**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****WASHINGTON, D.C. 20549**

**FORM 10-Q**

 
| ****(Mark One)****                                                                                                                                                                                                                                                                                                    | ** **     | ** **                                                                                        |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------|---------------------------------------------------------------------------------------------------|
| ****x****                                                                                                                                                                                                                                                                                                             | **** **** | ****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934****  |
| ** **                                                                                                                                                                                                                                                                                                            | ** **     | ** **                                                                                        |
| ****FOR THE QUARTERLY PERIOD  ENDED JUNE 30, 2006****                                                                                                                                                                                                                                                                 |
| **** ****                                                                                                                                                                                                                                                                                                        |
| ****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  001-32380****                                                                                                                                                                                                                                                                             |

 

**INTERLINE BRANDS, INC.**(Exact name of registrant as specified in its charter)
| ****DELAWARE****                                 | **** **** | ****03-0542659****          |
|--------------------------------------------------|----------------|-----------------------------|
| ****(State or other jurisdiction of****          | **** **** | ****(I.R.S. Employer****    |
| ****incorporation or organization)****           | **** **** | ****Identification No.)**** |
| **** ****                                   | **** **** | **** ****              |
| ****801  WEST BAY STREET****                     |           |                        |
| ****JACKSONVILLE,  FLORIDA****                   | **** **** | ****32204****               |
| ****(Address of principal executive offices)**** | **** **** | ****(Zip code)****          |

 

**(904) 421-1400**(Registrant’s telephone number, including area code)

**NOT APPLICABLE**(Former name, former address and former fiscal year, if changed since last report)

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

| Yes   x |   | No   o |
|------------------------|--------|-----------------------|

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

| Yes   o |   | No   x |
|------------------------|--------|-----------------------|

 

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of the latest practicable date:  As of July 31, 2006, there were 32,242,197shares of the registrant’s common stock outstanding (excluding 24,152 sharesheld in treasury), par value $0.01.

 

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**TABLE OF CONTENTS**
| ****ITEM****                          | **** **** | ** **                                                                                                                                               |           | PAGE           |
|---------------------------------------|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|----------------|----------------|
| ****PART I. FINANCIAL INFORMATION**** |           |                                                                                                                                                     |
| **** ****                        |           |                                                                                                                                                     |
| ****1.****                            | **** **** | ****Financial Statements****                                                                                                                             |           |           |
| ** **                            |           | ****Condensed Consolidated Balance Sheets (Unaudited)  as of June 30, 2006 and December 30, 2005****                                                     |           | 1              |
| ** **                            |           | ****Condensed Consolidated Statements of Operations  (Unaudited)  for the Three and Six Months Ended June 30, 2006 and July 1, 2005****                  |           | 2              |
| ** **                            |           | ****Condensed Consolidated Statements of Comprehensive  (Loss) Income (Unaudited)  for the Three and Six Months Ended June 30, 2006 and July 1, 2005**** |           | 3              |
| ** **                            |           | ****Condensed Consolidated Statements of Cash Flows  (Unaudited)  for the Six Months Ended June 30, 2006 and July 1, 2005****                            |           | 4              |
| **** ****                        | **** **** | ****Notes to Unaudited Condensed Consolidated Financial  Statements****                                                                                  |           | 6              |
| ****2.****                            | **** **** | ****Management’s  Discussions and Analysis of Financial Condition and Results of Operations****                                                     | **** **** | 15             |
| ****3.****                            | **** **** | ****Quantitative  and Qualitative Disclosures about Market Risk****                                                                                      | **** **** | 24             |
| ****4.****                            | **** **** | ****Controls and  Procedures****                                                                                                                         | **** **** | 24             |
| **** ****                        | **** **** | **** ****                                                                                                                                           | **** **** | **** **** |
| ****PART II. OTHER INFORMATION****    |           |                                                                                                                                                     |
| **** ****                        |           |                                                                                                                                                     |
| ****1.****                            | **** **** | ****Legal Proceedings****                                                                                                                                | **** **** | 25             |
| ****1A.****                           | **** **** | ****Risk Factors****                                                                                                                                     | **** **** | 25             |
| ****2.****                            | **** **** | ****Unregistered  Sales of Equity Securities and Use of Proceeds****                                                                                     |           | 26             |
| ****3.****                            | **** **** | ****Defaults Upon Senior Securities****                                                                                                                  |           | 26             |
| ****4.****                            |           | Submission of  Matters to a Vote of Security Holders                                                                                                     |           | 26             |
| 5.                                    |           | Other Information                                                                                                                                        |           | 27             |
| ****6.****                            | **** **** | ****Exhibits****                                                                                                                                         | **** **** | 28             |
| **** ****                        | **** **** | **** ****                                                                                                                                           | **** **** |           |
| ****SIGNATURES****                    |           | 29                                                                                                                                                       |
|                                       |                |                                                                                                                                                          |                |                |  |  |

 

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**PART I. FINANCIAL INFORMATION**

**ITEM 1. Financial Statements**

**INTERLINE BRANDS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)AS OF JUNE 30, 2006 AND DECEMBER 30, 2005(in thousands, except share and per share data)**
| ** **                                                                                                                                                                              | ** ** | **June 30,** | ** ** | **December 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                              | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| **ASSETS**                                                                                                                                                                              | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current Assets:                                                                                                                                                                         |       |              |       |                  |       |
| Cash and cash equivalents                                                                                                                                                               |       | $                 | 7,625      |                  | $          | 2,958 |   |
| Accounts receivable - trade (net of allowance for  doubtful accounts of $9,155 and $8,150)                                                                                              |       | 127,684           |       | 113,271               |       |
| Accounts receivable - other                                                                                                                                                             |       | 9,168             |       | 12,163                |       |
| Inventory                                                                                                                                                                               |       | 171,095           |       | 165,282               |       |
| Prepaid expenses and other current assets                                                                                                                                               |       | 6,713             |       | 5,498                 |       |
| Income taxes receivable                                                                                                                                                                 |       | 5,767             |       | —                |       |
| Deferred income taxes                                                                                                                                                                   |       | 15,562            |       | 13,945                |       |
| Total current assets                                                                                                                                                                    |       | 343,614           |       | 313,117               |       |
| Property and equipment, net                                                                                                                                                             |       | 29,103            |       | 29,865                |       |
| Goodwill                                                                                                                                                                                |       | 248,708           |       | 249,574               |       |
| Other intangible assets, net                                                                                                                                                            |       | 101,208           |       | 104,244               |       |
| Other assets                                                                                                                                                                            |       | 10,152            |       | 8,969                 |       |
| Total assets                                                                                                                                                                            |       | $                 | 732,785    |                  | $          | 705,769 |   |
| ** **                                                                                                                                                                              | ** ** | ** **        | ** ** | ** **            | ** ** |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                           | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current Liabilities:                                                                                                                                                                    |       |              |       |                  |       |
| Accounts payable                                                                                                                                                                        |       | $                 | 75,276     |                  | $          | 69,182 |   |
| Accrued expenses and other current liabilities                                                                                                                                          |       | 23,582            |       | 21,574                |       |
| Accrued merger expenses                                                                                                                                                                 |       | 4,210             |       | 5,408                 |       |
| Accrued interest                                                                                                                                                                        |       | 493               |       | 2,152                 |       |
| Income taxes payable                                                                                                                                                                    |       | —            |       | 1,780                 |       |
| Revolver                                                                                                                                                                                |       | —            |       | 3,000                 |       |
| Current portion of long-term debt                                                                                                                                                       |       | 1,000             |       | 1,400                 |       |
| Capital lease - current                                                                                                                                                                 |       | 452               |       | 452                   |       |
| Total current liabilities                                                                                                                                                               |       | 105,013           |       | 104,948               |       |
|                                                                                                                                                                                    |       |              |       |                  |       |
| Long-Term Liabilities:                                                                                                                                                                  |       |              |       |                  |       |
| Deferred income taxes                                                                                                                                                                   |       | 33,661            |       | 34,646                |       |
| Long-term debt, net of current portion                                                                                                                                                  |       | 300,841           |       | 280,675               |       |
| Capital lease - long term                                                                                                                                                               |       | 754               |       | 958                   |       |
| Total liabilities                                                                                                                                                                       |       | 440,269           |       | 421,227               |       |
| Commitments and contingencies                                                                                                                                                           |       |              |       |                  |       |
| Senior preferred stock, $0.01 par value, 20,000,000  shares authorized, no shares outstanding as of June 30, 2006 and December 30,  2005                                                |       | —            |       | —                |       |
|                                                                                                                                                                                    |       |              |       |                  |       |
| Stockholders’ equity:                                                                                                                                                              |       |              |       |                  |       |
| Common stock; $0.01 par value, 100,000,000  authorized; 32,266,349 issued and 32,242,197 outstanding as of June 30, 2006  and 32,220,669 issued and outstanding as of December 30, 2005 |       | 323               |       | 322                   |       |
| Additional paid-in capital                                                                                                                                                              |       | 558,988           |       | 558,183               |       |
| Accumulated deficit                                                                                                                                                                     |       | (267,461          | )          | (273,037              | )          |
| Accumulated other comprehensive income                                                                                                                                                  |       | 1,164             |       | 992                   |       |
| Deferred compensation                                                                                                                                                                   |       | —            |       | (1,918                | )          |
| Treasury stock, at cost, 24,152 shares as of June  30, 2006                                                                                                                             |       | (498              | )          | —                |       |
| Total stockholders’ equity                                                                                                                                                         |       | 292,516           |       | 284,542               |       |
| Total liabilities and stockholders’ equity                                                                                                                                         |       | $                 | 732,785    |                  | $          | 705,769 |   |

 

*See accompanying notes to unaudited condensedconsolidated financial statements.*

1

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**INTERLINE BRANDS, INC. ANDSUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND JULY 1, 2005(in thousands, except share and per share data)**
| ** **                                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                    | ** ** | **June 30,**                | ** ** | **July 1,**               | ** ** | **June 30,** | ** ** | **July 1,** | ** ** |
| ** **                                    | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net sales                                     |       | $                                | 235,409    |                           | $          | 203,666 |   | $ | 460,083 |   | $ | 400,157 |   |
| Cost of sales                                 |       | 145,913                          |       | 126,411                        |       | 284,879 |   | 247,416 |   |
| Gross profit                                  |       | 89,496                           |       | 77,255                         |       | 175,204 |   | 152,741 |   |
|                                          |       |                             |       |                           |       |   |   |   |   |
| Operating Expenses:                           |       |                             |       |                           |       |   |   |   |   |
| Selling, general  and administrative expenses |       | 63,303                           |       | 54,516                         |       | 124,981 |   | 108,256 |   |
| Depreciation and  amortization                |       | 3,509                            |       | 3,222                          |       | 6,954 |   | 6,338 |   |
| Total operating  expense                      |       | 66,812                           |       | 57,738                         |       | 131,935 |   | 114,594 |   |
| Operating income                              |       | 22,684                           |       | 19,517                         |       | 43,269 |   | 38,147 |   |
|                                          |       |                             |       |                           |       |   |   |   |   |
| Loss on extinguishment  of debt               |       | (20,700                          | )          | —                         |       | (20,700 | ) | (10,340 | ) |
| Interest expense                              |       | (6,982                           | )          | (5,746                         | )          | (13,934 | ) | (12,015 | ) |
| Interest income                               |       | 174                              |       | 6                              |       | 234 |   | 126 |   |
| Other income                                  |       | 129                              |       | 119                            |       | 255 |   | 286 |   |
| (Loss) Income  before income taxes            |       | (4,695                           | )          | 13,896                         |       | 9,124 |   | 16,204 |   |
| Income tax (benefit)  provision               |       | (1,830                           | )          | 5,331                          |       | 3,548 |   | 6,246 |   |
| Net (loss) income                             |       | $                                | (2,865     | )                              | $          | 8,565 |   | $ | 5,576 |   | $ | 9,958 |   |
|                                          |       |                             |       |                           |       |   |   |   |   |
| (Loss) Earnings Per  Share:                   |       |                             |       |                           |       |   |   |   |   |
| Basic                                         |       | $                                | (0.09      | )                              | $          | 0.27 |   | $ | 0.17 |   | $ | 0.31 |   |
| Diluted                                       |       | $                                | (0.09      | )                              | $          | 0.26 |   | $ | 0.17 |   | $ | 0.31 |   |
|                                          |       |                             |       |                           |       |   |   |   |   |
| Weighted-Average Shares  Outstanding:         |       |                             |       |                           |       |   |   |   |   |
| Basic                                         |       | 32,121,936                       |       | 31,959,119                     |       | 32,106,534 |   | 31,938,147 |   |
| Diluted                                       |       | 32,121,936                       |       | 32,364,012                     |       | 32,667,695 |   | 32,328,273 |   |

** **

*See accompanying notes to unaudited condensedconsolidated financial statements.*

2

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** **

**INTERLINE BRANDS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE  (LOSS) INCOME (UNAUDITED)THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND JULY 1, 2005(in thousands)**

 
| ** **                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                          | ** ** | **June 30,**                | ** ** | **July 1,**               | ** ** | **June 30,** | ** ** | **July 1,** | ** ** |
| ** **                          | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                |       |                             |       |                           |       |   |   |   |   |
| Net (loss) income                   |       | $                                | (2,865     | )                              | $          | 8,565 |   | $ | 5,576 |   | $ | 9,958 |   |
|                                |       |                             |       |                           |       |   |   |   |   |
| Other comprehensive  income (loss): |       |                             |       |                           |       |   |   |   |   |
| Foreign currency  translation       |       | 189                              |       | (30                            | )          | 172 |   | (68 | ) |
|                                |       |                             |       |                           |       |   |   |   |   |
| Total comprehensive  (loss) income  |       | $                                | (2,676     | )                              | $          | 8,535 |   | $ | 5,748 |   | $ | 9,890 |   |
|                                |       |                             |       |                           |       |   |   |   |   |

 

*See accompanying notes to unaudited condensed consolidated financial statements.*

3

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**INTERLINE BRANDS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)SIX MONTHS ENDED JUNE 30, 2006 AND JULY 1, 2005(in thousands)**
| ** **                                                                          | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                          | ** ** | **June 30,**              | ** ** | **July 1,** | ** ** |
| ** **                                                                          | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| Cash Flows from  Operating Activities:                                              |       |                           |       |   |   |
| Net income                                                                          |       | $                              | 5,576      |   | $ | 9,958 |   |
| Adjustments to  reconcile net income to net cash provided by  operating activities: |       |                           |       |   |   |
| Depreciation and  amortization                                                      |       | 6,954                          |       | 6,338 |   |
| Amortization of  debt issuance costs                                                |       | 821                            |       | 774 |   |
| Write-off of  debt issuance costs                                                   |       | 7,037                          |       | 2,290 |   |
| Tender and  redemption premiums on 111⁄2% senior subordinated notes              |       | 13,663                         |       | 8,050 |   |
| Share-based  compensation                                                           |       | 1,622                          |       | 477 |   |
| Deferred income  taxes                                                              |       | (2,390                         | )          | (855 | ) |
| Provision for  doubtful accounts                                                    |       | 1,684                          |       | 1,176 |   |
| Loss on disposal  of property and equipment                                         |       | 30                             |       | — |   |
| Income tax  effect from exercise of stock options                                   |       | —                         |       | 215 |   |
|                                                                                |       |                           |       |   |   |
| Changes in assets and  liabilities, net of business acquired:                       |       |                           |       |   |   |
| Accounts  receivable - trade                                                        |       | (16,097                        | )          | (18,705 | ) |
| Accounts  receivable - other                                                        |       | 2,995                          |       | 3,519 |   |
| Inventory                                                                           |       | (5,813                         | )          | (4,407 | ) |
| Prepaid expenses  and other current assets                                          |       | (1,215                         | )          | (1,401 | ) |
| Other assets                                                                        |       | (1,183                         | )          | (281 | ) |
| Accounts payable                                                                    |       | 6,094                          |       | 9,194 |   |
| Accrued expenses  and other current liabilities                                     |       | 1,539                          |       | (594 | ) |
| Accrued merger  expenses                                                            |       | (102                           | )          | (206 | ) |
| Accrued interest                                                                    |       | (1,753                         | )          | (1,035 | ) |
| Income taxes  payable                                                               |       | (7,547                         | )          | (2,722 | ) |
| Net cash  provided by operating activities                                          |       | 11,915                         |       | 11,785 |   |
| Cash Flows from  Investing Activities:                                              |       |                           |       |   |   |
| Purchase of  property and equipment, net                                            |       | (3,711                         | )          | (3,900 | ) |
| Purchase of  businesses, net of cash acquired                                       |       | (355                           | )          | (1,602 | ) |
| Net cash used in  investing activities                                              |       | (4,066                         | )          | (5,502 | ) |
|                                                                                     |            |                                |            |  |  |  |  |

 

 

4

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**INTERLINE BRANDS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)—ContinuedSIX MONTHS ENDED JUNE 30, 2006 AND JULY 1, 2005(in thousands)**
|                                                                              |   | **Six Months Ended** |       |
|-----------------------------------------------------------------------------------|--------|--------------------------------|------------|
|                                                                              |   | **June 30,**              | ** ** | **June 30,** |   |
|                                                                              |   | **2006**                       | ** ** | **2005** |   |
| Cash Flows from  Financing Activities:                                            |   | ** **                     | ** ** | ** ** |   |
| (Decrease)  Increase in revolver, net                                             |   | (3,000                         | )          | — |   |
| Repayment of  term debt                                                           |   | (148,800                       | )          | (500 | ) |
| Repayment of  111⁄2% senior subordinated notes                                 |   | (130,000                       | )          | (70,000 | ) |
| Payment of tender  and redemption premiums on 111⁄2% senior subordinated notes |   | (13,663                        | )          | (8,050 | ) |
| Proceeds from  issuance of 81¤8%  senior subordinated notes, net of discount |   | 198,566                        |       | — |   |
| Proceeds from  issuance of term debt                                              |   | 100,000                        |       | — |   |
| Payment of debt  issuance costs                                                   |   | (7,326                         | )          | — |   |
| Proceeds from  stock options exercised                                            |   | 685                            |       | 1,693 |   |
| Excess tax  benefits from share-based compensation                                |   | 388                            |       | — |   |
| Payments on  capital lease obligations                                            |   | (204                           | )          | — |   |
| Initial public  offering costs                                                    |   | —                         |       | (616 | ) |
| Proceeds from  exercise of underwriters over-allotment options                    |   | —                         |       | 2,333 |   |
| Net cash used in  financing activities                                            |   | (3,354                         | )          | (75,140 | ) |
| Effect of exchange rate  changes on cash and cash equivalents                     |   | 172                            |       | (68 | ) |
| Net increase (decrease)  in cash and cash equivalents                             |   | 4,667                          |       | (68,925 | ) |
| Cash and cash equivalents  at beginning of period                                 |   | 2,958                          |       | 69,178 |   |
| Cash and cash  equivalents at end of period                                       |   | $                              | 7,625      |   | $ | 253 |   |
|                                                                              |   |                           |       |   |   |
| Supplemental Disclosure  of Cash Flow Information:                                |   |                           |       |   |   |
| Cash paid during  the period for :                                                |   |                           |       |   |   |
| Interest                                                                          |   | $                              | 14,854     |   | $ | 10,842 |   |
| Income taxes,  net of refunds                                                     |   | $                              | 13,526     |   | $ | 9,708 |   |
|                                                                              |   |                           |       |   |   |
|  Schedule of Non-Cash Investing and Financing  Activities:                   |   |                           |       |   |   |
| Treasury stock  acquired with accrued expenses and other current liabilities      |   | $                              | 498        |   | $ | — |   |
| Adjustments to  liabilities assumed and goodwill on businesses acquired           |   | $                              | 866        |   | $ | (16 | ) |

**** ****

*See accompanying notes to unaudited condensed consolidated financial statements.*

5

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**INTERLINE BRANDS, INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.**              DESCRIPTIONOF BUSINESS AND BASIS OF PRESENTATION

*Business*

Interline Brands, Inc., a Delaware corporation, andits subsidiaries (“Interline” or the “Company”) is a direct marketer andspecialty distributor of maintenance, repair and operations (“MRO”) products.The Company sells plumbing, electrical, hardware, security, heating,ventilation and air conditioning (“HVAC”) and other MRO products. Interline’shighly diverse customer base consists of multi-family housing, educational,lodging and health care facilities, professional contractors and specialtydistributors.

The Company markets and sells its products primarilythrough nine distinct and targeted brands. The Company utilizes a variety ofsales channels, including a direct sales force, telesales representatives, adirect marketing program, brand-specific websites and a national accounts salesprogram. The Company delivers its products through its network of regionaldistribution centers and professional contractor showrooms located throughoutthe United States and Canada, a national distribution center in Nashville,Tennessee, vendor managed inventory locations at large professional contractorcustomer locations and its dedicated fleet of trucks. Through its broaddistribution network, the Company provides same day/next day delivery serviceto 98% of the U.S. population.

During December 2004, the Company completed itsinitial public offering (“IPO”). Immediately prior to the closing of the IPO, areincorporation merger occurred and the Company became the parent company ofits principal operating subsidiary, Interline Brands, Inc., a New Jerseycorporation (“Interline New Jersey”).

*Basis ofPresentation*

The accompanying unaudited interim condensedconsolidated financial statements of Interline have been prepared in accordancewith accounting principles generally accepted in the United States of Americaand instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,certain information and footnote disclosures normally included in financialstatements included in the Company’s Annual Report on Form 10-K have beencondensed or omitted. The accompanying unaudited interim condensed consolidatedfinancial statements should be read in conjunction with Management’s Discussionand Analysis of Financial Condition and Results of Operations contained in thisreport and the audited consolidated financial statements and related notesincluded in the Company’s Annual Report on Form 10-K for the fiscal year endedDecember 30, 2005 filed with the Securities and Exchange Commission (“SEC”).

All adjustments which are, in the opinion ofmanagement, necessary for a fair statement of the results for the interim periodspresented have been recorded. The results of operations for the interim periodspresented are not necessarily indicative of the results to be expected for thefull year.

The preparation of condensed consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the condensed consolidatedfinancial statements and the reported amounts of revenues and expenses duringthe reporting period. Significant estimates include valuation reserves foraccounts receivable, inventory and income taxes, reserves for self-insurance programs,valuation of goodwill and valuation of assets and liabilities assumed in theacquisition of CCS Enterprises, Inc. (“Copperfield”). Actual results coulddiffer from those estimates.

*Reclassifications*

Certain prior year amounts in the unaudited condensedconsolidated financial statements and the notes thereto have been reclassifiedto conform to the current year presentation. These reclassifications had noeffect on total stockholders’ equity or net income.

6

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*Segment Information*

The Company is in one industry, the distribution ofMRO products. In accordance with Statement of Financial Accounting Standards (“SFAS”)No. 131, *Disclosure about Segments of an Enterpriseand Related Information*, the Company has one operating segment. Ournet sales for the three and six-month periods ended June 30, 2006 and July 1,2005 by product category were as follows (in thousands):
| ** **                                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                 | ** ** | **June 30,**                | ** ** | **July 1,**               | ** ** | **June 30,** | ** ** | **July 1,** | ** ** |
| **Product Category**                  | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                 | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Plumbing                                   |       | $                                | 92,987     |                           | $          | 87,576 |   | $ | 188,473 |   | $ | 177,962 |   |
| Electrical                                 |       | 29,897                           |       | 29,735                         |       | 60,003 |   | 59,209 |   |
| Heating,  Ventilation and Air Conditioning |       | 33,687                           |       | 21,018                         |       | 60,050 |   | 34,643 |   |
| Security                                   |       | 13,418                           |       | 13,442                         |       | 27,123 |   | 27,196 |   |
| Appliances                                 |       | 13,889                           |       | 12,424                         |       | 26,471 |   | 24,213 |   |
| Hardware                                   |       | 13,183                           |       | 13,239                         |       | 25,540 |   | 25,028 |   |
| Other                                      |       | 38,348                           |       | 26,232                         |       | 72,423 |   | 51,906 |   |
|                                       |       |                             |       |                           |       |   |   |   |   |
| Total                                      |       | $                                | 235,409    |                           | $          | 203,666 |   | $ | 460,083 |   | $ | 400,157 |   |

* *

*NewAccounting Pronouncements*

In June 2006, the Financial Accounting Standards Board(“FASB”) issued FASB Interpretation No. 48 (“FIN No. 48”), *Accounting for Uncertainty in Income Taxes — an Interpretation of FASBStatement No. 109*, which clarifies the accounting foruncertainty in income taxes recognized in accordance with SFAS No. 109, *Accounting for Income Taxes*. FIN No. 48 clarifies theapplication of SFAS No. 109 by defining criteria that an individual taxposition must meet for any part of the benefit of that position to berecognized in the financial statements. Additionally, FIN No. 48 providesguidance on the measurement, derecognition, classification and disclosure oftax positions, along with accounting for the related interest and penalties.The provisions of FIN No. 48 are effective for fiscal years beginning afterDecember 15, 2006, with the cumulative effect of the change in accountingprinciple recorded as an adjustment to opening retained earnings. The Companyis currently evaluating the impact that adoption of FIN No. 48 will have on itsfinancial position, results of operations and cash flows.

In June 2006, the FASB ratified the consensus reachedby the Emerging Issues Task Force (“EITF”) with respect to EITF Issued No.06-3, *How Taxes Collected from Customers and Remitted toGovernmental Authorities Should Be Presented in the Income Statement (That Is,Gross versus Net Presentation)*, which addresses how taxes imposed ona revenue producing transaction between a buyer and a customer, such as sales,use, value-added and excise and other taxes imposed at the point of sale,should be recorded in the income statement. The consensus reached requiresthat a policy decision be made as to the presentation of taxes in the incomestatement. This policy should be disclosed within the notes to the financialstatements and the amount of taxes included in revenue, if any, should also bedisclosed. This EITF is effective for financial reports for interim andannual periods beginning after December 15, 2006 with earlier applicationpermitted. Currently, the Company records sales taxes net and it will disclosesuch policy in its Annual Report on Form10-K for the fiscal year ended December29, 2006. The adoption of this EITF will result in additional disclosure andwill not change the way the Company accounts for taxes collected and remitted.

**2.     SHARE-BASED COMPENSATION**

Effective December 31, 2005, the Company adopted theprovisions of SFAS No. 123(R), *Share-Based Payment*,using the modified prospective application transition method. Under thismethod, the share-based compensation cost recognized beginning December 31,2005 includes compensation cost for (1) all share-based payments granted priorto, but not vested as of December 31, 2005, based on the grant date fair valueoriginally estimated in accordance with the provisions of SFAS No. 123, *Accounting for Stock-Based Compensation*, and (2) allshare-based payments granted subsequent to December 30, 2005, based on thegrant date fair value estimated in accordance with the provisions of SFAS No.123(R). Compensation cost under SFAS No. 123(R) is recognized ratably using thestraight-line attribution method over the expected vesting period or to theretirement eligibility date, if less than the vesting period when vesting isnot contingent upon any future performance. In addition, pursuant to SFAS No.123(R), the Company is required to estimate the amount of expected forfeitureswhen calculating the compensation costs, instead of accounting for forfeituresas incurred, which was the method previously used by the Company. As ofDecember 31, 2005, the cumulative effect of adopting the estimated forfeituremethod was not significant. Prior periods are not restated under thistransition method.

7

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SFAS No. 123(R) also requires the Company to reflectthe tax benefit from the exercise of stock options in the statement of cash flowsas a cash inflow from financing activities. Prior to the adoption of SFAS No.123(R), these tax benefits have been reflected as a cash inflow from operatingactivities. The prior year statement of cash flows has not been restated. Thetax benefit from the exercise of stock options was $0.2 million during thethree and six months ended June 30, 2006 and $0.2 million during the three andsix months ended July 1, 2005.

Prior to December 31, 2005, the Company accounted forshare-based compensation plans in accordance with the provisions of AccountingPrinciples Board (“APB”) Opinion No. 25, *Accounting for StockIssued to Employees*, as permitted by SFAS No. 123. The Companyelected to use the intrinsic value method of accounting for employee anddirector share-based compensation expense for its nonqualified employee anddirector stock option awards and did not recognize compensation expense for theissuance of options with an exercise price equal to or greater than the marketprice of the underlying common stock at the date of grant. Had the Companyelected to adopt the fair value approach as prescribed by SFAS No. 123, whichcharges earnings for the estimated fair value of stock options, the pro formanet income and pro forma earnings per share for the three and six months endedJuly 1, 2005 would have been as follows (in thousands, except per shareamounts):
| ** **                                                                                                                               | ** ** | **Three Months** | ** ** | **Six Months** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                                                                                                                               | ** ** | **Ended**             | ** ** | **Ended**           | ** ** |
| ** **                                                                                                                               | ** ** | **July 1,**      | ** ** | **July 1,**    | ** ** |
| ** **                                                                                                                               | ** ** | **2005**              | ** ** | **2005**            | ** ** |
|                                                                                                                                     |       |                  |       |                |       |
| Net income as  reported                                                                                                                  |       | $                     | 8,565      |                | $          | 9,958 |   |
|                                                                                                                                     |       |                  |       |                |       |
| Add: Share-based  compensation expense included in reported net income, net of related tax  effects                                      |       | 147                   |       | 293                 |       |
|                                                                                                                                     |       |                  |       |                |       |
| Deduct: Total  share-based compensation expense determined under the fair value-based method  for all awards, net of related tax effects |       | (246                  | )          | (392                | )          |
|                                                                                                                                     |       |                  |       |                |       |
| Pro forma net  income                                                                                                                    |       | $                     | 8,466      |                | $          | 9,859 |   |
|                                                                                                                                     |       |                  |       |                |       |
| Earnings per  share:                                                                                                                     |       |                  |       |                |       |
| Basic—as reported                                                                                                                   |       | $                     | 0.27       |                | $          | 0.31 |   |
| Basic—pro forma                                                                                                                     |       | $                     | 0.26       |                | $          | 0.31 |   |
|                                                                                                                                     |       |                  |       |                |       |
| Diluted—as reported                                                                                                                 |       | $                     | 0.26       |                | $          | 0.31 |   |
| Diluted—pro  forma                                                                                                                  |       | $                     | 0.26       |                | $          | 0.30 |   |

 

As a result of adopting SFAS No. 123(R) on December31, 2005, the Company’s income before income taxes and net income for the threemonths ended June 30, 2006, are $0.9 million and $0.6 million lower,respectively, than if the Company had continued to account for share-basedcompensation under APB Opinion No. 25. Basic and diluted earnings per share are$0.02 lower for the three months ended June 30, 2006 than if the Company hadcontinued to account for share-based compensation under APB Opinion No. 25. Asa result of adopting SFAS No. 123(R) on December 31, 2005, the Company’s incomebefore income taxes and net income for the six months ended June 30, 2006, are$1.6 million and $1.0 million lower, respectively, than if the Company hadcontinued to account for share-based compensation under APB Opinion No. 25.Basic and diluted earnings per share are $0.03 lower for the six months endedJune 30, 2006 than if the Company had continued to account for share-basedcompensation under APB Opinion No. 25.

*Stock Incentive Plans*

During 2000, Interline New Jersey established a StockAward Plan (the “2000 Plan”), under which Interline New Jersey may award atotal of 6,395 shares of common stock in the form of incentive stock options(which may be awarded to key employees only), nonqualified stock options, stockappreciation rights (“SARs”) and restricted stock awards, all of which may beawarded to directors, officers, key employees and consultants. The Company’scompensation committee will determine in its sole discretion whether a SAR issettled in cash, shares or a combination of cash and shares. In connection withthe Company’s IPO in December 2004, options to purchase shares of the commonstock of Interline New Jersey were converted into options to purchase shares ofthe Company’s common stock.

8

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During 2004, the Company adopted the 2004 EquityIncentive Plan, (the “2004 Plan”), under which the Company may award 3,175,000shares in the form of incentive stock options, nonqualified stock options,stock appreciation rights, or SARs, restricted stock, restricted stock units (“RSUs”),deferred stock units (“DSUs”) and stock bonus awards, all of which may beawarded to any employee, director, officer or consultant of the Company. In May2006, the stockholders of the Company approved an amendment to the 2004 Planwhereby the number of shares of the Company’s common stock reserved forissuance under the 2004 Plan was increased by 2,000,000 shares and whereby therepricing of awards granted under the 2004 Plan was further restricted withoutfirst obtaining approval by the Company’s stockholders.

These plans allow the Company to fulfill its incentivestock option, nonqualified stock option, SAR, restricted stock, RSU, DSU andstock bonus award obligations using unissued or treasury shares. The totalshare-based compensation expense, which is included in the unaudited condensedconsolidated statement of earnings, was $0.9 million and $1.6 million for thethree and six months ended June 30, 2006, respectively.

*Stock Options*

Under the terms of the 2000 Plan, the exercise priceper share 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 priceper share for an incentive stock option granted to a person owning stockpossessing more than 10% of the total combined voting power of all classes ofstock may not be less than 110% of the fair market value of a share of commonstock on the grant date. These incentive stock options vest in 25% incrementsover four years and may not be exercisable after the expiration of ten yearsfrom the date of grant.

Under the terms of the 2004 plan and unless thecompensation committee of the Company determines otherwise, the exercise priceof the options will not be less than the fair market value of the common stockat the time of grant, vest in 25% increments over four years and may not beexercisable after the expiration of seven or ten years from the date of grant.

As permitted by SFAS No. 123(R), the fair values ofstock options were estimated using the Black-Scholes option-pricing model.Expected volatility is based on historical performance of the Company’s stock.The Company also uses historical data to estimate the timing and amount ofstock option exercises and forfeitures. The expected life represents the periodof time that stock options are expected to remain outstanding and is based onthe contractual term of the stock options and expected exercise behavior. Therisk-free interest rate is based on U.S. Treasury zero-coupon issues with a remainingterm equal to the expected option life assumed at the date of grant. TheBlack-Scholes weighted-average assumptions for the three and six months endedJune 30, 2006 were as follows:
| ** **                | ** ** | **Three Months** | ** ** | **Six Months** | ** ** |
|---------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                | ** ** | **Ended**             | ** ** | **Ended**           | ** ** |
| ** **                | ** ** | **June 30,**     | ** ** | **June 30,**   | ** ** |
| ** **                | ** ** | **2006**              | ** ** | **2006**            | ** ** |
|                      |       |                  |       |                |       |
| Expected  volatility      |       | 30.9                  | %          | 26.8                | %          |
|                      |       |                  |       |                |       |
| Expected  dividends       |       | 0.0                   | %          | 0.0                 | %          |
|                      |       |                  |       |                |       |
| Expected life  (in years) |       | 5.0                   |       | 5.0                 |       |
|                      |       |                  |       |                |       |
| Risk-free  interest rate  |       | 5.0                   | %          | 4.8                 | %          |
|                      |       |                  |       |                |       |

 

The weighted average fair value of stock optionsgranted during the three and six months ended June 30, 2006 was $9.48 peroption and $7.81 per option, respectively. The weighted average fair value ofstock options granted during the three and six months ended July 1, 2005 was$5.36 per option and $5.36 per option, respectively.

9

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A summary of stock option activity as of June 30, 2006and changes during the six months then ended is presented below:
| **Options**                       | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value (a)** | ** ** |
|-----------------------------------|------------|------------|------------|-----------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                        |       |       |       |                                    |       | (in years)                                      |       | (in thousands)                      |       |
| Outstanding at  December 30, 2005 |       | 2,274,027  |       | $                                       | 17.42      |                                                 |       |                                     |       |   |
|                              |       |       |       |                                    |       |                                                 |       |                                     |       |
| Granted                           |       | 397,702    |       | 23.67                                   |       |                                                 |       |                                     |       |
|                              |       |       |       |                                    |       |                                                 |       |                                     |       |
| Exercised                         |       | (45,680    | )          | 15.00                                   |       |                                                 |       |                                     |       |
|                              |       |       |       |                                    |       |                                                 |       |                                     |       |
| Forfeited or  expired             |       | (69,301    | )          | 15.02                                   |       |                                                 |       |                                     |       |
|                              |       |       |       |                                    |       |                                                 |       |                                     |       |
| Outstanding at  June 30, 2006     |       | 2,556,748  |       | $                                       | 18.50      |                                                 | 8.3        |                                     | $          | 14,362 |   |
|                              |       |       |       |                                    |       |                                                 |       |                                     |       |
| Exercisable at June 30,  2006     |       | 2,124,016  |       | $                                       | 17.38      |                                                 | 8.5        |                                     | $          | 14,226 |   |

----

**(a)****                         **Theaggregate intrinsic value represents the amount by which the fair value of theunderlying stock at period end exceeds the stock option exercise price.

The total intrinsic value, the difference between theexercise price and the market price on the date of exercise, of all optionsexercised during the six months ended June 30, 2006 was $0.5 million. As ofJune 30, 2006, there was $3.0 million of total unrecognized compensation costrelated to unvested stock options. The cost is expected to be recognized over aweighted-average period of 3.7 years.

*Restricted Stock, Restricted Stock Units andDeferred Stock Units*

Shares of restricted stock granted under the 2004 Planto senior management and non-employee directors do not have an exercise price.The share-based compensation expense associated with the restricted stock isbased on the quoted market price of the Company’s shares of common stock on thedate of grant. The restricted stock awards for senior management vest either onan accelerated basis contingent upon the executive’s continued employment inone-third installments over three years provided that certain pre-establishedannual percentage increases in the Company’s earnings per share are attained oron the seventh anniversary of the date of grant if the executive remains in ouremploy for seven years. The restricted stock awards for non-employee directorsvest (depending on the grant) either evenly over two years or at the end ofthree years.

RSUs granted under the 2004 Plan to management do nothave an exercise price. The share-based compensation expense associated withthe RSUs is based on the quoted market price of the Company’s shares of commonstock on the date of grant. One half of the RSUs vest on an accelerated basiscontingent upon the executive’s continued employment in two installments overtwo years provided that certain pre-established annual percentage increases inthe Company’s earnings per share are attained and one half vest evenly overthree years.

DSUs granted under the 2004 Plan to non-employeedirectors do not have an exercise price. The share-based compensation expenseassociated with the DSUs is based on the quoted market price of the Company’sshares of common stock on the date of grant. DSUs vest evenly over thenon-employee directors’ service term. All DSUs are to be settled in shares ofthe Company’s common stock upon termination of the non-employee directors’service.

In prior periods, unearned stock compensation wasrecorded as deferred compensation within stockholders’ equity at the date ofthe award based on the quoted market price of the Company’s common stock on thedate of grant and amortized to expense using the straight-line method from thegrant date through the vesting date. Upon adoption of SFAS No. 123(R), the $1.9million of deferred compensation as of December 30, 2005 was required to becharged against additional paid-in capital.

10

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A summary status of restricted stock, RSUs and DSUs asof June 30, 2006, and changes during the six months then ended is presentedbelow:
| ** **                        | ** ** | **Restricted Stock** | ** ** | **Restricted Stock Units**                    | ** ** | **Deferred Stock Units** | ** ** |
|-----------------------------------|------------|---------------------------|------------|---------------------------------------------------------|------------|------------------------------------|------------|
| ** **                        | ** ** | **Shares**                | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** | **Shares**                         | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** | **Shares** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
|                              |       |                      |       |                                                    |       |                               |       |   |   |   |   |   |   |
| Outstanding at  December 30, 2005 |       | 190,820                   |       | $                                                       | 15.11      |                               | —     |   | $ | — |   | — |   | $ | — |   |
|                              |       |                      |       |                                                    |       |                               |       |   |   |   |   |   |   |
| Granted                           |       | —                    |       | —                                                  |       | 173,345                            |       | 23.32 |   | 10,162 |   | 25.62 |   |
|                              |       |                      |       |                                                    |       |                               |       |   |   |   |   |   |   |
| Vested                            |       | (63,607                   | )          | 15.00                                                   |       | —                             |       | — |   | — |   | — |   |
|                              |       |                      |       |                                                    |       |                               |       |   |   |   |   |   |   |
| Forfeited                         |       | (7,675                    | )          | 15.00                                                   |       | —                             |       | — |   | — |   | — |   |
|                              |       |                      |       |                                                    |       |                               |       |   |   |   |   |   |   |
| Outstanding at June 30,  2006     |       | 119,538                   |       | $                                                       | 15.18      |                               | 173,345    |   | $ | 23.32 |   | 10,162 |   | $ | 25.62 |   |
|                                   |            |                           |            |                                                         |            |                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The total fair value of restricted stock vested duringthe six months ended June 30, 2006 was $1.5 million. No restricted stock vestedduring the six months ended July 1, 2005. As of June 30, 2006, there was $4.8million of total unrecognized compensation cost related to nonvested restrictedstock, RSUs and DSUs. The cost is expected to be recognized over aweighted-average period of 1.4 years.

**3.     EARNINGS PER SHARE**

Earnings per share for all periods has been computedin accordance with SFAS No. 128, *Earnings per Share*.Basic earnings per share is computed by dividing net income applicable tocommon stockholders by the weighted-average number of shares of common stockoutstanding during the period. Diluted earnings per share is computed bydividing net income applicable to common stockholders by the weighted-averagenumber of shares of common stock outstanding during the period as adjusted forthe potential dilutive effect of stock options and non-vested shares ofrestricted stock, RSUs and DSUs using the treasury stock method. The followingsummarizes the shares of common stock used to calculate earnings per shareincluding the potentially dilutive impact of stock options, restricted stock,RSUs and DSUs, calculated using the treasury stock method, as included in thecalculation of diluted weighted-average shares:
| ** **                                        | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                        | ** ** | **June 30,**                | ** ** | **July 1,**               | ** ** | **June 30,** | ** ** | **July 1,** | ** ** |
| ** **                                        | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                        | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average  shares outstanding—basic   |       | 32,121,936                       |       | 31,959,119                     |       | 32,106,534 |   | 31,938,147 |   |
|                                              |       |                             |       |                           |       |   |   |   |   |
| Dilutive shares  resulting from:                  |       |                             |       |                           |       |   |   |   |   |
| Stock options                                     |       | —                           |       | 327,636                        |       | 469,797 |   | 313,919 |   |
| Restricted stock                                  |       | —                           |       | 77,257                         |       | 58,468 |   | 76,207 |   |
| Restricted stock units                            |       | —                           |       | —                         |       | 32,146 |   | — |   |
| Deferred stock units                              |       | —                           |       | —                         |       | 750 |   | — |   |
|                                              |       |                             |       |                           |       |   |   |   |   |
| Weighted average  shares outstanding—diluted |       | 32,121,936                       |       | 32,364,012                     |       | 32,667,695 |   | 32,328,273 |   |
|                                              |       |                             |       |                           |       |   |   |   |   |

 

During the three months ended June 30, 2006, potentialcommon shares totaling 628,946 were excluded from the computation of loss pershare because their effect would be anti-dilutive. Potential common sharesinclude stock options, restricted stock, RSUs and DSUs.

During the three months ended June 30, 2006 and July1, 2005, options to purchase 279,007 shares and 480,989 shares of common stock,respectively, were excluded from the computations of diluted weighted-averageshares outstanding because the exercise prices of those options are greaterthan the average market value of common stock and the effect would beanti-dilutive. During the six months ended June 30, 2006 and July 1, 2005,options to purchase 252,783 shares and 480,989 shares of common

11

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stock, respectively, were excluded from thecomputations of diluted weighted-average shares outstanding because theexercise prices of those options are greater than the average market value ofcommon stock and the effect would be anti-dilutive.

**4.**              DEBT

Long-term debt at June 30, 2006 and December 30, 2005consists of the following (in thousands):

 
| ** **                                                                   | ** ** | **June 30,** | ** ** | **December 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                   | ** ** | **2006**          | ** ** | **2005**              | ** ** |
|                                                                         |       |              |       |                  |       |
| Term loans                                                                   |       | $                 | 100,000    |                  | $          | 148,800 |   |
| Note payable                                                                 |       | 3,275             |       | 3,275                 |       |
| 81¤8%  senior subordinated notes, net of unamortized discount of $1,434 |       | 198,566           |       | —                |       |
| 111¤2%  senior subordinated notes                                       |       | —            |       | 130,000               |       |
|                                                                         |       |              |       |                  |       |
|                                                                         |       | 301,841           |       | 282,075               |       |
| Less current  portion                                                        |       | (1,000            | )          | (1,400                | )          |
|                                                                         |       |              |       |                  |       |
|                                                                         |       | $                 | 300,841    |                  | $          | 280,675 |   |
|                                                                         |       |              |       |                  |       |

 

In April 2003, Interline New Jersey 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 4.0% per annum, with principal due in full in April2010.

In May 2003, Interline New Jersey completed anoffering of $200.0 million of 111¤2% seniorsubordinated notes due 2011 and entered into a $205.0 million senior securedcredit facility.

On December 20, 2004, Interline New Jersey elected toredeem $70.0 million of the 111¤2% seniorsubordinated notes using proceeds from the Company’s IPO and gave the 30-daynotice required by the indenture. In January 2005, the Company recorded a losson extinguishment of debt of $10.3 million, consisting of the write-off ofdeferred financing costs of $2.3 million and the redemption premium of $8.1million on the $70.0 million redemption of 111¤2% seniorsubordinated notes. On June 23, 2006, Interline New Jersey repurchased theremaining $130.0 million of 111⁄2% senior subordinated notes as part of therefinancing transactions described below.

In December 2004, Interline New Jersey amended itsterm loan facility and revolving loan facility. The term loan was reduced to$100.0 million from $140.0 million and the revolving loan facility wasincreased to $100.0 million from $65.0 million. As part of the amendment inDecember 2004, Interline New Jersey paid down $31.3 million of the term loanusing proceeds from the Company’s IPO. Interline New Jersey also amended itscredit facility on July 7, 2005, in connection with the acquisition ofCopperfield, to permit the incurrence of an additional $50.0 million term loan,having substantially the same terms as the existing term loan. On August 8,2005, Interline New Jersey again amended its credit facility to lower theinterest rate spreads applicable to the additional $50.0 million term loan. Theamended credit facility provided for aggregate commitments of $250.0 million,consisting of (1) a revolving loan facility of $100.0 million, of which aportion not exceeding $20.0 million was available in the form of letters ofcredit, and (2) a term loan facility of $150.0 million.

Borrowings under the amended term loan facility andrevolving loan facility bore interest, at Interline New Jersey’s option, ateither LIBOR or at the alternate base rate plus a spread. The indebtednessunder the amended credit facility was guaranteed by the Company and by thedomestic subsidiaries of Interline New Jersey. Interest rates in effect onborrowings under the term loan facilities at June 23, 2006, the date suchborrowings were paid off, ranged from 7.72% for LIBOR based borrowings and9.25% for prime based borrowings under the $100.0 million tranche B-1 term loanand 7.22% for LIBOR based borrowings and 9.00% for prime based borrowings underthe $50.0 million tranche B-2 term loan. Outstanding letters of credit underthe revolving loan facility were subject to a per annum fee equal to theapplicable spread over the adjusted LIBOR for revolving loans. The term loanfacility was due to mature on December 31, 2010 and the revolving loan facilitywas due to mature on May 31, 2008. Debt issuance costs capitalized inconnection with the amended credit facility were $1.1 million. On June 23,2006, Interline New Jersey paid off the term loan facility as part of therefinancing transactions described below.

In June 2006, Interline New Jersey completed a seriesof refinancing transactions consisting of (1) an offering of $200.0 million of 81¤8%senior subordinated notes due 2014 and (2) entering into a $330.0 million bankcredit facility. The new bank credit facility consists of a $100.0 million7-year term loan, a $130.0 million 7-year delayed draw term loan and a $100.0million 6-year

12

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revolving credit facility of which a portion notexceeding $40.0 million is available in the form of letters of credit. Thedelayed draw term loan is available solely to fund the acquisition ofsubstantially all of the assets of American Sanitary Incorporated and theacquisition-related fees and expenses (see Note 6. Subsequent Events). Theproceeds from the 81¤8%senior subordinated notes and the new bank credit facility were used torepurchase the 111⁄2% senior subordinated notes and to repay the indebtednessunder the prior credit facility. The 111¤2% seniorsubordinated notes were repurchased at a price equal to 110.51% of theirprincipal amount.

In connection with the repurchase of the 111¤2%senior subordinated notes and the repayment of the prior credit facility,Interline New Jersey recorded a loss on early extinguishment of debt of $20.7million. The loss was comprised of $13.7 million in tender premiums associatedwith the repurchase of the 111¤2%senior subordinated notes and a non-cash charge of $7.0 million in deferred financingcosts associated with the repurchase of the 111⁄2% senior subordinated notes andthe repayment of the prior credit facility.

The 81¤8% seniorsubordinated notes were priced at 99.3%, or $198.6 million, of their principalamount, representing a yield to maturity of 81¤4%. Thediscount of $1.4 million will be amortized over the term of the 81¤8% seniorsubordinated notes. The 81¤8%senior subordinated notes mature on June 15, 2014 and interest is payable onJune 15 and December 15 of each year beginning on December 15, 2006. Debtissuance costs capitalized in connection with the 81¤8% seniorsubordinated notes were $5.5 million.

Borrowings under the new term loan, the delayed drawfacility and the new revolving credit facility bear interest, at Interline NewJersey’s option, at either LIBOR plus 1.75% or at the alternate base rate plus0.75%. As of June 30, 2006, the interest rate in effect with respect to the newterm loan and the delayed draw facility was 7.23% for the LIBOR option and9.00% for the alternate base rate option. Outstanding letters of credit underthe new revolving credit facility are subject to a per annum fee equal to theapplicable margin under the new revolving credit facility. The interest ratemargin is subject to pricing adjustments at the end of each fiscal quarterbased on net total indebtedness to consolidated EBITDA. The new term loan andthe delayed draw facility mature on June 23, 2013 and the revolving loanfacility matures on June 23, 2012. Amounts under the new term loan and thedelayed draw facility are due and payable in quarterly installments equal to1.0% of the principal amount on an annual basis through June 23, 2013, with thebalance payable in one final installment at the maturity date. Debt issuancecosts capitalized in connection with the new term loan and the new revolvingcredit facility were $1.8 million.

The new bank credit facility, which is secured bysubstantially all of the assets of Interline New Jersey and is guaranteed bythe Company and by the domestic subsidiaries of Interline New Jersey, containsaffirmative, negative and financial covenants that limit Interline New Jersey’sability to incur additional indebtedness, pay dividends on its common stock orredeem, repurchase or retire its common stock or subordinated indebtedness,make certain investments, sell assets, and consolidate, merge or transferassets, and that require Interline New Jersey to maintain certain financialratios as of the last day of each fiscal quarter, including a minimum ratio ofconsolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”)to consolidated cash interest expense and a maximum ratio of net totalindebtedness to consolidated EBITDA. Interline New Jersey and the Company werein compliance with all covenants at June 30, 2006.

In connection with the new bank credit facility,Interline New Jersey is required to pay administrative fees, commitment fees,letter of credit issuance and administration fees and certain expenses and toprovide certain indemnities, all of which are customary for financings of thistype. The new bank credit facility also allows for certain incremental termloans and incremental commitments under the revolving credit facility which areavailable to Interline New Jersey to repay indebtedness and make acquisitionsif certain conditions, including various financial ratios, are met.

The debt instruments of Interline New Jersey,primarily the credit facility and the indenture governing the terms of the 81¤8%senior subordinated notes, contain significant restrictions on the payment ofdividends and distributions to the Company by Interline New Jersey. InterlineNew Jersey’s credit facility allows it to pay dividends, make distributions tothe Company or make investments in the Company in an aggregate amount not toexceed $2.0 million during any fiscal year, so long as Interline New Jersey isnot in default or would be in default as a result of such payments. Inaddition, ordinary course distributions for overhead (up to $3.0 million annually)and taxes are permitted, as are annual payments of up to $7.5 million inrespect of the Company’s stock option or other benefit plans for management oremployees and (provided Interline New Jersey is not in default) aggregatepayments of up to $40.0 million depending on the pro forma net leverage ratioas of the last day of the previous quarter. In addition, the indenture for the81¤8%senior subordinated notes generally restricts the ability of Interline NewJersey to pay distributions to the Company and to make advances to, orinvestments in, the Company to an amount generally equal to 50% of the netincome of Interline New Jersey, plus an amount equal to the net proceeds fromcertain equity issuances, subject to compliance with a leverage ratio and nodefault having occurred and continuing. The indenture also contains certainpermitted exceptions including (1) allowing the Company to pay its franchisetaxes and other fees required to maintain its corporate existence, to pay forgeneral corporate and overhead expenses and to pay expenses incurred inconnection with certain financing, acquisition or disposition transactions, inan aggregate amount not to exceed $10.0 million per year; (2) allowing certaintax payments; and (3) allowing certain permitted distributions up to $75million.

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As of June 30, 2006, Interline New Jersey had $83.2million available under its revolving credit facility. Total letters of creditissued under this facility as of June 30, 2006 were $16.8 million. There wereno borrowings under the revolving credit facility as of June 30, 2006.

**5.**            SUBSIDIARYGUARANTORS

In June 2006, Interline New Jersey issued $200.0million of 81¤8%senior subordinated notes due 2014 and entered into a $330.0 million bankcredit facility (see Note 4. Debt). The 81¤8% seniorsubordinated notes and the bank credit facility are fully and unconditionallyguaranteed, jointly and severally, on a subordinated basis by the Company andall of Interline New Jersey’s wholly-owned domestic subsidiaries: Wilmar Holdings,Inc., Wilmar Financial, Inc. and Glenwood Acquisition LLC.  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.

The Company is a holding company whose only asset isthe stock of its subsidiaries. The Company conducts virtually all of its businessoperations through Interline New Jersey. Accordingly, the Company’s onlymaterial sources of cash are dividends and distributions with respect to itsownership interests in Interline New Jersey that are derived from the earningsand cash flow generated by Interline New Jersey. Since the Company has noindependent assets or operations and subsidiaries not guaranteeing the 81¤8%senior subordinated notes and the bank credit facility are minor, condensedconsolidating financial information for the Company and subsidiaries is notpresented.

**6.**              SUBSEQUENT EVENTS

On July 3, 2006, Interline New Jersey acquired all ofthe outstanding equity interests of AmSan, LLC (“AmSan”) from American SanitaryIncorporated for $127.5 million in cash. AmSan, which is headquartered inDeerfield, Illinois, is a leading national distributor and direct marketer ofjanitorial and sanitary supplies. The acquisition was funded with the $130.0million delayed draw facility under Interline New Jersey’s new bank creditfacility (see Note 4. Debt). The Company has not completed the allocation ofthe purchase price.

AmSan, one of the largest national distributors in theU.S. janitorial and sanitary maintenance supply industry, offers over 40,000products to more than 44,000 customers from 43 locations in 39 states. AmSan’sprimary end markets are institutional facilities, such as schools anduniversities, health care, lodging and government properties, as well asprofessional cleaning contractors. This acquisition represents an expansion ofthe Company’s MRO product offering and institutional facilities andprofessional contractor business.

 

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**ITEM 2. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

*Referencesto “us” and “we” are to the Company. You should read the following discussionin conjunction with our unaudited condensed consolidated financial statementsand related notes included in this quarterly report, and our auditedconsolidated financial statements and related notes and Management’s Discussionand Analysis of Financial Condition and Results of Operations included in ourAnnual Report on Form 10-K filed with the SEC.*

**Forward-Looking Statements**

This reportcontains forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of 1934(the “Exchange Act”) that are subject to risks and uncertainties. You shouldnot 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 this report,you should understand that these statements are not guarantees of performanceor results. They involve risks, uncertainties and assumptions. Although webelieve that these forward-looking statements are based on reasonableassumptions, you should be aware that many factors could affect our actualfinancial results or results of operations and could cause actual results todiffer materially from those in the forward-looking statements. These factorsinclude:

·                  materialfacilities and systems disruptions and shutdowns,

·                  the highlycompetitive nature of the maintenance, repair and operations distributionindustry,

·                  economicslowdowns,

·                  general marketconditions,

·                  our ability topurchase products from suppliers on favorable terms,

·                  the length ofour supply chains,

·                  fluctuations inthe cost of commodity-based products, raw materials and fuel prices,

·                  currencyexchange rates,

·                  the loss ofsignificant customers,

·                  our ability toaccurately predict market trends,

·                  product cost andprice fluctuations due to market conditions,

·                  failure tolocate, acquire and successfully integrate acquisition candidates,

·                  dependence onkey employees,

·                  our inability toprotect trademarks,

·                  adversepublicity and litigation,

·                  our level ofdebt,

·                  interest ratefluctuations,

·                  future cashflows,

·                  changes inconsumer preferences,

·                  labor andbenefit costs, and

·                  the otherfactors described under “Part I. Item 1A—Risk Factors” in our Annual Report onForm 10-K filed with the SEC.

You should keep in mind that anyforward-looking statement made by us in this report, or elsewhere, speaks onlyas of the date on which we make it. New risks and uncertainties arise from timeto time, and it is impossible for us to predict these events or how they may affect us. Inlight of these risks and uncertainties, you should keep in mind that anyforward-looking statement made in this report or elsewhere might not occur.Notwithstanding the foregoing, all information contained in this report ismaterially accurate as of the date of this report.

**Overview**

We are a leading nationaldistributor and direct marketer of specialty maintenance, repair and operations(“MRO”) products. We stock over 50,000 plumbing, electrical, hardware, securityhardware, heating, ventilation and air conditioning and other MRO products andsell to approximately 160,000 active customer accounts. Our products areprimarily used for the repair, maintenance, remodeling and refurbishment ofproperties and non-industrial facilities. We are able to realize higheroperating margins by focusing on repair, maintenance, remodeling andrefurbishment customers, who generally make smaller, more frequent purchasesand require high levels of service. Our diverse customer base includesfacilities maintenance customers, which consist of multi-family housing,educational, lodging

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and health carefacilities; professional contractors who primarily repair and maintainproperties and non-industrial facilities; and specialty distributors, includingplumbing and hardware retailers. Our customers range in size from individualcontractors and independent hardware stores to apartment management companiesand national purchasing groups.

We market and sell ourproducts primarily through nine distinct and targeted brands, each of which isnationally recognized in the markets we serve for providing premium products atcompetitive prices with reliable same-day or next-day delivery. Wilmar, Sexauerand Maintenance USA brands generally serve our facilities maintenancecustomers; Barnett, U.S. Lock, Sun Star and Copperfield brands generally serveour professional contractor customers; Hardware Express and AF Lighting brandsgenerally serve our specialty distributors customers. Our multi-brand operatingmodel, which we believe is unique in the industry, allows us to use a singleplatform to deliver tailored products and services to meet the individual needsof each respective customer group served. We reach our markets using a varietyof sales channels, including a sales force of approximately 390 field salesrepresentatives, approximately 430 telesales and customer servicerepresentatives, a direct marketing program of approximately five million piecesannually, brand-specific websites and a national accounts sales program.We deliver our products through our network of 53 regional distributioncenters, 25 professional contractor showrooms located throughout the UnitedStates and Canada, a national distribution center, or NDC, in Nashville,Tennessee, 15 vendor managed inventory locations at large professionalcontractor customer locations and a dedicated fleet of trucks. Our broaddistribution network allows us the ability to provide reliable, same-day ornext-day delivery service to 98% of the U.S. population.

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

**Recent Developments**

On July 3, 2006, weacquired all of the outstanding equity interests of AmSan, LLC (“AmSan”) fromAmerican Sanitary Incorporated for $127.5 million in cash. AmSan, which isheadquartered in Deerfield, Illinois, is a leading national distributor anddirect marketer of janitorial and sanitary supplies. The acquisition was fundedwith the $130.0 million delayed draw facility under our new bank creditfacility (see Refinancing Transactions below). We have not completed the allocationof the purchase price.

AmSan, one of the largestnational distributors in the U.S. janitorial and sanitary maintenance supplyindustry, offers over 40,000 products to more than 44,000 customers from 43locations in 39 states. AmSan’s primary end markets are institutionalfacilities, such as schools and universities, health care, lodging andgovernment properties, as well as professional cleaning contractors. Thisacquisition represents an expansion of our (1) MRO product offering and (2)institutional facilities and professional contractor business.

**Refinancing Transactions**

On June 23, 2006,Interline New Jersey completed a series of refinancing transactions consistingof (1) an offering of $200.0 million of 81¤8% senior subordinated notes due 2014 and(2) entering into a $330.0 million bank credit facility. The new bank creditfacility consists of a $100.0 million 7-year term loan, a $130.0 million 7-yeardelayed draw term loan and a $100.0 million 6-year revolving credit facility ofwhich a portion not exceeding $40.0 million is available in the form of lettersof credit. The delayed draw term loan was drawn on July 3, 2006 to fund theacquisition of AmSan and the acquisition-related fees and expenses (see RecentDevelopments above). We used the proceeds from the 81¤8% seniorsubordinated notes and the new bank credit facility to repurchase theoutstanding 111¤2%senior subordinated notes of Interline New Jersey and to repay indebtednessunder the prior credit facility of Interline New Jersey. We repurchased the 111¤2%senior subordinated notes at a price equal to 110.51% of their principalamount.

In connection with therepurchase of the 111¤2%senior subordinated notes and the repayment of the prior credit facility, werecorded a loss on early extinguishment of debt of $20.7 million, which wascomprised of $13.7 million in tender premiums associated with the repurchase ofthe 111¤2%senior subordinated notes and a non-cash charge of $7.0 million in deferredfinancing costs associated with the repurchase of the 111¤2% seniorsubordinated notes and the repayment of the prior credit facility.

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**Accounting and Disclosure Changes**

Effective December31, 2005, we adopted the provisions of SFAS No. 123(R), *Share-BasedPayment*, using the modified prospective application transitionmethod. Under this method, the share-based compensation cost recognizedbeginning December 31, 2005 includes compensation cost for (1) all share-basedpayments granted prior to, but not vested as of December 31, 2005, based on thegrant date fair value originally estimated in accordance with the provisions ofSFAS No. 123, *Accounting for Stock-Based Compensation*,and (2) all share-based payments granted subsequent to December 30, 2005, basedon the grant date fair value estimated in accordance with the provisions ofSFAS No. 123(R). Compensation cost under SFAS No. 123(R) is recognized ratablyusing the straight-line attribution method over the expected vesting period orto the retirement eligibility date, if less than the vesting period whenvesting is not contingent upon any future performance. In addition, pursuant toSFAS No. 123(R), we are required to estimate the amount of expected forfeitureswhen calculating the compensation costs, instead of accounting for forfeitures asincurred, which was the method previously used by us. As of December 31, 2005,the cumulative effect of adopting the estimated forfeiture method was notsignificant. Prior periods are not restated under this transition method.

SFAS No. 123(R)also requires us to reflect the tax benefit from the exercise of stock optionsin the statement of cash flows as a cash inflow from financing activities.Prior to the adoption of SFAS No. 123(R), these tax benefits have beenreflected as a cash inflow from operating activities. The prior year statementof cash flows has not been restated. The tax benefit from the exercise of stockoptions was $0.2 million during the three and six months ended June 30, 2006and $0.2 million during the three and six months ended July 1, 2005.

As of June 30,2006, there was $7.8 million of total unrecognized compensation cost related tounvested stock awards. The cost is expected to be recognized over aweighted-average period of 2.3 years.

Prior to December31, 2005, we accounted for share-based compensation plans in accordance withthe provisions of Accounting Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees*, as permitted bySFAS No. 123. We elected to use the intrinsic value method of accounting foremployee and director share-based compensation expense for its non-compensatoryemployee and director stock option awards and did not recognize compensationexpense for the issuance of options with an exercise price equal to or greaterthan the market price of the underlying common stock at the date of grant. Hadwe elected to adopt the fair value approach as prescribed by SFAS No. 123,which charges earnings for the estimated fair value of stock options, our netincome and earnings per share for the three and six months ended July 1, 2005would not have been materially affected.

As a result ofadopting SFAS No. 123(R) on December 31, 2005, our income before income taxesand net income for the three months ended June 30, 2006, are $0.9 million and$0.6 million lower, respectively, than if we had continued to account forshare-based compensation under APB Opinion No. 25. Basic and diluted earningsper share are $0.02 lower for the three months ended June 30, 2006 than if wehad continued to account for share-based compensation under APB Opinion No. 25.As a result of adopting SFAS No. 123(R) on December 31, 2005, our income beforeincome taxes and net income for the six months ended June 30, 2006, are $1.6million and $1.0 million lower, respectively, than if we had continued toaccount for share-based compensation under APB Opinion No. 25. Basic anddiluted earnings per share are $0.03 lower for the six months ended June 30,2006 than if we had continued to account for share-based compensation under APBOpinion No. 25.

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**Results of Operations**

Thefollowing table presents information derived from the condensed consolidatedstatements of operations expressed as a percentage of revenues for the threeand six months ended June 30, 2006 and July 1, 2005:
| ** **                                   | ** ** | **% of Net Sales** | ** ** | ** **       | ** ** | **% of Net Sales** | ** ** | ** **        | ** ** |
|----------------------------------------------|------------|-----------------------------------|------------|------------------|------------|-----------------------------------|------------|-------------------|------------|
| ** **                                   | ** ** | ** **                        | ** ** | ** **       | ** ** | **% Increase**               | ** ** | ** **        | ** ** | ** ** | ** ** | **% Increase** | ** ** |
| ** **                                   | ** ** | **Three Months Ended**  | ** ** | **(Decrease)**   | ** ** | **Six Months Ended**    | ** ** | **(Decrease)**    | ** ** |
| ** **                                   | ** ** | **June 30,**                 | ** ** | **July 1,** | ** ** | **2006**                          | ** ** | **June 30,** | ** ** | **July 1,** | ** ** | **2006** | ** ** |
| ** **                                   | ** ** | **2006**                          | ** ** | **2005**         | ** ** | **vs. 2005**                 | ** ** | **2006**          | ** ** | **2005** | ** ** | **vs. 2005** | ** ** |
|                                         |       |                              |       |             |       |                              |       |              |       |   |   |   |   |
| Net sales                                    |       | 100.0                             | %          | 100.0            | %          | 15.6                              | %          | 100.0             | %          | 100.0 | % | 15.0 | % |
| Cost of sales                                |       | 62.0                              |       | 62.1             |       | 15.4                              |       | 61.9              |       | 61.8 |   | 15.1 |   |
| Gross profit                                 |       | 38.0                              |       | 37.9             |       | 15.8                              |       | 38.1              |       | 38.2 |   | 14.7 |   |
|                                         |       |                              |       |             |       |                              |       |              |       |   |   |   |   |
| Operating  Expenses:                         |       |                              |       |             |       |                              |       |              |       |   |   |   |   |
| Selling, general and administrative expenses |       | 26.9                              |       | 26.8             |       | 16.1                              |       | 27.2              |       | 27.1 |   | 15.4 |   |
| Depreciation and amortization                |       | 1.5                               |       | 1.6              |       | 8.9                               |       | 1.5               |       | 1.6 |   | 9.7 |   |
| Total operating expense                      |       | 28.4                              |       | 28.3             |       | 15.7                              |       | 28.7              |       | 28.6 |   | 15.1 |   |
| Operating income                             |       | 9.6                               |       | 9.6              |       | 16.2                              |       | 9.4               |       | 9.5 |   | 13.4 |   |
|                                         |       |                              |       |             |       |                              |       |              |       |   |   |   |   |
| Loss on  extinguishment of debt              |       | (8.8                              | )          | 0.0              |       | 100.0                             |       | (4.5              | )          | (2.6 | ) | 100.2 |   |
| Interest expense                             |       | (3.0                              | )          | (2.8             | )          | 21.5                              |       | (3.0              | )          | (3.0 | ) | 16.0 |   |
| Interest income                              |       | 0.1                               |       | 0.0              |       | 2,800.0                           |       | 0.1               |       | 0.0 |   | 85.7 |   |
| Other income                                 |       | 0.1                               |       | 0.1              |       | 8.4                               |       | 0.1               |       | 0.1 |   | (10.8 | ) |
| (Loss) Income before income taxes            |       | (2.0                              | )          | 6.8              |       | (133.8                            | )          | 2.0               |       | 4.0 |   | (43.7 | ) |
| Income tax  benefit (provision)              |       | 0.8                               |       | (2.6             | )          | (134.3                            | )          | (0.8              | )          | (1.6 | ) | (43.2 | ) |
| Net (loss)  income                           |       | (1.2                              | )%         | 4.2              | %          | (133.5                            | )%         | 1.2               | %          | 2.5 | % | (44.0 | )% |
|                                         |       |                              |       |             |       |                              |       |              |       |   |   |   |   |

 

Thefollowing discussion includes references to the term average daily sales andaverage organic daily sales. Average daily sales are defined as sales for aperiod of time divided by the number of shipping days in that period of time.Average organic daily sales are defined as sales from a period of time dividedby the number of shipping days in that period of time excluding any sales fromacquisitions made subsequent to the beginning of the prior year period. Thecomputation of average organic daily sales is as follows (amounts inthousands):
| ** **                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                  | ** ** | **June 30,**                | ** ** | **July 1,**               | ** ** | ** ** | ** ** | **June 30,** | ** ** | **July 1,** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **% Variance** | ** ** | **2006** | ** ** | **2005** | ** ** | **% Variance** | ** ** |
| ** **                  | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net Sales                   |       | $                                | 235,409    |                           | $          | 203,666 |   | 15.6 | % | $ | 460,083 |   | $ | 400,157 |   | 15.0 | % |
| Less:  Acquisition          |       | (7,653                           | )          |                           |       |   |   | (18,615 | ) |   |   |   |   |
| Organic Sales               |       | $                                | 227,756    |                           | $          | 203,666 |   | 11.8 | % | $ | 441,468 |   | $ | 400,157 |   | 10.3 | % |
|                        |       |                             |       |                           |       |   |   |   |   |   |   |   |   |
| Daily Sales:                |       |                             |       |                           |       |   |   |   |   |   |   |   |   |
| Ship Days                   |       | 64                               |       | 64                             |       |   |   | 128 |   | 129 |   |   |   |
| Average Daily Sales         |       | $                                | 3,678      |                           | $          | 3,182 |   | 15.6 | % | $ | 3,594 |   | $ | 3,102 |   | 15.9 | % |
| Average Organic Daily Sales |       | $                                | 3,559      |                           | $          | 3,182 |   | 11.8 | % | $ | 3,449 |   | $ | 3,102 |   | 11.2 | % |

 

Averageorganic daily sales is presented herein because we believe it to be relevantand useful information to our investors since it is used by our management toevaluate the operating performance of our business, as adjusted to exclude theimpact of the acquisition of CCS Enterprises, Inc., or Copperfield, and compareour organic operating performance with that of our competitors. However,average organic daily sales is not a measure of financial performance underGAAP and it should be considered in addition to, but not as a substitute for,other measures of financial performance reported in accordance with GAAP, suchas net sales. Management utilizes average organic daily sales as an operatingperformance measure in conjunction with GAAP measures such as net sales.

*Overview*.   During the second quarter of 2006, we signed anagreement to purchase all of the outstanding equity interests of AmSan, anational distributor of janitorial and sanitary maintenance supply productswith annual sales of approximately $245 million offering over 40,000 productsto more than 44,000 customers from 43 locations in 39 states. This acquisitionwas closed on July 3, 2006 and financed as part of a comprehensive series ofrefinancing transactions which substantially lowered our overall cost of debt.

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* *

During the secondquarter, we continued to benefit from the strength in the three core customerend markets that we serve: facilities maintenance, professional contractors andspecialty distributors. Average daily sales grew 15.6% during the second quarterincluding 11.8% average organic daily sales growth and 3.8% average daily salesgrowth attributable to our July 2005 acquisition of Copperfield. Approximately5-6% of our sales growth was driven by price during the second quarter ascompared to 3-4% in the first quarter of 2006. This increase was primarilydriven by the sale of high copper content products such as copper tubing,copper sweat fittings and building wire. The sales of these product representedless than 5% of our consolidated sales in the second quarter. Our gross marginsincreased 10 basis points during the quarter as we were able to successfullymanage price increases from our suppliers. We continued to see the benefits ofeconomies of scale and diminishing marginal expense in the area of freight anddistribution center labor. Operating income for the quarter was 9.6% of sales,the same as the prior year period, as we continued to invest in organic growthinitiatives at a rate of approximately $1.5 million per quarter including theexpansion of our national accounts program, the addition of field sales andtelesales professionals, the addition of new products and geographic expansion.

*Three Months Ended June 30, 2006Compared to Three Months Ended July 1, 2005*

*Net Sales.**  *Our net sales increased by$31.7 million, or 15.6%, to $235.4 million in the three months endedJune 30, 2006 from $203.7 million in the three months ended July 1, 2005.Of the $31.7 million increase, $7.7 million was attributable to our Copperfieldacquisition with the remaining driven by continued strong demand for ourproducts, new sales and growth initiatives and from price increases.

*Gross Profit.**  *Gross profit increased by$12.2 million, or 15.8%, to $89.5 million in the three months endedJune 30, 2006 from $77.3 million in the three months ended July 1, 2005.Gross profit margins increased 10 basis points to 38.0% for the three monthsended June 30, 2006 compared to 37.9% for the three months ended July 1, 2005.This increase in our gross profit margins is primarily a result of higher grossmargins on Copperfield sales offset in part by a change in sales mix related tothe increase of over 10% in the sale of big ticket items such as HVACequipment, water heaters and appliances.

*Selling, General andAdministrative Expenses.**  *SG&A expenses increased by $8.8 million, or16.1%, to $63.3 million in the three months ended June 30, 2006 from$54.5 million in the three months ended July 1, 2005. Increased SG&Aexpenses related to our Copperfield acquisition accounted for $2.3 million ofthe $8.8 million increase. Excluding these expenses, SG&A expensesincreased 11.9% in the three months ended June 30, 2006. Certain expenseswithin SG&A, such as the costs of running regional distribution centers,delivery expenses and selling expenses fluctuate with sales volume. Theincrease in SG&A expenses included these increases, as well as increasedinvestment in new sales and marketing initiatives and additional share-basedcompensation associated with restricted stock units, deferred stock units andstock options during the three months ended June 30, 2006. SG&A expenses asa percentage of sales was 26.9% in the three months ended June 30, 2006compared to 26.8% in the three months ended July 1, 2005. This increase wasprimarily due to the additional share-based compensation associated withrestricted stock units, deferred stock units and stock options during the threemonths ended June 30, 2006.

*Depreciation andAmortization.**  *Depreciationand amortization expense increased by $0.3 million, or 8.9%, to $3.5million in the three months ended June 30, 2006 from $3.2 million in thethree months ended July 1, 2005. This increase was due to our Copperfieldacquisition.

*Operating Income.**  *As a result of the foregoing,operating income increased by $3.2 million, or 16.2%, to $22.7 million inthe three months ended June 30, 2006 from $19.5 million in the three monthsended July 1, 2005. As a percent of sales, operating income remained consistentat 9.6% in the three months ended June 30, 2006 compared to the three monthsended July 1, 2005.

*Loss on Extinguishment ofDebt.*   Losson extinguishment of debt was $20.7 million for the three months ended June 30,2006. In connection with the offering of $200.0 million of 81¤8%senior subordinated notes and entering into a $330.0 million bank creditfacility in June 2006, we repurchased the 111¤2% seniorsubordinated notes of Interline New Jersey and repaid the indebtedness underthe prior credit facility of Interline New Jersey. The 111¤2%senior subordinated notes were repurchased at a price equal to 110.51% of theirprincipal amount. In connection with the repurchase of the 111¤2% seniorsubordinated notes and the repayment of the prior credit facility, we recordeda loss on early extinguishment of debt of $20.7 million. The loss was comprisedof $13.7 million in tender premiums associated with the repurchase of the 111¤2%senior subordinated notes and a non-cash charge of $7.0 million in deferredfinancing costs associated with the repurchase of the 111¤2% seniorsubordinated notes and the repayment of the prior credit facility.

*Interest Expense.**  *Interest expense increased by $1.2million in the three months ended June 30, 2006 to $7.0 million from$5.7 million in the three months ended July 1, 2005. This increase was dueto higher overall debt balances resulting from the additional $50.0 millionterm loan incurred during the three months ended September 30, 2005 as well ashigher interest rates.

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*Provision for IncomeTaxes.**  *Theeffective tax rate for the three months ended June 30, 2006 was 39.0% comparedto 38.4% in the three months ended July 1, 2005. The increase in the effectivetax rate was due primarily to higher state income taxes, the decrease in thebenefit of extraterritorial income exclusions offset by a benefit from the losson extinguishment of debt.

*Six Months Ended June 30, 2006Compared to Six Months Ended July 1, 2005*

*Net Sales.**  *Our net sales increased by$59.9 million, or 15.0%, to $460.1 million in the six months endedJune 30, 2006 from $400.2 million in the six months ended July 1, 2005,with one less shipping day than the comparable prior year period. Of the $59.9million increase, $18.6 million was attributable to our Copperfield acquisitionwith the remaining driven by continued strong demand for our products, newsales and growth initiatives and from price increases.

*Gross Profit.**  *Gross profit increased by$22.5 million, or 14.7%, to $175.2 million in the six months endedJune 30, 2006 from $152.7 million in the six months ended July 1, 2005.Gross profit margins decreased 10 basis points to 38.1% for the six monthsended June 30, 2006 compared to 38.2% for the six months ended July 1, 2005.This decline in our gross profit margins is primarily a result of a change insales mix related to the increase of over 20% in the sale of big ticket itemssuch as HVAC equipment, water heaters and appliances offset in part by highergross margins on Copperfield sales.

*Selling, General andAdministrative Expenses.**  *SG&A expenses increased by $16.7 million, or15.4%, to $125.0 million in the six months ended June 30, 2006 from$108.3 million in the six months ended July 1, 2005. Increased SG&Aexpenses related to our Copperfield acquisition accounted for $5.8 million ofthe $16.7 million increase. Excluding these expenses, SG&A expensesincreased 10.1% in the six months ended June 30, 2006. Certain expenses withinSG&A, such as the costs of running regional distribution centers, deliveryexpenses and selling expenses fluctuate with sales volume. The increase inSG&A expenses included these increases, as well as increased investment innew sales and marketing initiatives and additional share-based compensationassociated with grants of restricted stock units, deferred stock units andstock options during the six months ended June 30, 2006. SG&A expenses as apercentage of sales was 27.2% in the six months ended June 30, 2006 compared to27.1% in the six months ended July 1, 2005. This increase was primarily due to theadditional share-based compensation associated with grants of restricted stockunits, deferred stock units and stock options during the six months ended June30, 2006.

*Depreciation andAmortization.**  *Depreciationand amortization expense increased by $0.6 million, or 9.7%, to $7.0million in the six months ended June 30, 2006 from $6.3 million in the sixmonths ended July 1, 2005. This increase was due to our Copperfieldacquisition.

*Operating Income.**  *As a result of the foregoing,operating income increased by $5.1 million, or 13.4%, to $43.3 million inthe six months ended June 30, 2006 from $38.1 million in the six months endedJuly 1, 2005. As a percent of sales, operating income decreased to 9.4% in thesix months ended June 30, 2006 from 9.5% in the six months ended July 1, 2005.This decrease was primarily due to additional share-based compensationassociated with grants of restricted stock units, deferred stock units andstock options during the six months ended June 30, 2006.

*Loss on Extinguishment ofDebt.*   Loss on extinguishment of debt was $20.7million for the six months ended June 30, 2006 compared to $10.3 million forthe six months ended July 1, 2005. In connection with the offering of $200.0million of 81¤8%senior subordinated notes and entering into a $330.0 million bank creditfacility in June 2006, we repurchased the 111¤2% seniorsubordinated notes of Interline New Jersey and repaid the indebtedness underthe prior credit facility of Interline New Jersey. The 111¤2% seniorsubordinated notes were repurchased at a price equal to 110.51% of theirprincipal amount. In connection with the repurchase of the 111¤2% seniorsubordinated notes and the repayment of the prior credit facility, we recordeda loss on early extinguishment of debt of $20.7 million. The loss was comprisedof $13.7 million in tender premiums associated with the repurchase of the 111¤2%senior subordinated notes and a non-cash charge of $7.0 million in deferredfinancing costs associated with the repurchase of the 111¤2% seniorsubordinated notes and the repayment of the prior credit facility. During thesix months ended July 1, 2005, we recorded a $10.3 million loss on the earlyextinguishment of debt consisting of $8.1 million in redemption premium and$2.3 million of deferred financing written-offs. The $10.3 million loss wasrecorded due to our redemption of $70.0 million of the 111¤2% seniorsubordinated notes. The redemption was made 30 days after the closing of ourinitial public offering, or IPO, in accordance with the redemption provision ofthe indenture governing the 111¤2%senior subordinated notes.

*Interest Expense.**  *Interest expense increased by $1.9million in the six months ended June 30, 2006 to $13.9 million from$12.0 million in the six months ended July 1, 2005. This increase was dueto higher overall debt balances resulting from the additional $50.0 million termloan incurred during the three months ended September 30, 2005 as well ashigher interest rates, offset by the early extinguishment of $70.0 million of 111¤2%senior subordinated notes during the three months ended April 1, 2005.

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*Provision for IncomeTaxes.*   Theeffective tax rate for the six months ended June 30, 2006 was 38.9% compared to38.6% in the six months ended July 1, 2005. The increase in the effective taxrate was due primarily to higher state income taxes and the decrease in thebenefit of extraterritorial income exclusions offset by a benefit from the losson extinguishment of debt.

**Liquidity and Capital Resources**

*Overview*

We are a holding companywhose only asset is the stock of our subsidiaries. We conduct virtually all ofour business operations through Interline New Jersey. Accordingly, our onlymaterial sources of cash are dividends and distributions with respect to ourownership interests in Interline New Jersey that are derived from the earningsand cash flow generated by Interline New Jersey.

The debt instruments ofInterline New Jersey, primarily the new credit facility entered into on June23, 2006 and the indenture governing the terms of the 81¤8%senior subordinated notes, contain significant restrictions on the payment ofdividends and distributions to us by Interline New Jersey. Interline NewJersey’s credit facility allows it to pay dividends, make distributions to usor make investments in us in an aggregate amount not to exceed $2.0 millionduring any fiscal year, so long as Interline New Jersey is not in default orwould be in default as a result of such payments. In addition, ordinary coursedistributions for overhead (up to $3.0 million annually) and taxes arepermitted, as are annual payments of up to $7.5 million in respect of our stockoption or other benefit plans for management or employees and (providedInterline New Jersey is not in default) aggregate payments of up to $40.0million depending on the pro forma net leverage ratio as of the last day of theprevious quarter. In addition, the indenture for the 81¤8% seniorsubordinated notes generally restricts the ability of Interline New Jersey topay distributions to us and to make advances to, or investments in, us to anamount generally equal to 50% of the net income of Interline New Jersey, plusan amount equal to the net proceeds from certain equity issuances, subject tocompliance with a leverage ratio and no default having occurred and continuing.The indenture also contains certain permitted exceptions including (1) allowingus to pay our franchise taxes and other fees required to maintain our corporateexistence, to pay for general corporate and overhead expenses and to payexpenses incurred in connection with certain financing, acquisition ordisposition transactions, in an aggregate amount not to exceed $10.0 millionper year; (2) allowing certain tax payments; and (3) allowing certain permitteddistributions up to $75 million.

On June 23, 2006,Interline New Jersey completed a series of refinancing transactions consistingof (1) an offering of $200.0 million of 81¤8% seniorsubordinated notes due 2014 and (2) entering into a $330.0 million bank creditfacility. The new bank credit facility consists of a $100.0 million 7-year termloan, a $130.0 million 7-year delayed draw term loan and a $100.0 million6-year revolving credit facility of which a portion not exceeding $40.0 millionis available in the form of letters of credit. We used the proceeds from the 81¤8%senior subordinated notes and the new bank credit facility to redeem the 111¤2%senior subordinated notes and to repay our indebtedness under the prior creditfacility of Interline New Jersey. We funded our July 3, 2006 acquisition ofAmSan with the $130.0 million delayed draw facility under our new bank creditfacility. See “—Recent Developments” above.

The 81¤8%senior subordinated notes were priced at 99.3%, or $198.6 million, of theirprincipal amount, representing a yield to maturity of 81¤4%. We willamortize the discount of $1.4 million over the term of the 81¤8% seniorsubordinated notes. The 81¤8%senior subordinated notes mature on June 15, 2014 and interest is payable onJune 15 and December 15 of each year beginning on December 15, 2006. Our debtissuance costs capitalized in connection with the 81¤8% seniorsubordinated notes were $5.5 million. For a description of certain terms of the81¤8%senior subordinated notes, see Note 4 to the Unaudited Condensed ConsolidatedFinancial Statements.

As of June 30, 2006, wehad approximately $83.2 million of availability under Interline New Jersey’snew $100.0 million revolving credit facility. Historically, our capitalrequirements have been for debt service obligations, working capitalrequirements, acquisitions, the expansion and maintenance of our distributionnetwork, and upgrades of our proprietary information systems. We expect this tocontinue in the foreseeable future. Historically, we have funded theserequirements through internally generated cash flow and funds borrowed underour credit facility. We expect our cash flow from operations and the loanavailability under our credit facility to be our primary source of funds in thefuture. Letters of credit, which are issued under the revolving loan facilityunder our credit facility, are used to support payment obligations incurred forour general corporate purposes. As of June 30, 2006, we had $16.8 millionof letters of credit issued under the new credit facility. For a furtherdescription of the new credit facility, see “—Credit Facility” below.

*Cash Flow*

Net cash provided byoperating activities was $11.9 million in the six months ended June 30,2006 compared to net cash provided by operating activities of$11.8 million in the six months ended July 1, 2005. Net cash provided byoperating activities in the six months ended June 30, 2006 was higher than theprior year period primarily as a result of our increase in operating income of$5.1 million and the non-cash add-back to operating income of $2.3 million,consisting primarily of share-based compensation of $1.1

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million, depreciation andamortization of $0.6 million and provision for doubtful accounts of $0.5million. These positive effects on cash from operations were offset by changesin our accounts receivable-trade, inventory and accounts payable of $1.9million, the change in all other assets and liabilities of $4.5 million,primarily related to the change in accrued income taxes of $4.8 million. Thechange in accrued income taxes was mainly due to higher cash taxes of $3.8million, due to the timing of income tax payments. In addition, we had highercash interest expense of $4.0 million resulting from an additional $50.0million term loan obtained in July 2005, which we used for our Copperfieldacquisition, and the interest paid in conjunction with Interline New Jersey’srefinancing transactions on June 23, 2006. We paid $1.6 million of accruedinterest on the early redemption of Interline New Jersey’s $130.0 million of111⁄2% senior subordinated notes and $1.8 million of accrued interest onInterline New Jersey’s prior credit facility.

Net cash used ininvesting activities was $4.1 million in the six months ended June 30,2006 compared to $5.5 million in the six months ended July 1, 2005. Net cashused in investing activities in the six months ended June 30, 2006 and the sixmonths ended July 1, 2005 were attributable to capital expenditures made in theordinary course of business and costs related to purchases of businesses inprior periods.

Net cash used infinancing activities totaled $3.4 million in the six months ended June 30, 2006compared to $75.1 million in the six months ended July 1, 2005. Net cash usedin financing activities in the six months ended June 30, 2006 was primarilyattributable to (1) our repayment of $3.2 million of borrowings on ourrevolving credit facility and capital lease obligations partially offset by$1.1 million from stock options exercised and excess tax benefits fromshare-based compensation and (2) our repayment of $148.8 million of term debt,our repurchase of $130.0 million of our 111¤2% seniorsubordinated notes and $13.7 million in redemption premiums offset by theissuance of $198.6 million of  81¤8%senior subordinated notes, net of $1.4 million discount, and $100.0 million ofterm debt, less $7.3 million in debt issuance costs associated with theissuance of the 81¤8%senior subordinated notes and the term debt. Net cash used in financing activities in the six months ended July 1,2005 was primarily due to the early redemption of $70.0 million of InterlineNew Jersey’s 111¤2%senior subordinated notes and $8.1 million in related redemption premiums,partially offset by $2.3 million received in January 2005 for theover-allotment of shares sold to underwriters, net of expenses, in conjunctionwith our IPO and $1.7 million of proceeds received from stock optionsexercised.

*Capital Expenditures*

Capital expenditures were$3.7 million in the six months ended June 30, 2006 compared to $3.9 million inthe six months ended July 1, 2005. Capital expenditures as a percentage ofsales were 0.8% in the six months ended June 30, 2006 compared to 1.0% in thesix months ended July 1, 2005.

*Liquidity*

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

*Credit*Facility

On June 23, 2006,Interline New Jersey entered into a $330.0 million bank credit facility. Thenew bank credit facility consists of a $100.0 million 7-year term loan, a$130.0 million 7-year delayed draw term loan and a $100.0 million 6-yearrevolving credit facility of which a portion not exceeding $40.0 million isavailable in the form of letters of credit. The delayed draw term loan isavailable solely to fund the acquisition of substantially all of the assets ofAmerican Sanitary Incorporated and the acquisition-related fees and expenses (see“—Recent Developments” above).

Borrowings under the newterm loan, the delayed draw facility and the new revolving credit facility bearinterest, at Interline New Jersey’s option, at either LIBOR plus 1.75% or atthe alternate base rate plus 0.75%. As of June 30, 2006, the interest rate ineffect with respect to the new term loan and the delayed draw facility was 7.2%for the LIBOR option and 9. 0% for the alternate base rate option. Outstandingletters of credit under the revolving credit facility are subject to a perannum fee equal to the applicable margin under the revolving credit facility.The interest rate margin is subject to pricing adjustments at the end of eachfiscal quarter based on net total indebtedness to consolidated EBITDA. The newterm loan and the delayed draw facility mature on June 23, 2013 and therevolving loan facility matures on June 23, 2012. Amounts under the new termloan and the delayed draw facility are due and payable in quarterlyinstallments equal to 1.0% of the principal amount on an annual basis throughJune 23, 2013, with the balance payable in one final installment at thematurity date. Our debt issuance costs capitalized in connection with the newterm loan and the new revolving credit facility were $1.8 million.

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The new bank creditfacility, which is secured by substantially all of the assets of Interline NewJersey and is guaranteed by us and by the domestic subsidiaries of InterlineNew Jersey, contains affirmative, negative and financial covenants that limitInterline New Jersey’s ability to incur additional indebtedness, pay dividendson its 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 Interline New Jersey tomaintain certain financial ratios as of the last day of each fiscal quarter,including a minimum ratio of consolidated earnings before interest, taxes,depreciation and amortization (“EBITDA”) to consolidated cash interest expenseand a maximum ratio of net total indebtedness to consolidated EBITDA. InterlineNew Jersey and the Company were in compliance with all covenants at June 30,2006.

In connection with thenew bank credit facility, Interline New Jersey is required to payadministrative fees, commitment fees, letter of credit issuance andadministration fees and certain expenses and to provide certain indemnities,all of which are customary for financings of this type. The new bank creditfacility also allows for certain incremental term loans and incrementalcommitments under the revolving credit facility which are available toInterline New Jersey to repay indebtedness and make acquisitions if certainconditions, including various financial ratios are met.

Duringthe six months ended June 30, 2006, we borrowed periodically on the priorrevolving credit facility to accommodate our daily working capital needs. The weighted average daily outstanding balanceduring the six-month period was $0.4 million, with ordinary courseborrowings ranging from $0.0 million to $3.5 million.

Asof June 30, 2006, Interline New Jersey had $16.8 million of letters ofcredit issued under the new revolving loan facility and $100.0 millionaggregate principal outstanding under the new term loan facility.

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

**Critical Accounting Policies**

Inpreparing the unaudited condensed consolidated financial statements inconformity with accounting principles generally accepted in the United Statesof America, management is required to make certain estimates, judgments andassumptions. 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 thereported amounts of revenues and expenses during the periods presented. On anongoing basis, management evaluates these estimates and assumptions. Managementbases its estimates and assumptions on historical experience and on variousother factors 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.

Ourcritical accounting policies are included in our Annual Report on Form 10-K forthe year ended December 30, 2005 filed with the SEC. During the six monthsended June 30, 2006, there were no significant changes to any of our criticalaccounting policies.

**RecentAccounting Pronouncements**

In June 2006, theFinancial Accounting Standards Board (“FASB”) issued FASB InterpretationNo. 48 (“FIN No. 48”), *Accounting for Uncertaintyin Income Taxes — an Interpretation of FASB Statement No. 109*,which clarifies the accounting for uncertainty in income taxes recognized inaccordance with FASB Statement No. 109 (“SFAS No. 109”), *Accounting for Income Taxes*. FIN No. 48 clarifies theapplication of SFAS No. 109 by defining criteria that an individual taxposition must meet for any part of the benefit of that position to berecognized in the financial statements. Additionally, FIN No. 48 providesguidance on the measurement, derecognition, classification and disclosure oftax positions, along with accounting for the related interest and penalties.The provisions of FIN No. 48 are effective for fiscal years beginning afterDecember 15, 2006, with the cumulative effect of the change in accountingprinciple recorded as an adjustment to opening retained earnings. We arecurrently evaluating the impact that adoption of FIN No. 48 will have on ourfinancial position, results of operations and cash flows.

In June 2006, the FASBratified the consensus reached by the Emerging Issues Task Force (“EITF”) withrespect to EITF Issued No. 06-3, *How Taxes Collected fromCustomers and Remitted to Governmental Authorities Should Be Presented in theIncome Statement (That Is, Gross versus Net Presentation)*, whichaddresses how taxes imposed on a revenue producing transaction between a buyerand a customer, such as sales, use, value-added and excise and other taxesimposed at the point of sale, should be recorded in the incomestatement. The consensus reached requires that a policy decision be madeas to the presentation of taxes in the income statement. This policy should bedisclosed within the notes to the financial statements and the amount of taxesincluded in revenue, if any, should also be disclosed. This EITF iseffective for financial reports for interim and annual periods beginning afterDecember 15, 2006 with earlier application permitted. Currently, we recordsales taxes net and we will disclose such policy in our Annual Report on

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Form10-K for the fiscal year ended December 29, 2006.The adoption of this EITF will result in additional disclosure and will notchange the way we account for taxes collected and remitted.

**ITEM 3.Quantitative and Qualitative Disclosures About Market Risk**

*Commodity Price Risk*

We are aware of thepotentially unfavorable effects inflationary pressures may create throughhigher asset replacement costs and related depreciation, higher interest ratesand higher product and material costs. In addition, our operating performanceis affected by price fluctuations in copper, oil, stainless steel, aluminum,plastic and other commodities and raw materials. We seek to minimize theeffects of inflation and changing prices through economies of purchasing andinventory management resulting in cost reductions and productivity improvementsas well as price increases to maintain reasonable profit margins.

Our results of operationsin the six months ended June 30, 2006 and July 1, 2005 were favorably impactedby increases in the pricing of certain commodity-based products. Such commodityprice fluctuations have from time to time created cyclicality in our financialperformance, and could continue to do so in the future. In addition, our use ofpriced catalogs may not allow us to offset such cost increases quickly,resulting in a decrease in gross margins and profit.

*Foreign Currency Exchange Risk*

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

*Interest Rate Risk*

The fair value oflong-term debt is subject to interest rate risk. While changes in marketinterest rates may affect the fair value of our fixed-rate long-term debt, webelieve a change in interest rates would not have a material impact on ourfinancial condition, future results of operations or cash flows.

*Derivative Financial Instruments*

Historically, we enteredinto derivative financial instruments from time to time, including interestrate exchange agreements, or swaps, to manage our exposure to fluctuations ininterest rates on our debt. As of June 30, 2006, we did not have any interestrate swap exchange agreements, or swaps. Under our former swap agreements, wepay a fixed rate on the notional amount to our banks and the banks pay us avariable rate on the notional amount equal to a base LIBOR rate. Our derivativeactivities, all of which are for purposes other than trading, are initiatedwithin the guidelines of corporate risk-management policies.

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

**ITEM 4. Controls and Procedures**

*Evaluation of Disclosure Controlsand Procedures*

Our management, with theparticipation of our Chief Executive Officer and Chief Financial Officer (ourprincipal executive officer and principal financial officer), evaluated theeffectiveness of our disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2006. Based onthis evaluation, our Chief Executive Officer and Chief Financial Officerconcluded that, as of June 30, 2006, our disclosure controls and procedureswere (1) designed to ensure that material information relating to us, includingour consolidated subsidiaries, is made known to our Chief Executive Officer andChief Financial Officer by others within those entities, particularly duringthe period in which this report was being prepared and (2) effective, in thatthey provide reasonable assurance that information required to be disclosed byus in the 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.

*Changes in Internal Control overFinancial Reporting*

No change in our internal control over financialreporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)occurred during the quarter ended June 30, 2006 that has materially affected,or is reasonably likely to materially affect, our internal control overfinancial reporting.

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**PART II. OTHER INFORMATION**

**ITEM 1. Legal Proceedings**

We areinvolved in various legal proceedings that have arisen in the ordinary courseof our business and have not been fully adjudicated. These actions, whenultimately concluded and determined, will not, in the opinion of management,have a material effect upon our consolidated financial position, results ofoperations or liquidity.

**ITEM 1A. Risk Factors**

***Fluctuations in the cost of rawmaterials, fuel prices or in currency exchange rates could significantly reduceour revenues and profitability.***

As a distributor ofmanufactured products, our profitability is tied to the prices we pay to themanufacturers from which we purchase our products and to the cost oftransporting the products to us and our customers. The price that our supplierscharge us for our products is dependent in part upon the availability and costof the raw materials used to produce those products. Such raw materials areoften subject to price fluctuations, frequently due to factors beyond ourcontrol, including changes in supply and demand, general U.S. and internationaleconomic conditions, labor costs, competition and government regulations.Increases in the cost of raw materials, such as copper, have occurred in thepast and adversely impacted our operating results. Transportation prices aresignificantly dependent on fuel prices, which generally change due to factorsbeyond our control, such as changes in worldwide demand, disruptions in supply,changes in the political climate in the Middle East and other regions andchanges in government regulations. Fluctuations in raw materials and fuelprices may increase our costs and significantly reduce our revenues andprofitability.

A significant decline inraw materials, fuel and transportation costs may also adversely affect us.During the last three years, the cost of our products has increased materiallybecause of raw materials, fuel and transportation cost increases and otherdemand factors. During this period, a significant portion of our sales growthhas resulted from our price increases related to these increased costs. To theextent the costs of products decrease, the prices we charge for our productsmay correspondingly decrease, adversely affecting our revenues andprofitability.

In addition, many of oursuppliers price their products in currencies other than the U.S. dollar orincur costs of production in non-U.S. currencies. Accordingly, depreciation ofthe U.S. dollar against foreign currencies could increase the price we pay forthese products. For example, a substantial portion of our products are sourcedfrom suppliers in China. On July 21, 2005, the People’s Bank of China announcedthat the Yuan will no longer be pegged to the U.S. dollar, but will be allowedto float in a band (and, to a limited extent, increase in value) against abasket of foreign currencies, a move that increases the risk thatChinese-sourced products could become more expensive for us. Adverse currencyfluctuations have occurred in the past and have impacted our operating results.If currency fluctuations occur in the future and were prolonged, our revenuesand profitability could be significantly diminished.

***We cannot assure you that AmSanwill be successfully integrated by us.***

If we cannot successfullyintegrate the operations of AmSan with our existing operations, we mayexperience material negative consequences to our business, financial conditionor results of operations. The integration of companies that have previouslybeen operated separately involves a number of risks, including, but not limitedto:

·                  demands on management related to the increase in our size after theAmSan acquisition;

·                  the diversion of management’s attention from the management of dailyoperations to the integration of operations;

·                  difficulties in the assimilation and retention of employees;

·                  difficulties in the integration of departments, systems, includingaccounting systems, technologies, books and records and procedures, as well asin maintaining uniform standards, controls, including internal accountingcontrols, procedures and policies; and expenses of any undisclosed or potentiallegal liabilities.

Prior to the proposed acquisition, AmSan and InterlineBrands operated as separate entities. We may not be able to maintain the levelsof revenue, earnings or operating efficiency that each entity had achieved ormight achieve separately. Successful

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integration of AmSan’s operations will depend on ourability to manage those operations, realize opportunities for revenue growthpresented by strengthened product offerings and, to some degree, to eliminateredundant and excess costs.

For further information regarding factors that couldaffect our results of operations, financial position and liquidity, see therisk factors discussion provided in Item 1A of our Annual Report on Form 10-Kfor the fiscal year ended December 30, 2005. See also “Part I. Item 2—ForwardLooking Statements” above.

**ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds**

*Unregistered Sales of Equity Securities*

None

*Purchases of Equity Securities bythe Issuer*

The followingtable summarizes repurchases of our stock, comprising entirely of shares ofunvested forfeited restricted stock awards returned to us, during the threemonths ended June 30, 2006:
| **Period**                 | ** ** | **Total  Number of  Shares  Purchased** | ** ** | **Average  Price Paid  per Share** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced Plans or  Programs** | ** ** | **Maximum Number of  Shares that May Yet  Be Purchased Under  the Plans or Programs** | ** ** |
|----------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|------------|
| April 2006                 |       |                                         |       |                                         |       |                                                                                                                             |       |                                                                                                                                    |       |
| (April 1 — April  28) |       | 7,675                                        |       | $                                            | 15.00      |                                                                                                                             | —     |                                                                                                                                    | —     |   |
| May 2006                   |       |                                         |       |                                         |       |                                                                                                                             |       |                                                                                                                                    |       |
| (April 29 — May  26)  |       | —                                       |       | —                                       |       | —                                                                                                                           |       | —                                                                                                                                  |       |
| June 2006                  |       |                                         |       |                                         |       |                                                                                                                             |       |                                                                                                                                    |       |
| (May 27 — June  30)   |       | —                                       |       | —                                       |       | —                                                                                                                           |       | —                                                                                                                                  |       |
| Total                      |       | 7,675                                        |       | $                                            | 15.00      |                                                                                                                             | —     |                                                                                                                                    | —     |   |

** **

**ITEM 3. DefaultsUpon Senior Securities**

None

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

Our2006 Annual Meeting of Stockholders was held on Thursday, May 11, 2006 (the “2006Annual Meeting”). The matters submitted to our stockholders for approval at the2006 Annual Meeting included (1) the election of three Class IImembers of the Board of Directors for a term of three years; (2) aproposal to approve amendments to our 2004 Equity Incentive Plan to increasethe number of shares of common stock reserved for issuance thereunder by2,000,000 shares and to further restrict the repricing of awards thereunderwithout first obtaining stockholder approval; (3) a proposal to approve theadoption of an Executive Cash Incentive Plan; and (4) a proposal to ratify theselection of Deloitte & Touche, LLP as independent registered publicaccounting firm for the fiscal year ending December 29, 2006.

As ofMarch 24, 2005, the record date for the 2006 Annual Meeting, there were32,220,669 shares issued and 32,204,192 outstanding and entitled to vote at the2006 Annual Meeting. There were 29,421,854 shares present in person or byproxy, which constitutes approximately 91 percent of the shares entitled tovote at the 2006 Annual Meeting.

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Thetabulation of the votes present in person or by proxy at the 2006 AnnualMeeting with respect to the above matters was as follows:

*DirectorElections*

| Nominee             | ** ** | **For**    | ** ** | **Against/  Abstained** | ** ** |
|---------------------|------------|------------|------------|-------------------------|------------|
| Barry J.  Goldstein |       | 29,306,601 |       | 115,253                 |       |
| Charles W.  Santoro |       | 29,293,978 |       | 127,876                 |       |
| Drew T. Sawyer      |       | 28,174,618 |       | 1,247,236               |       |

 

Thenominees for election to the board were elected to serve until the annualmeeting in 2009, and until their respective successors are elected andqualified.

*Approvalto amend our 2004 Equity Incentive Plan*

| For        | ** ** | **Against** | ** ** | **Abstained** | ** ** | **Broker  Non-votes** |
|------------|------------|-------------|------------|---------------|------------|-----------------------|
| 24,574,044 |       | 3,291,068   |       | 566,100       |       | 990,642               |

 

*Approvalto adopt an Executive Cash Incentive Plan*

| For        | ** ** | **Against** | ** ** | **Abstained** | ** ** | **Broker  Non-votes** |
|------------|------------|-------------|------------|---------------|------------|-----------------------|
| 27,721,363 |       | 697,274     |       | 12,575        |       | 990,642               |

 

*Approvalto ratify the selection of Deloitte & Touche LLP*

| For        | ** ** | **Against** | ** ** | **Abstained** | ** ** | ** ** |
|------------|------------|-------------|------------|---------------|------------|------------|
| 28,775,307 |       | 640,172     |       | 6,375         |       |       |

 

**ITEM 5. OtherInformation**

                                                                      None.

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**ITEM 6. Exhibits**

Thefollowing exhibits are being filed as part of this Quarterly Report on Form10-Q:
| 1.1  |   | Underwriting Agreement, dated as of June 9, 2006,  among Interline Delaware, Interline New Jersey and certain subsidiary  guarantors listed in Schedule 2 thereto, Lehman Brothers Inc. and J.P. Morgan  Securities Inc, as representatives of the several underwriters listed in  Schedule 1 thereto (incorporated by reference to the Company’s interim report  on Form 8-K filed June 13, 2006).                                                                                                                                                                                                                                                                   |
|------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1  |   | Securities Purchase Agreement, dated as of May 23,  2006, by and among American Sanitary Incorporated, AmSan, LLC, Golder, Thoma,  Cressey, Rauner Fund V, L.P., GTCR Associates V, GTCR Capital Partners, L.P.  and Interline New Jersey (incorporated by reference to the Company’s interim  report on Form 8-K filed July 10, 2006).                                                                                                                                                                                                                                                                                                                               |
| 4.1  |   | Second Supplemental Indenture, dated as of June 7,  2006, among Interline New Jersey, Wilmar Holdings, Inc., Wilmar Financial,  Inc., Glenwood Acquisition LLC and The Bank of New York, as trustee  (incorporated by reference to the Company’s interim report on Form 8-K filed  June 13, 2006).                                                                                                                                                                                                                                                                                                                                                                    |
| 4.2  |   | Credit Agreement, dated June 23, 2006 among  Interline Delaware, Interline Brands, Inc., a wholly-owned subsidiary of  Interline Delaware (“Interline New Jersey”), as borrower, the lenders party  therein, JPMorgan Chase Bank, N.A., as administrative agent, Lehman  Commercial Paper Inc., as syndication agent, Credit Suisse, Bank of America,  N.A., Wachovia Bank, National Association and SunTrust Bank, each as a  co-documentation agent and J.P. Morgan Securities Inc. and Lehman Brothers  Inc. as joint bookrunners and joint-lean arrangers (incorporated by reference  to the Company’s interim report on Form 8-K filed June 26, 2006). |
| 4.3  |   | Guarantee and Collateral Agreement, dated as of June  23, 2006, among Interline Delaware, Interline New Jersey, certain  subsidiaries of Interline New Jersey and JPMorgan Chase Bank, N.A., as  collateral agent (incorporated by reference to the Company’s interim report  on Form 8-K filed June 26, 2006).                                                                                                                                                                                                                                                                                                                                                       |
| 4.4  |   | Base Indenture, dated as of June 23, 2006, among  Interline New Jersey, Interline Delaware, as guarantor, certain subsidiaries  of Interline Delaware and the Bank of New York Trust Company, N.A., as  trustee (incorporated by reference to the Company’s interim report on Form  8-K filed June 26, 2006).                                                                                                                                                                                                                                                                                                                                                         |
| 4.5  |   | First Supplemental Indenture, dated as of June 23,  2006, among Interline New Jersey, Interline Delaware, as guarantor, certain  subsidiaries of Interline Delaware and the Bank of New York Trust Company,  N.A., as trustee (incorporated by reference to the Company’s interim report  on Form 8-K filed June 26, 2006).                                                                                                                                                                                                                                                                                                                                           |
| 4.6  |   | Second Supplemental Indenture, dated as of July 3,  2006, by and among Interline New Jersey, Interline Delaware, AmSan as a  subsidiary guarantor, certain other subsidiaries of Interline New Jersey and  the Bank of New York Trust Company, N.A., as trustee (incorporated by  reference to the Company’s interim report on Form 8-K filed July 10, 2006).                                                                                                                                                                                                                                                                                                         |
| 4.7  |   | Supplement No.1, dated as of July 3, 2006, to the  Guarantee and Collateral Agreement, dated June 23, 2006, between AmSan, LLC  and JPMorgan Chase Bank, N.A., as collateral agent (incorporated by reference  to the Company’s interim report on Form 8-K filed July 10, 2006).                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.1 |   | 2004 Equity Incentive Plan (incorporated by  reference to Appendix A to the Company’s definitive proxy statement for its  annual meeting of stockholders held on May 11, 2006, Commission File No.  1-32380).                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.2 |   | Executive Cash Incentive Plan (incorporated by  reference to Appendix B to the Company’s definitive proxy statement for its  annual meeting of stockholders held on May 11, 2006, Commission File No.  1-32380).                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 31.1 |   | Certification of the Chief Executive Officer of  Interline Brands, Inc., pursuant to Rule 13a-14 of the Exchange Act, as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  (furnished herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 31.2 |   | Certification of the Chief Financial Officer of  Interline Brands, Inc., pursuant to Rule 13a-14 of the Exchange Act, as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  (furnished herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 32.1 |   | Certification of the Chief Executive Officer  pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished  herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 32.2 |   | Certification of the Chief Financial Officer  pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished  herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

 

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned hereuntoduly authorized.
|                       | INTERLINE  BRANDS, INC. |
|-----------------------|-------------------------|
|                  | Registrant              |
|                  |                    |
|                  |                    |
|                  |                    |
| Date: August 8,  2006 | /S/                     | THOMAS J. TOSSAVAINEN |
|                  |                    | Thomas J. Tossavainen |
|                  |                    | Chief Financial Officer |
|                  |                    | (Duly Authorized Signatory, Principal Financial and |
|                  |                    | Accounting Officer) |

 

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