

 

6

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OpinionNo. 20, “Accounting Changes,” and FASB Statement No. 3, “ReportingAccounting Changes in Interim Financial Statements,” and changes therequirements for the accounting for and reporting of a change in accountingprinciple. SFAS 154 requires retrospective application to prior periods’financial statements of changes in accounting principle, unless it isimpracticable to do so, in which case other alternatives are required.SFAS 154 is effective for accounting changes and corrections of errorsmade in fiscal years beginning after December 15, 2005, or for the Company’sfiscal 2006 year end. We have evaluated the requirements of SFAS 154and have determined that there is no impact on the consolidated financialstatements.

 

**2.**              DEBT

 

Long-term debt at July 1, 2005 and December 31,2004 consists of the following:

 
| ** **                       | ** ** | **July 1,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------------|------------|------------------------|------------|-----------------------------|------------|
|                             |       |                   |       |                        |       |
| Term loan                        |       | $                      | 99,500     |                        | $          | 100,000 |   |
| Note payable                     |       | 3,275                  |       | 3,275                       |       |
| 11.5% senior  subordinated notes |       | 130,000                |       | 200,000                     |       |
|                             |       |                   |       |                        |       |
|                             |       | 232,775                |       | 303,275                     |       |
| Less current  portion            |       | (1,000                 | )          | (1,000                      | )          |
|                             |       |                   |       |                        |       |
|                             |       | $                      | 231,775    |                        | $          | 302,275 |   |

 

In May 2003,the Company completed an offering of $200 million of 11.5% senior subordinatednotes due 2011 and entered into a $205.0 million senior secured credit facilitywhich consisted of a $140.0 million term loan facility and a $65.0 millionrevolving loan facility, a portion of which is available in the form of lettersof credit.  The net proceeds from theoffering of senior subordinated notes and the refinancing of the former creditfacility with the new credit facility were used to: (1) repay alloutstanding 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 foregoing transactions, which transactionsare refered to as the “Refinancing Transactions”.  Debt issuance costs capitalized in connectionwith the Refinancing Transactions were approximately $13.1 million. An expenseof approximately $14.9 million in May 2003 for the early extinguishment ofdebt resulted from the write-off of the unamortized loan fees and loan discountrelating to the Company’s former credit facility and the redemption premiumincurred upon redemption of the 16% Senior Subordinated Notes.

 

Thesenior subordinated notes pay interest each May 15 and November 15,with the first payment made on November 15, 2003.  Prior to May 15, 2006, the Company mayredeem up to 35% of the notes using proceeds of certain equity offerings andthe Company may redeem all of the notes after May 15, 2007, subject toredemption premiums unless redeemed after May 15, 2009.   The Company elected to redeem $70.0 millionof the 11.5% senior subordinated notes using proceeds from the IPO and gave the30-day notice, required by the indenture, on December 20, 2004.  In January 2005, the Company recorded aloss on extinguishment of debt of $10.3 million, consisting of the write-off ofdeferred financing costs of $2.3 million and the premium of $8.1 million on the$70.0 million redemption of 11.5% senior subordinated notes.

 

In December 2004,the Company amended its term loan facility and revolving loan facility.  The term loan was reduced to $100.0 millionfrom $140.0 million and the revolving loan facility was increased to $100.0million from $65.0 million.  As part ofthe amendment in December 2004, the Company paid down $31.3

 

7

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millionof the term loan using proceeds from Interline Delaware’s IPO transaction.  Borrowings under the amended term loanfacility and revolving loan facility bear interest, at the Company’s option, ateither LIBOR plus a spread or at the alternate base rate plus a spread. Interestrates in effect on borrowings under the term loan facility at July 1, 2005ranged from 5.78% for LIBOR based borrowings and 7.5% for prime basedborrowings.  Outstanding letters ofcredit under the revolving loan facility are subject to a per annum fee equalto the applicable spread over 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.  Debt issuance costs capitalized in connectionwith the amended credit facility were approximately $1.1 million.

 

As of July 1,2005, the Company had $92.1 million available under its revolving loanfacility.  Total letters of credit issuedunder this facility as of July 1, 2005 were $7.9 million.  There were no borrowings under the revolvingloan facility at July 1, 2005. The credit facility is secured bysubstantially all of the assets of the Company.

 

Inconjunction with Interline Delaware’s IPO and the amended credit facility anexpense of approximately $0.7 million for early extinguishments of debtresulting from the write-off of the unamortized loan fees relating to theCompany’s former credit facility in December 2004 and $2.3 million relatedto the $70.0 million calculation of the 11.5% senior subordinated notes in January 2005.

 

Periodically,the Company has entered into derivative financial instruments, includinginterest rate exchange agreements, to manage its exposure to fluctuations ininterest rates on its debt.  All interestrate swap agreements were terminated in conjunction with the IPO in December 2004.

 

Thecredit facility contains customary affirmative and negative covenants thatlimit the Company’s ability to incur additional indebtedness, pay dividends onits common stock or redeem, repurchase or retire its common stock orsubordinated indebtedness, make certain investments, sell assets, andconsolidate, merge or transfer assets, and that require the Company to maintaina maximum debt to cash flow ratio and a minimum interest expense coverageratio. The Company was in compliance with all covenants at July 1, 2005.

 

In April 2003, the Company issued anon-recourse note payable in the principal amount of $3.3 million for thepurchase of an investment. This note, which is secured only by the investment,bears interest at a rate of 4% per annum, with principal due in full in April 2010.

 

The maturities of long-termdebt subsequent to July 1, 2005 are as follows:

 
| 2005       |   | $       | 500     |   |
|------------|--------|---------|---------|--------|
| 2006       |   | 1,000   |    |
| 2007       |   | 1,000   |    |
| 2008       |   | 1,000   |    |
| 2009       |   | 1,000   |    |
| Thereafter |   | 228,275 |    |
|       |   | $       | 232,775 |   |

 

**3.**              STOCKOPTION PLANS

** **

During 2000, theCompany established a Stock Award Plan, (the “2000 Plan”), under whichInterline New Jersey may award a total of 6,395 shares of common stock in theform of incentive stock options (which may be awarded to key employees only),nonqualified stock options, stock appreciation rights, or SARs, and restrictedstock awards, all of which may be awarded to directors, officers, key employeesand consultants.  The exercise price pershare for an incentive stock option may not be less than 100% of the fairmarket value of a share of common stock on the grant date.  The exercise price per share for an incentivestock option granted to a person owning stock possessing more than 10% of thetotal combined

 

8

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voting power ofall classes of stock may not be less than 110% of the fair market value of ashare of common stock on the grant date, and may not be exercisable after theexpiration of ten years from the date of grant. The Parent’s compensation committee will determine in its solediscretion whether a SAR is settled in cash, shares or a combination of cashand shares.

 

During 2004, theParent adopted the 2004 Equity Incentive Plan, (the “2004 Plan”), under whichthe Parent may award 3,175,000 shares in the form of incentive stock options,nonqualified stock options, stock appreciation rights, or SARs, restrictedshare units, restricted stock and stock bonus awards, all of which may beawarded to any employee, director, officer or consultant of the Company or theParent.  Under the terms of the 2004 planand unless the compensation committee of the Parent determines otherwise, theexercise price of the options will not be less than the fair market value ofthe common stock at the time of grant.

 

Upon completion ofthe Parent’s IPO in December 2004, 175,820 shares of Parent restrictedstock were issued to senior management. The restricted stock awards will vest contingent upon the executive’scontinued employment in one-third installments over three years provided thatcertain pre-established annual percentage increases in our earnings per shareare attained.  The restricted stock mayalso vest on the seventh anniversary of the date of grant if the executiveremains in our employ for seven years. In addition, an aggregate of 10,000 shares of the Parent’s restrictedstock were issued to non-employee directors who are not affiliated with any ofour principal stockholders.  Such awardswill vest over two years.  As a result ofthese restricted stock awards, the Company expects to incur non-cash chargesbetween $0.4 million and $0.9 million in each of the next three to seven yearsdepending upon the acceleration of vesting of restricted stock.  These two directors also each received 20,000non-qualified stock options with an exercise price equal to the IPO price of$15.00 per share.  In addition, theParent issued to management 1,835,218 non-qualified stock options to purchasethe Parent’s common stock with an exercise price equal to the IPO price of$15.00 per share and 590,465 non-qualified stock options to purchase the Parent’scommon stock with a weighted average exercise price of $24.00 per share.  All of these options were fully vested andexercisable when granted.  However,management will only be permitted to sell shares acquired upon the exercise ofthe options in 25% increments over four years.

 

Asummary of the status of stock option plans to purchase the Parent’s commonstock is as follows:

 
| ** **                             | ** ** | ** **    | ** ** | ** **          | ** ** | **Weighted**              | ** ** |
|----------------------------------------|------------|---------------|------------|---------------------|------------|---------------------------|------------|
| ** **                             | ** ** | **Number**    | ** ** | **Exercise Price**  | ** ** | **Average Exercise** | ** ** |
| ** **                             | ** ** | **of Shares** | ** ** | **Per Share**       | ** ** | **Price Per Share**       | ** ** |
|                                   |       |          |       |                |       |                      |       |
| Outstanding  at December 31, 2004 |       | 2,468,009     |       | $15.00 -  $1,669.13 |       | $                         | 17.61      |   |
|                                   |       |          |       |                |       |                      |       |
| 2005:                                  |       |          |       |                |       |                      |       |
| Granted                                |       | 30,000        |       | $19.43              |       | $                         | 19.43      |   |
|                                   |       |          |       |                |       |                      |       |
| Exercised                              |       | (112,849      | )          | $15.00              |       | $                         | 15.00      |   |
|                                   |       |          |       |                |       |                      |       |
| Cancelled                              |       | (151,835      | )          | $15.00 -  $1,669.13 |       | $                         | 30.73      |   |
|                                   |       |          |       |                |       |                      |       |
| Outstanding  at July 1, 2005      |       | 2,233,325     |       | $15.00 -  $41.05    |       | $                         | 16.88      |   |

 

9

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**4.**              SUBSEQUENTEVENTS

** **

*Acquisition*

 

OnJuly 7, 2005, the Company acquired all of the common stock of CCSEnterprises, Inc., known as Copperfield, a national distributor and directmarketer of specialty ventilation and chimney maintenance products.  Headquartered in Fairfield, Iowa, Copperfield’sannual sales for the year ended November 30, 2004 were $41.0 million.  The transaction was valued at$70.0 million and funded with borrowings under the Company’s creditfacility.  This acquisition represents anexpansion of the Company’s professional contractors and specialty distributorbusiness.

 

Copperfieldoffers more than 5,000 brand name and private label repair and replacementitems including chimney replacement and relining products, specialtyventilation components, hearth products and gas and electrical appliances.

 

The Company has not completed the process of performing its allocationof the purchase price.

 

*CreditFacility*

 

In connection with theCopperfield acquisition, the Company amended its credit facility on July 22,2005, to permit the incurrence of an additional $50.0 million term loan. OnAugust 8, 2005, the Company again amended its credit facility to lower theinterest rate spreads applicable to the additional $50.0 million term loan.

 

**5.**              SUBSIDIARYGUARANTORS

** **

The Company completed anoffering of $200 million principal amount of 11.5% senior subordinated notes inconnection with its Refinancing Transactions in 2003, of which $130 millionprincipal amount remains outstanding. The Company filed a registration statement with the Securities andExchange Commission with respect to an exchange offer for the 11.5% seniorsubordinated notes and with respect to resales of the senior subordinated notesby an affiliate of the Company for market-making purposes.  The registration statement was declaredeffective by the SEC and the exchange offer was consummated.  The Company’s 11.5% senior subordinated notesare fully and unconditionally guaranteed, jointly and severally, on asubordinated basis by Wilmar Holdings, Inc., Wilmar Financial, Inc.,and Glenwood Acquisition LLC (100%-owned subsidiaries of Interline).  The guarantees by these subsidiary guarantors(the “Subsidiary Guarantors”) are senior to any of their existing and futuresubordinated obligations, equal in right of payment with any of their existingand future senior subordinated indebtedness and subordinated to any of theirexisting and future senior indebtedness. Accordingly, condensed consolidating financial statements for InterlineBrands, Inc. and the Subsidiary Guarantors are presented below.

 

10

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**CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)**

**INTERLINEBRANDS, INC. (A NEW JERSEY CORPORATION) AND THE SUBSIDIARY GUARANTORS**

**As of July1, 2005**

 
| ** **                                                    | ** ** | **Company**                            | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                    | ** ** | **Excluding**                          | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                    | ** ** | **Subsidiary**                         | ** ** | **Subsidiary** | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                    | ** ** | **Guarantors**                         | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                                    | ** ** | **(In thousands, except share  data)** | ** ** |
| ASSETS                                                        |       |                                   |       |           |       |             |       |             |       |
|                                                          |       |                                   |       |           |       |             |       |             |       |
| CURRENT  ASSETS:                                              |       |                                   |       |           |       |             |       |             |       |
| Cash and  cash equivalents                                    |       | $                                      | 218        |           | $          | 35               |       | $                | —     |   | $ | 253 |   |
| Accounts  receivable - trade, net                             |       | 116,039                                |       | —         |       | —           |       | 116,039          |       |
| Accounts  receivable - other                                  |       | 11,976                                 |       | —         |       | —           |       | 11,976           |       |
| Inventory                                                     |       | 149,939                                |       | —         |       | —           |       | 149,939          |       |
| Prepaid  expenses and other current assets                    |       | 4,598                                  |       | 8              |       | —           |       | 4,606            |       |
| Deferred  income taxes                                        |       | 11,991                                 |       | —         |       | —           |       | 11,991           |       |
| Due from  Parent                                              |       | —                                 |       | 78,275         |       | (78,275          | )          | —           |       |
| Investment  in subsidiaries                                   |       | 42,360                                 |       | —         |       | (42,360          | )          | —           |       |
| Total  current assets                                         |       | 337,121                                |       | 78,318         |       | (120,635         | )          | 294,804          |       |
|                                                          |       |                                   |       |           |       |             |       |             |       |
| PROPERTY AND  EQUIPMENT, net                                  |       | 28,333                                 |       | —         |       | —           |       | 28,333           |       |
|                                                          |       |                                   |       |           |       |             |       |             |       |
| GOODWILL                                                      |       | 204,381                                |       | —         |       | —           |       | 204,381          |       |
|                                                          |       |                                   |       |           |       |             |       |             |       |
| OTHER  INTANGIBLE ASSETS, net                                 |       | 80,334                                 |       | —         |       | —           |       | 80,334           |       |
|                                                          |       |                                   |       |           |       |             |       |             |       |
| OTHER ASSETS                                                  |       | 6,075                                  |       | 7,356          |       | (4,081           | )          | 9,350            |       |
|                                                          |       |                                   |       |           |       |             |       |             |       |
| TOTAL ASSETS                                                  |       | $                                      | 656,244    |           | $          | 85,674           |       | $                | (124,716   | ) | $ | 617,202 |   |
|                                                          |       |                                   |       |           |       |             |       |             |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY (DEFICIENCY)       |       |                                   |       |           |       |             |       |             |       |
|                                                          |       |                                   |       |           |       |             |       |             |       |
| CURRENT  LIABILITIES:                                         |       |                                   |       |           |       |             |       |             |       |
| Current  portion of long-term debt                            |       | $                                      | 1,000      |           | $          | —           |       | $                | —     |   | $ | 1,000 |   |
| Accounts  payable                                             |       | 62,455                                 |       | —         |       | —           |       | 62,455           |       |
| Accrued  expenses and other current liabilities               |       | 20,084                                 |       | 1              |       | —           |       | 20,085           |       |
| Accrued  interest payable                                     |       | 2,007                                  |       | —         |       | —           |       | 2,007            |       |
| Accrued  merger expenses                                      |       | 5,900                                  |       | —         |       | —           |       | 5,900            |       |
| Income taxes  payable                                         |       | 3,350                                  |       | 1,300          |       | —           |       | 4,650            |       |
| Due to  subsidiaries                                          |       | 43,618                                 |       | —         |       | (43,618          | )          | —           |       |
|                                                          |       |                                   |       |           |       |             |       |             |       |
| Total  current liabilities                                    |       | 138,414                                |       | 1,301          |       | (43,618          | )          | 96,097           |       |
|                                                          |       |                                   |       |           |       |             |       |             |       |
| LONG-TERM  LIABILITIES:                                       |       |                                   |       |           |       |             |       |             |       |
| Deferred  income taxes                                        |       | 24,273                                 |       | —         |       | —           |       | 24,273           |       |
| Long-term  debt, net of current portion                       |       | 228,500                                |       | 3,275          |       | —           |       | 231,775          |       |
|                                                          |       |                                   |       |           |       |             |       |             |       |
| TOTAL  LIABILITIES                                            |       | 391,187                                |       | 4,576          |       | (43,618          | )          | 352,145          |       |
|                                                          |       |                                   |       |           |       |             |       |             |       |
| SENIOR  PREFERRED STOCK                                       |       | 408,411                                |       | —         |       | —           |       | 408,411          |       |
|                                                          |       |                                   |       |           |       |             |       |             |       |
| STOCKHOLDERS’  EQUITY (DEFICIENCY):                      |       |                                   |       |           |       |             |       |             |       |
| Common stock                                                  |       | 177,147                                |       | —         |       | —           |       | 177,147          |       |
| Additional  paid-in-capital                                   |       |                                   |       | 43,285         |       | (43,285          | )          | —           |       |
| Accumulated  deficit                                          |       | (321,288                               | )          | 37,813         |       | (37,813          | )          | (321,288         | )          |
| Accumulated  other comprehensive loss                         |       | 787                                    |       | —         |       | —           |       | 787              |       |
|                                                          |       |                                   |       |           |       |             |       |             |       |
| TOTAL  STOCKHOLDERS’ EQUITY (DEFICIENCY)                 |       | (143,354                               | )          | 81,098         |       | (81,098          | )          | (143,354         | )          |
|                                                          |       |                                   |       |           |       |             |       |             |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY) |       | $                                      | 656,244    |           | $          | 85,674           |       | $                | (124,716   | ) | $ | 617,202 |   |

 

11

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**CONDENSEDCONSOLIDATING BALANCE SHEET (UNAUDITED)**

**INTERLINEBRANDS, INC. (A NEW JERSEY CORPORATION) AND THE SUBSIDIARY GUARANTORS**

**As of December 31,2004**

 
| ** **                                                    | ** ** | **Company**                           | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                    | ** ** | **Excluding**                         | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                    | ** ** | **Subsidiary**                        | ** ** | **Subsidiary** | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                    | ** ** | **Guarantors**                        | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                                    | ** ** | **(In thousands, except share data)** | ** ** |
| ASSETS                                                        |       |                                  |       |           |       |             |       |             |       |
|                                                          |       |                                  |       |           |       |             |       |             |       |
| CURRENT  ASSETS:                                              |       |                                  |       |           |       |             |       |             |       |
| Cash and  cash equivalents                                    |       | $                                     | 69,110     |           | $          | 68               |       | $                | —     |   | $ | 69,178 |   |
| Accounts  receivable - trade, net                             |       | 98,511                                |       | —         |       | —           |       | 98,511           |       |
| Accounts  receivable - other                                  |       | 17,828                                |       | —         |       | —           |       | 17,828           |       |
| Inventory                                                     |       | 145,532                               |       | —         |       | —           |       | 145,532          |       |
| Prepaid  expenses and other current assets                    |       | 3,196                                 |       | 8              |       | —           |       | 3,204            |       |
| Deferred  income taxes                                        |       | 12,084                                |       | —         |       | —           |       | 12,084           |       |
| Due from  Parent                                              |       | —                                |       | 75,892         |       | (75,892          | )          | —           |       |
| Investment  in subsidiaries                                   |       | 39,745                                |       | —         |       | (39,745          | )          | —           |       |
| Total  current assets                                         |       | 386,006                               |       | 75,968         |       | (115,637         | )          | 346,337          |       |
|                                                          |       |                                  |       |           |       |             |       |             |       |
| PROPERTY AND  EQUIPMENT, net                                  |       | 28,767                                |       | —         |       | —           |       | 28,767           |       |
|                                                          |       |                                  |       |           |       |             |       |             |       |
| GOODWILL                                                      |       | 203,848                               |       | —         |       | —           |       | 203,848          |       |
|                                                          |       |                                  |       |           |       |             |       |             |       |
| OTHER  INTANGIBLE ASSETS, net                                 |       | 85,361                                |       | —         |       | —           |       | 85,361           |       |
|                                                          |       |                                  |       |           |       |             |       |             |       |
| OTHER ASSETS                                                  |       | 5,793                                 |       | 7,068          |       | (3,794           | )          | 9,067            |       |
|                                                          |       |                                  |       |           |       |             |       |             |       |
| TOTAL ASSETS                                                  |       | $                                     | 709,775    |           | $          | 83,036           |       | $                | (119,431   | ) | $ | 673,380 |   |
|                                                          |       |                                  |       |           |       |             |       |             |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY (DEFICIENCY)       |       |                                  |       |           |       |             |       |             |       |
|                                                          |       |                                  |       |           |       |             |       |             |       |
| CURRENT  LIABILITIES:                                         |       |                                  |       |           |       |             |       |             |       |
| Current  portion of long-term debt                            |       | $                                     | 1,000      |           | $          | —           |       | $                | —     |   | $ | 1,000 |   |
| Accounts  payable                                             |       | 53,260                                |       | —         |       | —           |       | 53,260           |       |
| Accrued  expenses and other current liabilities               |       | 22,180                                |       | —         |       | —           |       | 22,180           |       |
| Accrued  interest payable                                     |       | 3,042                                 |       | —         |       | —           |       | 3,042            |       |
| Accrued  merger expenses                                      |       | 6,131                                 |       | —         |       | —           |       | 6,131            |       |
| Income taxes  payable                                         |       | 3,772                                 |       | 3,600          |       | —           |       | 7,372            |       |
| Due to  subsidiaries                                          |       | 43,270                                |       | —         |       | (43,270          | )          | —           |       |
|                                                          |       |                                  |       |           |       |             |       |             |       |
| Total  current liabilities                                    |       | 132,655                               |       | 3,600          |       | (43,270          | )          | 92,985           |       |
|                                                          |       |                                  |       |           |       |             |       |             |       |
| LONG-TERM LIABILITIES:                                        |       |                                  |       |           |       |             |       |             |       |
| Deferred  income taxes                                        |       | 25,221                                |       | —         |       | —           |       | 25,221           |       |
| Long-term  debt, net of current portion                       |       | 299,000                               |       | 3,275          |       | —           |       | 302,275          |       |
|                                                          |       |                                  |       |           |       |             |       |             |       |
| TOTAL  LIABILITIES                                            |       | 456,876                               |       | 6,875          |       | (43,270          | )          | 420,481          |       |
|                                                          |       |                                  |       |           |       |             |       |             |       |
| SENIOR  PREFERRED STOCK                                       |       | 381,327                               |       | —         |       | —           |       | 381,327          |       |
|                                                          |       |                                  |       |           |       |             |       |             |       |
| STOCKHOLDERS’  EQUITY (DEFICIENCY):                      |       |                                  |       |           |       |             |       |             |       |
| Common stock                                                  |       | 174,879                               |       | —         |       | —           |       | 174,879          |       |
| Additional  paid-in-capital                                   |       | —                                |       | 43,285         |       | (43,285          | )          | —           |       |
| Accumulated  deficit                                          |       | (304,162                              | )          | 32,876         |       | (32,876          | )          | (304,162         | )          |
| Accumulated  other comprehensive loss                         |       | 855                                   |       | —         |       | —           |       | 855              |       |
|                                                          |       |                                  |       |           |       |             |       |             |       |
| TOTAL  STOCKHOLDERS’ EQUITY (DEFICIENCY)                 |       | (128,428                              | )          | 76,161         |       | (76,161          | )          | (128,428         | )          |
|                                                          |       |                                  |       |           |       |             |       |             |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY) |       | $                                     | 709,775    |           | $          | 83,036           |       | $                | (119,431   | ) | $ | 673,380 |   |

 

12

----

 

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)INTERLINE BRANDS, INC. (A NEW JERSEY CORPORATION) AND THE SUBSIDIARY GUARANTORSThree Months Ended July 1, 2005**

 
| ** **                                           | ** ** | **Company**        | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------|------------|--------------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                           | ** ** | **Excluding**      | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                           | ** ** | **Subsidiary**     | ** ** | **Subsidiary** | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                           | ** ** | **Guarantors**     | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                           | ** ** | **(In thousands)** | ** ** |
|                                                 |       |               |       |           |       |             |       |             |       |
| NET SALES                                            |       | $                  | 203,666    |           | $          | —           |       | $                | —     |   | $ | 203,666 |   |
| COST OF  SALES                                       |       | 126,411            |       | —         |       | —           |       | 126,411          |       |
|                                                 |       |               |       |           |       |             |       |             |       |
| Gross profit                                         |       | 77,255             |       | —         |       | —           |       | 77,255           |       |
|                                                 |       |               |       |           |       |             |       |             |       |
| OPERATING  EXPENSES:                                 |       |               |       |           |       |             |       |             |       |
| Selling,  general and administrative expenses        |       | 54,510             |       | 6              |       | —           |       | 54,516           |       |
| Depreciation  and amortization                       |       | 3,222              |       | —         |       | —           |       | 3,222            |       |
|                                                 |       |               |       |           |       |             |       |             |       |
| Total  operating expenses                            |       | 57,732             |       | 6              |       | —           |       | 57,738           |       |
|                                                 |       |               |       |           |       |             |       |             |       |
| OPERATING  INCOME (LOSS)                             |       | 19,523             |       | (6             | )          | —           |       | 19,517           |       |
|                                                 |       |               |       |           |       |             |       |             |       |
| INTEREST  EXPENSE                                    |       | (9,359             | )          | —         |       | 3,613            |       | (5,746           | )          |
| INTEREST  INCOME                                     |       | 6                  |       | 3,613          |       | (3,613           | )          | 6                |       |
| OTHER INCOME                                         |       | 119                |       | 119            |       | (119             | )          | 119              |       |
| EQUITY IN  EARNINGS OF SUBSIDIARIES                  |       | 2,307              |       | —         |       | (2,307           | )          | —           |       |
|                                                 |       |               |       |           |       |             |       |             |       |
| Income before  income taxes                          |       | 12,596             |       | 3,726          |       | (2,426           | )          | 13,896           |       |
|                                                 |       |               |       |           |       |             |       |             |       |
| PROVISION  FOR INCOME TAXES                          |       | 4,031              |       | 1,300          |       | —           |       | 5,331            |       |
|                                                 |       |               |       |           |       |             |       |             |       |
| NET INCOME                                           |       | 8,565              |       | 2,426          |       | (2,426           | )          | 8,565            |       |
|                                                 |       |               |       |           |       |             |       |             |       |
| PREFERRED  STOCK DIVIDENDS                           |       | (13,774            | )          | —         |       | —           |       | (13,774          | )          |
|                                                 |       |               |       |           |       |             |       |             |       |
| NET (LOSS)  INCOME APPLICABLE TO COMMON STOCKHOLDERS |       | $                  | (5,209     | )              | $          | 2,426            |       | $                | (2,426     | ) | $ | (5,209 | ) |

 

13

----

 

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)INTERLINE BRANDS, INC. (A NEW JERSEY CORPORATION) AND THE SUBSIDIARY GUARANTORSThree Months Ended  June 25, 2004**

 
| ** **                                            | ** ** | **Company**        | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|-------------------------------------------------------|------------|--------------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                            | ** ** | **Excluding**      | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                            | ** ** | **Subsidiary**     | ** ** | **Subsidiary** | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                            | ** ** | **Guarantors**     | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                            | ** ** | **(In thousands)** | ** ** |
| ** **                                            | ** ** | ** **         | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
| NET SALES                                             |       | $                  | 185,379    |           | $          | —           |       | $                | —     |   | $ | 185,379 |   |
| COST OF  SALES                                        |       | 114,434            |       | —         |       | —           |       | 114,434          |       |
|                                                  |       |               |       |           |       |             |       |             |       |
| Gross profit                                          |       | 70,945             |       | —         |       | —           |       | 70,945           |       |
|                                                  |       |               |       |           |       |             |       |             |       |
| OPERATING  EXPENSES:                                  |       |               |       |           |       |             |       |             |       |
| Selling,  general and administrative expenses         |       | 50,078             |       | 3              |       | —           |       | 50,081           |       |
| Depreciation  and amortization                        |       | 3,443              |       | —         |       | —           |       | 3,443            |       |
|                                                  |       |               |       |           |       |             |       |             |       |
| Total  operating expenses                             |       | 53,521             |       | 3              |       | —           |       | 53,524           |       |
|                                                  |       |               |       |           |       |             |       |             |       |
| OPERATING  INCOME (LOSS)                              |       | 17,424             |       | (3             | )          | —           |       | 17,421           |       |
|                                                  |       |               |       |           |       |             |       |             |       |
| CHANGE IN  FAIR VALUE OF INTEREST RATE SWAPS          |       | 3,594              |       | —         |       | —           |       | 3,594            |       |
| INTEREST  EXPENSE                                     |       | (13,249            | )          | —         |       | 3,149            |       | (10,100          | )          |
| INTEREST  INCOME                                      |       | 25                 |       | 3,149          |       | (3,149           | )          | 25               |       |
| OTHER INCOME                                          |       | 45                 |       | 45             |       | (45              | )          | 45               |       |
| EQUITY IN  EARNINGS OF SUBSIDIARIES                   |       | 2,146              |       | —         |       | (2,146           | )          | —           |       |
|                                                  |       |               |       |           |       |             |       |             |       |
| Income  before income taxes                           |       | 9,985              |       | 3,191          |       | (2,191           | )          | 10,985           |       |
|                                                  |       |               |       |           |       |             |       |             |       |
| PROVISION  FOR INCOME TAXES                           |       | 3,028              |       | 1,000          |       | —           |       | 4,028            |       |
|                                                  |       |               |       |           |       |             |       |             |       |
| NET INCOME                                            |       | 6,957              |       | 2,191          |       | (2,191           | )          | 6,957            |       |
|                                                  |       |               |       |           |       |             |       |             |       |
| PREFERRED  STOCK DIVIDENDS                            |       | (13,723            | )          | —         |       | —           |       | (13,723          | )          |
|                                                  |       |               |       |           |       |             |       |             |       |
| NET (LOSS)  INCOME APPLICABLE TO  COMMON STOCKHOLDERS |       | $                  | (6,766     | )              | $          | 2,191            |       | $                | (2,191     | ) | $ | (6,766 | ) |

 

14

----

 

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)INTERLINE BRANDS, INC. (A NEW JERSEY CORPORATION) AND THE SUBSIDIARY GUARANTORSSix Months Ended July 1, 2005**

 
| ** **                                            | ** ** | **Company**        | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|-------------------------------------------------------|------------|--------------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                            | ** ** | **Excluding**      | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                            | ** ** | **Subsidiary**     | ** ** | **Subsidiary** | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                            | ** ** | **Guarantors**     | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                            | ** ** | **(In thousands)** | ** ** |
|                                                  |       |               |       |           |       |             |       |             |       |
| NET SALES                                             |       | $                  | 400,157    |           | $          | —           |       | $                | —     |   | $ | 400,157 |   |
| COST OF  SALES                                        |       | 247,416            |       | —         |       | —           |       | 247,416          |       |
|                                                  |       |               |       |           |       |             |       |             |       |
| Gross profit                                          |       | 152,741            |       | —         |       | —           |       | 152,741          |       |
|                                                  |       |               |       |           |       |             |       |             |       |
| OPERATING  EXPENSES:                                  |       |               |       |           |       |             |       |             |       |
| Selling,  general and administrative expenses         |       | 108,245            |       | 11             |       | —           |       | 108,256          |       |
| Depreciation  and amortization                        |       | 6,338              |       | —         |       | —           |       | 6,338            |       |
|                                                  |       |               |       |           |       |             |       |             |       |
| Total  operating expenses                             |       | 114,583            |       | 11             |       | —           |       | 114,594          |       |
|                                                  |       |               |       |           |       |             |       |             |       |
| OPERATING  INCOME (LOSS)                              |       | 38,158             |       | (11            | )          | —           |       | 38,147           |       |
|                                                  |       |               |       |           |       |             |       |             |       |
| LOSS ON  EXTINGUISHMENT OF DEBT                       |       | (10,340            | )          | —         |       | —           |       | (10,340          | )          |
| INTEREST  EXPENSE                                     |       | (19,176            | )          | —         |       | 7,161            |       | (12,015          | )          |
| INTEREST  INCOME                                      |       | 126                |       | 7,161          |       | (7,161           | )          | 126              |       |
| OTHER INCOME                                          |       | 286                |       | 287            |       | (287             | )          | 286              |       |
| EQUITY IN  EARNINGS OF SUBSIDIARIES                   |       | 4,650              |       | —         |       | (4,650           | )          | —           |       |
|                                                  |       |               |       |           |       |             |       |             |       |
| Income  before income taxes                           |       | 13,704             |       | 7,437          |       | (4,937           | )          | 16,204           |       |
|                                                  |       |               |       |           |       |             |       |             |       |
| PROVISION  FOR INCOME TAXES                           |       | 3,746              |       | 2,500          |       | —           |       | 6,246            |       |
|                                                  |       |               |       |           |       |             |       |             |       |
| NET INCOME                                            |       | 9,958              |       | 4,937          |       | (4,937           | )          | 9,958            |       |
|                                                  |       |               |       |           |       |             |       |             |       |
| PREFERRED  STOCK DIVIDENDS                            |       | (27,084            | )          | —         |       | —           |       | (27,084          | )          |
|                                                  |       |               |       |           |       |             |       |             |       |
| NET (LOSS)  INCOME APPLICABLE TO  COMMON STOCKHOLDERS |       | $                  | (17,126    | )              | $          | 4,937            |       | $                | (4,937     | ) | $ | (17,126 | ) |

 

15

----

 

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)INTERLINE BRANDS, INC. (A NEW JERSEY CORPORATION) AND THE SUBSIDIARY GUARANTORSSix Months Ended June 25, 2004**

 
| ** **                                           | ** ** | **Company**        | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------|------------|--------------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                           | ** ** | **Excluding**      | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                           | ** ** | **Subsidiary**     | ** ** | **Subsidiary** | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                           | ** ** | **Guarantors**     | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                           | ** ** | **(In thousands)** | ** ** |
| ** **                                           | ** ** | ** **         | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
| NET SALES                                            |       | $                  | 357,983    |           | $          | —           |       | $                | —     |   | $ | 357,983 |   |
| COST OF  SALES                                       |       | 221,315            |       | —         |       | —           |       | 221,315          |       |
|                                                 |       |               |       |           |       |             |       |             |       |
| Gross profit                                         |       | 136,668            |       | —         |       | —           |       | 136,668          |       |
|                                                 |       |               |       |           |       |             |       |             |       |
| OPERATING  EXPENSES:                                 |       |               |       |           |       |             |       |             |       |
| Selling,  general and administrative expenses        |       | 98,330             |       | 8              |       | —           |       | 98,338           |       |
| Depreciation  and amortization                       |       | 6,426              |       | —         |       | —           |       | 6,426            |       |
|                                                 |       |               |       |           |       |             |       |             |       |
| Total  operating expenses                            |       | 104,756            |       | 8              |       | —           |       | 104,764          |       |
|                                                 |       |               |       |           |       |             |       |             |       |
| OPERATING  INCOME                                    |       | 31,912             |       | (8             | )          | —           |       | 31,904           |       |
|                                                 |       |               |       |           |       |             |       |             |       |
| CHANGE IN  FAIR VALUE OF INTEREST RATE SWAPS         |       | 4,698              |       | —         |       | —           |       | 4,698            |       |
| INTEREST  EXPENSE                                    |       | (26,270            | )          | —         |       | 5,976            |       | (20,294          | )          |
| INTEREST  INCOME                                     |       | 33                 |       | 5,976          |       | (5,976           | )          | 33               |       |
| OTHER INCOME  (EXPENSE)                              |       | 181                |       | 181            |       | (181             | )          | 181              |       |
| EQUITY IN  EARNINGS OF SUBSIDIARIES                  |       | 3,968              |       | —         |       | (3,968           | )          | —           |       |
|                                                 |       |               |       |           |       |             |       |             |       |
| Income  before income taxes                          |       | 14,522             |       | 6,149          |       | (4,149           | )          | 16,522           |       |
|                                                 |       |               |       |           |       |             |       |             |       |
| PROVISION  FOR INCOME TAXES                          |       | 4,314              |       | 2,000          |       | —           |       | 6,314            |       |
|                                                 |       |               |       |           |       |             |       |             |       |
| NET INCOME                                           |       | 10,208             |       | 4,149          |       | (4,149           | )          | 10,208           |       |
|                                                 |       |               |       |           |       |             |       |             |       |
| PREFERRED  STOCK DIVIDENDS                           |       | (26,984            | )          | —         |       | —           |       | (26,984          | )          |
|                                                 |       |               |       |           |       |             |       |             |       |
| NET (LOSS)  INCOME APPLICABLE TO COMMON STOCKHOLDERS |       | $                  | (16,776    | )              | $          | 4,149            |       | $                | (4,149     | ) | $ | (16,776 | ) |

 

16

----

 

**CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)INTERLINE BRANDS, INC. (A NEW JERSEY CORPORATION) AND THE SUBSIDIARY GUARANTORSSix Months Ended July 1, 2005**

 
| ** **                                                                                    | ** ** | **Company**        | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                    | ** ** | **Excluding**      | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                                    | ** ** | **Subsidiary**     | ** ** | **Subsidiary** | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                                    | ** ** | **Guarantors**     | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                                                                    | ** ** | **(In thousands)** | ** ** |
|                                                                                          |       |               |       |           |       |             |       |             |       |
| OPERATING  ACTIVITIES:                                                                        |       |               |       |           |       |             |       |             |       |
| Net income                                                                                    |       | $                  | 9,958      |           | $          | 4,937            |       | $                | (4,937     | ) | $ | 9,958 |   |
| Adjustments  to reconcile net income to net cash provided by (used in) operating  activities: |       |               |       |           |       |             |       |             |       |
| Depreciation  and amortization                                                                |       | 6,338              |       | —         |       | —           |       | 6,338            |       |
| Amortization  and write-off of debt issuance costs                                            |       | 3,064              |       | —         |       | —           |       | 3,064            |       |
| Redemption  premium on 11.5% senior subordinated notes                                        |       | 8,050              |       | —         |       | —           |       | 8,050            |       |
| Stock based  compensation                                                                     |       | 477                |       | —         |       | —           |       | 477              |       |
| Deferred  income taxes                                                                        |       | (855               | )          | —         |       | —           |       | (855             | )          |
| Income tax  effect from exercise of stock options                                             |       | 215                |       | —         |       | —           |       | 215              |       |
| Equity in  earnings of subsidiaries                                                           |       | (4,937             | )          | —         |       | 4,937            |       | —           |       |
|                                                                                          |       |               |       |           |       |             |       |             |       |
| Changes in  assets and liabilities:                                                           |       |               |       |           |       |             |       |             |       |
| Accounts  receivable – trade                                                             |       | (17,529            | )          | —         |       | —           |       | (17,529          | )          |
| Accounts  receivable – other                                                             |       | 3,519              |       | —         |       | —           |       | 3,519            |       |
| Inventory                                                                                     |       | (4,407             | )          | —         |       | —           |       | (4,407           | )          |
| Prepaid  expenses and other current assets                                                    |       | (1,401             | )          | —         |       | —           |       | (1,401           | )          |
| Due from  parent                                                                              |       | —             |       | (2,384         | )          | 2,384            |       | —           |       |
| Other assets                                                                                  |       | 6                  |       | (287           | )          | —           |       | (281             | )          |
| Accrued  interest payable                                                                     |       | (1,035             | )          | —         |       | —           |       | (1,035           | )          |
| Accounts payable                                                                              |       | 9,194              |       | —         |       | —           |       | 9,194            |       |
| Accrued  expenses and other current liabilities                                               |       | (595               | )          | 1              |       | —           |       | (594             | )          |
| Accrued  merger expenses                                                                      |       | (206               | )          | —         |       | —           |       | (206             | )          |
| Income taxes  payable                                                                         |       | (422               | )          | (2,300         | )          | —           |       | (2,722           | )          |
| Due to  subsidiaries                                                                          |       | 2,384              |       | —         |       | (2,384           | )          | —           |       |
| Net cash  provided by (used in) operating activities                                          |       | 11,818             |       | (33            | )          | —           |       | 11,785           |       |
|                                                                                          |       |               |       |           |       |             |       |             |       |
| INVESTING  ACTIVITIES:                                                                        |       |               |       |           |       |             |       |             |       |
| Purchase of  property and equipment                                                           |       | (3,900             | )          | —         |       | —           |       | (3,900           | )          |
| Purchase of  business, net of cash acquired                                                   |       | (1,602             | )          | —         |       | —           |       | (1,602           | )          |
| Net cash  used in investing activities                                                        |       | (5,502             | )          | —         |       | —           |       | (5,502           | )          |
|                                                                                          |       |               |       |           |       |             |       |             |       |
| FINANCING  ACTIVITIES:                                                                        |       |               |       |           |       |             |       |             |       |
|                                                                                          |       |               |       |           |       |             |       |             |       |
| Increase in  revolver and swingline, net                                                      |       | —             |       | —         |       | —           |       | —           |       |
| Repayment of  long-term debt                                                                  |       | (70,500            | )          | —         |       | —           |       | (70,500          | )          |
| Payment of  redemption premium on 11.5% senior subordinated notes                             |       | (8,050             | )          | —         |       | —           |       | (8,050           | )          |
| Contribution  from Parent, net                                                                |       | 3,410              |       | —         |       | —           |       | 3,410            |       |
| Net cash  used in financing activities                                                        |       | (75,140            | )          | —         |       | —           |       | (75,140          | )          |
|                                                                                          |       |               |       |           |       |             |       |             |       |
| EFFECT OF  EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS                                 |       | (68                | )          | —         |       | —           |       | (68              | )     |
|                                                                                          |       |               |       |           |       |             |       |             |       |
| NET DECREASE  IN CASH AND CASH EQUIVALENTS                                                    |       | (68,892            | )          | (33            | )          | —           |       | (68,925          | )          |
|                                                                                          |       |               |       |           |       |             |       |             |       |
| CASH AND  CASH EQUIVALENTS, BEGINNING OF PERIOD                                               |       | 69,110             |       | 68             |       | —           |       | 69,178           |       |
|                                                                                          |       |               |       |           |       |             |       |             |       |
| CASH AND  CASH EQUIVALENTS, END OF PERIOD                                                     |       | $                  | 218        |           | $          | 35               |       | $                | —     |   | $ | 253 |   |

 

17

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**CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)****INTERLINEBRANDS, INC. (A NEW JERSEY CORPORATION) AND THE SUBSIDIARY GUARANTORS****SixMonths Ended June 25, 2004**

 
| ** **                                                                                    | ** ** | **Company**        | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                    | ** ** | **Excluding**      | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                                    | ** ** | **Subsidiary**     | ** ** | **Subsidiary** | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                                    | ** ** | **Guarantors**     | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                                                                    | ** ** | **(In thousands)** | ** ** |
|                                                                                          |       |               |       |           |       |             |       |             |       |
| OPERATING  ACTIVITIES:                                                                        |       |               |       |           |       |             |       |             |       |
| Net income                                                                                    |       | $                  | 10,208     |           | $          | 4,149            |       | $                | (4,149     | ) | $ | 10,208 |   |
| Adjustments  to reconcile net income to net cash provided by (used in) operating  activities: |       |               |       |           |       |             |       |             |       |
| Depreciation  and amortization                                                                |       | 6,426              |       | —         |       | —           |       | 6,426            |       |
| Amortization  of debt issuance costs                                                          |       | 957                |       | —         |       | —           |       | 957              |       |
| Change in  fair value of interest rate swaps                                                  |       | (4,697             | )          | —         |       | —           |       | (4,697           | )          |
| Interest on  shareholder loans                                                                |       | (6                 | )          | —         |       | —           |       | (6               | )          |
| Deferred  income taxes                                                                        |       | 4,294              |       | —         |       | —           |       | 4,294            |       |
| Equity in  earnings of subsidiaries                                                           |       | (4,149             | )          | —         |       | 4,149            |       | —           |       |
| Changes in  assets and liabilities:                                                           |       |               |       |           |       |             |       |             |       |
| Accounts  receivable – trade                                                             |       | (20,339            | )          | —         |       | —           |       | (20,339          | )          |
| Accounts  receivable – other                                                             |       | 3,646              |       | —         |       | —           |       | 3,646            |       |
| Inventory                                                                                     |       | (14,618            | )          | —         |       | —           |       | (14,618          | )          |
| Prepaid  expenses and other current assets                                                    |       | 141                |       | —         |       | —           |       | 141              |       |
| Due from  parent                                                                              |       | —             |       | (5,975         | )          | 5,975            |       | —           |       |
| Other assets                                                                                  |       | 81                 |       | (181           | )          | —           |       | (100             | )          |
| Accrued  interest payable                                                                     |       | (334               | )          | —         |       | —           |       | (334             | )          |
| Accounts  payable                                                                             |       | 18,312             |       | (8             | )          | —           |       | 18,304           |       |
| Accrued  expenses and other current liabilities                                               |       | 1,369              |       | —         |       | —           |       | 1,369            |       |
| Accrued  merger expenses                                                                      |       | (183               | )          | —         |       | —           |       | (183             | )          |
| Income taxes  payable                                                                         |       | (1,258             | )          | 2,000          |       | —           |       | 742              |       |
| Due to  subsidiaries                                                                          |       | 5,975              |       | —         |       | (5,975           | )          | —           |       |
| Net cash  provided by (used in) operating activities                                          |       | 5,825              |       | (15            | )          | —           |       | 5,810            |       |
|                                                                                          |       |               |       |           |       |             |       |             |       |
| INVESTING  ACTIVITIES:                                                                        |       |               |       |           |       |             |       |             |       |
| Purchase of  property and equipment                                                           |       | (3,692             | )          | —         |       | —           |       | (3,692           | )          |
| Purchase of  business, net of cash acquired                                                   |       | (459               | )          | —         |       | —           |       | (459             | )          |
| Net cash  used in investing activities                                                        |       | (4,151             | )          | —         |       | —           |       | (4,151           | )          |
|                                                                                          |       |               |       |           |       |             |       |             |       |
| FINANCING  ACTIVITIES:                                                                        |       |               |       |           |       |             |       |             |       |
| Increase in revolver  and swingline, net                                                      |       | 4,500              |       | —         |       | —           |       | 4,500            |       |
| Repayment of  long-term debt                                                                  |       | (3,500             | )          | —         |       | —           |       | (3,500           | )          |
| Payment of  debt issuance costs                                                               |       | (307               | )          | —         |       | —           |       | (307             | )          |
| Net cash  provided by financing activities                                                    |       | 693                |       | —         |       | —           |       | 693              |       |
|                                                                                          |       |               |       |           |       |             |       |             |       |
| EFFECT OF EXCHANGE  RATE CHANGES ON CASH AND CASH EQUIVALENTS                                 |       | (93                | )     | —         |       | —           |       | (93              | )     |
|                                                                                          |       |               |       |           |       |             |       |             |       |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                                         |       | 2,274              |       | (15            | )          | —           |       | 2,259            |       |
|                                                                                          |       |               |       |           |       |             |       |             |       |
| CASH AND  CASH EQUIVALENTS, BEGINNING OF PERIOD                                               |       | 1,527              |       | 85             |       | —           |       | 1,612            |       |
|                                                                                          |       |               |       |           |       |             |       |             |       |
| CASH AND  CASH EQUIVALENTS, END OF PERIOD                                                     |       | $                  | 3,801      |           | $          | 70               |       | $                | —     |   | $ | 3,871 |   |

 

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ITEM 2. MANAGEMENT’S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS.

 

*References to “us” and “we” are to theCompany.  You should read the followingdiscussion in conjunction with our unaudited consolidated financial statementsand related notes included in this quarterly report, and our auditedconsolidated financial statements and related notes included  in**our Annual Report on Form 10-K filed with the SEC.*

 

**Cautionary Statement for Purposes of the “SafeHarbor” Provisions of the Private Securities Litigation Reform Act of 1995**

 

This quarterly report containsforward-looking statements that are subject to risks and uncertainties. Youshould not place undue reliance on those statements because they are subject tonumerous uncertainties and factors relating to our operations and businessenvironment, all of which are difficult to predict and many of which are beyondour control. Forward-looking statements include information concerning ourpossible or assumed future results of operations, including descriptions of ourbusiness strategy. These statements often include words such as “may,” “believe,”“expect,” “anticipate,” “intend,” “plan,” “estimate” or similar expressions.These statements are based on assumptions that we have made in light of ourexperience in the industry as well as our perceptions of historical trends,current conditions, expected future developments and other factors we believeare appropriate under the circumstances. As you read and consider thisquarterly report, you should understand that these statements are notguarantees of performance or results. They involve risks, uncertainties andassumptions. Although we believe that these forward-looking statements arebased on reasonable assumptions, you should be aware that many factors couldaffect our actual financial results or results of operations and could causeactual results 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 or foreign currencyfluctuations,

•                  failureto locate and acquire acquisition candidates,

•                  failureto successfully integrate acquired businesses,

•                  dependenceon key employees,

•                  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 listed under “Risk Factors” in our Annual Report on Form 10-Kfiled with the SEC.

 

All information contained in this quarterlyreport is materially accurate as of the date of this report.   New risks and uncertainties arise from timeto time, and it is impossible for us to predict these events or how they mayaffect us. In light of these risks and uncertainties, you should keep in mindthat any forward-looking statement made in this quarterly report might notoccur.  We assume no obligation to updateany forward-looking statements after the date of this quarterly report as aresult of new information, future events or developments, except as required byfederal securities law.

 

Overview

 

As a leading national distributor and directmarketer of over 45,000 specialty MRO products, we sell to over 150,000 activecustomer accounts. Our highly diverse customer base includes facilitiesmaintenance customers, professional contractors and specialty distributors. Ourcustomers range in size from individual contractors and independent specialtydistributors or hardware stores to apartment management companies and nationalpurchasing groups.

 

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We market and sell our products primarily througheight distinct and targeted brands. Our multi-brand operating model, which webelieve is unique in the industry, allows us to use a single platform todeliver tailored products and services to meet the individual needs of eachrespective customer group served. We reach our markets using a variety of saleschannels, including a direct sales force of field sales representatives,telesales representatives, a direct marketing program, brand-specifice-commerce websites and a national accounts sales program.

 

CriticalAccounting Policies

 

In preparing the consolidated financial statementsin conformity with accounting principles generally accepted in the UnitedStates of America, management is required to make certain estimates, judgmentsand assumptions. These estimates, judgments and assumptions affect the reportedamounts of assets and liabilities, including the disclosure of contingentassets and liabilities, at the date of the financial statements and the reportedamounts of revenues and expenses during the periods presented. On an ongoingbasis, management evaluates these estimates and assumptions. Management basesits estimates and assumptions on historical experience and on various otherfactors that are believed to be reasonable at the time the estimates andassumptions are made. Actual results may differ from these estimates andassumptions under different circumstances or conditions. The significantaccounting policies that management believes are the most critical in order tofully understand and evaluate our financial position and results of operationsinclude the following policies.

 

*Revenue Recognition*

 

While our recognition of revenue ispredominantly derived from routine transactions and does not involve significantjudgment, revenue recognition represents an important accounting policy forus.  We recognize a sale when the producthas been shipped and risk of loss has passed to the customer, collection of theresulting receivable is probable, persuasive evidence of an arrangement exists,and the price is fixed or determinable. Sales are recorded net of estimated discounts, rebates and returns.  A portion of our sales is delivered directfrom the manufacturer.  Thesedirect-shipment sales are recorded on a gross basis, with the correspondingcost of goods sold, in accordance with the guidance in EITF 99-19, *Reporting Revenues Gross as a Principal verses Net as an Agent*.  We provide limited product return andprotection rights to certain customers. We accrue product return reserves and warranty obligations.  A provision is made for estimated productreturns based on sales volumes and our experience.  Actual returns have not varied materiallyfrom amounts provided historically.

 

*Estimating Allowances for Doubtful Accounts*

 

We maintain allowances for doubtful accounts forestimated losses resulting from our inability to collect outstanding amountsfrom customers. The allowances include specific amounts for those accounts thatare likely to be uncollectible, such as accounts of customers in bankruptcy andgeneral allowances for those accounts that management currently believes to becollectible but later become uncollectible. Estimates are used to determine theallowances for bad debts and are based on historical collection experience,current economic trends, credit worthiness of customers and changes in customerpayment terms. Adjustments to credit limits are made based upon payment historyand our customers’ current credit worthiness. If the financial condition of ourcustomers were to deteriorate, allowances may be needed that will increaseselling, general and administrative expenses and decrease accountsreceivable.  At July 1, 2005 theallowance for doubtful accounts totaled $7.3 million.

 

*Estimating Write-Offs for Excess and Obsolete Inventory*

 

Inventories are valued at the lower of cost or market. Wedetermine inventory cost using the average cost method. We adjust inventory forexcess and obsolete inventory and for the difference by which the cost of the inventoryexceeds the estimated market value. In order to determine the adjustments,management reviews inventory quantities on hand, slow movement reports andsales history reports. Management estimates the required adjustment based onestimated demand for products and market conditions. To the extent historicalresults are not indicative of future results and if events occur that affectour relationships with suppliers or the salability of our products, additionalwrite-offs may be needed that will increase our cost of sales and decreaseinventory.

 

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*Impairment of Goodwill, Intangibles and Other Long-Lived Assets*

 

Management assesses the recoverability of ourgoodwill, identifiable intangibles and other long-lived assets whenever eventsor changes in circumstances indicate that the carrying value may not berecoverable. The following factors, if present, may trigger an impairmentreview: (1) significant underperformance relative to expected historicalor projected future operating results, (2) significant negative industryor economic trends, (3) a significant increase in competition, and (4) asignificant increase in interest rates on debt. If the recoverability of theseassets is unlikely because of the existence of one or more of theabove-mentioned factors, an impairment analysis is performed using a projecteddiscounted cash flow method. Management must make assumptions regardingestimated future cash flows and other factors to determine the fair value ofthese respective assets. If these estimates or related assumptions change inthe future, we may be required to record an impairment charge. Impairmentcharges would be included in selling, general and administrative expenses inour statements of operations, and would result in reduced carrying amounts ofthe related assets in our balance sheets.

 

*Legal Contingencies*

 

From time to time, in the course of our business, webecome involved in legal proceedings. In accordance with SFAS No. 5 “Accountingfor Contingencies,” if it is probable that, as a result of a pending legalclaim, an asset had been impaired or a liability had been incurred at the dateof the financial statements and the amount of the loss is estimable, an accrualfor the costs to resolve the claim is recorded in accrued expenses in ourbalance sheets. Professional fees related to legal claims are included ingeneral and administrative expenses in our statements of operations.Management, with the assistance of outside counsel, determines whether it isprobable that a liability from a legal claim has been incurred and estimatesthe amount of loss. The analysis is based upon potential results, assuming acombination of litigation and settlement strategies. Management does notbelieve that currently pending proceedings will have a material adverse effecton our consolidated financial position. It is possible, however, that futureresults of operations for any particular period could be materially affected bychanges in our assumptions related to these proceedings.

 

*Derivative Financial Instruments*

 

We periodically enter into derivative financialinstruments, including interest rate exchange agreements, or swaps, to manageexposure to fluctuations in interest rates on our debt. In December 2004,in conjunction with our Parent’s initial public offering, we terminated allinterest rate exchange agreements, or swaps. Under our former swap agreements we paid a fixed rate on the notionalamount to a bank and the bank paid us a variable rate on the notional amountequal to a base LIBOR rate. These interest rate swaps did not qualify for hedgeaccounting under SFAS No. 133 “Accounting for Derivative Statementsand Hedging Activities,” and were recorded at fair value in our balance sheetwith changes in the fair value reflected in non-operating expense. The fairmarket value of these instruments was determined by quotes obtained from therelated counter parties.

 

Results of Operations

 

The following discussion includes references to theterm average daily sales.  Average dailysales are defined as sales for a period of time divided by the number ofshipping days in that period of time.

 

*Overview.*  During the second quarter of2005 we achieved record revenue.  Salesincreased 9.9% to $203.7 million in the second quarter compared to $185.4million in the prior year period, with the same number of shipping days in eachperiod.  Our continued revenue growth isa reflection of improving market conditions and the success of several salesgrowth initiatives put in place over the last six quarters.  An increasing component of our top linegrowth in the second quarter came from new product initiatives, such as theexpansion of our capabilities to sell and distribute HVAC equipment.  Sales of this equipment, and including otherlarger items such as appliances and water heaters, taken as a whole, haveincreased over the prior year period at a rate exceeding 30%.  These three product groups have a higheraverage sales price than our average stock-keeping units and generally come atlower gross margins.  Our gross marginpercentage on these three specific product groups has increased compared to theprior year period.  Primarily as a resultof sales mix our consolidated gross margin percentage declined in the period byapproximately 30 basis points.  Wecontinued to benefit from operating expense leverage in the areas of freight,distribution center labor and occupancy costs 

 

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which offset the sales mix driven gross margin change.  As a result, operating income increased by12.0% over the comparable prior year period.

 

*Three Months Ended July 1, 2005Compared to Three Months Ended June 25, 2004*

 

**Net Sales.**  Our net sales increased by$18.3 million, or 9.9%, to $203.7 million in the three months ended July 1,2005 from $185.4 million in the three months ended June 25,2004.  There were the same number ofshipping days in both periods.  The salesincrease was largely attributable to continued strong demand for our products,new sales and growth initiatives, and the success of new productintroductions.  Our strongest salesgrowth this quarter was 13.3% in the professional contractor market, followedby 10.5% sales growth in the facilities maintenance market and 4.0% salesgrowth in the specialty distributor market.

 

*Gross Profit.*  Gross profitincreased by $6.3 million, or 8.9%, to $77.3 million in the threemonths ended July 1, 2005 from $70.9 million in the three monthsended June 25, 2004.  Gross profitmargins decreased to 37.9% for the three months ended July 1, 2005compared to 38.3% for the three months ended June 25, 2004.  This decline in our gross profit margins is aresult of increased sales of large equipment items, such as appliances, waterheaters and HVAC equipment, which generally carry lower gross profit margins.

 

*Selling, General andAdministrative Expenses.*  SG&A expenses increased by $4.4 million, or 8.9%,to $54.5 million in the three months ended July 1, 2005 from$50.1 million in the three months ended June 25, 2004.  Certain expenses within SG&A, such as thecosts of running distribution centers, delivery expenses and selling expensesfluctuate with sales volume.  Theincrease in SG&A expenses included these increases as well as increasedinvestment in new sales and marketing initiatives.  SG&A expenses as a percentage of salesimproved approximately 20 basis points to 26.8% in the three months ended July 1,2005 from 27.0% in the three months ended June 25, 2004.  This improvement in operating leverage is aresult of improved operating efficiencies at our regional distribution centers– specifically distribution center labor and freight costs– as well as thebenefit of increased sales on our fixed cost infrastructure, partially offsetby our continued investment in our growth initiatives.

 

*Depreciation and Amortization.*  Depreciation andamortization expense decreased by $0.2 million, or 6.4%, to $3.2 millionin the three months ended July 1, 2005 from $3.4 million in the threemonths ended June 25, 2004.

 

*Operating Income.*  As a result of theforegoing, operating income increased by $2.1 million, or 12.0%, to$19.5 million in the three months ended July 1, 2005 from $17.4million in the three months ended June 25, 2004.  As a percent of sales, operating income increasedto 9.6% in the current quarter from 9.4% in the comparable prior year period.

 

*Change in Fair Value of Interest RateSwaps.*  Ourinterest rate swaps were terminated at the time of our Parent’s IPO in December 2004.  As such, changes in fair value of interestrate swaps were zero in the three months ended July 1, 2005 compared to again of $3.6 million in the three months ended June 25, 2004.  These gains are related to changes in themarket value of our interest rate swap instruments. The non-cash gains wereattributable to changes in market conditions, including but not limited tofluctuations in interest rates, general market volatility, and the remainingtenor of our instruments.

 

*Interest Expense.*  Interest expensedecreased by $4.4 million in the three months ended July 1, 2005 to$5.7 million from $10.1 million in the three months ended June 25,2004.  The net decrease was attributed tolower debt balances associated with the early extinguishment of $70.0 millionof the 11.5% senior subordinated notes in January 2005 and the pay down of$31.3 million of our term loan, as well as lower interest expense associatedwith the termination of our interest rate swaps and the write-off of deferredfinancing costs – all associated with our Parent’s IPO.

 

*Provisionfor Income Taxes.*  Theprovision for income taxes was $5.3 million in the three months ended July 1,2005 compared to a provision of $4.0 million in the three months ended June 25,2004. The effective tax rate for the three months ended July 1, 2005 was38.4% compared to 36.7% in the three months ended June 25, 2004.  The increase in the effective tax rate wasdue primarily to lower state income taxes during the three months ended June 25,2004.

 

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*Six Months Ended July 1, 2005Compared to Six Months Ended June 25, 2004*

 

**Net Sales.**  Our netsales increased by $42.2 million, or 11.8%, to $400.2 million in thesix months ended July 1, 2005 from $358.0 million in the six monthsended June 25, 2004.  During 2005 wehad one more shipping day than during the prior year period.  Average daily sales increased 10.9% to$3.1 million in the six months ended July 1, 2005 compared to$2.8 million in the six months ended June 25, 2004.  The sales increase was largely attributableto improved demand for our products, new sales and growth initiatives, and tonew product introductions.  Average dailysales growth for the six months ended July 1, 2005 was 15.9% in theprofessional contractor market, followed by 10.9% sales growth in thefacilities maintenance market and 4.4% sales growth in the specialtydistributor market.

 

*Gross Profit.*  Gross profitincreased by $16.1 million, or 11.8%, to $152.7 million in the sixmonths ended July 1, 2005 from $136.7 million in the six months endedJune 25, 2004.  Gross profit marginsremained steady at 38.2% for the six months ended July 1, 2005 and June 25,2004.  Gross profit margins in certainproduct categories improved due to the success of our private label program,improved pricing from suppliers, and increased efficiencies at our nationaldistribution center.   These benefitswere offset by the increase in sales of lower margin products such asappliances, water heaters and HVAC equipment.

 

*Selling, General andAdministrative Expenses.*  SG&A expenses increased by $9.9 million, or 10.1%,to $108.3 million in the six months ended July 1, 2005 from$98.3 million in the six months ended June 25, 2004.  Certain expenses within SG&A, such as thecosts of running distribution centers, delivery expenses and selling expensesfluctuate with sales volume.  Theincrease in SG&A expenses included these increases as well as continuinginvestments in new sales and marketing initiatives.  SG&A expenses as a percentage of salesimproved 40 basis points to 27.1% in the six months ended July 1, 2005from 27.5% in the six months ended June 25, 2004.  This improvement in operating leverage is aresult of improved operating efficiencies at our regional distribution centers– specifically distribution center labor and freight costs – as well as thebenefit of increased sales on our fixed cost infrastructure, partially offsetby our continued investment in our growth initiatives.

 

*Depreciation and Amortization.*  Depreciation andamortization expense decreased by $0.1 million, or 1.4%, to $6.3 millionin the six months ended July 1, 2005 from $6.4 million in the sixmonths ended June 25, 2004.

 

*Operating Income.*  As a result of theforegoing, operating income increased by $6.2 million, or 19.6%, to$38.1 million in the six months ended July 1, 2005 from$31.9 million in the six months ended June 25, 2004.  As a percent of sales, operating incomeincreased to 9.5% in the first six months from 8.9% in the comparable prioryear period.

 

*Change in Fair Value of Interest RateSwaps.*  Ourinterest rate swaps were terminated at the time of our Parent’s IPO in December 2004.  As such, changes in fair value of interestrate swaps were zero in the six months ended July 1, 2005 compared to again of $4.7 million in the six months ended June 25, 2004.  Theses gains are related to changes in themarket value of our interest rate swap instruments. The non-cash gains wereattributable to changes in market conditions, including but not limited tofluctuations in interest rates, general market volatility, and the remainingtenor of our instruments.

 

*Interest Expense.*  Interest expensedecreased by $8.3 million in the six months ended July 1, 2005 to$12.0 million from $20.3 million in the six months ended June 25,2004.  The net decrease was attributed tolower debt balances associated with the early extinguishment of $70.0 millionof our 11.5% senior subordinated notes in January 2005 and the pay down of$31.5 million of our term loan, as well as lower interest expense associatedwith the termination of our interest rate swaps and the write-off of deferredfinancing costs – all associated with our Parent’s IPO.

 

*Loss on Extinguishment of Debt*.  Aspart of our Parent’s IPO, we redeemed $70.0 million of the 11.5% seniorsubordinated notes in January 2005. This redemption was made 30 days after the closing of our Parent’s IPO,in accordance with the redemption provision of the indenture governing thenotes.  In connection with theredemption, we recorded a $10.3 million loss on the early extinguishment ofdebt in the first quarter of 2005,consisting of an $8.1 million redemption premium and $2.3 million write-off ofdeferred financing costs.

 

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*Provision for Income Taxes.*  The provision for income taxeswas $6.2 million in the fiscal six months ended July 1, 2005 comparedto a provision of $6.3 million in the six months ended June 25, 2004.The effective tax rate for the six months ended July 1, 2005 was 38.5%compared to 38.2% in the six months ended June 25, 2004. The increase inthe effective tax rate was due primarily to a decrease in our state incometaxes and foreign income taxes partially offset by an increase innon-deductible expenses.

 

**Liquidity and Capital Resources**

 

As of July 1,2005, we had approximately $92.1 million of availability under our$100.0 million revolving credit facility. Historically, our capital requirements have been for debt serviceobligations, working capital requirements, acquisitions, the expansion andmaintenance of our distribution network, and upgrades of our proprietaryinformation systems.  We expect this tocontinue in the foreseeable future. Historically, we have funded these requirements through internallygenerated cash flow and funds borrowed under our credit facility.  We expect our cash flow from operations andthe loan availability under our credit facility to be our primary source offunds in the future.  Letters of credit,which are issued under the revolving loan facility under our credit facility,are used to support payment obligations incurred for our general corporatepurposes.  As of July 1, 2005, wehad $7.9 million of letters of credit issued under the creditfacility.  Interest on our 11.5% seniorsubordinated notes due 2011 is payable each May 15 and November 15.  With respect to borrowings under our creditfacility, we have the option to borrow at an adjusted LIBOR or an alternativebase rate.  Interest on the creditfacility is generally payable quarterly, and with respect to any LIBORborrowings, on the last day of the interest period applicable to the term ofthe borrowing.

 

Net cash provided by operating activities was$11.8 million for the six months ended July 1, 2005 compared to netcash provided by operating activities of $5.8 million in the six monthsended June 25, 2004.  Net cashprovided by operating activities for the six months ended July 1, 2005 washigher than the prior year period primarily as a result of our increase inoperating income of $6.2 million and changes in our core working capital of$3.9 million.  This was partially offsetby the changes in all other assets and liabilities.  In addition, we had lower cash interestexpense of $8.6 million, resulting from our lower average debt balances, whichwere reduced using proceeds from our Parent’s IPO transaction, and higher cashtaxes of $9.3 million, due to timing of income tax payments.

 

Net cash used in investing activities was$5.5 million in the six months ended July 1, 2005 compared to $4.2million in the six months ended June 25, 2004.  Net cash used in investing activities in thesix months ended July 1, 2005 and the six months ended June 25, 2004were primarily attributable to capital expenditures made in the ordinary courseof business and costs related to purchases of businesses.

 

Net cash used in financing activities totaled$75.1 million for the six months ended July 1, 2005 compared to netcash provided by financing activities of $0.7 million in the six monthsended June 25, 2004.  Net cash usedin financing activities for the six months ended July 1, 2005 wasprimarily attributable to our repayment of $70.0 million of our seniorsubordinated notes and $8.1 million in related redemption premiums partiallyoffset by $2.3 million received in January 2005 for the over-allotmentshares sold to underwriters, net of expenses, in conjunction with our Parent’s December 2004 IPO and $1.7 million ofproceeds received from the exercise of stock options.

 

As of July 1, 2005, other than the redemptionof $70.0 million of the 11.5% senior subordinated notes as described above, ourcontractual obligations and other contractual commitments have not changedmaterially outside the ordinary course of business since December 31,2004.

 

*The Reincorporation Merger and Related Transactions*

 

In December 2004, we completed a reincorporationmerger and became the 100%-owned subsidiary of Interline Brands Inc., aDelaware corporation (NYSE: IBI), which we also refer to as our Parent orInterline Delaware.  In this reincorporationmerger, in the aggregate, holders of our preferred stock received $55.0 millionin cash and 19,183,321 shares of Parent common stock and holders of our commonstock received 66,667 shares of Parent common stock.  In return, Parent received 100 shares of ourcommon stock and one 

 

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share of our preferred stock, representing all of our authorized andoutstanding shares.  Also, options topurchase shares of our common stock were converted into options to purchaseshares of Parent common stock.  Inconjunction with this reincorporation merger, Parent successfully completed itsInitial Public Offering, (“IPO”) and we amended our senior creditfacility.  A total of 14,375,000 sharesof Parent common stock were sold, of which 12,667,000 were sold by Parent and1,708,000 were sold by its shareholders. Parent sold 12,500,000 shares of itscommon stock in December 2004 and 167,000 shares in January 2005following the exercise of the underwriters’ over-allotment option.  Parent received $171.8 million in net proceedsincluding the exercise of the underwriters’ over-allotment option, representing$176.9 million of proceeds from the sale of stock net of underwriting discountsand commissions, less $4.1 million of IPO costs and $1.1 million of debtissuance costs.  After the IPO-relatedexpenses and preferred stock consideration in the reincorporation merger werepaid, all of the proceeds from the IPO were contributed to the Company.

 

We used $31.3 million of the proceeds to partiallyrepay the term loan under our credit facility. We amended our senior credit facility to allow for the IPO and reduceour applicable rate in respect to any term loans from LIBOR plus 3.50% to LIBORplus 2.25%.  In conjunction with thisamendment, we incurred $1.1 million of debt issuance costs.  In December 2004 we also used $4.6million of the proceeds to terminate the interest rate swap agreements.  In January 2005 we used $70.0 million ofthe proceeds from the IPO to partially redeem the 11.5% senior subordinatednotes.  In connection with theredemption, in January 2005 we paid $8.1 million of premiums for earlyredemption of the 11.5% senior subordinated notes and recorded a $10.3 millionloss on the early extinguishment of debt, which included a charge for write-offof unamortized debt issuance costs in the amount of $2.3 million.

 

*Capital Expenditures*

 

Capital expenditures were $3.9 million in the sixmonths ended July 1, 2005 compared to $3.7 million in the six months endedJune 25, 2004.  Capital expendituresas a percentage of sales were 1.0% in both periods.

 

*Liquidity*

 

Our principal working capital need is for inventoryand trade accounts receivable, which have generally increased with the growthin our business.  Our principal sourcesof cash to fund our working capital needs are cash generated from operatingactivities and borrowings under our revolving credit facility.

 

*Credit Facility*

 

We 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 our Parent’s IPO Transactions.  We also amended our credit facility on July 7,2005, to permit the incurrence of an additional $50.0 million term loan, havingsubstantially the same terms as the existing term loan in connection with theCopperfield acquisition.  OnAugust 8, 2005, we again amended our credit facility to lower the interest rate spreads applicable to theadditional $50.0 million term loan.  Theamended credit facility provides for aggregate commitments of$250.0 million, consisting of (1) a revolving loan facility of$100.0 million, of which a portion not exceeding $20.0 million will beavailable in the form of letters of credit, and (2) a term loan facilityof $150.0 million.  Borrowings underthe amended term loan facility and revolving loan facility bear interest, atour option, at either adjusted LIBOR or at the alternate base rate plus aspread. Outstanding letters of credit under the revolving loan facility aresubject to a per annum fee equal to the applicable spread over adjusted LIBORfor revolving loans. The indebtedness under the amended credit facility isguaranteed by our Parent and our domestic subsidiaries.  The amended term loan facility has a maturityof December 31, 2010, and the revolving loan facility has a maturity of May 31,2008.

 

On July 7, 2005, we used the proceeds from theadditional $50.0 million term loan and $20.0 million of borrowings under therevolving loan facility to fund the Copperfield acquisition.  As of July 1, 2005, after giving effectto the Copperfield acquisition as if it occurred on that date, we had $149.5million aggregate principal outstanding under the term loan facility.

 

During the six months ended July 1, 2005 weborrowed periodically on our revolving credit facility to accommodate our dailyworking capital needs. The weighted average daily outstanding balance duringthe six-month period was $10.2 million, with ordinary course borrowingsranging from $0.0 million to $22.0 million. 

 

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As of July 1, 2005, we had $7.9 million of letters of creditissued under the revolving loan facility and $99.5 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.

 

ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK.

 

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.  We seek to minimize the effectsof inflation and changing prices through economies of purchasing and inventorymanagement resulting in cost reductions and productivity improvements as wellas price increases to maintain reasonable profit margins.  Management believes that while inflation hashistorically been moderate the company and its markets have been impacted overthe past year by rising raw material prices and resulting supplier costincreases.  These increases havegenerally served to increase sales results.

 

The majority of our purchases from foreign-basedsuppliers is from China and other countries in Asia and is transacted in U.S.dollars.  On July 21, 2005, thePeople’s Bank of China announced that the yuan will no longer be pegged to theU.S. dollar, but will be allowed to float in a band (and to a limited extent,increase in value) against a basket of foreign currencies, a move thatincreases the risk that Chinese-sourced products could become more expensivefor us.

 

*Derivative Financial Instruments*

 

Periodically, we enter into derivative financialinstruments, including interest rate exchange agreements, or swaps, to manageour exposure to fluctuations in interest rates on our debt.  As of July 1, 2005, we did not have anyinterest rate swap exchange agreements, or swaps.  Under our former swap agreements, we pay afixed rate on the notional amount to our banks and the banks pay us a variablerate on the notional amount equal to a base LIBOR rate.  Our derivative activities, all of which are forpurposes other than trading, are initiated within the guidelines of corporaterisk-management policies.

 

We periodically evaluate the costs and benefits of anychanges in our interest rate risk.  Basedon such evaluation, we may enter into new interest rate swaps to manage ourinterest rate exposure.

 

ITEM 4.CONTROLS AND PROCEDURES.

 

Our management, with the participation of ourChief Executive Officer and Chief Financial Officer (our principal executiveofficer and principal financial officer), evaluated the effectiveness of ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act) as of July 1, 2005. Based on thisevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat, as of July 1, 2005, our disclosure controls and procedures were: (1) designedto ensure that material information relating to us, including our consolidatedsubsidiaries, is made known to our Chief Executive Officer and Chief FinancialOfficer by others within those entities, particularly during the period inwhich this report was being prepared, and (2) effective, in that theyprovide reasonable assurance that information required to be disclosed by us inthe reports that we file or submit under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms.

 

No change in our internal control overfinancial reporting (as defined in Rules 13a-15(f) and 15d-15(f) underthe Exchange Act) occurred during the quarter ended July 1, 2005 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

**PART II. OTHER INFORMATION**

 

ITEM1. LEGAL PROCEEDINGS.

 

We are involved in various legal proceedings that have arisenin the ordinary course of our business and have not been fully adjudicated.These actions, when ultimately concluded and determined, will not, in the 

 

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opinion of management, have a material effect upon our consolidatedfinancial position, results of operations or liquidity.

 

ITEM5. OTHER INFORMATION.

 

*BonusProgram*

 

On May 26,2005, the Compensation Committee of the Board of Directors of Interline Delawareapproved a bonus program and performance measures and goals for the payment tobonuses for the fiscal year ending December 30, 2005. All of the Company’sexecutive officers are eligible to participate in this bonus program. The keyperformance measures selected by the Compensation Committee for this 2005 bonusprogram are (i) earnings per share (EPS) and (ii) tangible return on investedcapital (Tangible ROIC), which is a function of the Company’s adjusted EBITDA,average core working capital and average property and equipment. In each casethe Compensation Committee retains discretion to adjust the performancemeasures to exclude the effects of certain events and transactions.

 

The Company’sexecutive officers are each eligible to earn a bonus under the 2005 bonusprogram, as provided in their respective employment agreements, pursuant towhich executives could earn bonuses between 30% and 120% of their annual basesalary. Under the program, the Compensation Committee retains discretion toadjust bonuses in excess of these amounts in the event of superior performanceabove the targeted performance measures with no individual bonus exceeding 200%of annual base salary.

 

*Credit Facility*

 

On August 8,2005, we amended our credit facility to lower the interest rate spreadsapplicable to the additional $50.0 million term loan.

 

ITEM 6. EXHIBITS.

 

The following exhibits are being filed aspart of this Quarterly Report on Form 10-Q:

 
| 10.1  |   | Amendment No. 1, dated as  of August 8, 2005, to the Amended and Restated Credit Agreement dated as of  December 21, 2004, among Interline Delaware, the Company, the lenders party  thereto and Credit Suisse, Cayman Islands Branch, as Administrative Agent (furnished  herewith).                                           |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.53 |   | Incremental Facility  Amendment, dated as of July 7, 2005, among Interline Delaware, the Company,  the lenders named thereto and Credit Suisse, Cayman Islands Branch as  Administrative Agent (incorporated by reference to exhibit 10.53 to the  Company’s Registration Statement on form S-1/A filed on July 22, 2005). |
| 10.55 |   | Employment Agreement,  dated as of July 22, 2005, between the Company and Thomas J. Tossavainen  (incorporated by reference to exhibit 10.55 to Interline Delaware’s  Registration Statement on form S-1/A filed on August 1, 2005).                                                                                       |
| 31.1  |   | Certification of Michael  J. Grebe as President and Chief Executive Officer of Interline Brands, Inc.,  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (furnished  herewith).                                                                                                                              |
| 31.2  |   | Certification of Thomas J.  Tossavainen as Vice President and Chief Financial Officer of Interline Brands, Inc.,  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (furnished  herewith).                                                                                                                    |
| 32.1  |   | Certification of the Chief  Executive Officer pursuant to Rule 13a-14(b) of the Exchange Act  and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002 (furnished herewith).                                                                                       |
| 32.2  |   | Certification of the Chief  Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act  and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002 (furnished herewith).                                                                                       |

 

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**Signatures**

 

Pursuant to the requirements of the Securities Exchange Actof 1934, the Registrant has duly caused this report to be signed on its behalfby the undersigned hereunto duly authorized. 

 
|                  | INTERLINE BRANDS, INC. |
|-----------------------|------------------------|
|                  |                   |   |
|                  | BY:                    |   /s/ MICHAEL J. GREBE |   |
|                  |                   | Michael J. Grebe  |
|                  |                   | President and  Chief Executive Officer |
|                  |                   |   |
|                  |                   | (Duly Authorized Signatory and Principal Executive Officer) |
|                  |                   |   |
| Date: August 11, 2005 |                   |   |

 

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**Signatures**

 

Pursuant to the requirements of the Securities Exchange Actof 1934, the Registrant has duly caused this report to be signed on its behalfby the undersigned hereunto duly authorized. 

 

 
|                  | INTERLINE BRANDS, INC. |
|-----------------------|------------------------|
|                  |                   |   |
|                  | BY:                    |   /s/ THOMAS J. TOSSAVAINEN |   |
|                  |                   | Thomas J. Tossavainen |
|                  |                   | Chief Financial  Officer |
|                  |                   |   |
|                  |                   | (Duly Authorized Signatory and Principal Financial Officer) |
|                  |                   |   |
| Date: August 11, 2005 |                   |   |

 

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