**UNITED STATES**

**SECURITIES 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 SEPTEMBER 28, 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

 

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

 

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

 

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

 

Yes  o      No  x

 

                    Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of October 31, 2007, there were 32,305,488 shares of the registrant’s common stock outstanding (excluding 39,400 shares held in treasury), par value $0.01.

 

 

 

 

**TABLE OF CONTENTS**

 

 

 

 
| ****ITEM****       | **** ****                                                                                                                        |   |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------|--------|
|               | ****PART I. FINANCIAL INFORMATION****                                                                                                 |   |
|               |                                                                                                                                  |   |
|               |                                                                                                                                  |   |
| ****1.****         | ****Financial Statements (Unaudited)****                                                                                              |   |
| **** ****     | ****Condensed Consolidated Balance Sheets as of September 28, 2007 and December 29, 2006****                                          |   |
| **** ****     | ****Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 28, 2007 and September 29, 2006**** |   |
| **** ****     | ****Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 28, 2007****                    |   |
| **** ****     | ****Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 28, 2007 and September 29, 2006****           |   |
| **** ****     | ****Notes to Condensed Consolidated Financial Statements****                                                                          |   |
| ****2.****         | ****Management’s Discussion 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**** |                                                                                                                                  |

 

 

**PART I. FINANCIAL INFORMATION**

 

**ITEM 1. Financial Statements**

**INTERLINE BRANDS, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS (UNAUDITED)**

**AS OFSEPTEMBER 28, 2007 AND DECEMBER 29, 2006**

**(inthousands, except share and per share data)**

 
| ** **                                                                                                                                                                                              | ** ** | **September 28,  2007** | ** ** | **December 29,  2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| **ASSETS**                                                                                                                                                                                              | ** ** | ** **              | ** ** | ** **             | ** ** |
| Current assets:                                                                                                                                                                                         |       |                    |       |                   |       |
| Cash and cash equivalents                                                                                                                                                                               |       | $                       | 16,285     |                   | $          | 6,852 |   |
| Short-term investments                                                                                                                                                                                  |       | 28,225                  |       | —                 |       |
| Accounts receivable - trade (net of allowance for doubtful accounts  of $6,252 and $10,224)                                                                                                             |       | 177,899                 |       | 142,901                |       |
| Accounts receivable - other                                                                                                                                                                             |       | 16,183                  |       | 15,663                 |       |
| Inventory                                                                                                                                                                                               |       | 202,147                 |       | 201,662                |       |
| Prepaid expenses and other current assets                                                                                                                                                               |       | 5,509                   |       | 7,252                  |       |
| Deferred income taxes                                                                                                                                                                                   |       | 18,266                  |       | 17,821                 |       |
| Total current assets                                                                                                                                                                                    |       | 464,514                 |       | 392,151                |       |
|                                                                                                                                                                                                    |       |                    |       |                   |       |
| Property and equipment, net                                                                                                                                                                             |       | 36,285                  |       | 31,754                 |       |
| Goodwill                                                                                                                                                                                                |       | 315,100                 |       | 313,077                |       |
| Other intangible assets, net                                                                                                                                                                            |       | 138,424                 |       | 143,440                |       |
| Other assets                                                                                                                                                                                            |       | 11,025                  |       | 10,147                 |       |
| Total assets                                                                                                                                                                                            |       | $                       | 965,348    |                   | $          | 890,569 |   |
|                                                                                                                                                                                                    |       |                    |       |                   |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                           | ** ** | ** **              | ** ** | ** **             | ** ** |
| Current liabilities:                                                                                                                                                                                    |       |                    |       |                   |       |
| Accounts payable                                                                                                                                                                                        |       | $                       | 91,935     |                   | $          | 67,493 |   |
| Accrued expenses and other current liabilities                                                                                                                                                          |       | 43,785                  |       | 38,722                 |       |
| Accrued interest                                                                                                                                                                                        |       | 4,866                   |       | 3,516                  |       |
| Income taxes payable                                                                                                                                                                                    |       | 3,462                   |       | 2,486                  |       |
| Current portion of long-term debt                                                                                                                                                                       |       | 2,409                   |       | 2,416                  |       |
| Capital lease - current                                                                                                                                                                                 |       | 216                     |       | 307                    |       |
| Total current liabilities                                                                                                                                                                               |       | 146,673                 |       | 114,940                |       |
|                                                                                                                                                                                                    |       |                    |       |                   |       |
| Long-term liabilities:                                                                                                                                                                                  |       |                    |       |                   |       |
| Deferred income taxes                                                                                                                                                                                   |       | 35,580                  |       | 34,799                 |       |
| Long-term debt, net of current portion                                                                                                                                                                  |       | 416,945                 |       | 418,650                |       |
| Capital lease - long term                                                                                                                                                                               |       | 518                     |       | 683                    |       |
| Other liabilities                                                                                                                                                                                       |       | 2,472                   |       | 818                    |       |
| Total liabilities                                                                                                                                                                                       |       | 602,188                 |       | 569,890                |       |
| Commitments and contingencies                                                                                                                                                                           |       |                    |       |                   |       |
| Senior preferred stock, $0.01 par value, 20,000,000 shares  authorized, no shares outstanding as of September 28, 2007 and December 29,  2006                                                           |       | —                  |       | —                 |       |
|                                                                                                                                                                                                    |       |                    |       |                   |       |
| Stockholders’ equity:                                                                                                                                                                              |       |                    |       |                   |       |
| Common stock; $0.01 par value, 100,000,000 authorized; 32,344,888  issued and 32,305,488 outstanding as of September 28, 2007 and 32,308,221  issued and 32,284,069 outstanding as of December 29, 2006 |       | 323                     |       | 323                    |       |
| Additional paid-in capital                                                                                                                                                                              |       | 567,202                 |       | 561,634                |       |
| Accumulated deficit                                                                                                                                                                                     |       | (205,225                | )          | (241,852               | )          |
| Accumulated other comprehensive income                                                                                                                                                                  |       | 1,675                   |       | 1,072                  |       |
| Treasury stock, at cost, 39,400 shares as of September 28, 2007 and  24,152 shares as of December 29, 2006                                                                                              |       | (815                    | )          | (498                   | )          |
| Total stockholders’ equity                                                                                                                                                                         |       | 363,160                 |       | 320,679                |       |
| Total liabilities and stockholders’ equity                                                                                                                                                         |       | $                       | 965,348    |                   | $          | 890,569 |   |

 

*See accompanying notes to unaudited condensed consolidatedfinancial statements.*

 

1

----

 
| **INTERLINE BRANDS, INC. AND SUBSIDIARIES**                                |
|----------------------------------------------------------------------------|
| **CONDENSED  CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)**             |
| **THREE  AND NINE MONTHS ENDED SEPTEMBER 28, 2007 AND SEPTEMBER 29, 2006** |
| **(in  thousands, except share and per share data)**                       |

 
| ** **                                   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **September 28,**      | ** ** | **September 29,**     | ** ** | **September 28,** | ** ** | **September 29,** | ** ** |
| ** **                                   | ** ** | **2007**               | ** ** | **2006**              | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                         |       |                   |       |                  |       |   |   |   |   |
| Net sales                                    |       | $                      | 330,193    |                  | $          | 314,182 |   | $ | 938,843 |   | $ | 774,265 |   |
| Cost of sales                                |       | 204,765                |       | 194,099               |       | 583,154 |   | 478,978 |   |
| Gross profit                                 |       | 125,428                |       | 120,083               |       | 355,689 |   | 295,287 |   |
|                                         |       |                   |       |                  |       |   |   |   |   |
| Operating expenses:                          |       |                   |       |                  |       |   |   |   |   |
| Selling, general and administrative expenses |       | 88,105                 |       | 84,578                |       | 260,345 |   | 209,559 |   |
| Depreciation and amortization                |       | 3,540                  |       | 3,866                 |       | 10,758 |   | 10,820 |   |
| Total operating expense                      |       | 91,645                 |       | 88,444                |       | 271,103 |   | 220,379 |   |
| Operating income                             |       | 33,783                 |       | 31,639                |       | 84,586 |   | 74,908 |   |
|                                         |       |                   |       |                  |       |   |   |   |   |
| Loss on extinguishment of debt               |       | —                 |       | —                |       | — |   | (20,700 | ) |
| Interest expense                             |       | (8,589                 | )          | (8,806                | )          | (25,636 | ) | (22,740 | ) |
| Interest income                              |       | 394                    |       | 177                   |       | 1,383 |   | 411 |   |
| Other income                                 |       | 429                    |       | 262                   |       | 788 |   | 517 |   |
| Income before income taxes                   |       | 26,017                 |       | 23,272                |       | 61,121 |   | 32,396 |   |
| Income tax provision                         |       | 10,029                 |       | 9,053                 |       | 23,718 |   | 12,601 |   |
| Net income                                   |       | $                      | 15,988     |                  | $          | 14,219 |   | $ | 37,403 |   | $ | 19,795 |   |
|                                         |       |                   |       |                  |       |   |   |   |   |
| Earnings per share:                          |       |                   |       |                  |       |   |   |   |   |
| Basic                                        |       | $                      | 0.50       |                  | $          | 0.44 |   | $ | 1.16 |   | $ | 0.62 |   |
| Diluted                                      |       | $                      | 0.49       |                  | $          | 0.43 |   | $ | 1.15 |   | $ | 0.60 |   |
|                                         |       |                   |       |                  |       |   |   |   |   |
| Weighted average shares outstanding:         |       |                   |       |                  |       |   |   |   |   |
| Basic                                        |       | 32,253,728             |       | 32,159,251            |       | 32,230,971 |   | 32,124,106 |   |
| Diluted                                      |       | 32,694,550             |       | 32,762,492            |       | 32,665,772 |   | 32,720,724 |   |

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

 

2

 
| **INTERLINE BRANDS, INC. AND SUBSIDIARIES**                                    |
|--------------------------------------------------------------------------------|
| **CONDENSED  CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)** |
| **NINE  MONTHS ENDED SEPTEMBER 28, 2007**                                      |
| **(in  thousands, 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                                                  |       |             |       |                   |       | 4,857           |       |                                |       |         |       |                         |       | 4,857 |   |
| Issuance of  restricted stock                                              |       | 4,600            |       | —                 |       | —          |       |                                |       |         |       |                         |       | — |   |
| Issuance of  common stock from stock options exercised                     |       | 32,067           |       | —                 |       | 476             |       |                                |       |         |       |                         |       | 476 |   |
| Tax benefits on  stock options exercised                                   |       |             |       |                   |       | 111             |       |                                |       |         |       |                         |       | 111 |   |
| 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                                                                 |       |             |       |                   |       |            |       | 37,403                              |       |         |       |                         |       |   |   |
| Amortization of  unrecognized gain on employee benefits                    |       |             |       |                   |       |            |       |                                |       | (127         | )          |                         |       |   |   |
| Foreign currency  translation                                              |       |             |       |                   |       |            |       |                                |       | 730          |       |                         |       |   |   |
| Total  comprehensive income                                                |       |             |       |                   |       |            |       |                                |       |         |       |                         |       | 38,006 |   |
| Balance at  September 28, 2007                                             |       | 32,344,888       |       | $                      | 323        |            | $          | 567,202                             |       | $            | (205,225   | )                            | $          | 1,675 |   | $ | (815 | ) | $ | 363,160 |   |

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

 

3

 
| **INTERLINE BRANDS, INC. AND SUBSIDIARIES**                      |
|------------------------------------------------------------------|
| **CONDENSED  CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)** |
| **NINE  MONTHS ENDED SEPTEMBER 28, 2007 AND SEPTEMBER 29, 2006** |
| **(in  thousands)**                                              |

**** ****
| ** **                                                                               | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                               | ** ** | **September 28,**     | ** ** | **September 29,** | ** ** |
| ** **                                                                               | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Cash flows from operating activities:                                                    |       |                  |       |   |   |
| Net income                                                                               |       | $                     | 37,403     |   | $ | 19,795 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities:       |       |                  |       |   |   |
| Depreciation and amortization                                                            |       | 11,281                |       | 10,820 |   |
| Amortization of debt issuance costs                                                      |       | 816                   |       | 1,154 |   |
| Amortization of discount on 81/8% senior  subordinated notes                             |       | 100                   |       | 33 |   |
| Write-off of debt issuance costs                                                         |       | —                |       | 7,037 |   |
| Tender and redemption premiums on 111⁄2% senior subordinated notes                    |       | —                |       | 13,663 |   |
| Share-based compensation                                                                 |       | 4,857                 |       | 2,739 |   |
| Deferred income taxes                                                                    |       | 402                   |       | (4,105 | ) |
| Provision for doubtful accounts                                                          |       | 2,798                 |       | 2,454 |   |
| (Gain) Loss on disposal of property and equipment                                        |       | (6                    | )          | 80 |   |
| Excess tax benefits from share-based compensation                                        |       | (235                  | )          | (453 | ) |
|                                                                                     |       |                  |       |   |   |
| Changes in assets and liabilities which provided (used) cash, net of  business acquired: |       |                  |       |   |   |
| Accounts receivable - trade                                                              |       | (37,530               | )          | (27,129 | ) |
| Accounts receivable - other                                                              |       | (93                   | )          | (1,261 | ) |
| Inventory                                                                                |       | (112                  | )          | (25,907 | ) |
| Prepaid expenses and other current assets                                                |       | 1,762                 |       | 409 |   |
| Other assets                                                                             |       | (837                  | )          | (724 | ) |
| Accounts payable                                                                         |       | 24,378                |       | 3,240 |   |
| Accrued expenses and other current liabilities                                           |       | 2,076                 |       | 3,199 |   |
| Accrued interest                                                                         |       | 1,350                 |       | 5,469 |   |
| Income taxes payable                                                                     |       | 1,872                 |       | 3,065 |   |
| Other liabilities                                                                        |       | 119                   |       | 8 |   |
| Net cash provided by operating activities                                                |       | 50,401                |       | 13,586 |   |
| Cash flows from investing activities:                                                    |       |                  |       |   |   |
| Purchase of property and equipment, net                                                  |       | (11,500               | )          | (5,303 | ) |
| Purchase of short-term investments                                                       |       | (75,572               | )          | — |   |
| Proceeds from sales and maturities of short-term investments                             |       | 47,347                |       | — |   |
| Purchase of businesses, net of cash acquired                                             |       | (3                    | )          | (131,282 | ) |
| Net cash used in investing activities                                                    |       | (39,728               | )          | (136,585 | ) |
|                                                                                          |            |                       |            |  |  |  |  |

 

*(Continued)*

 

4

----

 
| **INTERLINE BRANDS, INC. AND SUBSIDIARIES**                                |
|----------------------------------------------------------------------------|
| **CONDENSED CONSOLIDATED  STATEMENTS OF CASH FLOWS (UNAUDITED)-CONTINUED** |
| **NINE MONTHS ENDED  SEPTEMBER 28, 2007 AND SEPTEMBER 29, 2006**           |
| **(in thousands)**                                                         |

 
| ** **                                                                        | ** ** | **Nine  Months Ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                        | ** ** | **September  28,**     | ** ** | **September  29,** | ** ** |
| ** **                                                                        | ** ** | **2007**               | ** ** | **2006** | ** ** |
| Cash flows from financing activities:                                             |       |                   |       |   |   |
| Decrease in revolver, net                                                         |       | —                 |       | (3,000 | ) |
| Repayment of term debt                                                            |       | (1,813                 | )          | (149,381 | ) |
| Repayment of 111⁄2% senior subordinated notes                                  |       | —                 |       | (130,000 | ) |
| Payment of tender and redemption premiums on 111⁄2% senior subordinated  notes |       | —                 |       | (13,663 | ) |
| Proceeds from issuance of 81/8% senior subordinated  notes, net of discount       |       | —                 |       | 198,566 |   |
| Proceeds from issuance of term debt                                               |       | —                 |       | 230,000 |   |
| Payment of debt issuance costs                                                    |       | (34                    | )          | (9,804 | ) |
| Proceeds from stock options exercised                                             |       | 485                    |       | 945 |   |
| Excess tax benefits from share-based compensation                                 |       | 235                    |       | 453 |   |
| Payments on capital lease obligations                                             |       | (255                   | )          | (339 | ) |
| Net cash (used in) provided by financing activities                               |       | (1,382                 | )          | 123,777 |   |
| Effect of exchange rate changes on cash and cash equivalents                      |       | 142                    |       | 169 |   |
| Net increase in cash and cash equivalents                                         |       | 9,433                  |       | 947 |   |
| Cash and cash equivalents at beginning of period                                  |       | 6,852                  |       | 2,958 |   |
| Cash and cash equivalents at end of period                                        |       | $                      | 16,285     |   | $ | 3,905 |   |
|                                                                              |       |                   |       |   |   |
| Supplemental disclosure of cash flow information:                                 |       |                   |       |   |   |
| Cash paid during the period for :                                                 |       |                   |       |   |   |
| Interest                                                                          |       | $                      | 23,653     |   | $ | 16,648 |   |
| Income taxes,  net of refunds                                                     |       | $                      | 21,691     |   | $ | 14,107 |   |
|                                                                              |       |                   |       |   |   |
| Schedule of non-cash investing and financing activities:                          |       |                   |       |   |   |
| Adjustments to liabilities assumed and goodwill on businesses  acquired           |       | $                      | 2,137      |   | $ | 977 |   |
| Treasury stock acquired with accrued expenses and other current  liabilities      |       | $                      | 317        |   | $ | 498 |   |

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

 

5

 

**INTERLINE BRANDS, INC. AND SUBSIDIARIES**

**NOTES TOUNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

 

 

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

 

*Business*

 

                InterlineBrands, Inc., a Delaware corporation, and its subsidiaries (“Interline” or the “Company”)is a direct marketer and specialty distributor of maintenance, repair andoperations (“MRO”) products. The Company sells plumbing, electrical, hardware,security, heating, ventilation and air conditioning (“HVAC”), janitorial andsanitary supplies and other MRO products. Interline’s highly diverse customerbase consists of multi-family housing, educational, lodging, government andhealth care facilities, professional contractors and specialty distributors.

 

                The Company markets and sellsits products primarily through ten distinct and targeted brands. The Companyutilizes a variety of sales channels, including a direct sales force, telesalesrepresentatives, a direct marketing program, brand-specific websites and anational accounts sales program. The Company delivers its products through itsnetwork of regional distribution centers and professional contractor showroomslocated throughout the United States and Canada, a national distribution centerin Nashville, Tennessee, vendor managed inventory locations at largeprofessional contractor customer locations and its dedicated fleet of trucks.Through its broad distribution network, the Company provides same day/next daydelivery 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 Jersey corporation(“Interline New Jersey”).

 

*Basis of Presentation*

 

                The accompanying unauditedinterim condensed consolidated financial statements of Interline have beenprepared in accordance with accounting principles generally accepted in theUnited States of America and instructions to the Quarterly Report on Form 10-Qand Article 10 of Regulation S-X promulgated by the Securities and ExchangeCommission (“SEC”). Accordingly, certain information and footnote disclosuresnormally included in financial statements included in the Company’s AnnualReport on Form 10-K have been condensed or omitted. The accompanying unauditedinterim condensed consolidated financial statements should be read inconjunction with Management’s Discussion and Analysis of Financial Conditionand Results of Operations contained in this report and the audited consolidatedfinancial statements and related notes included in the Company’s Annual Reporton Form 10-K for the fiscal year ended December 29, 2006 filed with theSEC.

 

                All adjustments, consisting ofnormal recurring adjustments, which are, in the opinion of management,necessary for a fair statement of the results for the interim periods presentedhave been recorded. The results of operations for the interim periods presentedare not necessarily indicative of the results to be expected for the full year.

 

                The preparation of condensedconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the condensedconsolidated financial statements and the reported amounts of revenues andexpenses during the reporting period. Significant estimates include valuationreserves for accounts receivable, inventory and income taxes, reserves forself-insurance programs, valuation of goodwill and valuation of assets andliabilities assumed in the acquisition of AmSan LLC (“AmSan”). Actual resultscould differ from those estimates.

 

*SegmentInformation*

** **

Inaccordance with Financial Accounting Standards Board (“FASB”) StatementNo. 131, *Disclosure about Segments of an Enterpriseand Related Information*, (“FAS 131”) the Company has two operatingsegments: Interline Brands and AmSan. These segments are aggregated into onereportable segment, the distribution of MRO products, because they possesssimilar economic characteristics and have common products, customers and methodsof distribution. During 2007, the Company has and will continue to undertakesignificant integration activities to consolidate AmSan’s operations onto theCompany’s information systems platform.

 

6

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Ournet sales for the three and nine months ended September 28, 2007 and September29, 2006 by product category were as follows (in thousands):

 
| ** **                                | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **September 28,**      | ** ** | **September 29,**     | ** ** | **September 28,** | ** ** | **September 29,** | ** ** |
| **Product Category**                      | ** ** | **2007**               | ** ** | **2006**              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Plumbing                                  |       | $                      | 97,407     |                  | $          | 96,768 |   | $ | 289,267 |   | $ | 285,241 |   |
| Janitorial and sanitary                   |       | 74,954                 |       | 72,890                |       | 215,275 |   | 83,932 |   |
| Electrical                                |       | 33,349                 |       | 33,303                |       | 90,921 |   | 94,954 |   |
| Heating, ventilation and air conditioning |       | 34,941                 |       | 32,561                |       | 89,241 |   | 92,611 |   |
| Appliances                                |       | 20,472                 |       | 16,652                |       | 54,001 |   | 43,123 |   |
| Security                                  |       | 16,510                 |       | 14,767                |       | 47,238 |   | 41,890 |   |
| Hardware                                  |       | 15,519                 |       | 13,510                |       | 43,239 |   | 39,050 |   |
| Other                                     |       | 37,041                 |       | 33,731                |       | 109,661 |   | 93,464 |   |
| Total                                     |       | $                      | 330,193    |                  | $          | 314,182 |   | $ | 938,843 |   | $ | 774,265 |   |

 

**2**.             SHORT-TERM INVESTMENTS

 

Short-terminvestments include primarily investments in auction rate securities andvariable demand notes, which are debt instruments with long-term scheduledmaturities and periodic interest rate reset dates. The interest rates on thesesecurities are typically reset to market prevailing rates every 35 days orless, and in some cases every 7 days or less. Due to the liquidityprovided by the interest rate reset mechanism and the short-term nature of theCompany’s investment in these securities, they have been classified as currentassets. Short-term investments are recorded at fair value based on currentmarket rates and are classified as available-for-sale. Changes in the fairvalue, if any, are included in accumulated other comprehensive income, net ofapplicable taxes.

** **

**3**.             ACCOUNTS RECEIVABLE

 

TheCompany’s trade receivables are exposed to credit risk. The majority of themarket served by the Company is comprised of numerous individual accounts, noneof which is individually significant. The Company monitors the creditworthinessof its customers on an ongoing basis and provides a reserve for estimated baddebt losses. During the three and nine months ended September 28, 2007, theCompany wrote-off $3.8 million and $6.8 million, respectively, of accountsreceivable that was fully reserved for in prior years.

 

Theactivity in the allowance for doubtful accounts during the nine months endedSeptember 28, 2007 consists of the following (in thousands):

 

| **Beginning  Balance** | ** ** | **Charged to  Expense** | ** ** | **Deductions (1)** | ** ** | **Ending  Balance** | ** ** |
|------------------------|------------|-------------------------|------------|--------------------|------------|---------------------|------------|
| $                      | 10,224     |                    | $          | 2,798              |       | $                   | (6,770     | ) | $ | 6,252 |   |
|                        |            |                         |            |                    |            |                     |            |  |  |  |  |

----

(1) Deductionsrepresent accounts receivable written-off as uncollectible, net of recoveries.

 

**4.             ACQUISITIONS**

 

***AmSanLLC***

 

OnJuly 3, 2006, Interline New Jersey acquired all of the outstanding equityinterests of AmSan from American Sanitary Incorporated for $133.8 million incash, including cash acquired of $2.2 million and transaction fees of $3.0million. AmSan is a leading national distributor and direct marketer ofjanitorial and sanitary supplies. The acquisition was funded with the $130.0million delayed draw facility under Interline New Jersey’s bank creditfacility.

 

7

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Thefollowing table summarizes the allocation of the purchase price to the AmSanassets acquired and liabilities assumed at estimated fair values (inthousands):

 

| Current assets            |   | $       | 53,502  |   |
|---------------------------|--------|---------|---------|--------|
| Property and equipment    |   | 2,983   |    |
| Goodwill                  |   | 66,931  |    |
| Intangible assets         |   | 43,600  |    |
| Other assets              |   | 631     |    |
| Total assets acquired     |   | 167,647 |    |
| Current liabilities       |   | 32,549  |    |
| Other liabilities         |   | 1,255   |    |
| Total liabilities assumed |   | 33,804  |    |
| Net assets acquired       |   | $       | 133,843 |   |

 

***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 |   |
| Additions                     |       | $                                       | 248        |                                   | $          | 698       |       | 946 |   |
| Payments                      |       | (978                                    | )          | (301                                   | )          | (1,279    | )          |
| Balance at September 28, 2007 |       | $                                       | 363        |                                   | $          | 5,718     |       | $ | 6,081 |   |

 

**5**.             EARNINGS PER SHARE

 

Earningsper share for all periods has been computed in accordance with FASB StatementNo. 128, *Earnings per Share*, (“FAS 128”). Basicearnings per share is computed by dividing net income by the weighted-averagenumber of shares of common stock outstanding during the period. Dilutedearnings per share is computed by dividing net income by the weighted-averagenumber of shares of common stock outstanding during the period as adjusted forthe potential dilutive effect of stock options and non-vested shares ofrestricted stock, restricted share units and deferred stock units using thetreasury stock method.

 

Thefollowing summarizes the shares of common stock used to calculate earnings pershare including the potentially dilutive impact of stock options, restrictedstock, restricted share units and deferred stock units, calculated using thetreasury stock method, as included in the calculation of dilutedweighted-average shares:

 

| ** **                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **September 28,**      | ** ** | **September 29,**     | ** ** | **September 28,** | ** ** | **September 29,** | ** ** |
| ** **                                    | ** ** | **2007**               | ** ** | **2006**              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Weighted average shares outstanding - basic   |       | 32,253,728             |       | 32,159,251            |       | 32,230,971 |   | 32,124,106 |   |
| Dilutive shares resulting from:               |       |                   |       |                  |       |   |   |   |   |
| Stock options                                 |       | 396,751                |       | 509,046               |       | 359,654 |   | 482,880 |   |
| Restricted stock                              |       | 15,368                 |       | 42,272                |       | 21,647 |   | 53,069 |   |
| Restricted share units                        |       | 9,677                  |       | 50,051                |       | 46,112 |   | 59,545 |   |
| Deferred stock units                          |       | 19,026                 |       | 1,872                 |       | 7,388 |   | 1,124 |   |
| Weighted average shares outstanding - diluted |       | 32,694,550             |       | 32,762,492            |       | 32,665,772 |   | 32,720,724 |   |

 

Duringthe three months ended September 28, 2007 and September 29, 2006, stock optionsto purchase 1,145,427 shares and 280,807 shares of common stock, respectively,were excluded from the computations of diluted weighted-average sharesoutstanding because their effect would be anti-dilutive. During the nine monthsended September 28, 2007 and September 29, 2006, stock options to purchase988,202 shares and 262,124 shares of common stock, respectively, were excludedfrom the computations of diluted weighted-average shares outstanding becausetheir effect would be anti-dilutive.

 

8

----

 

**6.             COMPREHENSIVEINCOME**

 

                Comprehensiveincome refers to revenues, expenses, gains and losses that under accountingprinciples generally accepted in the United States are included incomprehensive income but are excluded from net income as these amounts arerecorded directly as an adjustment to stockholders’ equity, net of tax. Thecomponents of comprehensive income for the three and nine months endedSeptember 28, 2007 and September 29, 2006 are as follows (in thousands):

 

                

| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                             | ** ** | **September 28,**      | ** ** | **September 29,**     | ** ** | **September 28,** | ** ** | **September 29,** | ** ** |
| ** **                                             | ** ** | **2007**               | ** ** | **2006**              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income                                             |       | $                      | 15,988     |                  | $          | 14,219 |   | $ | 37,403 |   | $ | 19,795 |   |
| Other comprehensive income (loss):                     |       |                   |       |                  |       |   |   |   |   |
| Amortization of unrecognized gain on employee benefits |       | (49                    | )          | —                |       | (127 | ) | — |   |
| Foreign currency translation                           |       | 332                    |       | (3                    | )          | 730 |   | 169 |   |
| Total comprehensive income                             |       | $                      | 16,271     |                  | $          | 14,216 |   | $ | 38,006 |   | $ | 19,964 |   |

 

**7.             SHARE-BASEDCOMPENSATION**

 

                Duringthe three months ended September 28, 2007 and September 29, 2006, share-basedcompensation expense was $1.7 million and $1.1 million, respectively. Duringthe nine months ended September 28, 2007 and September 29, 2006, share-basedcompensation expense was $4.9 million and $2.7 million, respectively. As ofSeptember 28, 2007, there was $9.6 million of total unrecognized share-basedcompensation expense related to unvested share-based equity awards. The expenseis expected to be recognized over a weighted-average period of 2.3 years.

 

During the three monthsended September 28, 2007, the Company did not grant any stock options. Duringthe three months ended September 29, 2006, the Company granted 44,800 stockoptions with a weighted-average grant date fair value of $9.26. During the ninemonths ended September 28, 2007 and September 29, 2006, the Company granted485,346 and 442,502 stock options, respectively, with a weighted-average grantdate fair value of $6.88 and $7.96, respectively. As permitted by FASBStatement No. 123 (revised 2004), *Share-Based Compensation*,(“FAS 123R”) the fair values of stock options were estimated using theBlack-Scholes option-pricing model. Expected volatility is based on historicalperformance of the Company’s stock. The Company also uses historical data toestimate the timing and amount of stock option exercises and forfeitures. Theexpected life represents the period of time that stock options are expected toremain outstanding and is based on the contractual term of the stock optionsand expected exercise behavior. The risk-free interest rate is based on U.S.Treasury zero-coupon issues with a remaining term equal to the expected optionlife assumed at the date of grant. The Black-Scholes weighted-averageassumptions were as follows:

 

| ** **               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **               | ** ** | **September 29,**      | ** ** | **September 28,**     | ** ** | **September 29,** | ** ** |
| ** **               | ** ** | **2006**               | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Expected volatility      |       | 34.9                   | %          | 27.0                  | %          | 27.7 | % |
| Expected dividends       |       | 0.0                    | %          | 0.0                   | %          | 0.0 | % |
| Risk-free interest rate  |       | 5.1                    | %          | 4.5                   | %          | 4.9 | % |
| Expected life (in years) |       | 5.0                    |       | 5.0                   |       | 5.0 |   |

 

                During the three and nine monthsended September 28, 2007, 8,704 and 32,067 stock options were exercised with anintrinsic value of $0.1 million and $0.3 million, respectively. During thethree and nine months ended September 29, 2006, 17,297 and 62,977 stock optionswere exercised with an intrinsic value of $0.2 million and $0.7 million,respectively.

 

9

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A summary status ofrestricted stock, restricted share units and deferred stock units as ofSeptember 28, 2007, and changes during the year 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  |       | 132,335               |       | $                           | 16.39      |                      | 196,595    |   | $ | 23.35 |   | 12,924 |   | $ | 25.17 |   |
| Granted                           |       | 4,600                 |       | 22.27                       |       | 183,979                   |       | 21.00 |   | 12,889 |   | 23.25 |   |
| Vested                            |       | (54,770               | )          | 15.00                       |       | —                    |       | — |   | — |   | — |   |
| Forfeited                         |       | —                |       | —                      |       | (2,614                    | )          | 22.03 |   | — |   | — |   |
| Outstanding at September 28, 2007 |       | 82,165                |       | $                           | 17.64      |                      | 377,960    |   | $ | 22.21 |   | 25,813 |   | $ | 24.21 |   |

 

During the nine monthsended September 28, 2007 and September 29, 2006, 54,770 and 58,607 shares ofrestricted stock vested, respectively. The total fair value of restricted stockvested during the nine months ended September 28, 2007 and September 29, 2006was $1.1 million and $1.5 million, respectively.

 

**8.             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 and nine months ended September 28, 2007,the Company recognized less than $0.1 million and $0.2 million, respectively,in additional income tax benefits associated with uncertain tax positions andincreased the related liability to $1.6 million.

 

The Company recognizes potentialaccrued penalties and accrued interest related to unrecognized tax benefitswithin its statements of earnings as selling, general and administrativeexpenses and interest expense, respectively. In conjunction with the adoptionof FIN 48, the Company accrued $0.4 million of penalties and interest atDecember 30, 2006 which is included as a component of the $1.4 millionunrecognized tax benefits noted above. During the three and nine months endedSeptember 28, 2007, the Company recognized less than $0.1 million and $0.1million, respectively, in potential penalties and interest associated withuncertain tax positions. To the extent penalties and interest 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 September 26, 2008.

 

10

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**9.             GUARANTORSUBSIDIARIES**

 

In June 2006, Interline New Jersey (the “SubsidiaryIssuer”) issued $200.0 million of 81⁄8% senior subordinated notes due 2014and entered into a $330.0 million bank credit facility. The 81⁄8% seniorsubordinated notes and the bank credit facility are fully and unconditionallyguaranteed, jointly and severally, on a senior subordinated basis by theCompany (the “Parent Company”) and all of Interline New Jersey’s 100% owneddomestic subsidiaries: Wilmar Holdings, Inc., Wilmar Financial, Inc., GlenwoodAcquisition LLC and AmSan LLC (collectively the “Guarantor Subsidiaries”). Theguarantees by the Parent Company and the Guarantor Subsidiaries are senior toany of their existing and future subordinated obligations, equal in right ofpayment with any of their existing and future senior subordinated indebtednessand subordinated to any of their existing and future senior indebtedness.

 

The Company is a holding company whose only asset isthe stock of its subsidiaries. The Company conducts virtually all of itsbusiness operations through Interline New Jersey. Accordingly, the Company’sonly material sources of cash are dividends and distributions with respect toits ownership interests in Interline New Jersey that are derived from theearnings and cash flow generated by Interline New Jersey.

 

The following tables set forth, on a condensedconsolidating basis, the balance sheets, statements of operations andstatements of cash flows for the Parent Company, Subsidiary Issuer andGuarantor Subsidiaries for all financial statement periods presented in theCompany’s consolidated financial statements. The non-guarantor subsidiaries areminor and are included in the condensed financial data of the SubsidiaryIssuer. Subsequent to the issuance of the consolidated financial statements forthe three and nine months ended September 29, 2006, it was determined that thecondensed consolidating financial data for the three and nine months endedSeptember 29, 2006 was not presented. The current presentation has beensupplemented to reflect the condensed consolidating financial data for thethree and nine months ended September 29, 2006. The presentation did not affectthe Company’s consolidated financial position or consolidated results ofoperations, nor did it adversely impact the Company’s compliance with debtcovenants. The Subsidiary Issuer does not allocate integration expenses,corporate overhead or other expenses for shared services to the GuarantorSubsidiaries; therefore, the following tables do not reflect any suchallocation.

 

11

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**CONDENSEDCONSOLIDATING BALANCE SHEET (UNAUDITED)**

**AS OFSEPTEMBER 28, 2007**

**(inthousands)**

 
| ** **                                      | ** ** | **Parent Company** | ** ** | **Subsidiary Issuer** | ** ** | **Guarantor Subsidiaries** | ** ** | **Consolidating Adjustments** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------|------------|--------------------|------------|-----------------------|------------|----------------------------|------------|-------------------------------|------------|------------------|------------|
| **ASSETS**                                      | ** ** | ** **         | ** ** | ** **            | ** ** | ** **                 | ** ** | ** **                    | ** ** | ** **       | ** ** |
| Current assets:                                 |       |               |       |                  |       |                       |       |                          |       |             |       |
| Cash and cash equivalents                       |       | $                  | —     |                  | $          | 17,919                     |       | $                             | 17         |             | $          | (1,651 | ) | $ | 16,285 |   |
| Short-term investments                          |       | —             |       | 28,225                |       | —                     |       | —                        |       | 28,225           |       |
| Accounts receivable - trade                     |       | —             |       | 148,726               |       | 29,173                     |       | —                        |       | 177,899          |       |
| Inventory                                       |       | —             |       | 183,776               |       | 18,371                     |       | —                        |       | 202,147          |       |
| Intercompany receivable                         |       | —             |       | —                |       | 111,792                    |       | (111,792                      | )          | —           |       |
| Other current assets                            |       | —             |       | 35,875                |       | 4,083                      |       | —                        |       | 39,958           |       |
| Total current assets                            |       | —             |       | 414,521               |       | 163,436                    |       | (113,443                      | )          | 464,514          |       |
|                                            |       |               |       |                  |       |                       |       |                          |       |             |       |
| Property and equipment, net                     |       | —             |       | 33,415                |       | 2,870                      |       | —                        |       | 36,285           |       |
| Goodwill                                        |       | —             |       | 248,169               |       | 66,931                     |       | —                        |       | 315,100          |       |
| Other intangible assets, net                    |       | —             |       | 96,715                |       | 41,709                     |       | —                        |       | 138,424          |       |
| Investment in subsidiaries                      |       | 363,160            |       | 249,508               |       | —                     |       | (612,668                      | )     | —           |       |
| Other assets                                    |       | —             |       | 10,277                |       | 748                        |       | —                        |       | 11,025           |       |
| Total assets                                    |       | $                  | 363,160    |                  | $          | 1,052,605                  |       | $                             | 275,694    |             | $          | (726,111 | ) | $ | 965,348 |   |
|                                            |       |               |       |                  |       |                       |       |                          |       |             |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**  | ** ** | ** **         | ** ** | ** **            | ** ** | ** **                 | ** ** | ** **                    | ** ** | ** **       | ** ** |
| Current liabilities:                            |       |               |       |                  |       |                       |       |                          |       |             |       |
| Accounts payable                                |       | $                  | —     |                  | $          | 78,144                     |       | $                             | 15,442     |             | $          | (1,651 | ) | $ | 91,935 |   |
| Accrued expenses and other current liabilities  |       | —             |       | 42,484                |       | 9,629                      |       | —                        |       | 52,113           |       |
| Intercompany payable                            |       | —             |       | 111,792               |       | —                     |       | (111,792                      | )          | —           |       |
| Debt and capital lease - short-term             |       | —             |       | 2,504                 |       | 121                        |       | —                        |       | 2,625            |       |
| Total current liabilities                       |       | —             |       | 234,924               |       | 25,192                     |       | (113,443                      | )          | 146,673          |       |
|                                            |       |               |       |                  |       |                       |       |                          |       |             |       |
| Long-term liabilities:                          |       |               |       |                  |       |                       |       |                          |       |             |       |
| Term debt and capital lease - long-term         |       | —             |       | 417,333               |       | 130                        |       | —                        |       | 417,463          |       |
| Other liabilities                               |       | —             |       | 37,188                |       | 864                        |       | —                        |       | 38,052           |       |
| Total liabilities                               |       | —             |       | 689,445               |       | 26,186                     |       | (113,443                      | )          | 602,188          |       |
|                                            |       |               |       |                  |       |                       |       |                          |       |             |       |
| Senior preferred stock                          |       | —             |       | 556,158               |       | —                     |       | (556,158                      | )     | —           |       |
|                                            |       |               |       |                  |       |                       |       |                          |       |             |       |
| Stockholders’ equity (deficit)             |       | 363,160            |       | (192,998              | )     | 249,508                    |       | (56,510                       | )     | 363,160          |       |
| Total liabilities and stockholders’ equity |       | $                  | 363,160    |                  | $          | 1,052,605                  |       | $                             | 275,694    |             | $          | (726,111 | ) | $ | 965,348 |   |
|                                                 |            |                    |            |                       |            |                            |            |                               |            |                  |            |  |  |  |  |  |  |  |  |  |

 

12

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**CONDENSEDCONSOLIDATING BALANCE SHEET (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     |       | 232,302        |       | —           |       | (552,981          | )     | —           |       |
| Other assets                                    |       | —      |       | 9,461          |       | 686              |       | —            |       | 10,147           |       |
| Total assets                                    |       | $           | 320,679    |           | $          | 965,906          |       | $                 | 262,475    |             | $          | (658,491 | ) | $ | 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                            |       | —      |       | 103,564        |       | —           |       | (103,564          | )          | —           |       |
| Debt and capital lease - short-term             |       | —      |       | 2,594          |       | 129              |       | —            |       | 2,723            |       |
| Total current liabilities                       |       | —      |       | 191,315        |       | 29,135           |       | (105,510          | )          | 114,940          |       |
|                                            |       |        |       |           |       |             |       |              |       |             |       |
| Long-term liabilities:                          |       |        |       |           |       |             |       |              |       |             |       |
| Term debt and capital lease - long-term         |       | —      |       | 419,113        |       | 220              |       | —            |       | 419,333          |       |
| Other liabilities                               |       | —      |       | 34,799         |       | 818              |       | —            |       | 35,617           |       |
| Total liabilities                               |       | —      |       | 645,227        |       | 30,173           |       | (105,510          | )          | 569,890          |       |
|                                            |       |        |       |           |       |             |       |              |       |             |       |
| Senior preferred stock                          |       | —      |       | 501,763        |       | —           |       | (501,763          | )     | —           |       |
|                                            |       |        |       |           |       |             |       |              |       |             |       |
| Stockholders’ equity (deficit)             |       | 320,679     |       | (181,084       | )     | 232,302          |       | (51,218           | )     | 320,679          |       |
| Total liabilities and stockholders’ equity |       | $           | 320,679    |           | $          | 965,906          |       | $                 | 262,475    |             | $          | (658,491 | ) | $ | 890,569 |   |
|                                                 |            |             |            |                |            |                  |            |                   |            |                  |            |  |  |  |  |  |  |  |  |

 

13

----

** **

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)**

**FOR THETHREE MONTHS ENDED SEPTEMBER 28, 2007**

**(in thousands)**

 
| ** **                                            | ** ** | **Parent**  | ** ** | **Subsidiary** | ** ** | **Guarantor**       | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
|-------------------------------------------------------|------------|-------------|------------|----------------|------------|---------------------|------------|-------------------|------------|------------------|------------|
| ** **                                            | ** ** | **Company** | ** ** | **Issuer**     | ** ** | **Subsidiaries(1)** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
|                                                  |       |        |       |           |       |                |       |              |       |             |       |
| Net sales                                             |       | $           | —     |           | $          | 260,828             |       | $                 | 69,365     |             | $          | — |   | $ | 330,193 |   |
| Cost of sales                                         |       | —      |       | 161,728        |       | 43,037              |       | —            |       | 204,765          |       |
| Gross profit                                          |       | —      |       | 99,100         |       | 26,328              |       | —            |       | 125,428          |       |
|                                                  |       |        |       |           |       |                |       |              |       |             |       |
| Operating expenses:                                   |       |        |       |           |       |                |       |              |       |             |       |
| Selling, general and administrative expenses          |       | —      |       | 73,495         |       | 14,610              |       | —            |       | 88,105           |       |
| Depreciation and amortization                         |       | —      |       | 2,881          |       | 659                 |       | —            |       | 3,540            |       |
| Equity earnings of subsidiaries                       |       | (26,017     | )          | (21,169        | )          | —              |       | 47,186            |       | —           |       |
| Total operating expense                               |       | (26,017     | )          | 55,207         |       | 15,269              |       | 47,186            |       | 91,645           |       |
| Operating income                                      |       | 26,017      |       | 43,893         |       | 11,059              |       | (47,186           | )          | 33,783           |       |
|                                                  |       |        |       |           |       |                |       |              |       |             |       |
| Interest (expense) income, net                        |       | —      |       | (11,523        | )          | 3,328               |       | —            |       | (8,195           | )          |
| Other income                                          |       | —      |       | 429            |       | 419                 |       | (419              | )          | 429              |       |
| Income before income taxes                            |       | 26,017      |       | 32,799         |       | 14,806              |       | (47,605           | )          | 26,017           |       |
| Income tax provision                                  |       | 10,029      |       | 7,685          |       | 2,344               |       | (10,029           | )          | 10,029           |       |
| Net income                                            |       | 15,988      |       | 25,114         |       | 12,462              |       | (37,576           | )          | 15,988           |       |
| Preferred stock dividends                             |       | —      |       | (18,758        | )          | —              |       | 18,758            |       | —           |       |
| Net income (loss) attributable to common stockholders |       | $           | 15,988     |           | $          | 6,356               |       | $                 | 12,462     |             | $          | (18,818 | ) | $ | 15,988 |   |
|                                                       |            |             |            |                |            |                     |            |                   |            |                  |            |  |  |  |  |  |  |

 

----

(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.

 

14

----

 

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)**

**FOR THETHREE MONTHS ENDED SEPTEMBER 29, 2006**

**(inthousands)**

 
| ** **                                            | ** ** | **Parent**  | ** ** | **Subsidiary** | ** ** | **Guarantor**       | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
|-------------------------------------------------------|------------|-------------|------------|----------------|------------|---------------------|------------|-------------------|------------|------------------|------------|
| ** **                                            | ** ** | **Company** | ** ** | **Issuer**     | ** ** | **Subsidiaries(1)** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
|                                                  |       |        |       |           |       |                |       |              |       |             |       |
| Net sales                                             |       | $           | —     |           | $          | 245,919             |       | $                 | 68,263     |             | $          | — |   | $ | 314,182 |   |
| Cost of sales                                         |       | —      |       | 151,497        |       | 42,602              |       | —            |       | 194,099          |       |
| Gross profit                                          |       | —      |       | 94,422         |       | 25,661              |       | —            |       | 120,083          |       |
|                                                  |       |        |       |           |       |                |       |              |       |             |       |
| Operating expenses:                                   |       |        |       |           |       |                |       |              |       |             |       |
| Selling, general and administrative expenses          |       | —      |       | 65,318         |       | 19,260              |       | —            |       | 84,578           |       |
| Depreciation and amortization                         |       | —      |       | 3,169          |       | 697                 |       | —            |       | 3,866            |       |
| Equity earnings of subsidiaries                       |       | (23,272     | )          | (5,669         | )          | —              |       | 28,941            |       | —           |       |
| Total operating expense                               |       | (23,272     | )          | 62,818         |       | 19,957              |       | 28,941            |       | 88,444           |       |
| Operating income                                      |       | 23,272      |       | 31,604         |       | 5,704               |       | (28,941           | )          | 31,639           |       |
|                                                  |       |        |       |           |       |                |       |              |       |             |       |
| Loss on extinguishment of debt                        |       | —      |       | —         |       | —              |       | —            |       | —           |       |
| Interest (expense) income, net                        |       | —      |       | (11,916        | )          | 3,287               |       | —            |       | (8,629           | )          |
| Other income                                          |       | —      |       | —         |       | 262                 |       | —            |       | 262              |       |
| Income before income taxes                            |       | 23,272      |       | 19,688         |       | 9,253               |       | (28,941           | )          | 23,272           |       |
| Income tax provision                                  |       | 9,053       |       | 5,731          |       | 3,322               |       | (9,053            | )          | 9,053            |       |
| Net income                                            |       | 14,219      |       | 13,957         |       | 5,931               |       | (19,888           | )          | 14,219           |       |
| Preferred stock dividends                             |       | —      |       | (16,352        | )          | —              |       | 16,352            |       | —           |       |
| Net income (loss) attributable to common stockholders |       | $           | 14,219     |           | $          | (2,395              | )          | $                 | 5,931      |             | $          | (3,536 | ) | $ | 14,219 |   |
|                                                       |            |             |            |                |            |                     |            |                   |            |                  |            |  |  |  |  |  |  |  |

 

----

(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.

 

15

----

 

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)**

**FOR THENINE MONTHS ENDED SEPTEMBER 28, 2007**

**(inthousands)**

 
| ** **                                            | ** ** | **Parent**  | ** ** | **Subsidiary** | ** ** | **Guarantor**       | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
|-------------------------------------------------------|------------|-------------|------------|----------------|------------|---------------------|------------|-------------------|------------|------------------|------------|
| ** **                                            | ** ** | **Company** | ** ** | **Issuer**     | ** ** | **Subsidiaries(1)** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
|                                                  |       |        |       |           |       |                |       |              |       |             |       |
| Net sales                                             |       | $           | —     |           | $          | 737,873             |       | $                 | 200,970    |             | $          | — |   | $ | 938,843 |   |
| Cost of sales                                         |       | —      |       | 458,796        |       | 124,358             |       | —            |       | 583,154          |       |
| Gross profit                                          |       | —      |       | 279,077        |       | 76,612              |       | —            |       | 355,689          |       |
|                                                  |       |        |       |           |       |                |       |              |       |             |       |
| Operating expenses:                                   |       |        |       |           |       |                |       |              |       |             |       |
| Selling, general and administrative expenses          |       | —      |       | 216,633        |       | 43,712              |       | —            |       | 260,345          |       |
| Depreciation and amortization                         |       | —      |       | 8,763          |       | 1,995               |       | —            |       | 10,758           |       |
| Equity earnings of subsidiaries                       |       | (61,121     | )          | (30,599        | )          | —              |       | 91,720            |       | —           |       |
| Total operating expense                               |       | (61,121     | )          | 194,797        |       | 45,707              |       | 91,720            |       | 271,103          |       |
| Operating income                                      |       | 61,121      |       | 84,280         |       | 30,905              |       | (91,720           | )          | 84,586           |       |
|                                                  |       |        |       |           |       |                |       |              |       |             |       |
| Interest (expense) income, net                        |       | —      |       | (33,509        | )          | 9,256               |       | —            |       | (24,253          | )          |
| Other income                                          |       | —      |       | 788            |       | 787                 |       | (787              | )          | 788              |       |
| Income before income taxes                            |       | 61,121      |       | 51,559         |       | 40,948              |       | (92,507           | )          | 61,121           |       |
| Income tax provision                                  |       | 23,718      |       | 14,156         |       | 9,562               |       | (23,718           | )          | 23,718           |       |
| Net income                                            |       | 37,403      |       | 37,403         |       | 31,386              |       | (68,789           | )          | 37,403           |       |
| Preferred stock dividends                             |       | —      |       | (54,396        | )          | —              |       | 54,396            |       | —           |       |
| Net income (loss) attributable to common stockholders |       | $           | 37,403     |           | $          | (16,993             | )          | $                 | 31,386     |             | $          | (14,393 | ) | $ | 37,403 |   |

----

(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.

 

16

----

 

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)**

**FOR THENINE MONTHS ENDED SEPTEMBER 29, 2006**

**(inthousands)**

 
| ** **                                            | ** ** | **Parent**  | ** ** | **Subsidiary** | ** ** | **Guarantor**       | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
|-------------------------------------------------------|------------|-------------|------------|----------------|------------|---------------------|------------|-------------------|------------|------------------|------------|
| ** **                                            | ** ** | **Company** | ** ** | **Issuer**     | ** ** | **Subsidiaries(1)** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
|                                                  |       |        |       |           |       |                |       |              |       |             |       |
| Net sales                                             |       | $           | —     |           | $          | 706,002             |       | $                 | 68,263     |             | $          | — |   | $ | 774,265 |   |
| Cost of sales                                         |       | —      |       | 436,376        |       | 42,602              |       | —            |       | 478,978          |       |
| Gross profit                                          |       | —      |       | 269,626        |       | 25,661              |       | —            |       | 295,287          |       |
|                                                  |       |        |       |           |       |                |       |              |       |             |       |
| Operating expenses:                                   |       |        |       |           |       |                |       |              |       |             |       |
| Selling, general and administrative expenses          |       | —      |       | 190,286        |       | 19,273              |       | —            |       | 209,559          |       |
| Depreciation and amortization                         |       | —      |       | 10,123         |       | 697                 |       | —            |       | 10,820           |       |
| Equity earnings of subsidiaries                       |       | (32,396     | )          | (11,214        | )          | —              |       | 43,610            |       | —           |       |
| Total operating expense                               |       | (32,396     | )          | 189,195        |       | 19,970              |       | 43,610            |       | 220,379          |       |
| Operating income                                      |       | 32,396      |       | 80,431         |       | 5,691               |       | (43,610           | )          | 74,908           |       |
|                                                  |       |        |       |           |       |                |       |              |       |             |       |
| Loss on extinguishment of debt                        |       | —      |       | (20,700        | )          | —              |       | —            |       | (20,700          | )          |
| Interest (expense) income, net                        |       | —      |       | (34,174        | )          | 11,845              |       | —            |       | (22,329          | )          |
| Other income                                          |       | —      |       | 255            |       | 517                 |       | (255              | )          | 517              |       |
| Income before income taxes                            |       | 32,396      |       | 25,812         |       | 18,053              |       | (43,865           | )          | 32,396           |       |
| Income tax provision                                  |       | 12,601      |       | 6,279          |       | 6,322               |       | (12,601           | )          | 12,601           |       |
| Net income                                            |       | 19,795      |       | 19,533         |       | 11,731              |       | (31,264           | )          | 19,795           |       |
| Preferred stock dividends                             |       | —      |       | (47,420        | )          | —              |       | 47,420            |       | —           |       |
| Net income (loss) attributable to common stockholders |       | $           | 19,795     |           | $          | (27,887             | )          | $                 | 11,731     |             | $          | 16,156 |   | $ | 19,795 |   |

----

(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.

 

17

----

 

**CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOW (UNAUDITED)**

**FOR THENINE MONTHS ENDED SEPTEMBER 28, 2007**

**(inthousands)**

 
| ** **                                                          | ** ** | **Parent**  | ** ** | **Subsidiary** | ** ** | **Guarantor**    | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
|---------------------------------------------------------------------|------------|-------------|------------|----------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                          | ** ** | **Company** | ** ** | **Issuer**     | ** ** | **Subsidiaries** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
|                                                                |       |        |       |           |       |             |       |              |       |             |       |
| Net cash provided by operating activities                           |       | $           | —     |           | $          | 48,874           |       | $                 | 1,232      |             | $          | 295 |   | $ | 50,401 |   |
| Cash flows from investing activities:                               |       |        |       |           |       |             |       |              |       |             |       |
| Purchase of property and equipment, net                             |       | —      |       | (10,374        | )          | (1,126           | )          | —            |       | (11,500          | )          |
| Purchases of short-term investments                                 |       | —      |       | (75,572        | )          | —           |       | —            |       | (75,572          | )          |
| Proceeds from sales and maturities of   short-term investments |       | —      |       | 47,347         |       | —           |       | —            |       | 47,347           |       |
| Purchase of businesses, net of cash acquired                        |       | —      |       | 3              |       | 209              |       | (215              | )          | (3               | )          |
| Net cash used in investing activities                               |       | —      |       | (38,596        | )          | (917             | )          | (215              | )          | (39,728          | )          |
| Cash flows from financing activities:                               |       |        |       |           |       |             |       |              |       |             |       |
| Repayment of debt and capital lease obligations                     |       | —      |       | (1,970         | )          | (98              | )          | —            |       | (2,068           | )          |
| Other                                                               |       | —      |       | 686            |       | (215             | )          | 215               |       | 686              |       |
| Net cash provided by (used in)   financing activities          |       | —      |       | (1,284         | )          | (313             | )          | 215               |       | (1,382           | )          |
| Effect of exchange rate changes on   cash and cash equivalents |       | —      |       | 142            |       | —           |       | —            |       | 142              |       |
| Net increase in cash and cash equivalents                           |       | —      |       | 9,136          |       | 2                |       | 295               |       | 9,433            |       |
| Cash and cash equivalents at beginning of period                    |       | —      |       | 8,783          |       | 15               |       | (1,946            | )          | 6,852            |       |
| Cash and cash equivalents at end of period                          |       | $           | —     |           | $          | 17,919           |       | $                 | 17         |             | $          | (1,651 | ) | $ | 16,285 |   |

 

18

----

 

**CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOW (UNAUDITED)**

**FOR THENINE MONTHS ENDED SEPTEMBER 29, 2006**

**(inthousands)**

 
| ** **                                                                        | ** ** | **Parent**  | ** ** | **Subsidiary** | ** ** | **Guarantor**    | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------|------------|----------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                        | ** ** | **Company** | ** ** | **Issuer**     | ** ** | **Subsidiaries** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
|                                                                              |       |        |       |           |       |             |       |              |       |             |       |
| Net cash provided by (used in) operating activities                               |       | $           | —     |           | $          | 14,475           |       | $                 | (889       | )                | $          | — |   | $ | 13,586 |   |
| Cash flows from investing activities:                                             |       |        |       |           |       |             |       |              |       |             |       |
| Purchase of property and equipment, net                                           |       | —      |       | (5,170         | )          | (133             | )          | —            |       | (5,303           | )          |
| Purchase of businesses, net of cash acquired                                      |       | —      |       | (130,186       | )          | (1,096           | )          |              |       | (131,282         | )          |
| Net cash used in investing activities                                             |       | —      |       | (135,356       | )          | (1,229           | )          | —            |       | (136,585         | )          |
| Cash flows from financing activities:                                             |       |        |       |           |       |             |       |              |       |             |       |
| Repayment of debt and capital lease obligations                                   |       | —      |       | (152,712       | )          | (8               | )          | —            |       | (152,720         | )          |
| Repayment of 111/2% senior  subordinated notes                                    |       | —      |       | (130,000       | )          | —           |       | —            |       | (130,000         | )          |
| Payment of tender and redemption premiums                                         |       | —      |       | (13,663        | )          | —           |       | —            |       | (13,663          | )          |
| Proceeds from issuance of 81/8% senior  subordinated  notes, net of discount |       | —      |       | 198,566        |       | —           |       | —            |       | 198,566          |       |
| Proceeds from issuance of term debt                                               |       | —      |       | 230,000        |       | —           |       | —            |       | 230,000          |       |
| Payment of debt issuance costs                                                    |       | —      |       | (9,804         | )          | —           |       | —            |       | (9,804           | )          |
| Other                                                                             |       | —      |       | 1,398          |       | 2,119            |       | (2,119            | )          | 1,398            |       |
| Net cash provided by (used in)  financing activities                         |       | —      |       | 123,785        |       | 2,111            |       | (2,119            | )          | 123,777          |       |
| Effect of exchange rate changes on  cash and cash equivalents                |       | —      |       | 169            |       | —           |       | —            |       | 169              |       |
| Net increase (decrease) in cash and cash equivalents                              |       | —      |       | 3,073          |       | (7               | )          | (2,119            | )          | 947              |       |
| Cash and cash equivalents at beginning of period                                  |       | —      |       | 2,935          |       | 23               |       | —            |       | 2,958            |       |
| Cash and cash equivalents at end of period                                        |       | $           | —     |           | $          | 6,008            |       | $                 | 16         |             | $          | (2,119 | ) | $ | 3,905 |   |

 

19

----

 

**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-LookingStatements**

 

Thisreport contains forward-looking statements within the meaning of Section 27A ofthe Securities 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:

 

•                  material facilities and systemsdisruptions and shutdowns,

•                  economic slowdowns,

•                  general market conditions,

•                  adverse changes in trends in the homeimprovement and remodeling and home building markets,

•                  the highly competitive nature of themaintenance, repair and operations distribution industry,

•                  failure to realize expected benefits fromacquisitions,

•                  our ability to purchase products fromsuppliers on favorable terms,

•                  the length of our supply chains,

•                  fluctuations in the cost ofcommodity-based products, raw materials and fuel prices,

•                  currency exchange rates,

•                  the loss of significant customers,

•                  our ability to accurately predict markettrends,

•                  product cost and price fluctuations dueto market conditions,

•                  failure to locate, acquire andsuccessfully integrate acquisition candidates,

•                  dependence on key employees,

•                  our inability to protect trademarks,

•                  adverse publicity and litigation,

•                  our level of debt,

•                  interest rate fluctuations,

•                  future cash flows,

•                  changes in consumer preferences,

•                  labor and benefit costs, and

•                  the other factors described under “PartI. Item 1A—Risk Factors” in our Annual Report on Form 10-K filed with the SEC.

 

                You should keep inmind that any forward-looking statement made by us in this report, orelsewhere, speaks only as of the date on which we make it. New risks anduncertainties arise from time to time, and it is impossible for us to predictthese events or how they may affect us. In light of these risks anduncertainties, you should keep in mind that any forward-looking statement madein this report or elsewhere might not occur. Notwithstanding the foregoing, allinformation contained in this report is materially accurate as of the date ofthis report.

 

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**Overview**

 

                We are a leadingnational distributor and direct marketer of maintenance, repair and operations(“MRO”) products. We stock over 80,000 plumbing, electrical, hardware, security,heating, ventilation and air conditioning (“HVAC”), janitorial and sanitary andother MRO products and sell to approximately 200,000 active customer accounts.Our products 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 sellour products primarily through ten distinct and targeted brands, each of whichis nationally recognized in the markets we serve for providing premium productsat competitive prices with reliable same-day and/or next-day delivery. OurWilmar, Sexauer, Maintenance USA and AmSan brands generally serve ourfacilities maintenance customers; our Barnett, U.S. Lock, Sun Star andCopperfield brands generally serve our professional contractor customers; andour Hardware Express and AF Lighting brands generally serve our specialtydistributors customers. Our multi-brand operating model, which we believe isunique in the industry, allows us to use a single platform to deliver tailoredproducts and services to meet the individual needs of each respective customergroup served. We reach our markets using a variety of sales channels, includinga sales force of over 650 field sales representatives, approximately 500telesales and customer service representatives, a direct marketing program ofapproximately five million pieces annually, brand-specific websites and anational accounts sales program. We deliver our products through our network of72 regional distribution centers, 38 professional contractor showrooms locatedthroughout the United States and Canada, a national distribution center, or NDC,in Nashville, Tennessee, 18 vendor managed inventory locations at largecustomer locations and a dedicated fleet of trucks. Our broad distributionnetwork allows us the ability to provide reliable, same-day and/or next-daydelivery service to 98% of the U.S. population.

 

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

 

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**Resultsof Operations**

 

The following table presents information derived fromthe condensed consolidated statements of earnings expressed as a percentage ofrevenues for the three and nine months ended September 28, 2007 and September29, 2006:

 

                
| ** **                                   | ** ** | **% of Net Sales**     | ** ** | **% Increase**    | ** ** | **% of Net Sales**    | ** ** | **% Increase**    | ** ** |
|----------------------------------------------|------------|------------------------|------------|-------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                   | ** ** | **Three Months Ended** | ** ** | **(Decrease)**    | ** ** | **Nine Months Ended** | ** ** | **(Decrease)**    | ** ** |
| ** **                                   | ** ** | **September 28,**      | ** ** | **September 29,** | ** ** | **2007**              | ** ** | **September 28,** | ** ** | **September 29,** | ** ** | **2007** | ** ** |
| ** **                                   | ** ** | **2007**               | ** ** | **2006**          | ** ** | **vs. 2006 (1)**      | ** ** | **2007**          | ** ** | **2006** | ** ** | **vs. 2006 (1)** | ** ** |
|                                         |       |                   |       |              |       |                  |       |              |       |   |   |   |   |
| Net sales                                    |       | 100.0                  | %          | 100.0             | %          | 5.1                   | %          | 100.0             | %          | 100.0 | % | 21.3 | % |
| Cost of sales                                |       | 62.0                   |       | 61.8              |       | 5.5                   |       | 62.1              |       | 61.9 |   | 21.7 |   |
| Gross profit                                 |       | 38.0                   |       | 38.2              |       | 4.5                   |       | 37.9              |       | 38.1 |   | 20.5 |   |
|                                         |       |                   |       |              |       |                  |       |              |       |   |   |   |   |
| Operating expenses:                          |       |                   |       |              |       |                  |       |              |       |   |   |   |   |
| Selling, general and administrative expenses |       | 26.7                   |       | 26.9              |       | 4.2                   |       | 27.7              |       | 27.1 |   | 24.2 |   |
| Depreciation and amortization                |       | 1.1                    |       | 1.2               |       | (8.4                  | )          | 1.1               |       | 1.4 |   | (0.6 | ) |
| Total operating expense                      |       | 27.8                   |       | 28.2              |       | 3.6                   |       | 28.9              |       | 28.5 |   | 23.0 |   |
| Operating income                             |       | 10.2                   |       | 10.1              |       | 6.8                   |       | 9.0               |       | 9.7 |   | 12.9 |   |
|                                         |       |                   |       |              |       |                  |       |              |       |   |   |   |   |
| Loss on extiguishment of debt                |       | —                 |       | —            |       | —                |       | —            |       | (2.7 | ) | (100.0 | ) |
| Interest expense                             |       | (2.6                   | )          | (2.8              | )          | (2.5                  | )          | (2.7              | )          | (2.9 | ) | 12.7 |   |
| Interest income                              |       | 0.1                    |       | 0.1               |       | 122.6                 |       | 0.1               |       | 0.1 |   | 236.5 |   |
| Other income                                 |       | 0.1                    |       | 0.1               |       | 63.7                  |       | 0.1               |       | 0.1 |   | 52.4 |   |
| Income before income taxes                   |       | 7.9                    |       | 7.4               |       | 11.8                  |       | 6.5               |       | 4.2 |   | 88.7 |   |
| Income tax provision                         |       | (3.0                   | )          | (2.9              | )          | 10.8                  |       | (2.5              | )          | (1.6 | ) | 88.2 |   |
| Net income                                   |       | 4.8                    | %          | 4.5               | %          | 12.4                  | %          | 4.0               | %          | 2.6 | % | 89.0 | % |

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(1)          Percent increase (decrease) represents theactual change as a percent of the prior year’s result.

 

                The following discussion includes references to the terms average dailysales and average organic daily sales. Average daily sales are defined as salesfor a period of time divided by the number of shipping days in that period oftime.Averageorganic daily sales are defined as sales for a period of time divided by the numberof shipping days in that period of time excluding any sales from acquisitionsmade subsequent to the beginning of the prior year period. The computation ofaverage organic daily sales is as follows (amounts in thousands):

                
| ** **                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **September 28,**      | ** ** | **September 29,**     | ** ** | ** ** | ** ** | **September 28,** | ** ** | **September 29,** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **2007**               | ** ** | **2006**              | ** ** | **% Variance** | ** ** | **2007** | ** ** | **2006** | ** ** | **% Variance** | ** ** |
| ** **                  | ** ** | ** **             | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                   |       | $                      | 330,193    |                  | $          | 314,182 |   | 5.1 | % | $ | 938,843 |   | $ | 774,265 |   | 21.3 | % |
| Less acquisitions:          |       |                   |       |                  |       |   |   |   |   |   |   |   |   |
| AmSan                       |       | —                 |       | —                |       |   |   | (131,605 | ) | — |   |   |   |
| Organic sales               |       | $                      | 330,193    |                  | $          | 314,182 |   | 5.1 | % | $ | 807,238 |   | $ | 774,265 |   | 4.3 | % |
|                        |       |                   |       |                  |       |   |   |   |   |   |   |   |   |
| Daily sales:                |       |                   |       |                  |       |   |   |   |   |   |   |   |   |
| Ship days                   |       | 63                     |       | 63                    |       |   |   | 191 |   | 191 |   |   |   |
| Average daily sales         |       | $                      | 5,241      |                  | $          | 4,987 |   | 5.1 | % | $ | 4,915 |   | $ | 4,054 |   | 21.3 | % |
| Average organic daily sales |       | $                      | 5,241      |                  | $          | 4,987 |   | 5.1 | % | $ | 4,226 |   | $ | 4,054 |   | 4.3 | % |

 

                Average organic daily sales is presented hereinbecause we believe it to be relevant and useful information to our investorssince it is used by our management to evaluate the operating performance of ourbusiness, as adjusted to exclude the impact of the acquisition of AmSan LLC (“AmSan”),and compare our organic operating performance with that of our competitors.However, average organic daily sales is not a measure of financial performanceunder GAAP and it should be considered in addition to, but not as a substitutefor, other measures of financial performance reported in accordance with GAAP,such as net sales. Management utilizes average organic daily sales as anoperating performance measure in conjunction with GAAP measures such as netsales.

 

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*Overview.*During the three months ended September 28, 2007, ouraverage daily sales grew 5.1%. Sales growth during the quarter was driven bysolid demand from customers in our facilities maintenance end-market, whichmakes up over 68% of our total sales. This sales growth was partially offset bya continued slow down in the professional contractor and specialty distributorend-markets that we serve. Operating income as a percentage of sales was 10.2%in the third quarter compared to 10.1% in the comparable prior year period.This improvement in operating margin is primarily related to our continuedfocus on cost control, operating expense structure, operating efficienciesattained at AmSan as a result of our integration efforts and the leveraging ofour logistics network. The resulting lower selling, general and administrativeexpenses and lower depreciation and amortization as a percentage of sales was partiallyoffset by our continued investment in our growth initiatives such as theexpansion of our field sales force and national accounts program, as well as incrementallyhigher share-based compensation expense during the quarter.

 

*ThreeMonths Ended September 28, 2007 Compared to Three Months Ended September 29,2006*

 

*               **NetSales.*Our netsales increased by $16.0 million, or 5.1%, to $330.2 million in thethree months ended September 28, 2007 from $314.2 million in the threemonths ended September 29, 2006. The growth in revenue was driven by continuedgrowth in our sales to the facilities maintenance end market, which grew 13.9%,partially offset by slower rates to customers in the professional contractorand specialty distributor end markets that we serve, both of which declined10.4%.

 

*                GrossProfit.*Grossprofit increased by $5.3 million, or 4.5%, to $125.4 million in thethree months ended September 28, 2007 from $120.1 million in the three monthsended September 29, 2006. Our gross profit margin decreased 20 basis points to38.0% for the three months ended September 28, 2007 compared to 38.2% for thethree months ended September 29, 2006. The slight decrease in gross margin isreflective of the continued expansion of our product mix, the sale of certaincommodity and HVAC equipment sales in the prior year comparable period athigher than typical gross margins, as well as slightly more competitive pricingin the professional contractor and specialty distributor end markets.

 

*                Selling, General andAdministrative Expenses.*SG&A expenses increased by $3.5 million, or 4.2%, to$88.1 million in the three months ended September 28, 2007 from$84.6 million in the three months ended September 29, 2006. Certainexpenses within SG&A, such as the costs of running regional distributioncenters, delivery expenses and selling expenses, fluctuate with sales volume.The increase in SG&A expenses included these increases, higher expensesassociated with our continued investment in our growth initiatives, as well asincrementally higher share-based compensation associated with the issuance of restrictedshare units, deferred stock units and stock options this year.

 

*                Depreciationand Amortization.*Depreciation and amortization expense decreased by$0.3 million, or 8.4%, to $3.5 million in the three months ended September28, 2007 from $3.9 million in the three months ended September 29, 2006.This decrease was due to the elimination of certain amortization associatedwith our trademarks as these intangible assets were deemed to have anindefinite life as part of a change in estimate during the year ended December29, 2006. This decrease was partially offset by higher depreciation resultingfrom our higher capital spending associated with our information systemsinfrastructure and distribution center consolidation and integration efforts.As a percentage of sales, depreciation and amortization was 1.1% or 10 basispoints lower than the 1.2% of sales that it represented in the comparable prioryear period.

 

*                OperatingIncome.*As aresult of the foregoing, operating income increased by $2.1 million, or 6.8%,to $33.8 million in the three months ended September 28, 2007 from $31.6million in the three months ended September 28, 2006. As a percent of sales,operating income increased to 10.2% in the three months ended September 28,2007 compared to 10.1% in the three months ended September 28, 2006.

 

*Interest Expense.*Interest expense decreased by$0.2 million in the three months ended September 28, 2007 to $8.6 millionfrom $8.8 million in the three months ended September 29, 2006. Thisdecrease was primarily due to a lower debt balance resulting from our $10.0million debt repayment in the three months ended December 29, 2006 as well asscheduled reductions in the principal balance of our term-debt.

 

*                Provision for Income Taxes.*The effective tax rate for the threemonths ended September 28, 2007 was 38.5% compared to 38.9% for the threemonths ended September 29, 2006. The decrease in the effective tax rate wasprimarily due to tax-free income generated from our short-term investments aswell as the change in a state’s measurement of tax from an income tax-basedmethod to a non-income tax-based method partially offset by the additionalliability associated with unrecognized tax benefits arising from the adoptionof Financial Accounting Standards Board (“FASB”) Interpretation No. 48, *Accounting for Uncertainty in Income Taxes—an Interpretation of FASBStatement No. 109*, (“FIN 48”).

 

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*NineMonths Ended September 28, 2007 Compared to Nine Months Ended September 29,2006*

 

*               **NetSales.*Our netsales increased by $164.6 million, or 21.3%, to $938.8 million in thenine months ended September 28, 2007 from $774.3 million in the ninemonths ended September 29, 2006. Of the $164.6 million increase, $131.6 millionwas attributable to our AmSan acquisition and the remaining $33.0 million wasdriven by continued growth in our sales to the facilities maintenance end market,which grew 45.8% including AmSan, partially offset by slower sales to customersin the professional contractor and specialty distributor end markets that weserve, which declined 8.7% and 9.4%, respectively.

 

*                GrossProfit.*Grossprofit increased by $60.4 million, or 20.5%, to $355.7 million in thenine months ended September 28, 2007 from $295.3 million in the ninemonths ended September 29, 2006. Gross profit margins decreased 20 basis pointsto 37.9% for the nine months ended September 28, 2007 compared to 38.1% for thenine months ended September 29, 2006. The slight decrease in gross margin isreflective of the continued expansion of our product mix, the sale of certaincommodity and HVAC equipment sales in the prior year comparble period at higherthan typical gross margins, as well as slightly more competitive pricing in theprofessional contractor and specialty distributor end markets.

 

*                Selling, General andAdministrative Expenses.*SG&A expenses increased by $50.8 million, or 24.2%, to$260.3 million in the nine months ended September 28, 2007 from$209.6 million in the nine months ended September 29, 2006. IncreasedSG&A expenses related to our AmSan acquisition accounted for $38.2 millionof the $50.8 million increase. Excluding AmSan, SG&A expenses increased6.0% in the nine months ended September 28, 2007. SG&A expenses as apercentage of sales were 27.7% in the nine months ended September 28, 2007compared to 27.1% in the nine months ended September 29, 2006. Certain expenseswithin SG&A, such as the costs of running regional distribution centers,delivery expenses and selling expenses, fluctuate with sales volume. Theincrease in SG&A expenses included these increases, higher expensesassociated with our continued investment in our growth initiatives, as well asincrementally higher additional share-based compensation associated with theissuance of restricted share units, deferred stock units and stock options thisyear.

 

*                Depreciationand Amortization.*Depreciation and amortization expense decreased less than$0.1 million, or 0.6%, to $10.8 million in the nine months ended September28, 2007 from $10.8 million in the nine months ended September 29, 2006.This decrease was due to the elimination of certain amortization associatedwith our trademarks as these intangible assets were deemed to have anindefinite life as part of a change in estimate during the year ended December29, 2006. This decrease was partially offset by higher depreciation resultingfrom our higher capital spending associated with our information systemsinfrastructure and distribution center consolidation and integration efforts.As a percentage of sales, depreciation and amortization was 1.1% or 30 basispoints lower than the 1.4% of sales that it represented in the comparable prioryear period.

 

*                OperatingIncome.*As aresult of the foregoing, operating income increased by $9.7 million, or 12.9%,to $84.6 million in the nine months ended September 28, 2007 from $74.9million in the nine months ended September 29, 2006. As a percent of sales,operating income decreased to 9.0% in the nine months ended September 28, 2007compared to 9.7% in the nine months ended September 29, 2006. This decrease wasprimarily due to our AmSan acquisitionas well as additional share-basedcompensation associated with restricted share units, deferred stock units andstock options.

 

*Loss on Extinguishment of Debt*. Loss on extinguishment of debt was$20.7 million for the nine months ended September 29, 2006. In connection withthe offering of $200.0 million of 81/8% senior subordinated notes and entering into a $330.0million bank credit facility in June 2006, we repurchased the 111⁄2% seniorsubordinated notes of Interline New Jersey and repaid the indebtedness underthe prior credit facility of Interline New Jersey. The 111⁄2% senior subordinatednotes were repurchased at a price equal to 110.51% of their principal amount.In connection with the repurchase of the 111⁄2% senior subordinated notes and therepayment of the prior credit facility, we recorded a loss on earlyextinguishment of debt of $20.7 million. The loss was comprised of $13.7million in tender premiums associated with the repurchase of the 111⁄2% seniorsubordinated notes and a non-cash charge of $7.0 million in deferred financingcosts associated with the repurchase of the 111⁄2% senior subordinated notes andthe repayment of the prior credit facility.

 

*Interest Expense.*Interest expense increased by$2.9 million in the nine months ended September 28, 2007 to $25.6 millionfrom $22.7 million in the nine months ended September 29, 2006. Thisincrease was primarily due to incrementally higher debt balances resulting fromour $130.0 million debt financed acquisition of AmSan in July 2006.

 

*                Provision for Income Taxes.*The effective tax rate for the ninemonths ended September 28, 2007 was 38.8% compared to 38.9% in the nine monthsended September 29, 2006. The decrease in the effective tax rate was dueprimarily to tax-free income generated from our short-term investments as wellas the change in a state’s measurement of tax from an income tax-based methodto a non-income tax-based method partially offset by the additional liabilityassociated with unrecognized tax benefits arising from the adoption of FIN 48.

 

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**Liquidity and Capital Resources**

 

*Overview*

 

We area holding company whose only asset is the stock of our subsidiaries. We conductvirtually all of our business operations through Interline New Jersey.Accordingly, our only material sources of cash are dividends and distributionswith respect to our ownership interests in Interline New Jersey that arederived from the earnings and cash flow generated by Interline New Jersey.

 

We have $200.0 million of 81/8% senior subordinated notes due 2014 and a $330.0million bank credit facility. The bank credit facility consists of a $230.0million 7-year term loan and a $100.0 million 6-year revolving credit facilityof which a portion not exceeding $40.0 million is available in the form ofletters of credit.

 

The 81/8% senior subordinated notes were priced at 99.3%, or$198.6 million, of their principal amount, representing a yield to maturity of81⁄4%. We will amortize the discount of $1.4 million over the term of the 81/8% seniorsubordinated notes. As of September 28, 2007, the 81/8% senior subordinated notes had a fair market value of$197.5 million or 98.75% of par. The 81/8% senior subordinated notes mature on June 15, 2014and interest is payable on June 15 and December 15 of each year.

 

The debt instruments of Interline New Jersey,primarily the credit facility entered into on June 23, 2006 and the indenturegoverning 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 the 81/8% seniorsubordinated notes generally restricts the ability of Interline New Jersey topay distributions to us and to make advances to, or investments in, us to anamount generally equal to 50% of the net income of Interline New Jersey, plusan amount equal to the net proceeds from certain equity issuances, subject tocompliance with a leverage ratio and no default having occurred and continuing.The indenture also contains certain permitted exceptions including (1) allowingus to pay our franchise taxes and other fees required to maintain our corporateexistence, to pay for general corporate and overhead expenses and to payexpenses incurred in connection with certain financing, acquisition ordisposition transactions, in an aggregate amount not to exceed $10.0 millionper year; (2) allowing certain tax payments; and (3) allowing certain permitteddistributions up to $75.0 million. For a further description of the creditfacility, see “—Credit Facility” below.

 

*FinancialCondition*

 

                Working capital increased by$40.2 million to $317.4 million as of September 28, 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 providedby operating activities was $50.4 million in the nine months endedSeptember 28, 2007 compared to net cash provided by operating activities of$13.6 million in the nine months ended September 29, 2006. The increase of $36.8 million in net cashprovided by operating activities in the nine months ended September 28, 2007compared to the nine months ended September 29, 2006 was primarily as a result of strongoperating performance and working capital management. Changes in our workingcapital components used $6.3 million during the nine months ended September 28,2007 compared to $38.9 million used during the nine months ended September 29,2006. Changes in our working capital for the comparable nine-month periodincludes the timing of certain purchases of inventory which are not due andpayable as of the end of the quarter, reflective of a $24.4 million increase intrade accounts payable balances as well as improved inventory turns and lowerinventory needs associated with lower sales demand from our professionalcontractor and specialty distributor customers. The increase in cash fromoperations from changes in our trade payable and inventory balances waspartially offset by higher trade receivable balances associated with salesgrowth.

 

Netcash used in investing activities was $39.7 million in the nine monthsended September 28, 2007 compared to net cash used in investing activities of$136.6 million in the nine months ended September 29, 2006. Net cash used ininvesting activities in the nine months ended September 28, 2007 wasattributable to capital expenditures made in the ordinary course of business of$11.5 million and $28.2 million in net investments in short-term investmentscomprised of tax exempt auction rate securities and variable rate demand notes.Net cash used in investing activities in the nine months ended September 29,2006 was attributable to capital 

 

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expenditures madein the ordinary course of business of $5.3 million and costs related topurchases of businesses, net of cash, of $131.3 million, including $130.6 forAmSan.

 

Net cash used in financing activities totaled$1.4 million in the nine months ended September 28, 2007 compared to netcash provided by financing activities of $123.8 million in the nine monthsended September 29, 2006. Net cash used in financing activities in the ninemonths ended September 28, 2007 was attributable to our repayment of $2.1million of borrowings on our credit facility and capital lease obligationsoffset by $0.7 million of proceeds from stock options exercised and excess taxbenefits from share-based compensation. Net cash provided by financingactivities in the nine months ended September 29, 2006 was attributable to (1)our issuance of $198.6 million of 81/8% senior subordinated notes, net of $1.4 milliondiscount, and $230.0 million of term debt, less $9.8 million in debt issuancecosts associated with the issuance of the 81/8% senior subordinated notes and the term debt,partially offset by our repayment of $149.4 million of term debt, ourrepurchase of $130.0 million of our 111⁄2% senior subordinated notes and $13.7million in redemption premiums and (2) our repayment of $3.3 million ofborrowings on our revolving credit facility and capital lease obligationspartially offset by $1.4 million of proceeds from stock options exercised andexcess tax benefits from share-based compensation.

 

*Capital Expenditures*

 

                Capital expenditures were $3.5million in the three months ended September 28, 2007 compared to $1.6 million in the three months endedSeptember 29, 2006. Capital expenditures asa percentage of sales were 1.1% in the three months ended September 28, 2007compared to 0.5% in the three months ended September 29, 2006. Capitalexpenditures were $11.5 million in the nine months ended September 28, 2007compared to $5.3 million in the nine months ended September 29, 2006. Capital expenditures as a percentage of saleswere 1.2% in the nine months ended September 28, 2007 compared to 0.7% in thenine months ended September 29, 2006. The increases in capital expenditures aredue to our AmSan acquisition as well as the expansion ofexisting distribution centers and warehouse equipment and investments in ourinformation technology systems necessary for the integration of our AmSanacquisition.

 

*Credit Facility*

 

Borrowingsunder the term loan, the delayed draw facility and the revolving creditfacility bear interest, at Interline New Jersey’s option, at either LIBOR plus1.75% or at the alternate base rate, which is the greater of the Prime Rate orthe Federal Funds Effective Rate plus 0.50%, plus 0.75%. As of September 28,2007, the interest rate in effect with respect to the term loan and the delayeddraw facility was 6.93% for the LIBOR option and 8.50% for the alternate baserate option. Outstanding letters of credit under the revolving credit facilityare subject to a per annum fee equal to the applicable margin under therevolving credit facility. The interest rate margin is subject to pricing adjustmentsat the end of each fiscal quarter based on net total indebtedness toconsolidated earnings before interest, taxes, depreciation and amortization (“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.

 

Thebank credit facility, which is secured by substantially all of the assets ofInterline New Jersey and is guaranteed by us and by the domestic subsidiariesof Interline New Jersey, contains affirmative, negative and financial covenantsthat limit Interline New Jersey’s ability to incur additional indebtedness, paydividends on its common stock or redeem, repurchase or retire its common stockor subordinated indebtedness, make certain investments, sell assets, andconsolidate, merge or transfer assets, and that require Interline New Jersey tomaintain certain financial ratios as of the last day of each fiscal quarter,including a minimum ratio based on an adjusted and consolidated EBITDA toconsolidated cash interest expense and a maximum ratio of net totalindebtedness to an adjusted consolidated EBITDA. Interline New Jersey and theCompany were in compliance with all covenants at September 28, 2007.

 

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

 

As of September 28, 2007, Interline New Jersey had$15.2 million of letters of credit issued under the revolving loanfacility and $217.1 million of aggregate principal outstanding under theterm loan facility.

 

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*Liquidity*

 

Historically, our capitalrequirements have been for debt service obligations, working capitalrequirements, including for inventory, accounts receivable and accountspayable, acquisitions, the expansion and maintenance of our distributionnetwork and upgrades of our information systems. We expect this to continue inthe foreseeable future. Historically, we have funded these requirements throughcash flow generated from operating activities and funds borrowed under ourcredit facility. We expect our cash and short-term investments on hand as wellas cash flow from operations and loan availability under our credit facility tobe our primary source of funds in the future. Letters of credit, which areissued under the revolving loan facility under our credit facility, are used tosupport payment obligations incurred for our general corporate purposes.

 

                As of September 28, 2007, we hadapproximately $84.8 million of availability under Interline New Jersey’s$100.0 million revolving credit facility.

 

                We believe that cash andshort-term investments on hand, cash flow from operations and availableborrowing capacity under our new credit facility will be adequate to financeour ongoing operational cash flow needs and debt service obligations for thenext twelve months.

 

*Contractual Obligations*

 

                Our contractual obligations are disclosed in ourAnnual Report on Form 10-K for the year ended December 29, 2006 filed with theSEC. Other than the adoption of FIN 48 as described in “Note 7. Income Taxes”to the unaudited condensed consolidated financial statements above, there havebeen no material changes to our contractual obligations since December 29,2006. As of September 28, 2007, we cannot reasonably estimate the period ofcash settlement on our unrecognized tax benefits. In addition, we do notanticipate that our total unrecognized tax benefits will significantly changeprior to September 26, 2008.

 

**Critical Accounting Policies**

 

                In preparing the unauditedcondensed consolidated financial statements in conformity with accountingprinciples generally accepted in the United States of America, management isrequired to make certain estimates, judgments and assumptions. These estimates,judgments and assumptions affect the reported amounts of assets andliabilities, including the disclosure of contingent assets and liabilities, atthe date of the financial statements and the reported amounts of revenues andexpenses during the periods presented. On an ongoing basis, managementevaluates these estimates and assumptions. Management bases its estimates andassumptions on historical experience and on various other factors that arebelieved to be reasonable at the time the estimates and assumptions are made.Actual results may differ from these estimates and assumptions under differentcircumstances or conditions.

 

                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 nine months ended September 28, 2007, therewere no significant changes to any of our critical accounting policies.

 

**ITEM 3. Quantitative and Qualitative DisclosuresAbout Market Risk**

 

*CommodityPrice 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.

 

*InterestRate Risk*

 

Ourvariable rate term debt is sensitive to changes in the general level ofinterest rates. As of September 28, 2007, the interest rate in effect withrespect to our $217.1 million variable rate term debt was 6.93% for the LIBORoption and 8.50% for the alternate base rate option. While our variable rateterm debt obligations expose us to the risk of rising interest rates, we do notbelieve that the potential exposure is material to our overall financialperformance or results of operations. Based on the outstanding variable rateterm 

 

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debt as of September 28, 2007, a 1.0% annual increase or decrease incurrent market interest rates would have the effect of causing a $1.6 millionpre-tax change to our statement of operations for the nine months endedSeptember 28, 2007.

 

The fair market value of our fixed rate debt issubject to interest rate risk. As of September 28, 2007, the fair market valueof our $200.0 million 81/8%senior subordinated notes was $197.5 million or 98.75% of par.

 

*ForeignCurrency Exchange Risk*

 

                The majority of our purchasesfrom foreign-based suppliers are from China and other countries in Asia and aretransacted in U.S. dollars. Accordingly, our risk to foreign currency exchangerates was not material as of September 28, 2007.

 

*DerivativeFinancial Instruments*

 

As ofSeptember 28, 2007, we did not have any interest rate swap exchange agreements,or swaps. Historically, we entered into derivative financial instruments fromtime to time, including interest rate exchange agreements, or swaps, to manageour exposure to fluctuations in interest rates on our debt. Under our formerswap agreements, we pay a fixed rate on the notional amount to our banks andthe banks pay us a variable rate on the notional amount equal to a base LIBORrate.

 

                We periodically evaluate thecosts 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. Our derivative activities, all of which are for purposes otherthan trading, are initiated within the guidelines of corporate risk-managementpolicies.

 

**ITEM 4.Controls and Procedures**

 

*Evaluationof Disclosure Controls and 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 September 28, 2007. Based on this evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that, as of September28, 2007, our disclosure controls and procedures were (1) designed to ensurethat material information relating to us, including our consolidatedsubsidiaries, is made known to our Chief Executive Officer and Chief FinancialOfficer by others within those entities, particularly during the period inwhich this report was being prepared and (2) effective, in that they providereasonable assurance that information required to be disclosed by us in thereports that we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the SEC’s rulesand forms.

 

*Changesin Internal Control over Financial 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 September 28, 2007 that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

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**PART II. OTHER INFORMATION**

 

**ITEM 1. LegalProceedings**

 

                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 regarding factors that could affectour financial position, results of operations and cash flows, see the riskfactors discussion provided in our Annual Report on Form 10-K for the yearended December 29, 2006 in Part I. Item 1A. Risk Factors. See also “Part I. Item 2—Forward LookingStatements” above.

 

There have been no material changes from the riskfactors previously disclosed in our Annual Report on Form 10-K for the yearended December 29, 2006.

 

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

 

None.

 

**ITEM 3. Defaults Upon Senior Securities**

 

None.

 

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

 

None.

 

**ITEM 5. Other Information**

 

None.

 

**ITEM 6. Exhibits**

 

The following exhibits are being filed as part of thisQuarterly Report on Form 10-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**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned hereunto duly authorized.

 
| ** **             | ** ** | INTERLINE BRANDS, INC.                                                   |
|------------------------|------------|--------------------------------------------------------------------------|
|                   |       | Registrant                                                               |
|                   |       |                                                                     |
|                   |       |                                                                     |
|                   |       |                                                                     |
| Date: November 2, 2007 | By:        | /S/ THOMAS J. TOSSAVAINEN                                                |
|                   |       | Thomas J. Tossavainen                                                    |
|                   |       | Chief Financial Officer                                                  |
|                   |       | (Duly Authorized Signatory, Principal Financial and  Accounting Officer) |
|                   |       |                                                                     |
|                   |       |                                                                     |

 

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