**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 MARCH 30,  2007****                                                                                                                                                                                                                                                                       |
|           |           | **** ****                                                                                                                                                                                                                                                                                                               |
|           |           |                                                                                                                                                                                                                                                                                                                         | ****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

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “accelerated filerand large accelerated 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    Nox

Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpracticable date: As of May 1, 2007, there were 32,285,884 shares of theregistrant’s common stock outstanding (excluding 39,398 shares held intreasury), par value $0.01.

 

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**TABLE OF CONTENTS**
| ****ITEM****       | **** ****                                                                                       | ** **                                                                                                                         | ** ** | ** ** |
|--------------------|------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **         |                                                                                                 | ****PART  I. FINANCIAL INFORMATION****                                                                                             |       |       |
| ** **         |                                                                                                 | **** ****                                                                                                                     |       |       |
| ****1.****         | ****Financial Statements****                                                                         |                                                                                                                               |       |
| ** **         |                                                                                                 | ****Condensed  Consolidated Balance Sheets (Unaudited)  as of March 30, 2007 and December 29, 2006****                             |       |       |
| ** **         |                                                                                                 | ****Condensed  Consolidated Statements of Earnings (Unaudited)  for the Three Months Ended March 30, 2007 and March 31, 2006****   |       |       |
| ** **         |                                                                                                 | ****Condensed  Consolidated Statement of Stockholders’ Equity (Unaudited)  for the Three Months Ended March 30, 2007****      |       |       |
| ** **         |                                                                                                 | ****Condensed  Consolidated Statements of Cash Flows (Unaudited)  for the Three Months Ended March 30, 2007 and March 31, 2006**** |       |       |
| **** ****     | **** ****                                                                                       | ****Notes to  Unaudited Condensed Consolidated Financial Statements****                                                            |       |       |
| ****2.****         | ****Management’s  Discussions and Analysis of Financial Condition and Results of Operations**** | **** ****                                                                                                                     | ** ** |
| ****3.****         | ****Quantitative  and Qualitative Disclosures about Market Risk****                                  | **** ****                                                                                                                     | ** ** |
| ****4.****         | ****Controls and  Procedures****                                                                     | **** ****                                                                                                                     | ** ** |
| **** ****     | **** ****                                                                                       | **** ****                                                                                                                     | ** ** |
| ** **         |                                                                                                 | ****PART  II. OTHER INFORMATION****                                                                                                |       |       |
| ** **         |                                                                                                 | **** ****                                                                                                                     |       |       |
| ****1.****         | ****Legal Proceedings****                                                                            | **** ****                                                                                                                     | ** ** |
| ****1A.****        | ****Risk Factors****                                                                                 | **** ****                                                                                                                     | ** ** |
| ****2.****         | ****Unregistered  Sales of Equity Securities and Use of Proceeds****                                 |                                                                                                                               |       |
| ****3.****         | ****Defaults Upon Senior Securities****                                                              |                                                                                                                               |       |
| ****4.****         | Submission of  Matters to a Vote of Security Holders                                                 |                                                                                                                               |       |
| 5.                 | Other Information                                                                                    |                                                                                                                               |       |
| ****6.****         | ****Exhibits****                                                                                     | **** ****                                                                                                                     | ** ** |
| **** ****     | **** ****                                                                                       | **** ****                                                                                                                     | ** ** |
| ****SIGNATURES**** | **** ****                                                                                       | ** **                                                                                                                         |
|                    |                                                                                                      |                                                                                                                                    |            |            |  |

 

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**PART I. FINANCIAL INFORMATION**

**ITEM 1. Financial Statements**

**INTERLINEBRANDS, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS (UNAUDITED)AS OF MARCH 30, 2007 AND DECEMBER 29, 2006**

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

 
| ** **                                                                                                                                                                                          | ** ** | **March 30,** | ** ** | **December 29,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                          | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| **ASSETS**                                                                                                                                                                                          |       |               |       |                  |       |
| Current Assets:                                                                                                                                                                                     |       |               |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                           |       | $                  | 34,944     |                  | $          | 6,852 |   |
| Accounts receivable - trade (net of allowance for doubtful  accounts of $10,689 and $10,224)                                                                                                        |       | 152,666            |       | 142,901               |       |
| Accounts receivable - other                                                                                                                                                                         |       | 9,622              |       | 15,663                |       |
| Inventory                                                                                                                                                                                           |       | 195,435            |       | 201,662               |       |
| Prepaid expenses and other current assets                                                                                                                                                           |       | 7,118              |       | 7,252                 |       |
| Deferred income taxes                                                                                                                                                                               |       | 17,886             |       | 17,821                |       |
| Total current assets                                                                                                                                                                                |       | 417,671            |       | 392,151               |       |
|                                                                                                                                                                                                |       |               |       |                  |       |
| Property and  equipment, net                                                                                                                                                                        |       | 32,949             |       | 31,754                |       |
| Goodwill                                                                                                                                                                                            |       | 313,118            |       | 313,077               |       |
| Other intangible  assets, net                                                                                                                                                                       |       | 141,792            |       | 143,440               |       |
| Other assets                                                                                                                                                                                        |       | 10,458             |       | 10,147                |       |
| Total assets                                                                                                                                                                                        |       | $                  | 915,988    |                  | $          | 890,569 |   |
|                                                                                                                                                                                                |       |               |       |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                      | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current  Liabilities:                                                                                                                                                                               |       |               |       |                  |       |
| Accounts payable                                                                                                                                                                                    |       | $                  | 80,621     |                  | $          | 67,493 |   |
| Accrued expenses and other current liabilities                                                                                                                                                      |       | 36,575             |       | 38,722                |       |
| Accrued interest                                                                                                                                                                                    |       | 5,123              |       | 3,516                 |       |
| Income taxes payable                                                                                                                                                                                |       | 4,412              |       | 2,486                 |       |
| Current portion of long-term debt                                                                                                                                                                   |       | 2,416              |       | 2,416                 |       |
| Capital lease - current                                                                                                                                                                             |       | 228                |       | 307                   |       |
| Total current liabilities                                                                                                                                                                           |       | 129,375            |       | 114,940               |       |
|                                                                                                                                                                                                |       |               |       |                  |       |
| Long-Term  Liabilities:                                                                                                                                                                             |       |               |       |                  |       |
| Deferred income taxes                                                                                                                                                                               |       | 34,719             |       | 34,799                |       |
| Long-term debt, net of current portion                                                                                                                                                              |       | 418,079            |       | 418,650               |       |
| Capital lease - long term                                                                                                                                                                           |       | 633                |       | 683                   |       |
| Other liabilities                                                                                                                                                                                   |       | 2,360              |       | 818                   |       |
| Total liabilities                                                                                                                                                                                   |       | 585,166            |       | 569,890               |       |
| Commitments and contingencies                                                                                                                                                                       |       |               |       |                  |       |
| Senior preferred  stock, $0.01 par value, 20,000,000 shares authorized, no shares outstanding  as of March 30, 2007 and December 29, 2006                                                           |       | —             |       | —                |       |
|                                                                                                                                                                                                |       |               |       |                  |       |
| Stockholders’  Equity:                                                                                                                                                                         |       |               |       |                  |       |
| Common stock; $0.01 par value, 100,000,000  authorized; 32,325,282 issued and 32,285,884 outstanding as of March 30, 2007  and 32,308,221 issued and 32,284,069 outstanding as of December 29, 2006 |       | 323                |       | 323                   |       |
| Additional paid-in capital                                                                                                                                                                          |       | 563,468            |       | 561,634               |       |
| Accumulated deficit                                                                                                                                                                                 |       | (233,188           | )          | (241,852              | )          |
| Accumulated other comprehensive income                                                                                                                                                              |       | 1,034              |       | 1,072                 |       |
| Treasury stock, at cost, 39,398 shares as of March  30, 2007 and 24,152 shares as of December 29, 2006                                                                                              |       | (815               | )          | (498                  | )          |
| Total stockholders’ equity                                                                                                                                                                     |       | 330,822            |       | 320,679               |       |
| Total liabilities and stockholders’ equity                                                                                                                                                     |       | $                  | 915,988    |                  | $          | 890,569 |   |

 

*See accompanying notes to unaudited condensed consolidatedfinancial statements.*

1

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**INTERLINEBRANDS, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)**

**THREEMONTHS ENDED MARCH 30, 2007 AND MARCH 31, 2006**

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

 
| ** **                                   | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| ** **                                   | ** ** | **March 30,**               | ** ** | **March 31,** | ** ** |
| ** **                                   | ** ** | **2007**                         | ** ** | **2006** | ** ** |
|                                         |       |                             |       |   |   |
| Net sales                                    |       | $                                | 295,403    |   | $ | 224,674 |   |
| Cost of sales                                |       | 183,109                          |       | 138,966 |   |
| Gross profit                                 |       | 112,294                          |       | 85,708 |   |
|                                         |       |                             |       |   |   |
| Operating  Expenses:                         |       |                             |       |   |   |
| Selling, general and administrative expenses |       | 85,305                           |       | 61,678 |   |
| Depreciation and amortization                |       | 3,551                            |       | 3,445 |   |
| Total operating expense                      |       | 88,856                           |       | 65,123 |   |
| Operating income                             |       | 23,438                           |       | 20,585 |   |
|                                         |       |                             |       |   |   |
| Interest expense                             |       | (8,560                           | )          | (6,952 | ) |
| Interest income                              |       | 400                              |       | 60 |   |
| Other income                                 |       | 205                              |       | 126 |   |
| Income before income taxes                   |       | 15,483                           |       | 13,819 |   |
| Income tax  provision                        |       | 6,043                            |       | 5,378 |   |
| Net income                                   |       | $                                | 9,440      |   | $ | 8,441 |   |
|                                         |       |                             |       |   |   |
| Earnings Per  Share:                         |       |                             |       |   |   |
| Basic                                        |       | $                                | 0.29       |   | $ | 0.26 |   |
| Diluted                                      |       | $                                | 0.29       |   | $ | 0.26 |   |
|                                         |       |                             |       |   |   |
| Weighted-Average  Shares Outstanding:        |       |                             |       |   |   |
| Basic                                        |       | 32,217,839                       |       | 32,091,133 |   |
| Diluted                                      |       | 32,603,148                       |       | 32,584,503 |   |

 

*Seeaccompanying notes to unaudited condensed consolidated financial statements.*

2

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**INTERLINEBRANDS, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)**

**THREE MONTHS ENDED MARCH 30, 2007**

**(inthousands, except share data)**

 
| ** **                                                                 | ** ** | **Common Stock** | ** ** | **Additional  Paid-In** | ** ** | **Accumulated** | ** ** | **Accumulated Other  Comprehensive** | ** ** | **Treasury** | ** ** | **Total  Stockholders’** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|-----------------|------------|-------------------------------------------|------------|--------------|------------|-------------------------------|------------|
| ** **                                                                 | ** ** | **Shares**            | ** ** | **Amount**              | ** ** | **Capital**     | ** ** | **Deficit**                               | ** ** | **Income**   | ** ** | **Stock**                     | ** ** | **Equity** | ** ** |
|                                                                       |       |                  |       |                    |       |            |       |                                      |       |         |       |                          |       |   |   |
| Balance at  December 29, 2006                                              |       | 32,308,221            |       | $                       | 323        |            | $          | 561,634                                   |       | $            | (241,852   | )                             | $          | 1,072 |   | $ | (498 | ) | $ | 320,679 |   |
| Share-based compensation                                                   |       |                  |       |                    |       | 1,496           |       |                                      |       |         |       |                          |       | 1,496 |   |
| Issuance of restricted stock                                               |       | 4,600                 |       | —                  |       | —          |       |                                      |       |         |       |                          |       | — |   |
| Issuance of common stock from exercise of stock  options                   |       | 12,461                |       | —                  |       | 180             |       |                                      |       |         |       |                          |       | 180 |   |
| Tax benefits on stock options exercised                                    |       |                  |       |                    |       | 34              |       |                                      |       |         |       |                          |       | 34 |   |
| Tax benefits on other vested share-based payments                          |       |                  |       |                    |       | 124             |       |                                      |       |         |       |                          |       | 124 |   |
| Repurchase of common stock                                                 |       |                  |       |                    |       |            |       |                                      |       |         |       | (317                          | )          | (317 | ) |
| Cumulative impact of change in accounting for  uncertainty in income taxes |       |                  |       |                    |       |            |       | (776                                      | )          |         |       |                          |       | (776 | ) |
| Comprehensive income:                                                      |       |                  |       |                    |       |            |       |                                      |       |         |       |                          |       |   |   |
| Net income                                                                 |       |                  |       |                    |       |            |       | 9,440                                     |       |         |       |                          |       |   |   |
| Amortization of unrecognized gain on employee  benefits                    |       |                  |       |                    |       |            |       |                                      |       | (77          | )          |                          |       |   |   |
| Foreign currency translation                                               |       |                  |       |                    |       |            |       |                                      |       | 39           |       |                          |       |   |   |
| Total comprehensive income                                                 |       |                  |       |                    |       |            |       |                                      |       |         |       |                          |       | 9,402 |   |
| Balance at March 30,  2007                                                 |       | 32,325,282            |       | $                       | 323        |            | $          | 563,468                                   |       | $            | (233,188   | )                             | $          | 1,034 |   | $ | (815 | ) | $ | 330,822 |   |

 

*See accompanying notes to unaudited condensed consolidatedfinancial statements.*

3

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**INTERLINE BRANDS, INC. ANDSUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**

**THREE MONTHS ENDED MARCH 30, 2007 AND MARCH 31, 2006**

**(inthousands)**
| ** **                                                                               | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                               | ** ** | **March 30,**               | ** ** | **March 31,** | ** ** |
| ** **                                                                               | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Cash Flows from  Operating Activities:                                                   |       |                             |       |   |   |
| Net income                                                                               |       | $                                | 9,440      |   | $ | 8,441 |   |
| Adjustments to reconcile net income to net cash provided  by operating activities:       |       |                             |       |   |   |
| Depreciation and amortization                                                            |       | 3,761                            |       | 3,445 |   |
| Amortization of debt issuance costs                                                      |       | 271                              |       | 418 |   |
| Amortization of discount on 81¤8%  senior subordinated notes                        |       | 33                               |       | — |   |
| Share-based compensation                                                                 |       | 1,496                            |       | 716 |   |
| Deferred income taxes                                                                    |       | (299                             | )          | (1,117 | ) |
| Provision for doubtful accounts                                                          |       | 824                              |       | 836 |   |
| Gain on disposal of property and equipment                                               |       | (6                               | )          | — |   |
| Excess tax benefits from share-based compensation                                        |       | (158                             | )          | — |   |
|                                                                                     |       |                             |       |   |   |
| Changes in assets and liabilities which provided  (used) cash, net of business acquired: |       |                             |       |   |   |
| Accounts receivable - trade                                                              |       | (10,570                          | )          | (4,269 | ) |
| Accounts receivable - other                                                              |       | 6,042                            |       | 3,095 |   |
| Inventory                                                                                |       | 6,301                            |       | 661 |   |
| Prepaid expenses and other current assets                                                |       | 135                              |       | (1,407 | ) |
| Other assets                                                                             |       | (270                             | )          | (206 | ) |
| Accounts payable                                                                         |       | 13,124                           |       | (280 | ) |
| Accrued expenses and other current liabilities                                           |       | (2,475                           | )          | 463 |   |
| Accrued interest                                                                         |       | 1,606                            |       | 3,837 |   |
| Income taxes payable                                                                     |       | 2,715                            |       | 4,136 |   |
| Other liabilities                                                                        |       | 57                               |       | — |   |
| Net cash provided by operating activities                                                |       | 32,027                           |       | 18,769 |   |
| Cash Flows from  Investing Activities:                                                   |       |                             |       |   |   |
| Purchase of property and equipment, net                                                  |       | (3,517                           | )          | (1,527 | ) |
| Purchase of businesses, net of cash acquired                                             |       | (3                               | )          | (193 | ) |
| Net cash used in investing activities                                                    |       | (3,520                           | )          | (1,720 | ) |
|                                                                                          |            |                                  |            |  |  |  |  |

 

*(Continued)*

4

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| ** **                                                                   | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                   | ** ** | **March 30,**               | ** ** | **March 31,** | ** ** |
| ** **                                                                   | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Cash Flows from  Financing Activities:                                       |       |                             |       |   |   |
| Decrease in revolver, net                                                    |       | —                           |       | (3,000 | ) |
| Repayment of term debt                                                       |       | (604                             | )          | (350 | ) |
| Payment of debt issuance costs                                               |       | (34                              | )          | — |   |
| Proceeds from stock options exercised                                        |       | 187                              |       | — |   |
| Excess tax benefits from share-based compensation                            |       | 158                              |       | 155 |   |
| Payments on capital lease obligations                                        |       | (129                             | )          | (83 | ) |
| Net cash used in financing activities                                        |       | (422                             | )          | (3,278 | ) |
| Effect of  exchange rate changes on cash and cash equivalents                |       | 7                                |       | (17 | ) |
| Net increase in  cash and cash equivalents                                   |       | 28,092                           |       | 13,754 |   |
| Cash and cash  equivalents at beginning of period                            |       | 6,852                            |       | 2,958 |   |
| Cash and cash  equivalents at end of period                                  |       | $                                | 34,944     |   | $ | 16,712 |   |
|                                                                         |       |                             |       |   |   |
| Supplemental  Disclosure of Cash Flow Information:                           |       |                             |       |   |   |
| Cash paid during the period for :                                            |       |                             |       |   |   |
| Interest                                                                     |       | $                                | 7,139      |   | $ | 2,697 |   |
| Income taxes, net of refunds                                                 |       | $                                | 3,905      |   | $ | 2,246 |   |
|                                                                         |       |                             |       |   |   |
| Schedule of  Non-Cash Investing and Financing Activities:                    |       |                             |       |   |   |
| Adjustments to liabilities assumed and goodwill on businesses  acquired      |       | $                                | 154        |   | $ | 20 |   |
| Treasury stock acquired with accrued expenses and other  current liabilities |       | $                                | 317        |   | $ | 383 |   |

 

*See accompanying notes to unaudited condensed consolidatedfinancial statements.*

5

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**INTERLINEBRANDS, INC. AND SUBSIDIARIES**

**NOTES TO UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**1.**                                      DESCRIPTION OF BUSINESS AND BASIS OFPRESENTATION

*Business*

Interline Brands, Inc., aDelaware corporation, and its subsidiaries (“Interline” or the “Company”) is adirect marketer and specialty distributor of maintenance, repair and operations(“MRO”) products. The Company sells plumbing, electrical, hardware, security,heating, ventilation and air conditioning (“HVAC”), janitorial and sanitarysupplies and other MRO products. Interline’s highly diverse customer baseconsists of multi-family housing, educational, lodging, government and healthcare facilities, professional contractors and specialty distributors.

TheCompany markets and sells its products primarily through ten distinct andtargeted brands. The Company utilizes a variety of sales channels, including adirect sales force, telesales representatives, a direct marketing program,brand-specific websites and a national accounts sales program. The Companydelivers its products through its network of regional distribution centers andprofessional contractor showrooms located throughout the United States andCanada, a national distribution center in Nashville, Tennessee, vendor managedinventory locations at large professional contractor customer locations and itsdedicated fleet of trucks. Through its broad distribution network, the Companyprovides same day/next day delivery service to 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*

Theaccompanying unaudited interim condensed consolidated financial statements ofInterline have been prepared in accordance with accounting principles generallyaccepted in the United States of America and instructions to the QuarterlyReport on Form 10-Q and Article 10 of Regulation S-X promulgated by theSecurities and Exchange Commission (“SEC”). Accordingly, certain informationand footnote disclosures normally included in financial statements included inthe Company’s Annual Report on Form 10-K have been condensed oromitted. The accompanying unaudited interim condensed consolidated financialstatements should be read in conjunction with Management’s Discussion andAnalysis 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 29, 2006 filed with the SEC.

Alladjustments, consisting of normal recurring adjustments, which are, in theopinion of management, necessary for a fair statement of the results for theinterim periods presented have been recorded. The results of operations for theinterim periods presented are not necessarily indicative of the results to beexpected for the full year.

Thepreparation of condensed consolidated financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the condensed consolidated financial statements andthe reported amounts of revenues and expenses during the reporting period.Significant estimates include valuation reserves for accounts receivable,inventory and income taxes, reserves for self-insurance programs, valuation ofgoodwill and valuation of assets and liabilities assumed in the acquisition ofAmSan LLC (“AmSan”). Actual results could differ from those estimates.

*Segment Information*

In accordance withFinancial Accounting Standards Board (“FASB”) Statement No. 131, *Disclosure about Segments of an Enterprise and Related Information*,(“FAS 131”) the Company has two operating segments: Interline Brands and AmSan.These segments are aggregated into one reportable segment, the distribution ofMRO products, because they possess similar economic characteristics and havecommon products, customers and methods of distribution. During 2007, theCompany will undertake significant integration activities to consolidate AmSan’soperations onto the Company’s information systems platform.

6

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Our net sales forthe three months ended March 30, 2007 and March 31, 2006 by product categorywere as follows (in thousands):
|                                            | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | **March 30,**               | ** ** | **March 31,** | ** ** |
| **Product Category**                  | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Plumbing                                   |       | $                                | 96,006     |   | $ | 95,486 |   |
| Janitorial and  Sanitary                   |       | 67,647                           |       | 5,392 |   |
| Electrical                                 |       | 32,199                           |       | 30,106 |   |
| Heating,  Ventilation and Air Conditioning |       | 24,541                           |       | 26,363 |   |
| Appliances                                 |       | 15,361                           |       | 12,582 |   |
| Security                                   |       | 15,066                           |       | 13,705 |   |
| Hardware                                   |       | 12,998                           |       | 12,357 |   |
| Other                                      |       | 31,585                           |       | 28,683 |   |
| Total                                      |       | $                                | 295,403    |   | $ | 224,674 |   |

 

**2.**                                      ACQUISITIONS

***AmSanLLC***

On July 3, 2006,Interline New Jersey acquired all of the outstanding equity interests of AmSanfrom American Sanitary Incorporated for $133.0 million in cash, including cashacquired of $2.2 million and transaction fees of $3.0 million. AmSan is aleading national distributor and direct marketer of janitorial and sanitarysupplies. The acquisition was funded with the $130.0 million delayed drawfacility under Interline New Jersey’s bank credit facility.

The followingtable summarizes the preliminary allocation of the purchase price to the AmSanassets acquired and liabilities assumed at estimated fair values (inthousands):
| Current assets            |   | $       | 53,282  |   |
|---------------------------|--------|---------|---------|--------|
| Property and  equipment   |   | 2,983   |    |
| Goodwill                  |   | 64,948  |    |
| Intangible  assets        |   | 43,600  |    |
| Other assets              |   | 631     |    |
| Total assets acquired     |   | 165,444 |    |
| Current  liabilities      |   | 31,150  |    |
| Other  liabilities        |   | 1,255   |    |
| Total liabilities assumed |   | 32,405  |    |
| Net assets acquired       |   | $       | 133,039 |   |

 

Given the recentacquisition date, Interline New Jersey has not completed its integration plan;therefore, the final purchase price allocation is not yet complete. InterlineNew Jersey expects to complete the allocation process during the three monthsended June 29, 2007.

***Acquisition Reserves***

The following table summarizes the changes to reserves assumed in connection with the Company’s business combinations (in thousands):
|                               | ** ** | **Employee  Severance and  Relocation** | ** ** | **Facility  Closing and  Other Costs** | ** ** | **Total** | ** ** |
|-------------------------------|------------|----------------------------------------------|------------|--------------------------------------------------|------------|-----------|------------|
| Balance at  December 29, 2006 |       | $                                            | 1,093      |                                             | $          | 5,321     |       | $ | 6,414 |   |
| Payments                      |       | (607                                         | )          | (42                                              | )          | (649      | )          |
| Balance at March 30, 2007     |       | $                                            | 486        |                                             | $          | 5,279     |       | $ | 5,765 |   |

 

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**3****.****                                      EARNINGSPER SHARE**

Earnings per sharefor all periods has been computed in accordance with FASB Statement No. 128, *Earnings per Share*, (“FAS 128”). Basic earnings per share iscomputed by dividing net income by the weighted-average number of shares ofcommon stock outstanding during the period. Diluted earnings per share iscomputed by dividing net income by the weighted-average number of shares ofcommon stock outstanding during the period as adjusted for the potentialdilutive effect of stock options and non-vested shares of restricted stock,restricted share units and deferred stock units using the treasury stockmethod.

The followingsummarizes the shares of common stock used to calculate earnings per shareincluding the potentially dilutive impact of stock options, restricted stock,restricted share units and deferred stock units, calculated using the treasurystock method, as included in the calculation of diluted weighted-averageshares:
|                                                | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|
| ** **                                     | ** ** | **March 30,**               | ** ** | **March 31,** | ** ** |
| ** **                                     | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Weighted average  shares outstanding - basic   |       | 32,217,839                       |       | 32,091,133 |   |
| Dilutive shares resulting from:                |       |                             |       |   |   |
| Stock options                                  |       | 312,170                          |       | 416,735 |   |
| Restricted stock                               |       | 27,778                           |       | 65,494 |   |
| Restricted share units                         |       | 44,516                           |       | 11,141 |   |
| Deferred stock units                           |       | 845                              |       | — |   |
| Weighted average shares  outstanding - diluted |       | 32,603,148                       |       | 32,584,503 |   |

 

During the threemonths ended March 30, 2007 and March 31, 2006, options to purchase 668,665shares and 226,507 shares of common 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.**                                      COMPREHENSIVE INCOME

Comprehensive income refers to revenues, expenses,gains and losses that under accounting principles generally accepted in theUnited States are included in comprehensive income but are excluded from netincome as these amounts are recorded directly as an adjustment to stockholders’equity, net of tax. The components of comprehensive income for the three monthsended March 30, 2007 and March 31, 2006 are as follows (in thousands):

|                                                         | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                              | ** ** | **March 30,**               | ** ** | **March 31,** | ** ** |
| ** **                                              | ** ** | **2007**                         | ** ** | **2006** | ** ** |
|                                                    |       |                             |       |   |   |
| Net income                                              |       | $                                | 9,440      |   | $ | 8,441 |   |
|                                                    |       |                             |       |   |   |
| Other  comprehensive income (loss):                     |       |                             |       |   |   |
| Amortization of unrecognized gain on employee  benefits |       | (77                              | )          | — |   |
| Foreign currency translation                            |       | 39                               |       | (17 | ) |
| Total comprehensive  income                             |       | $                                | 9,402      |   | $ | 8,424 |   |

 

**5.**                                      SHARE-BASED COMPENSATION

Share-based compensation expense was $1.5 million and$0.7 million for three months ended March 30, 2007 and March 31, 2006,respectively. As of March 30, 2007, there was $11.5 million of totalunrecognized share-based compensation expense related to unvested share-basedequity awards. The expense is expected to be recognized over a weighted-averageperiod of 2.7 years.

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During the three months ended March 30, 2007 and March31, 2006, the Company granted 402,851 and 345,202 stock options, respectively,with a weighted-average grant date fair value of $6.78 and $7.56, respectively.As permitted by FASB Statement No. 123 (revised 2004), *Share-BasedCompensation*, (“FAS 123R”) the fair values of stock options wereestimated using the Black-Scholes option-pricing model. Expected volatility isbased on historical performance of the Company’s stock. The Company also useshistorical data to estimate the timing and amount of stock option exercises andforfeitures. The expected life represents the period of time that stock optionsare expected to remain outstanding and is based on the contractual term of thestock options and expected exercise behavior. The risk-free interest rate isbased on U.S. Treasury zero-coupon issues with a remaining term equal to theexpected option life assumed at the date of grant. The Black-Scholesweighted-average assumptions were as follows:
|                           | ** ** | **Three Months Ended** | ** ** |
|---------------------------|------------|----------------------------------|------------|
| ** **                | ** ** | **March 30,**               | ** ** | **March 31,** | ** ** |
| ** **                | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Expected  volatility      |       | 27.0                             | %          | 26.0 | % |
| Expected  dividends       |       | 0.0                              | %          | 0.0 | % |
| Risk-free  interest rate  |       | 4.5                              | %          | 4.8 | % |
| Expected life (in  years) |       | 5.0                              |       | 5.0 |   |

 

During the three months ended March 30, 2007, 12,461stock options were exercised with an intrinsic value of $0.1 million. Therewere no stock options exercised during the three months ended March 31, 2006.

A summary status of restricted stock, restricted shareunits and deferred stock units as of March 30, 2007, and changes during theyear then ended is presented below:
|                                   | ** ** | **Restricted Stock** | ** ** | **Restricted Share Units** | ** ** | **Deferred Stock Units** | ** ** |
|-----------------------------------|------------|---------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                        | ** ** | ** **                | ** ** | **Weighted-**                        | ** ** | ** **                         | ** ** | **Weighted-** | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| ** **                        | ** ** | ** **                | ** ** | **Average**                          | ** ** | ** **                         | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                        | ** ** | ** **                | ** ** | **Grant Date**                  | ** ** | ** **                         | ** ** | **Grant Date** | ** ** | ** ** | ** ** | **Grant Date** | ** ** |
| ** **                        | ** ** | **Shares**                | ** ** | **Fair Value**                  | ** ** | **Shares**                         | ** ** | **Fair Value** | ** ** | **Shares** | ** ** | **Fair Value** | ** ** |
| Outstanding at  December 29, 2006 |       | 137,335                   |       | $                                    | 16.34      |                               | 196,595    |   | $ | 23.35 |   | 12,924 |   | $ | 25.17 |   |
| Granted                           |       | 4,600                     |       | 22.27                                |       | 157,104                            |       | 20.79 |   | 1,482 |   | 21.92 |   |
| Vested                            |       | (54,770                   | )          | 15.00                                |       | —                             |       | — |   | — |   | — |   |
| Outstanding at March  30, 2007    |       | 87,165                    |       | $                                    | 17.49      |                               | 353,699    |   | $ | 22.21 |   | 14,406 |   | $ | 24.83 |   |

 

During the three months ended March 30, 2007 and March31, 2006, 54,770 and 58,607 shares of restricted stock vested, respectively.The total fair value of restricted stock vested during the three months endedMarch 30, 2007 and March 31, 2006 was $1.1 million and $1.4 million,respectively.

**6.             INCOMETAXES**

Effective December 30,2006, the Company adopted the provisions of FASB Interpretation No. 48, *Accounting for Uncertainty in Income Taxes–an Interpretation of FASBStatement No. 109*, (“FIN 48”). FIN 48 clarifies the accounting foruncertainty in income taxes recognized in accordance with FASB Statement No.109, *Accounting for Income Taxes*, (“FAS 109”).FIN 48 clarifies the application of FAS 109 by defining criteria that anindividual tax position must meet for any part of the benefit of that positionto be recognized in the financial statements. Additionally, FIN 48 providesguidance on the measurement, derecognition, classification and disclosure oftax positions, along with accounting for the related interest and penalties.

As a result of theimplementation of FIN 48, the Company recognized an increase of $0.8 million inthe liability for unrecognized tax benefits, which was accounted for as anincrease to the December 30, 2006 balance of accumulated deficit. As of thedate of adoption and after the impact of recognizing the increase in liabilitynoted above, the Company’s unrecognized tax benefits totaled $1.4 million. Ofthis $1.4 million, $1.0 million represents the amount of unrecognized taxbenefits that, if recognized, would favorably affect the effective income taxrate. In addition, during the three months ended March 30, 2007, the Companyrecognized $0.1 million in additional income tax benefits associated withuncertain tax positions and increased the related liability to $1.5 million.

The Company recognizespotential accrued penalties and accrued interest related to unrecognized taxbenefits within its statements of earnings as selling, general andadministrative expenses and interest expense, respectively. In conjunction withthe adoption of FIN 48, the Company accrued $0.4 million of interest andpenalties at December 30, 2006 which is included as a component of the $1.4million unrecognized tax benefits noted above. During the three months endedMarch 30, 2007,

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the Company recognizedless than $0.1 million in potential interest and penalties associated withuncertain tax positions. To the extent interest and penalties are not assessedwith respect to uncertain tax positions, amounts accrued will be reduced andreflected as a reduction of selling, general and administrative expenses andinterest expense, respectively.

The Company files numerousconsolidated and separate income tax returns in the United States Federaljurisdiction and in many state and foreign jurisdictions. With few exceptions,the Company is no longer subject to U.S. Federal income tax examinations foryears before 2004 and is no longer subject to state and local, or foreignincome tax examinations by tax authorities for years before 2003.

The Company does notanticipate that total unrecognized tax benefits will significantly change priorto March 28, 2008.

**7.**                                      GUARANTOR SUBSIDIARIES

InJune 2006, Interline New Jersey (the “Subsidiary Issuer”) issued $200.0 millionof 81/8%senior subordinated notes due 2014 and entered into a $330.0 million bankcredit facility. The 81/8%senior subordinated notes and the bank credit facility are fully andunconditionally guaranteed, jointly and severally, on a senior subordinatedbasis by the Company (the “Parent Company”) and all of Interline New Jersey’s100% owned domestic subsidiaries: Wilmar Holdings, Inc., Wilmar Financial,Inc., Glenwood Acquisition LLC and AmSan LLC (collectively the “GuarantorSubsidiaries”). The guarantees by the Parent Company and the GuarantorSubsidiaries are senior to any of their existing and future subordinatedobligations, equal in right of payment with any of their existing and futuresenior subordinated indebtedness and subordinated to any of their existing andfuture senior indebtedness.

TheCompany is a holding company whose only asset is the stock of its subsidiaries.The Company conducts virtually all of its business operations through InterlineNew Jersey. Accordingly, the Company’s only material sources of cash aredividends and distributions with respect to its ownership interests inInterline New Jersey that are derived from the earnings and cash flow generatedby Interline New Jersey.

Thefollowing tables set forth, on a condensed consolidating basis, the balancesheets, statements of operations and statements of cash flows for the ParentCompany, Subsidiary Issuer and Guarantor Subsidiaries for all financialstatement periods presented in the Company’s consolidated financial statements.The Subsidiary Issuer does not allocate integration expenses, corporateoverhead or other expenses for shared services to the Guarantor Subsidiaries;therefore, the following tables do not reflect any such allocation.

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**CONDENSEDCONSOLIDATING BALANCE SHEET (UNAUDITED)**

**AS OFMARCH 30, 2007**

**(inthousands)**
| ** **                                       | ** ** | **Parent**  | ** ** | **Subsidiary** | ** ** | **Guarantor**    | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
|--------------------------------------------------|------------|-------------|------------|----------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                       | ** ** | **Company** | ** ** | **Issuer**     | ** ** | **Subsidiaries** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                       |       |        |       |           |       |             |       |              |       |             |       |
| Current Assets:                                  |       |        |       |           |       |             |       |              |       |             |       |
| Cash and cash  equivalents                       |       | $           | —     |           | $          | 36,104           |       | $                 | 16         |             | $          | (1,176 | ) | $ | 34,944 |   |
| Accounts  receivable - trade                     |       | —      |       | 126,556        |       | 26,110           |       | —            |       | 152,666          |       |
| Inventory                                        |       | —      |       | 178,335        |       | 17,100           |       | —            |       | 195,435          |       |
| Intercompany  receivable                         |       | —      |       | —         |       | 105,937          |       | (105,937          | )          | —           |       |
| Other current  assets                            |       | —      |       | 31,869         |       | 2,757            |       | —            |       | 34,626           |       |
| Total current  assets                            |       | —      |       | 372,864        |       | 151,920          |       | (107,113          | )          | 417,671          |       |
|                                             |       |        |       |           |       |             |       |              |       |             |       |
| Property and equipment,  net                     |       | —      |       | 30,335         |       | 2,614            |       | —            |       | 32,949           |       |
| Goodwill                                         |       | —      |       | 248,170        |       | 64,948           |       | —            |       | 313,118          |       |
| Other intangible  assets, net                    |       | —      |       | 99,326         |       | 42,466           |       | —            |       | 141,792          |       |
| Investment in  subsidiaries                      |       | 330,822     |       | 176,344        |       | —           |       | (507,166          | )          | —           |       |
| Other assets                                     |       | —      |       | 6,459          |       | 8,827            |       | (4,828            | )          | 10,458           |       |
| Total assets                                     |       | $           | 330,822    |           | $          | 933,498          |       | $                 | 270,775    |             | $          | (619,107 | ) | $ | 915,988 |   |
|                                             |       |        |       |           |       |             |       |              |       |             |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**   |       |        |       |           |       |             |       |              |       |             |       |
| Current Liabilities:                             |       |        |       |           |       |             |       |              |       |             |       |
| Accounts payable                                 |       | $           | —     |           | $          | 66,018           |       | $                 | 15,779     |             | $          | (1,176 | ) | $ | 80,621 |   |
| Accrued expenses  and other current liabilities  |       | —      |       | 37,679         |       | 8,431            |       | —            |       | 46,110           |       |
| Intercompany  payable                            |       | —      |       | 50,955         |       | —           |       | (50,955           | )          | —           |       |
| Debt and capital  lease - short-term             |       | —      |       | 2,518          |       | 126              |       | —            |       | 2,644            |       |
| Total current  liabilities                       |       | —      |       | 157,170        |       | 24,336           |       | (52,131           | )          | 129,375          |       |
|                                             |       |        |       |           |       |             |       |              |       |             |       |
| Long-Term Liabilities:                           |       |        |       |           |       |             |       |              |       |             |       |
| Term debt and  capital lease - long-term         |       | —      |       | 415,246        |       | 3,466            |       | —            |       | 418,712          |       |
| Other  liabilities                               |       | —      |       | 36,191         |       | 888              |       | —            |       | 37,079           |       |
| Total  liabilities                               |       | —      |       | 608,607        |       | 28,690           |       | (52,131           | )          | 585,166          |       |
|                                             |       |        |       |           |       |             |       |              |       |             |       |
| Senior preferred stock                           |       | —      |       | 519,276        |       | —           |       | (519,276          | )          | —           |       |
|                                             |       |        |       |           |       |             |       |              |       |             |       |
| Stockholders’ equity (deficit)              |       | 330,822     |       | (194,385       | )          | 242,085          |       | (47,700           | )          | 330,822          |       |
| Total liabilities and  stockholders’ equity |       | $           | 330,822    |           | $          | 933,498          |       | $                 | 270,775    |             | $          | (619,107 | ) | $ | 915,988 |   |

 

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**CONDENSED CONSOLIDATING BALANCESHEET (UNAUDITED)**

**AS OFDECEMBER 29, 2006**

**(inthousands)**
| ** **                                      | ** ** | **Parent**  | ** ** | **Subsidiary** | ** ** | **Guarantor**    | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
|-------------------------------------------------|------------|-------------|------------|----------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                      | ** ** | **Company** | ** ** | **Issuer**     | ** ** | **Subsidiaries** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                      |       |        |       |           |       |             |       |              |       |             |       |
| Current Assets:                                 |       |        |       |           |       |             |       |              |       |             |       |
| Cash and cash equivalents                       |       | $           | —     |           | $          | 8,783            |       | $                 | 15         |             | $          | (1,946 | ) | $ | 6,852 |   |
| Accounts receivable - trade                     |       | —      |       | 119,118        |       | 23,783           |       | —            |       | 142,901          |       |
| Inventory                                       |       | —      |       | 183,023        |       | 18,639           |       | —            |       | 201,662          |       |
| Intercompany receivable                         |       | —      |       | —         |       | 103,564          |       | (103,564          | )          | —           |       |
| Other current assets                            |       | —      |       | 35,385         |       | 5,351            |       | —            |       | 40,736           |       |
| Total current assets                            |       | —      |       | 346,309        |       | 151,352          |       | (105,510          | )          | 392,151          |       |
|                                            |       |        |       |           |       |             |       |              |       |             |       |
| Property and  equipment, net                    |       | —      |       | 29,164         |       | 2,590            |       | —            |       | 31,754           |       |
| Goodwill                                        |       | —      |       | 248,074        |       | 65,003           |       | —            |       | 313,077          |       |
| Other intangible  assets, net                   |       | —      |       | 100,596        |       | 42,844           |       | —            |       | 143,440          |       |
| Investment in  subsidiaries                     |       | 320,679     |       | 176,523        |       | —           |       | (497,202          | )          | —           |       |
| Other assets                                    |       | —      |       | 6,186          |       | 8,570            |       | (4,609            | )          | 10,147           |       |
| Total assets                                    |       | $           | 320,679    |           | $          | 906,852          |       | $                 | 270,359    |             | $          | (607,321 | ) | $ | 890,569 |   |
|                                            |       |        |       |           |       |             |       |              |       |             |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**  |       |        |       |           |       |             |       |              |       |             |       |
| Current  Liabilities:                           |       |        |       |           |       |             |       |              |       |             |       |
| Accounts payable                                |       | $           | —     |           | $          | 53,976           |       | $                 | 15,463     |             | $          | (1,946 | ) | $ | 67,493 |   |
| Accrued expenses and other current liabilities  |       | —      |       | 31,181         |       | 13,543           |       | —            |       | 44,724           |       |
| Intercompany payable                            |       | —      |       | 52,060         |       | —           |       | (52,060           | )          | —           |       |
| Debt and capital lease - short-term             |       | —      |       | 2,594          |       | 129              |       | —            |       | 2,723            |       |
| Total current liabilities                       |       | —      |       | 139,811        |       | 29,135           |       | (54,006           | )          | 114,940          |       |
|                                            |       |        |       |           |       |             |       |              |       |             |       |
| Long-Term  Liabilities:                         |       |        |       |           |       |             |       |              |       |             |       |
| Term debt and capital lease - long-term         |       | —      |       | 415,838        |       | 3,495            |       | —            |       | 419,333          |       |
| Other liabilities                               |       | —      |       | 34,799         |       | 818              |       | —            |       | 35,617           |       |
| Total liabilities                               |       | —      |       | 590,448        |       | 33,448           |       | (54,006           | )          | 569,890          |       |
|                                            |       |        |       |           |       |             |       |              |       |             |       |
| Senior preferred  stock                         |       | —      |       | 501,763        |       | —           |       | (501,763          | )          | —           |       |
|                                            |       |        |       |           |       |             |       |              |       |             |       |
| Stockholders’  equity (deficit)            |       | 320,679     |       | (185,359       | )          | 236,911          |       | (51,552           | )          | 320,679          |       |
| Total liabilities and stockholders’ equity |       | $           | 320,679    |           | $          | 906,852          |       | $                 | 270,359    |             | $          | (607,321 | ) | $ | 890,569 |   |

 

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**CONDENSED CONSOLIDATING STATEMENTOF OPERATIONS (UNAUDITED)**

**FOR THETHREE MONTHS ENDED MARCH 30, 2007**

**(inthousands)**
| ** **                                             | ** ** | **Parent**  | ** ** | **Subsidiary** | ** ** | **Guarantor**       | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|-------------|------------|----------------|------------|---------------------|------------|-------------------|------------|------------------|------------|
| ** **                                             | ** ** | **Company** | ** ** | **Issuer**     | ** ** | **Subsidiaries(1)** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
|                                                   |       |        |       |           |       |                |       |              |       |             |       |
| Net sales                                              |       | $           | —     |           | $          | 231,856             |       | $                 | 63,547     |             | $          | — |   | $ | 295,403 |   |
| Cost of sales                                          |       | —      |       | 144,374        |       | 38,735              |       | —            |       | 183,109          |       |
| Gross profit                                           |       | —      |       | 87,482         |       | 24,812              |       | —            |       | 112,294          |       |
|                                                   |       |        |       |           |       |                |       |              |       |             |       |
| Operating  Expenses:                                   |       |        |       |           |       |                |       |              |       |             |       |
| Selling, general and administrative expenses           |       | —      |       | 70,779         |       | 14,526              |       | —            |       | 85,305           |       |
| Depreciation and amortization                          |       | —      |       | 2,884          |       | 667                 |       | —            |       | 3,551            |       |
| Equity earnings of subsidiaries                        |       | (15,483     | )          | (4,988         | )          | —              |       | 20,471            |       | —           |       |
| Total operating expense                                |       | (15,483     | )          | 68,675         |       | 15,193              |       | 20,471            |       | 88,856           |       |
| Operating income                                       |       | 15,483      |       | 18,807         |       | 9,619               |       | (20,471           | )          | 23,438           |       |
|                                                   |       |        |       |           |       |                |       |              |       |             |       |
| Interest  (expense) income, net                        |       | —      |       | (6,544         | )          | (1,616              | )          | —            |       | (8,160           | )          |
| Other income                                           |       | —      |       | 205            |       | 219                 |       | (219              | )          | 205              |       |
| Income before income taxes                             |       | 15,483      |       | 12,468         |       | 8,222               |       | (20,690           | )          | 15,483           |       |
| Income tax  provision                                  |       | 6,043       |       | 3,028          |       | 3,015               |       | (6,043            | )          | 6,043            |       |
| Net income                                             |       | 9,440       |       | 9,440          |       | 5,207               |       | (14,647           | )          | 9,440            |       |
| Preferred stock  dividends                             |       | —      |       | (17,513        | )          | —              |       | 17,513            |       | —           |       |
| Net income (loss)  attributable to common stockholders |       | $           | 9,440      |           | $          | (8,073              | )          | $                 | 5,207      |             | $          | 2,866 |   | $ | 9,440 |   |

 

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(1)          The Subsidiary Issuer does not allocateintegration expenses, corporate overhead or other expenses for shared servicesto the Guarantor Subsidiaries; therefore, the results for the GuarantorSubsidiaries do not reflect any such allocation.

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**CONDENSED CONSOLIDATING STATEMENTOF OPERATIONS (UNAUDITED)**

**FOR THETHREE MONTHS ENDED MARCH 31, 2006**

**(inthousands)**
| ** **                                             | ** ** | **Parent**  | ** ** | **Subsidiary** | ** ** | **Guarantor**       | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|-------------|------------|----------------|------------|---------------------|------------|-------------------|------------|------------------|------------|
| ** **                                             | ** ** | **Company** | ** ** | **Issuer**     | ** ** | **Subsidiaries(1)** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
|                                                   |       |        |       |           |       |                |       |              |       |             |       |
| Net sales                                              |       | $           | —     |           | $          | 224,674             |       | $                 | —     |             | $          | — |   | $ | 224,674 |   |
| Cost of sales                                          |       | —      |       | 138,966        |       | —              |       | —            |       | 138,966          |       |
| Gross profit                                           |       | —      |       | 85,708         |       | —              |       | —            |       | 85,708           |       |
|                                                   |       |        |       |           |       |                |       |              |       |             |       |
| Operating  Expenses:                                   |       |        |       |           |       |                |       |              |       |             |       |
| Selling, general and administrative expenses           |       | —      |       | 61,672         |       | 6                   |       | —            |       | 61,678           |       |
| Depreciation and amortization                          |       | —      |       | 3,445          |       | —              |       | —            |       | 3,445            |       |
| Equity earnings of subsidiaries                        |       | (13,819     | )          | (2,663         | )          | —              |       | 16,482            |       | —           |       |
| Total operating expense                                |       | (13,819     | )          | 62,454         |       | 6                   |       | 16,482            |       | 65,123           |       |
| Operating income                                       |       | 13,819      |       | 23,254         |       | (6                  | )          | (16,482           | )          | 20,585           |       |
|                                                   |       |        |       |           |       |                |       |              |       |             |       |
| Interest  (expense) income, net                        |       | —      |       | (11,061        | )          | 4,169               |       | —            |       | (6,892           | )          |
| Other income                                           |       | —      |       | 126            |       | 126                 |       | (126              | )          | 126              |       |
| Income before income taxes                             |       | 13,819      |       | 12,319         |       | 4,289               |       | (16,608           | )          | 13,819           |       |
| Income tax  provision                                  |       | 5,378       |       | 3,878          |       | 1,500               |       | (5,378            | )          | 5,378            |       |
| Net income                                             |       | 8,441       |       | 8,441          |       | 2,789               |       | (11,230           | )          | 8,441            |       |
| Preferred stock  dividends                             |       | —      |       | (15,268        | )          | —              |       | 15,268            |       | —           |       |
| Net income (loss)  attributable to common stockholders |       | $           | 8,441      |           | $          | (6,827              | )          | $                 | 2,789      |             | $          | 4,038 |   | $ | 8,441 |   |

 

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(1)          The Subsidiary Issuer does not allocateintegration expenses, corporate overhead or other expenses for shared servicesto the Guarantor Subsidiaries; therefore, the results for the GuarantorSubsidiaries do not reflect any such allocation.

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**CONDENSED CONSOLIDATING STATEMENTOF CASH FLOW (UNAUDITED)**

**FOR THETHREE MONTHS ENDED MARCH 30, 2007**

**(inthousands)**
| ** **                                                    | ** ** | **Parent**  | ** ** | **Subsidiary** | ** ** | **Guarantor**    | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
|---------------------------------------------------------------|------------|-------------|------------|----------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                    | ** ** | **Company** | ** ** | **Issuer**     | ** ** | **Subsidiaries** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
|                                                          |       |        |       |           |       |             |       |              |       |             |       |
| Net cash  provided by operating activities                    |       | $           | —     |           | $          | 30,147           |       | $                 | 1,110      |             | $          | 770 |   | $ | 32,027 |   |
| Cash Flows from  Investing Activities:                        |       |        |       |           |       |             |       |              |       |             |       |
| Purchase of property and equipment, net                       |       | —      |       | (3,210         | )          | (307             | )          | —            |       | (3,517           | )          |
| Purchase of businesses, net of cash acquired                  |       | —      |       | 767            |       | 209              |       | (979              | )          | (3               | )          |
| Net cash (used in) provided by investing activities           |       | —      |       | (2,443         | )          | (98              | )          | (979              | )          | (3,520           | )          |
| Cash Flows from  Financing Activities:                        |       |        |       |           |       |             |       |              |       |             |       |
| Repayment of debt and capital lease obligations               |       | —      |       | (701           | )          | (32              | )          | —            |       | (733             | )          |
| Other                                                         |       | —      |       | 311            |       |  (979       | )          | 979               |       | 311              |       |
| Net cash provided by (used in) financing activities           |       | —      |       | (390           | )          | (1,011           | )          | 979               |       | (422             | )          |
| Effect of  exchange rate changes on cash and cash equivalents |       | —      |       | 7              |       | —           |       | —            |       | 7                |       |
| Net increase  (decrease) in cash and cash equivalents         |       | —      |       | 27,321         |       | 1                |       | 770               |       | 28,092           |       |
| Cash and cash  equivalents at beginning of period             |       | —      |       | 8,783          |       | 15               |       | (1,946            | )          | 6,852            |       |
| Cash and cash  equivalents at end of period                   |       | $           | —     |           | $          | 36,104           |       | $                 | 16         |             | $          | (1,176 | ) | $ | 34,944 |   |

 

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**CONDENSED CONSOLIDATING STATEMENTOF CASH FLOW (UNAUDITED)**

**FOR THETHREE MONTHS ENDED MARCH 31, 2006**

**(inthousands)**
| ** **                                                    | ** ** | **Parent**  | ** ** | **Subsidiary** | ** ** | **Guarantor**    | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
|---------------------------------------------------------------|------------|-------------|------------|----------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                    | ** ** | **Company** | ** ** | **Issuer**     | ** ** | **Subsidiaries** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
|                                                          |       |        |       |           |       |             |       |              |       |             |       |
| Net cash (used  in) provided by operating activities          |       | $           | —     |           | $          | 18,772           |       | $                 | (3         | )                | $          | — |   | $ | 18,769 |   |
| Cash Flows from  Investing Activities:                        |       |        |       |           |       |             |       |              |       |             |       |
| Purchase of property and equipment, net                       |       | —      |       | (1,527         | )          | —           |       | —            |       | (1,527           | )          |
| Purchase of businesses, net of cash acquired                  |       | —      |       | (193           | )          | —           |       | —            |       | (193             | )          |
| Net cash used in investing activities                         |       | —      |       | (1,720         | )          | —           |       | —            |       | (1,720           | )          |
| Cash Flows from  Financing Activities:                        |       |        |       |           |       |             |       |              |       |             |       |
| Decrease in revolver, net                                     |       | —      |       | (3,000         | )          | —           |       | —            |       | (3,000           | )          |
| Repayment of debt and capital lease obligations               |       | —      |       | (433           | )          | —           |       | —            |       | (433             | )          |
| Other                                                         |       | —      |       | 155            |       | —           |       | —            |       | 155              |       |
| Net cash provided by (used in) financing activities           |       | —      |       | (3,278         | )          | —           |       | —            |       | (3,278           | )          |
| Effect of  exchange rate changes on cash and cash equivalents |       | —      |       | (17            | )          | —           |       | —            |       | (17              | )          |
| Net (decrease)  increase in cash and cash equivalents         |       | —      |       | 13,757         |       | (3               | )          | —            |       | 13,754           |       |
| Cash and cash  equivalents at beginning of period             |       | —      |       | 2,935          |       | 23               |       | —            |       | 2,958            |       |
| Cash and cash  equivalents at end of period                   |       | $           | —     |           | $          | 16,692           |       | $                 | 20         |             | $          | — |   | $ | 16,712 |   |

 

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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 of1934 (the “Exchange Act”) that are subject to risks and uncertainties. Youshould not place undue reliance on those statements because they are subject tonumerous uncertainties and factors relating to our operations and businessenvironment, all of which are difficult to predict and many of which are beyondour control. Forward-looking statements include information concerning ourpossible or assumed future results of operations, including descriptions of ourbusiness strategy. These statements often include words such as “may,” “believe,”“expect,” “anticipate,” “intend,” “plan,” “estimate” or similar expressions.These statements are based on assumptions that we have made in light of ourexperience in the industry as well as our perceptions of historical trends,current conditions, expected future developments and other factors we believeare appropriate under the circumstances. As you read and consider 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,

·                  economicslowdowns,

·                  general marketconditions,

·                  adverse changesin trends in the home improvement and remodeling and home building markets,

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

·                  failure torealize expected benefits from acquisitions,

·                  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 mindthat any forward-looking statement made by us in this report, or elsewhere,speaks only as of the date on which we make it. New risks and uncertaintiesarise from time to time, and it is impossible for us to predict these events orhow they may affect us. In light of these risks and uncertainties, you shouldkeep in mind that any forward-looking statement made in this report orelsewhere might not occur. Notwithstanding the foregoing, all informationcontained in this report is materially accurate as of the date of this report.

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**Overview**

We are a leading nationaldistributor and direct marketer of maintenance, repair and operations (“MRO”)products. We stock over 80,000 plumbing, electrical, hardware, security,heating, ventilation and air conditioning, janitorial and sanitary and otherMRO products and sell to approximately 200,000 active customer accounts. Ourproducts are primarily used for the repair, maintenance, remodeling andrefurbishment of properties and non-industrial facilities. We are able torealize high operating margins by focusing on repair, maintenance, remodelingand refurbishment customers, who generally make smaller, more frequentpurchases and require high levels of service. Our diverse customer baseincludes facilities maintenance customers, which consist of multi-familyhousing facilities, educational institutions, lodging and health carefacilities, government properties and building service contractors;professional contractors who are primarily involved in the repair, remodelingand construction of residential and non-industrial facilities; and specialtydistributors, including plumbing and hardware retailers. Our customers range insize from individual contractors and independent hardware stores to apartmentmanagement companies and national purchasing groups.

We market and sell our productsprimarily through ten distinct and targeted brands, each of which is nationallyrecognized in the markets we serve for providing premium products atcompetitive prices with reliable same-day and/or next-day delivery. Wilmar,Sexauer, Maintenance USA and AmSan brands generally serve our facilitiesmaintenance customers; Barnett, U.S. Lock, Sun Star and Copperfield brandsgenerally serve our professional contractor customers; Hardware Express and AFLighting brands generally serve our specialty distributors customers. Ourmulti-brand operating model, which we believe is unique in the industry, allowsus to use a single platform to deliver tailored products and services to meetthe individual needs of each respective customer group served. We reach ourmarkets using a variety of sales channels, including a sales force ofapproximately 670 field sales representatives, approximately 525 telesales andcustomer service representatives, a direct marketing program of approximatelyfive million pieces annually, brand-specific websites and a nationalaccounts sales program. We deliver our products through our network of 77regional distribution centers, 38 professional contractor showrooms locatedthroughout the United States and Canada, a national distribution center, orNDC, in Nashville, Tennessee, 15 vendor managed inventory locations at largeprofessional contractor customer locations and a dedicated fleet of trucks. Ourbroad distribution network allows us the ability to provide reliable, same-dayand/or next-day delivery service to 98% of the U.S. population.

Our information technology andlogistics platform supports our major business functions, allowing us to marketand sell our products at varying price points depending on the customer’sservice requirements. While we market our products under a variety of brandedcatalogs, generally our brands draw from the same inventory within commondistribution centers and share associated employee and transportation costs. Inaddition, we have centralized marketing, purchasing and catalog productionoperations to support our brands. We believe that our information technologyand logistics platform also benefits our customers by allowing us to offer abroad product selection at highly competitive prices while maintaining theunique customer appeal of each of our targeted brands. Overall, our commonoperating platform has enabled us to improve customer service, maintain loweroperating costs, efficiently manage working capital and support our growthinitiatives.

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**Results of Operations**

The following tablepresents information derived from the condensed consolidated statements ofearnings expressed as a percentage of revenues for the three months ended March30, 2007 and March 31, 2006:

|                                              | ** ** | **% of Net Sales** | ** ** | **% Increase** | ** ** |
|----------------------------------------------|------------|-----------------------------------|------------|---------------------|------------|
| ** **                                   | ** ** | **Three Months Ended**  | ** ** | **(Decrease)**      | ** ** |
| ** **                                   | ** ** | **March 30,**                | ** ** | **March 31,**  | ** ** | **2007** | ** ** |
| ** **                                   | ** ** | **2007**                          | ** ** | **2006**            | ** ** | **vs. 2006 (1)** | ** ** |
|                                         | ** ** | ** **                        | ** ** | ** **          |       |   |   |
| Net sales                                    |       | 100.0                             | %          | 100.0               | %          | 31.5 | % |
| Cost of sales                                |       | 62.0                              |       | 61.9                |       | 31.8 |   |
| Gross profit                                 |       | 38.0                              |       | 38.1                |       | 31.0 |   |
|                                         |       |                              |       |                |       |   |   |
| Operating  Expenses:                         |       |                              |       |                |       |   |   |
| Selling, general and administrative expenses |       | 28.9                              |       | 27.5                |       | 38.3 |   |
| Depreciation and amortization                |       | 1.2                               |       | 1.5                 |       | 3.1 |   |
| Total operating expense                      |       | 30.1                              |       | 29.0                |       | 36.4 |   |
| Operating income                             |       | 7.9                               |       | 9.2                 |       | 13.9 |   |
|                                         |       |                              |       |                |       |   |   |
| Interest expense                             |       | (2.9                              | )          | (3.1                | )          | 23.1 |   |
| Interest income                              |       | 0.1                               |       | 0.0                 |       | N/M |   |
| Other income                                 |       | 0.1                               |       | 0.1                 |       | N/M |   |
| Income before income taxes                   |       | 5.2                               |       | 6.2                 |       | 12.0 |   |
| Income tax  provision                        |       | (2.0                              | )          | (2.4                | )          | 12.4 |   |
| Net income                                   |       | 3.2                               | %          | 3.8                 | %          | 11.8 | % |

 

N/M - NotMeaningful.

----

(1)          Percent increase (decrease) represents the actual change as apercent of the prior year’s result.

Thefollowing discussion includes references to the terms 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. Averageorganic daily sales are defined as sales for a period of time divided by thenumber of shipping days in that period of time excluding any sales fromacquisitions made subsequent to the beginning of the prior year period. Thecomputation of average organic daily sales is as follows (amounts inthousands):
|                              | ** ** | **Three Months Ended** | ** ** |
|------------------------------|------------|----------------------------------|------------|
| ** **                   | ** ** | **March 30,**               | ** ** | **March 31,** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **2007**                         | ** ** | **2006** | ** ** | **% Variance** | ** ** |
| ** **                   | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net Sales                    |       | $                                | 295,403    |   | $ | 224,674 |   | 31.5 | % |
| Less  Acquisitions:          |       |                             |       |   |   |   |   |
| AmSan                        |       | (63,547                          | )          | — |   |   |   |
| Organic Sales                |       | $                                | 231,856    |   | $ | 224,674 |   | 3.2 | % |
|                         |       |                             |       |   |   |   |   |
| Daily Sales:                 |       |                             |       |   |   |   |   |
| Ship Days                    |       | 64                               |       | 64 |   |   |   |
| Average Daily Sales          |       | $                                | 4,616      |   | $ | 3,511 |   | 31.5 | % |
| Average Organic  Daily Sales |       | $                                | 3,623      |   | $ | 3,511 |   | 3.2 | % |

 

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 AmSan, and compare our organic operatingperformance with that of our competitors. However, average organic daily salesis not a

19

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measureof financial performance under GAAP and it should be considered in addition to,but not as a substitute for, other measures of financial performance reportedin accordance with GAAP, such as net sales. Management utilizes average organicdaily sales as an operating performance measure in conjunction with GAAPmeasures such as net sales.

*Overview.*During the threemonths ended March 30, 2007, our average daily sales grew 31.5% including 3.2%average organic daily sales growth and 28.3% average daily sales growthattributable to our July 2006 acquisition of AmSan LLC (“AmSan”). Our organicgrowth is a result of strong sales performance in the facilities maintenancemarkets that we serve, which represent over 60% of our sales, offset by a slowdown in sales during what continues to be a soft economic period of theprofessional contractor and specialty distributor markets that we serve. Ourgross margins during the first quarter decreased 10 basis points to 38.0%compared to the prior year quarter. Total SG&A expenses during the first quarterwere 28.9% of sales or 140 basis points higher than the prior year quarter,reflecting the effect of the AmSan acquisition, expected incremental share basedcompensation expense, higher health care costs and continued investments in ourgrowth initiatives including the expansion of our national accounts program,the addition of field sales professionals and the addition of new products.

*Three Months Ended March 30, 2007Compared to Three Months Ended March 31, 2006*

*NetSales.*Our net sales increased by $70.7 million, or31.5%, to $295.4 million in the three months ended March 30, 2007 from$224.7 million in the three months ended March 31, 2006. Of the $70.7million increase, $63.5 million was attributable to our AmSan acquisition andthe remaining $7.2 million was driven by continued growth in our facilitiesmaintenance markets partially offset by the slow down in our professional contractorand specialty distributor markets.

*GrossProfit.*Gross profit increased by $26.6 million, or31.0%, to $112.3 million in the three months ended March 30, 2007 from$85.7 million in the three months ended March 31, 2006. Gross profitmargins decreased 10 basis points to 38.0% for the three months ended March 30,2007 compared to 38.1% for the three months ended March 31, 2006.

*Selling,General and Administrative Expenses.*SG&A expensesincreased by $23.6 million, or 38.3%, to $85.3 million in the threemonths ended March 30, 2007 from $61.7 million in the three months endedMarch 31, 2006. Increased SG&A expenses related to our AmSan acquisitionaccounted for $19.0 million of the $23.6 million increase. Excluding AmSan,SG&A expenses increased 7.6% in the three months ended March 30, 2007.SG&A expenses as a percentage of sales were 28.9% in the three months endedMarch 30, 2007 compared to 27.5% in the three months ended March 31, 2006.Certain expenses within SG&A, such as the costs of running regionaldistribution centers, delivery expenses and selling expenses, fluctuate withsales volume. The increase in SG&A expenses included these increases, aswell as increased investment in new sales and marketing initiatives andadditional share-based compensation associated with restricted share units,deferred stock units and stock options during the three months ended March 30,2007, higher health insurance costs and continued investments in our growthdrivers.

*Depreciation and Amortization.*Depreciation and amortization expense increased by$0.1 million, or 3.1%, to approximately $3.6 million in the three monthsended March 30, 2007 from $3.4 million in the three months ended March 31,2006. This increase was due to our AmSan acquisition.

*Operating Income.*Asa result of the foregoing, operating income increased by $3.0 million, or 13.9%,to $23.5 million in the three months ended March 30, 2007 from $20.6million in the three months ended March 31, 2006. As a percent of sales,operating income decreased to 7.9% in the three months ended March 30, 2007compared to 9.2% in the three months ended March 31, 2006. This decrease wasprimarily due to our AmSan acquisition as well as additional share-basedcompensation associated with restricted share units, deferred stock units andstock options granted during the three months ended March 30, 2007.

*Interest Expense.*Interestexpense increased by $1.6 million in the three months ended March 30, 2007 to$8.6 million from $7.0 million in the three months ended March 31,2006. This increase was primarily due to incrementally higher debt balancesresulting from our $130.0 million debt financed acquisition of AmSan in July2006.

*Provision for Income Taxes.*Theeffective tax rate for the three months ended March 30, 2007 was 39.0% comparedto 38.9% in the three months ended March 31, 2006. The increase in theeffective tax rate was due primarily to the additional liability associatedwith unrecognized tax benefits arising from the adoption of Financial AccountingStandards Board (“FASB”) Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109*,(“FIN 48”) partially offset by the change in a state’s measurement of tax froman income tax-based method to a non-income tax-based method.

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**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.

We have $200.0 million of81/8%senior subordinated notes due 2014 and a $330.0 million bank credit facility.The bank credit facility consists of a $230.0 million 7-year term loan and a$100.0 million 6-year revolving credit facility of which a portion notexceeding $40.0 million is available in the form of letters of credit.

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%. We will amortize the discountof $1.4 million over the term of the 81/8% senior subordinated notes. As of March 30, 2007, the81/8%senior subordinated notes had a fair market value of $206.5 million. The 81/8% seniorsubordinated notes mature on June 15, 2014 and interest is payable on June 15and December 15 of each year.

The debt instruments of InterlineNew Jersey, primarily the credit facility entered into on June 23, 2006 and theindenture governing the terms of the 81/8% senior subordinated notes, contain significantrestrictions on the payment of dividends and distributions to us by InterlineNew Jersey. Interline New Jersey’s credit facility allows it to pay dividends,make distributions to us or make investments in us in an aggregate amount notto exceed $2.0 million during any fiscal year, so long as Interline New Jerseyis not in default or would be in default as a result of such payments. Inaddition, ordinary course distributions for overhead (up to $3.0 millionannually) and taxes are permitted, as are annual payments of up to $7.5 millionin respect of our 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 us and to make advances to, or investments in,us to an amount generally equal to 50% of the net income of Interline NewJersey, plus an amount equal to the net proceeds from certain equity issuances,subject to compliance with a leverage ratio and no default having occurred andcontinuing. The indenture also contains certain permitted exceptions including(1) allowing us to pay our franchise taxes and other fees required to maintainour corporate existence, to pay for general corporate and overhead expenses andto pay expenses 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 $75.0 million. The bank credit facility also allows forcertain incremental term loans and incremental commitments under the revolvingcredit facility which are available to Interline New Jersey to repayindebtedness and make acquisitions if certain conditions, including variousfinancial ratios are met. For a further description of the credit facility, see“—Credit Facility” below.

*Financial Condition*

Working capital increasedby $11.1 million to $288.3 million as of March 30, 2007 from $277.2 million asof December 29, 2006. The increase in working capital was primarily funded bycash flows from operating activities.

*Cash Flow*

Net cash provided by operatingactivities was $32.0 million in the three months ended March 30, 2007compared to net cash provided by operating activities of $18.8 million inthe three months ended March 31, 2006.The increase of $13.2 million in net cash provided by operating activities inthe three months ended March 30, 2007 compared to the three months endedMarch 31, 2006 was primarily as aresult of returns on our previous investments in working capital. Changes inour working capital components generated $16.9 million during the three monthsended March 30, 2007 compared to $6.2 million during the three months endedMarch 31, 2006. The increase in cash generated from working capital primarilyconsists of incremental cash generated from inventory and accounts payable of$5.6 million and $13.4 million, respectively, offset by incremental cash usedby accounts receivable of $6.3 million.

Net cash used ininvesting activities was $3.5 million in the three months ended March 30,2007 compared to net cash used in investing activities of $1.7 million in thethree months ended March 31, 2006. Net cash used in investing activities in thethree months ended March 30, 2007 and March 31, 2006 was primarily attributableto capital expenditures made in the ordinary course of business and costsrelated to purchases of businesses, net of cash. The increase in net cash usedin investing activities in the three months ended March 31, 2007 wasattributable to capital expenditures associated with the expansion of existingdistribution centers and warehouse equipment as well as investments in ourinformation technology systems necessary for the integration of our AmSanacquisition.

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Net cash used in financingactivities totaled $0.4 million in the three months ended March 30,2007 compared to net cash used in financingactivities of $3.3 million in the three months ended March 31, 2006. Net cash used in financing activities in thethree months ended March 30, 2007 and March 31, 2006 was primarily attributableto our repayment of borrowings on our credit facilityand capital lease obligations partially offset byproceeds from stock options exercised and excess tax benefits from share-basedcompensation. The decrease in net cash used in financing activities in thethree months ended March 30, 2007 compared to the three months ended March 31,2006 was due to the repayment of $3.0 million in borrowings on our revolvingcredit facility in the three months ended March 31, 2006. No such repayment wasnecessary in the three months ended March 30, 2007 because we did not borrowagainst our revolving credit facility during that period.

*Capital Expenditures*

Capital expenditures were $3.5million in the three months ended March 30, 2007 compared to $1.5million in the three months ended March 31, 2006. Capital expenditures as a percentage of sales were 1.2% in the threemonths ended March 30, 2007 compared to 0.7% in the three months ended March31, 2006. The increase in capital expenditures is due to the expansionof existing distribution centers and warehouse equipment as well as investmentsin our information technology systems necessary for the integration of ourAmSan acquisition.

*Credit Facility*

Borrowings under the termloan, the delayed draw facility and the revolving credit facility bearinterest, at Interline New Jersey’s option, at either LIBOR plus 1.75% or atthe alternate base rate, which is the greater of the Prime Rate or the FederalFunds Effective Rate plus 0.50%, plus 0.75%. As of March 30, 2007, the interestrate in effect with respect to the term loan and the delayed draw facility was7.07% for the LIBOR option and 9.00% for the alternate base rate option.Outstanding letters of credit under the revolving credit facility are subjectto a per annum fee equal to the applicable margin under the revolving creditfacility. The interest rate margin is subject to pricing adjustments at the endof each fiscal quarter based on net total indebtedness to consolidated EBITDA.The term loan and the delayed draw facility mature on June 23, 2013 and therevolving loan facility matures on June 23, 2012. Amounts under the term loanand the delayed draw facility are due and payable in quarterly installmentsequal to 1.0% of the original principal amount on an annual basis through June23, 2013, with the balance payable in one final installment at the maturitydate.

The bank credit facility,which is secured by substantially all of the assets of Interline New Jersey andis guaranteed by us and by the domestic subsidiaries of Interline New Jersey,contains affirmative, negative and financial covenants that limit Interline NewJersey’s ability to incur additional indebtedness, pay dividends on its commonstock or redeem, 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 ratiobased on an adjusted and consolidated earnings before interest, taxes,depreciation and amortization (“EBITDA”) to consolidated cash interest expenseand a maximum ratio of net total indebtedness to an adjusted consolidatedEBITDA. Interline New Jersey and the Company were in compliance with allcovenants at March 30, 2007.

In connection with thebank credit facility, Interline New Jersey is required to pay administrativefees, commitment fees, letter of credit issuance and administration fees andcertain expenses and to provide certain indemnities, all of which are customaryfor financings of this type. The bank credit facility also allows for certainincremental term loans and incremental commitments under the revolving creditfacility which are available to Interline New Jersey to repay indebtedness andmake acquisitions if certain conditions, including various financial ratios aremet.

Asof March 30, 2007, Interline New Jersey had $13.9 million of letters ofcredit issued under the revolving loan facility and $218.3 millionaggregate principal outstanding under the term loan facility.

*Liquidity*

Historically, our capital requirements have been fordebt service obligations, working capital requirements, including forinventory, accounts receivable and accounts payable, acquisitions, theexpansion and maintenance of our distribution network and upgrades of ourinformation systems. We expect this to continue in the foreseeable future.Historically, we have funded these requirements through cash flow generatedfrom operating activities and funds borrowed under our credit facility. Weexpect our cash flow from operations and the loan availability under our creditfacility to continue to be our primary source of funds in the future. Lettersof credit, which are issued under the revolving loan facility under our creditfacility, are used to support payment obligations incurred for our generalcorporate purposes.

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As of March 30, 2007, we had approximately$86.1 million of availability under Interline New Jersey’s$100.0 million revolving credit facility.

We believe that cash flow fromoperations and available borrowing capacity under our new credit facility willbe adequate to finance our ongoing operational cash flow needs and debt serviceobligations for the next twelve months.

*Contractual Obligations*

Ourcontractual obligations are disclosed in our Annual Report on Form 10-K for theyear ended December 29, 2006 filed with the SEC. Other than the adoptionof FIN 48 as described in “Note 6. Income Taxes” to the unaudited condensed consolidatedfinancial statements above, there have been no material changes to ourcontractual obligations since December 29, 2006. As of March 30, 2007, wecannot reasonably estimate the period of cash settlement on our unrecognizedtax benefits. In addition, we do not anticipate that our total unrecognized taxbenefits will significantly change prior to March 28, 2008.

**Critical Accounting Policies**

In preparing the unaudited condensedconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America, management is required tomake certain estimates, judgments and assumptions. These estimates, judgmentsand assumptions affect the reported amounts of assets and liabilities,including the disclosure of contingent assets and liabilities, at the date ofthe financial statements and the reported amounts of revenues and expensesduring the periods presented. On an ongoing basis, management evaluates theseestimates and assumptions. Management bases its estimates and assumptions onhistorical experience and on various other factors that are believed to bereasonable at the time the estimates and assumptions are made. Actual results maydiffer from these estimates and assumptions under different circumstances orconditions.

Our critical accounting policiesare included in our Annual Report on Form 10-K for the year ended December 29,2006 filed with the SEC. During the three months ended March 30, 2007, therewere no significant changes to any of our critical accounting policies.

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

*Commodity Price Risk*

We are aware of the potentially unfavorable effectsinflationary pressures may create through higher product and material costs,higher asset replacement costs and related depreciation and higher interestrates. In addition, our operating performance is affected by price fluctuationsin copper, oil, stainless steel, aluminum, zinc, plastic and PVC and othercommodities and raw materials. We seek to minimize the effects of inflation andchanging prices through economies of purchasing and inventory managementresulting in cost reductions and productivity improvements as well as priceincreases to maintain reasonable profit margins. However, such commodity pricefluctuations 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.

*Interest Rate Risk*

Our variable rate termdebt is sensitive to changes in the general level of interest rates. As ofMarch 30, 2007, the interest rate in effect with respect to our $218.3 millionvariable rate term debt was 7.07% for the LIBOR option and 9.00% for thealternate base rate option. While our variable rate term debt obligationsexpose us to the risk of rising interest rates, we do not believe that thepotential exposure is material to our overall financial performance or resultsof operations. Based on the outstanding variable rate term debt as of March 30,2007, a 1.0% annual increase or decrease in current market interest rates wouldhave the effect of causing a $0.6 million pre-tax change to our statement ofoperations for the three months ended March 30, 2007.

The fair market value of our fixed rate debt issubject to interest rate risk. As of March 30, 2007, the fair market value ofour $200.0 million 81/8% senior subordinated notes was$206.5 million.

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*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. Accordingly, our risk to foreigncurrency exchange rates was not material as of March 30, 2007.

*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 March 30, 2007, 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 the participation of our ChiefExecutive Officer and Chief Financial Officer (our principal executive officerand principal financial officer), evaluated the effectiveness of our disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under theExchange Act) as of March 30, 2007. Based on this evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that, as of March 30,2007, our disclosure controls and procedures were (1) designed to ensure that materialinformation relating to us, including our consolidated subsidiaries, is madeknown to our Chief Executive Officer and Chief Financial Officer by otherswithin those entities, particularly during the period in which this report wasbeing prepared and (2) effective, in that they provide reasonable assurancethat information required to be disclosed by us in the reports that we file orsubmit under the Exchange Act is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules 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 March 30, 2007 that has materially affected,or is reasonably likely to materially affect, our internal control overfinancial reporting.

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**PART II. OTHERINFORMATION**

**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**

For information regardingfactors that could affect our financial position, results of operations andcash flows, see the risk factors discussion provided in our Annual Report onForm 10-K for the year ended December 29, 2006 in Part I. Item 1A. RiskFactors. See also “Part I. Item 2—Forward Looking Statements” above.

There have been nomaterial changes from the risk factors previously disclosed in our AnnualReport on Form 10-K for the year ended December 29, 2006.

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

*Unregistered Sales of EquitySecurities*

None.

*Purchases of Equity Securities bythe Issuer*

The following tablesummarizes repurchases of our stock, comprising entirely of shares returned tous to satisfy employee tax withholding obligations that arose upon the vestingof restricted stock awards, during the three months ended March 30, 2007:
| 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** | ** ** |
|------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|------------|
| January 2007  (December 30 – January 26)  |       | —                                       |       | $                                            | —     |                                                                                                                             | —     |                                                                                                                                    | —     |   |
| February 2007  (January 27 – February 23) |       | —                                       |       | —                                       |       | —                                                                                                                           |       | —                                                                                                                                  |       |
| March 2007  (February 24 – March 30)      |       | 15,246                                       |       | 20.79                                        |       | —                                                                                                                           |       | —                                                                                                                                  |       |
| Total                                          |       | 15,246                                       |       | $                                            | 20.79      |                                                                                                                             | —     |                                                                                                                                    | —     |   |

 

**ITEM 3. Defaults Upon Senior Securities**

None.

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

None.

**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:
|        | 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: May 4, 2007 |       |       | By:        |   /S/ THOMAS J. TOSSAVAINEN                                    |
|              |       |       |       | Thomas J. Tossavainen                                                    |
|              |       |       |       | Chief Financial Officer                                                  |
|              |       |       |       | (Duly Authorized Signatory, Principal Financial and  Accounting Officer) |

 

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