Table of Contents

** **

 

** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

****(Mark One)****
| **ý** | ****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**** |
|------------|------------------------------------------------------------------------------------------------------------|

 

****For the quarterly period ended September 25, 2009****

 

****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.)**** |

 

| ****701  San Marco Boulevard********Jacksonville, Florida**** | **** **** | ****32207****      |
|---------------------------------------------------------------|----------------|--------------------|
| ****(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer o                   |   | Accelerated filer x         |
|---------------------------------------------|--------|-----------------------------|
|                                        |   |                        |
| Non-accelerated filer o                     |   | Smaller reporting company o |
| (Do not check if smaller reporting company) |   |                        |

 

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 30, 2009, there were 32,459,000 shares of the registrant’s common stock outstanding (excluding 115,463 shares held in treasury), par value $0.01.

 

 

 

----

Table of Contents

 

**TABLE OF CONTENTS**

 
| ****ITEM****       | **** **** | ** **                                                                                                                                      | ** **     | ****PAGE****   |
|--------------------|----------------|-------------------------------------------------------------------------------------------------------------------------------------------------|----------------|----------------|
|               |           |                                                                                                                                            |           |           |
| **** ****     | **** **** | ****PART I. FINANCIAL INFORMATION****                                                                                                      |           |           |
|               |           |                                                                                                                                            |           |           |
| ****1.****         | **** **** | ****Financial Statements (Unaudited)****                                                                                                        |           |           |
| **** ****     | **** **** | ****Condensed  Consolidated Balance Sheets as of September 25, 2009 and  December 26, 2008****                                        |           | ****1****      |
| **** ****     | **** **** | ****Condensed  Consolidated Statements of Earnings for the Three and Nine Months Ended  September 25, 2009 and September 26, 2008**** |           | ****2****      |
| **** ****     | **** **** | ****Condensed  Consolidated Statements of Cash Flows for the Nine Months Ended  September 25, 2009 and September 26, 2008****         |           | ****3****      |
| **** ****     | **** **** | ****Notes to Condensed Consolidated Financial Statements****                                                                                    |           | ****4****      |
| ****2.****         | **** **** | ****Management’s  Discussion and Analysis of Financial Condition and Results of Operations****                                             |           | ****20****     |
| ****3.****         | **** **** | ****Quantitative  and Qualitative Disclosures about Market Risk****                                                                             |           | ****29****     |
| ****4.****         | **** **** | ****Controls and  Procedures****                                                                                                                |           | ****30****     |
| **** ****     | **** **** | **** ****                                                                                                                                  | **** **** | **** **** |
| **** ****     | **** **** | ****PART II. OTHER INFORMATION****                                                                                                         |           |           |
|               |           |                                                                                                                                            |           |           |
| ****1.****         | **** **** | ****Legal Proceedings****                                                                                                                       |           | ****31****     |
| ****1A.****        | **** **** | ****Risk Factors****                                                                                                                            |           | ****31****     |
| ****2.****         | **** **** | ****Unregistered  Sales of Equity Securities and Use of Proceeds****                                                                            |           | 31             |
| ****3.****         | **** **** | ****Defaults Upon Senior Securities****                                                                                                         |           | 31             |
| ****4.****         | **** **** | Submission  of Matters to a Vote of Security Holders                                                                                            |           | 31             |
| 5.                 |           | Other Information                                                                                                                               |           | 31             |
| ****6.****         | **** **** | ****Exhibits****                                                                                                                                |           | ****32****     |
| **** ****     | **** **** | **** ****                                                                                                                                  | **** **** | **** **** |
| ****SIGNATURES**** |           | ****33****                                                                                                                                      |

 

----

Table of Contents

 

**PART I. FINANCIAL INFORMATION**

 

**ITEM 1. Financial Statements**

 

**INTERLINEBRANDS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS(UNAUDITED)**

**ASOF SEPTEMBER 25, 2009 AND DECEMBER 26, 2008**

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

 
| ** **                                                                                                                                                                                                         | ** ** | **September 25,** | ** ** | **December 26,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                         | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| **ASSETS**                                                                                                                                                                                                         |       |                   |       |                  |       |
| Current Assets:                                                                                                                                                                                                    |       |                   |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                                          |       | $                      | 63,691     |                  | $          | 62,724 |   |
| Short-term investments                                                                                                                                                                                             |       | 1,623                  |       | —                |       |
| Accounts receivable - trade (net of allowance for doubtful  accounts of $13,070 and $12,140)                                                                                                                       |       | 141,290                |       | 139,522               |       |
| Inventory                                                                                                                                                                                                          |       | 184,707                |       | 211,200               |       |
| Prepaid income taxes                                                                                                                                                                                               |       | 129                    |       | 1,452                 |       |
| Prepaid expenses and other current assets                                                                                                                                                                          |       | 18,414                 |       | 22,884                |       |
| Deferred income taxes                                                                                                                                                                                              |       | 16,001                 |       | 19,010                |       |
| Total current assets                                                                                                                                                                                               |       | 425,855                |       | 456,792               |       |
|                                                                                                                                                                                                               |       |                   |       |                  |       |
| Property and equipment, net                                                                                                                                                                                        |       | 48,461                 |       | 46,033                |       |
| Goodwill                                                                                                                                                                                                           |       | 318,229                |       | 317,117               |       |
| Other intangible assets, net                                                                                                                                                                                       |       | 126,598                |       | 132,787               |       |
| Other assets                                                                                                                                                                                                       |       | 8,673                  |       | 10,119                |       |
| Total assets                                                                                                                                                                                                       |       | $                      | 927,816    |                  | $          | 962,848 |   |
|                                                                                                                                                                                                               |       |                   |       |                  |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                                                                                                     |       |                   |       |                  |       |
| Current Liabilities:                                                                                                                                                                                               |       |                   |       |                  |       |
| Accounts payable                                                                                                                                                                                                   |       | $                      | 84,356     |                  | $          | 68,255 |   |
| Accrued expenses and other current liabilities                                                                                                                                                                     |       | 44,867                 |       | 31,394                |       |
| Accrued interest                                                                                                                                                                                                   |       | 3,466                  |       | 1,072                 |       |
| Current portion of long-term debt                                                                                                                                                                                  |       | 1,638                  |       | 1,625                 |       |
| Capital lease - current                                                                                                                                                                                            |       | 260                    |       | 239                   |       |
| Total current liabilities                                                                                                                                                                                          |       | 134,587                |       | 102,585               |       |
|                                                                                                                                                                                                               |       |                   |       |                  |       |
| Long-Term Liabilities:                                                                                                                                                                                             |       |                   |       |                  |       |
| Deferred income taxes                                                                                                                                                                                              |       | 39,854                 |       | 37,210                |       |
| Long-term debt, net of current portion                                                                                                                                                                             |       | 309,051                |       | 401,765               |       |
| Capital lease - long-term                                                                                                                                                                                          |       | 28                     |       | 226                   |       |
| Other liabilities                                                                                                                                                                                                  |       | 835                    |       | 989                   |       |
| Total liabilities                                                                                                                                                                                                  |       | 484,355                |       | 542,775               |       |
| Commitments and contingencies                                                                                                                                                                                      |       |                   |       |                  |       |
| Senior preferred stock; $0.01 par value, 20,000,000  shares authorized; no shares outstanding as of September 25, 2009 and  December 26, 2008                                                            |       | —                 |       | —                |       |
|                                                                                                                                                                                                               |       |                   |       |                  |       |
| Shareholders’ Equity:                                                                                                                                                                                         |       |                   |       |                  |       |
| Common stock; $0.01 par value, 100,000,000  authorized; 32,574,463 issued and 32,459,156 outstanding as of  September 25, 2009 and 32,561,360 issued and 32,449,946 outstanding as  of December 26, 2008 |       | 326                    |       | 326                   |       |
| Additional paid-in capital                                                                                                                                                                                         |       | 574,996                |       | 571,868               |       |
| Accumulated deficit                                                                                                                                                                                                |       | (131,058               | )          | (150,833              | )          |
| Accumulated other comprehensive income                                                                                                                                                                             |       | 1,249                  |       | 695                   |       |
| Treasury stock, at cost, 115,307 shares as of  September 25, 2009 and 111,414 shares as of December 26, 2008                                                                                             |       | (2,052                 | )          | (1,983                | )          |
| Total shareholders’ equity                                                                                                                                                                                    |       | 443,461                |       | 420,073               |       |
| Total liabilities and shareholders’ equity                                                                                                                                                                    |       | $                      | 927,816    |                  | $          | 962,848 |   |

 

*See accompanying notes to condensed consolidated financialstatements.*

 

1

----

Table ofContents

 

**INTERLINEBRANDS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFEARNINGS (UNAUDITED)**

**THREEAND NINE MONTHS ENDED SEPTEMBER 25, 2009 AND SEPTEMBER 26, 2008**

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

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|-----------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                    | ** ** | **September 25,** | ** ** | **September 26,** | ** ** | **September 25,** | ** ** | **September 26,** | ** ** |
| ** **                                    | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                    | ** ** | ** **             | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  sales                                    |       | $                      | 277,948    |                   | $          | 317,504 |   | $ | 804,661 |   | $ | 918,079 |   |
| Cost  of sales                                |       | 175,726                |       | 196,568                |       | 507,528 |   | 571,293 |   |
| Gross  profit                                 |       | 102,222                |       | 120,936                |       | 297,133 |   | 346,786 |   |
|                                          |       |                   |       |                   |       |   |   |   |   |
| Operating  Expenses:                          |       |                   |       |                   |       |   |   |   |   |
| Selling,  general and administrative expenses |       | 76,191                 |       | 87,828                 |       | 239,009 |   | 261,426 |   |
| Depreciation  and amortization                |       | 4,535                  |       | 4,319                  |       | 13,561 |   | 12,300 |   |
| Total  operating expense                      |       | 80,726                 |       | 92,147                 |       | 252,570 |   | 273,726 |   |
| Operating  income                             |       | 21,496                 |       | 28,789                 |       | 44,563 |   | 73,060 |   |
|                                          |       |                   |       |                   |       |   |   |   |   |
| (Loss)  Gain on extinguishment of debt, net   |       | (248                   | )          | —                 |       | 1,295 |   | — |   |
| Interest  expense                             |       | (4,577                 | )          | (7,054                 | )          | (14,673 | ) | (21,800 | ) |
| Interest  and other income                    |       | 554                    |       | 710                    |       | 1,284 |   | 2,113 |   |
| Income  before income taxes                   |       | 17,225                 |       | 22,445                 |       | 32,469 |   | 53,373 |   |
| Income  tax provision                         |       | 6,794                  |       | 8,709                  |       | 12,694 |   | 19,788 |   |
| Net  income                                   |       | $                      | 10,431     |                   | $          | 13,736 |   | $ | 19,775 |   | $ | 33,585 |   |
|                                          |       |                   |       |                   |       |   |   |   |   |
| Earnings  Per Share:                          |       |                   |       |                   |       |   |   |   |   |
| Basic                                         |       | $                      | 0.32       |                   | $          | 0.42 |   | $ | 0.61 |   | $ | 1.04 |   |
| Diluted                                       |       | $                      | 0.32       |                   | $          | 0.42 |   | $ | 0.60 |   | $ | 1.03 |   |
|                                          |       |                   |       |                   |       |   |   |   |   |
| Weighted-Average  Shares Outstanding:         |       |                   |       |                   |       |   |   |   |   |
| Basic                                         |       | 32,511,597             |       | 32,412,280             |       | 32,493,797 |   | 32,387,865 |   |
| Diluted                                       |       | 33,070,041             |       | 32,553,518             |       | 32,826,466 |   | 32,618,370 |   |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

2

----

Table of Contents

 

**INTERLINEBRANDS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS (UNAUDITED)**

**NINEMONTHS ENDED SEPTEMBER 25, 2009 AND SEPTEMBER 26, 2008**

**(inthousands)**

**** ****
| ** **                                                                         | ** ** | **Nine  Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                         | ** ** | **September 25,** | ** ** | **September 26,** | ** ** |
| ** **                                                                         | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Cash Flows from Operating Activities:                                              |       |                   |       |   |   |
| Net income                                                                         |       | $                      | 19,775     |   | $ | 33,585 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                   |       |   |   |
| Depreciation and amortization                                                      |       | 14,169                 |       | 12,695 |   |
| Gain on extinguishment of debt, net of original  issue discount                    |       | (2,165                 | )          | — |   |
| Write-off of debt issuance costs                                                   |       | 870                    |       | — |   |
| Amortization of debt issuance costs                                                |       | 829                    |       | 852 |   |
| Amortization of discount on 81/8% senior subordinated notes                        |       | 108                    |       | 109 |   |
| Write-off of deferred acquisition costs                                            |       | 672                    |       | — |   |
| Share-based compensation                                                           |       | 3,075                  |       | 2,994 |   |
| Excess tax benefits from share-based compensation                                  |       | (1                     | )          | (140 | ) |
| Deferred income taxes                                                              |       | 6,113                  |       | (667 | ) |
| Provision for doubtful accounts                                                    |       | 7,330                  |       | 3,571 |   |
| Loss on disposal of property and equipment                                         |       | 13                     |       | 79 |   |
|                                                                               |       |                   |       |   |   |
| Changes in assets and liabilities which provided  (used) cash:                     |       |                   |       |   |   |
| Accounts receivable - trade                                                        |       | (8,959                 | )          | (16,230 | ) |
| Inventory                                                                          |       | 26,720                 |       | (38,971 | ) |
| Prepaid expenses and other current assets                                          |       | 4,478                  |       | 1,703 |   |
| Other assets                                                                       |       | 774                    |       | 615 |   |
| Accounts payable                                                                   |       | 16,061                 |       | 8,428 |   |
| Accrued expenses and other current liabilities                                     |       | 8,751                  |       | 2,159 |   |
| Accrued interest                                                                   |       | 2,394                  |       | 4,144 |   |
| Income taxes                                                                       |       | 1,321                  |       | 513 |   |
| Other liabilities                                                                  |       | (145                   | )          | (1,394 | ) |
| Net cash provided by operating activities                                          |       | 102,183                |       | 14,045 |   |
| Cash Flows from Investing Activities:                                              |       |                   |       |   |   |
| Purchase of property and equipment, net                                            |       | (9,078                 | )          | (18,712 | ) |
| Purchase of short-term investments                                                 |       | (1,830                 | )          | (35,531 | ) |
| Proceeds from sales and maturities of short-term  investments                      |       | 203                    |       | 82,121 |   |
| Purchase of businesses, net of cash acquired                                       |       | (381                   | )          | (10,330 | ) |
| Net cash (used in) provided by investing activities                                |       | (11,086                | )          | 17,548 |   |
| Cash Flows from Financing Activities:                                              |       |                   |       |   |   |
| Increase in purchase card payable, net                                             |       | 492                    |       | 2,324 |   |
| Repayment of term debt                                                             |       | (56,488                | )          | (2,489 | ) |
| Repayment of 81/8% senior subordinated notes                                       |       | (34,157                | )          | — |   |
| Payments on capital lease obligations                                              |       | (177                   | )          | (164 | ) |
| Proceeds from stock options exercised                                              |       | 17                     |       | 611 |   |
| Excess tax benefits from share-based compensation                                  |       | 1                      |       | 140 |   |
| Treasury stock acquired to satisfy minimum  statutory tax withholding requirements |       | (34                    | )          | (808 | ) |
| Net cash used in financing activities                                              |       | (90,346                | )          | (386 | ) |
| Effect of exchange rate changes on cash and cash  equivalents                      |       | 216                    |       | (70 | ) |
| Net increase in cash and cash equivalents                                          |       | 967                    |       | 31,137 |   |
| Cash and cash equivalents at beginning of period                                   |       | 62,724                 |       | 4,975 |   |
| Cash and cash equivalents at end of period                                         |       | $                      | 63,691     |   | $ | 36,112 |   |
|                                                                               |       |                   |       |   |   |
| Supplemental Disclosure of Cash Flow Information:                                  |       |                   |       |   |   |
| Cash paid during the period for:                                                   |       |                   |       |   |   |
| Interest                                                                           |       | $                      | 11,278     |   | $ | 16,823 |   |
| Income taxes, net of refunds                                                       |       | $                      | 5,371      |   | $ | 21,124 |   |
|                                                                               |       |                   |       |   |   |
| Schedule of Non-Cash Investing Activities:                                         |       |                   |       |   |   |
| Property acquired through lease incentives                                         |       | $                      | 3,009      |   | $ | — |   |
| Adjustments to liabilities assumed and goodwill on  businesses acquired            |       | $                      | 732        |   | $ | — |   |

 

*See accompanying notes to condensed consolidated financialstatements.*

 

3

----

Table ofContents

 

**INTERLINEBRANDS, INC. AND SUBSIDIARIES**

**NOTES TO UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**THREEAND NINE MONTHS ENDED SEPTEMBER 25, 2009 AND SEPTEMBER 26, 2008**

** **

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

** **

*Business*

 

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

 

The Company markets and sells its products primarilythrough twelve distinct and targeted brands. The Company utilizes a variety ofsales channels, including a direct sales force, telesales representatives, adirect marketing program, brand-specific websites and a national accounts salesprogram. The Company delivers its products through its network of regionaldistribution centers and professional contractor showrooms located throughoutthe United States and Canada, two national distribution centers, vendor managedinventory locations at large professional contractor customer locations and itsdedicated fleet of trucks. Through its broad distribution network, the Companyis able to provide next-day delivery service to at least 98% of the U.S.population and same-day delivery service to most major metropolitan markets.

 

*Basis of Presentation*

 

The accompanying unaudited interim condensedconsolidated financial statements of Interline have been prepared in accordancewith accounting principles generally accepted in the United States of Americaand instructions to the Quarterly Report on Form 10-Q and Article 10of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”).Accordingly, certain information and footnote disclosures normally included infinancial statements included in the Company’s Annual Report on Form 10-Khave been condensed or omitted. The accompanying unaudited interim condensedconsolidated financial statements should be read in conjunction with theaudited consolidated financial statements and related notes included in theCompany’s Annual Report on Form 10-K for the fiscal year ended December 26,2008 filed with the SEC.

 

All adjustments, consisting of normal recurringadjustments, which are, in the opinion of management, necessary for a fairstatement of the results for the interim periods presented have been recorded.The results of operations for the interim periods presented are not necessarilyindicative of the results to be expected for the full year.

 

The preparation of condensed consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the condensed consolidatedfinancial statements and the reported amounts of revenues and expenses duringthe reporting period. Significant estimates include valuation reserves foraccounts receivable, inventory and income taxes, reserves for self-insuranceprograms and valuation of goodwill and other intangible assets. Actual resultscould differ from those estimates.

 

*Fair Value of Financial Instruments*

 

The Company, in accordance with accounting principlesgenerally accepted in the United States (“US GAAP”) defines fair value as theprice that would be received to sell an asset or paid to transfer a liabilityin an orderly transaction between market participants at the measurement date.US GAAP requires disclosure about how fair value is determined for assets andliabilities and establishes a hierarchy for which these assets and liabilitiesmust be grouped, based on significant levels of inputs as follows:

 
| **Level  1** | quoted  prices in active markets for identical assets or liabilities;                                                              |
|--------------|------------------------------------------------------------------------------------------------------------------------------------|
| **Level  2** | quoted  prices in active markets for similar assets and liabilities and inputs that  are observable for the asset or liability; or |
| **Level  3** | unobservable  inputs, such as discounted cash flow models or valuations.                                                           |

 

The determination of where assets and liabilities fallwithin this hierarchy is based upon the lowest level of input that is significantto the fair value measurement.

 

4

----

Table of Contents

 

The fair value of cash and cash equivalents, accountsreceivable, and accounts payable approximate the carrying amount because of theshort maturities of these items.

 

The Company’s short-term investments, which areclassified as available-for-sale, are comprised of pre-refunded municipalbonds. Pre-refunded municipal bonds are bonds that are refinanced by the issuerand remain outstanding in the marketplace until a specific call date ormaturity date is reached. Pre-refunded municipal bonds are secured by U.S.Treasury securities placed in an irrevocable escrow account. As of September 25,2009, all of the Company’s pre-refunded municipal bonds have contractualmaturities of less than one year. The fair value of the pre-refunded municipalbonds is determined by quoted market prices as they are publicly traded. Thefollowing table shows the fair value of the Company’s short-term investments asof September 25, 2009 (in thousands):

 
| **Description**               | ** ** | **Cost** | ** ** | **Fair Value  Using Quoted  Prices in Active  Markets  (Level 1)** | ** ** |
|-------------------------------|------------|----------|------------|--------------------------------------------------------------------|------------|
| Pre-refunded  municipal bonds |       | $        | 1,623      |                                                               | $          | 1,623 |   |
|                          |       | $        | 1,623      |                                                               | $          | 1,623 |   |

 

The fair value of term debt approximates the carryingamount because it bears interest at variable rates. The fair value of the 81/8% seniorsubordinated notes is determined by quoted market prices as they are publiclytraded.

 

*Subsequent Events*

 

The Company evaluated events and transactions thatoccurred during the period from September 25, 2009, the date of thebalance sheet, through November 2, 2009, the date the unaudited interimcondensed financial statements were issued, for potential recognition ordisclosure in the accompanying unaudited interim condensed consolidatedfinancial statements and did not identify any that should be recognized ordisclosed.

 

*SegmentInformation*

 

The Company has one operating segment and onereportable segment, the distribution of MRO products.

 

TheCompany’s net sales for the three and nine months ended September 25, 2009and September 26, 2008 by product category were as follows (in thousands):

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|--------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **September 25,** | ** ** | **September 26,** | ** ** | **September 25,** | ** ** | **September 26,** | ** ** |
| **Product Category**                       | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Janitorial  and sanitary                   |       | $                      | 80,546     |                   | $          | 80,328 |   | $ | 229,105 |   | $ | 225,423 |   |
| Plumbing                                   |       | 71,379                 |       | 86,361                 |       | 218,418 |   | 263,508 |   |
| Heating,  ventilation and air conditioning |       | 33,891                 |       | 36,830                 |       | 86,139 |   | 96,638 |   |
| Electrical  and lighting                   |       | 22,811                 |       | 28,575                 |       | 66,232 |   | 86,453 |   |
| Appliances  and parts                      |       | 17,954                 |       | 18,733                 |       | 49,030 |   | 52,721 |   |
| Security                                   |       | 13,449                 |       | 15,876                 |       | 39,502 |   | 47,350 |   |
| Hardware  and tools                        |       | 12,885                 |       | 13,970                 |       | 37,140 |   | 40,996 |   |
| Other                                      |       | 25,033                 |       | 36,831                 |       | 79,095 |   | 104,990 |   |
| Total                                      |       | $                      | 277,948    |                   | $          | 317,504 |   | $ | 804,661 |   | $ | 918,079 |   |

 

*Recently Adopted Accounting Standards*

 

Effective December 27, 2008, the Company adoptedFinancial Accounting Standards Board (“FASB”) Accounting Standards Codification(“ASC”) 820-10-65, *Fair Value Measurementsand Disclosures: Transition related to FASB Staff Position FAS 157-2, EffectiveDate of FASB Statement No. 157* (formerly FASB Staff Position157-2, *Effective Date of FASB Statement No. 157*).ASC 820-10-65 amends prior guidance to defer the effective date of fair valuemeasurements and disclosures for non-financial assets and non-financialliabilities, except for items that are recognized or disclosed at fair value inthe financial statements on a recurring basis (at least annually) until fiscalyears beginning after November 15, 2008 and interim periods within thosefiscal years. The adoption of ASC 820-10-65 did not have any impact on theCompany’s financial position, results of operations and cash flows.

 

EffectiveDecember 27, 2008, the Company adopted ASC 805-10, *BusinessCombinations* (formerly FASB Statement No. 141 (revised2007), *Business Combinations*). ASC 805-10replaces prior guidance on business combinations and establishes principles andrequirements for how an acquirer recognizes and measures in its financialstatements the identifiable assets acquired, the liabilities assumed, anynoncontrolling interest in the acquiree and the goodwill acquired. ASC 805-10also establishes disclosure requirements that enable users to evaluate the natureand financial effects of the business combination. As a result of the adoptionof, and in accordance with ASC 805-10, the Company expensed $0.7 million indeferred acquisition costs during the three months ended March 27, 2009,which are included as part of selling, general and administrative expense.

 

5

----

Table of Contents

 

Effective December 27, 2008, the Company adoptedASC 810-10-65, *Consolidation: Transition Related to FASBStatement No. 160, Noncontrolling Interests in Consolidated FinancialStatements—an amendment of ARB No. 51* (formerly FASB Statement No. 160,*Noncontrolling Interests in Consolidated FinancialStatements—an amendment of ARB No. 51*). ASC 810-10-65establishes accounting and reporting standards for ownership interests insubsidiaries held by parties other than the parent, the amount of consolidatednet income attributable to the parent and to the noncontrolling interest,changes in a parent’s ownership interest, and the valuation of retainednoncontrolling equity investments when a subsidiary is deconsolidated. ASC810-10-65 also establishes disclosure requirements that clearly identify anddistinguish between the interests of the parent and the interests of thenoncontrolling owners. ASC 810-10-65 applies to all entities that prepareconsolidated financial statements, except not-for-profit organizations, butaffects only those entities that have an outstanding noncontrolling interest inone or more subsidiaries or that deconsolidate a subsidiary. The adoptionof ASC 810-10-65 did not have any impact on the Company’s financial position,results of operations and cash flows.

 

Effective December 27,2008, the Company adopted ASC 815-10-65, *Derivatives and Hedging:Transition and Effective Date Related to FASB Statement No. 161,Disclosures about Derivative Instruments and Hedging Activities—an amendment ofFASB Statement No. 133* (formerly FASB Statement No. 161, *Disclosures about Derivative Instruments and Hedging Activities*).ASC 815-10-65 is intended to improve financial reporting about derivativeinstruments and hedging activities by requiring enhanced disclosures to enableinvestors to better understand their effects on an entity’s financial position,financial performance and cash flows. The adoption of ASC 815-10-65 did nothave any impact on the Company’s financial position, results of operations andcash flows.

 

In April 2009, the FASB issued ASC 825-10-65, *Financial Instruments: Transition Related to FSP FAS 107-1 and APB28-1, Interim Disclosures about Fair Value of Financial Instruments*(formerly FASB Staff Position No. FAS 107-1 and APB 28-1, *Interim Disclosures about Fair Value of Financial Instruments*).ASC 825-10-65 extends the disclosure requirements regarding the fair value offinancial instruments to interim financial statements of publicly tradedcompanies. The Company adopted the provisions of ASC 825-10-65 for the interimperiod ended June 26, 2009. The adoption of ASC 825-10-65 did not have anyimpact on the Company’s financial position, results of operations and cashflows.

 

In May 2009, the FASB issued ASC 855-10, *Subsequent Events* (formerly FASB Statement No. 165, *Subsequent Events*). ASC 855-10 establishes general standardsof accounting for and disclosure of events that occur after the balance sheetdate but before the financial statements are issued or are available to beissued. ASC 855-10 sets forth the period after the balance sheet date during whichmanagement should evaluate events or transactions that may occur for potentialrecognition or disclosure in the financial statements; the circumstances underwhich an entity should recognize events or transactions occurring after thebalance sheet date in its financial statements; and the disclosures that anentity should make about events or transactions that occurred after the balancesheet date. ASC 855-10 also requires disclosure of the date through which anentity has evaluated subsequent events. The Company adopted the provisions ofASC 855-10 for the interim period ended June 26, 2009. The adoption of ASC855-10 did not have any impact on the Company’s financial position, results ofoperations and cash flows.

 

In June 2009, the FASB issued ASC 105-10, *Generally Accepted Accounting Standards* (formerly FASBStatement No. 168, *The FASB AccountingStandards CodificationTM and the Hierarchy of Generally Accepted AccountingPrinciples — a replacement of FASB Statement No. 162*).ASC105-10 establishes the FASB Accounting Standards Codification (the “Codification”)as the single source of US GAAP. The Codification is effective for interim andannual periods ending after September 15, 2009. After the Codificationlaunch on July 1, 2009, only one level of authoritative US GAAP exists,other than guidance issued by the SEC. All other accounting literature excludedfrom the Codification is considered non-authoritative. While not intended tochange US GAAP, the Codification significantly changes the way in which theaccounting literature is organized. It is structured by accounting topic tohelp accountants and auditors more quickly identify the guidance that appliesto a specific accounting issue. The Company adopted the provisions of ASC105-10 for the interim period ended September 25, 2009. The adoption ofthe provisions of ASC 105-10 did not have a material impact on the Company’sfinancial position, results of operations or cash flows. However, because theCodification completely replaces existing standards, it affects the way US GAAPis referenced by the Company in its financial statements and accountingpolicies.

 

*Accounting Standards Not Yet Adopted*

 

In June 2009, the FASB issued FASB Statement No. 167,*Amendments to FASB Interpretation No. 46(R) *(FAS167). FAS 167 changes how a company determines when an entity that isinsufficiently capitalized or is not controlled through voting (or similarrights) should be consolidated. The determination of whether a company isrequired to consolidate an entity is based on, among other things, an entity’spurpose and design and a company’s ability to direct the activities of theentity that most significantly impact the entity’s economic performance. FAS167 is effective for periods beginning after November 15, 2009. Theprovisions of FAS 167 will not have any impact on the Company’s financialposition, results or operations or cash flows.

 

6

----

Table of Contents

 

**2**.             ACCOUNTSRECEIVABLE

** **

The Company’s trade receivables are exposed to creditrisk. The majority of the markets served by the Company are comprised ofnumerous individual accounts. The Company monitors the creditworthiness of itscustomers on an ongoing basis and provides a reserve for estimated bad debtlosses. If the financial condition of the Company’s customers were todeteriorate, increases in its allowance for doubtful accounts may be needed.

 

The activity in the allowance for doubtful accountsconsisted of the following (in thousands):

 
| **Balance at  December 26,   2008** | ** **   | **Charged to  Expense****(1)** | ** ** | **Deductions****(2)** | ** ** | **Balance at  September 25,  2009** | ** ** |
|----------------------------------------------------|--------------|-------------------------------------|------------|-----------------------|------------|-----------------------------------------------|------------|
| $                                                  |  12,140 |                                | $          | 7,330                 |       | $                                             | (6,400     | ) | $ | 13,070 |   |
|                                                    |              |                                     |            |                       |            |                                               |            |  |  |  |  |

 

----

(1)          Provision for doubtfulaccounts includes $3.0 million associated with a customer seeking Chapter 11bankruptcy protection in March 2009.

 

(2)          Accounts receivablewritten-off as uncollectible, net of recoveries.

 

**3**.             DEBT

** **

During the three months ended March 27, 2009, theCompany repurchased $36.4 million of its 81/8% senior subordinated notes at an average of 93.8% ofpar, or $34.2 million. In connection with the repurchase of the 81/8% seniorsubordinated notes, the Company recorded a gain on extinguishment of debt of$1.8 million net of $0.1 million and $0.4 million in original issue discountand deferred financing costs written-off, respectively. As of September 25,2009, the fair market value of the $150.7 million of 81/8% seniorsubordinated notes was approximately $147.3 million, or 97.75% of par.

 

During the three and nine months ended September 25,2009, the Company repaid $30.0 million and $55.2 million, respectively, of itsterm loan ahead of schedule. In connection with these payments, the Companyrecorded a loss on extinguishment of debt of $0.2 million and $0.5 million,respectively, associated with the write-off of deferred financing costs. As aresult of these repayments of term debt, the Company is not required to makeanother principal payment until the debt matures in 2013.

 

**4**.             SHAREHOLDERRIGHTS PLAN

** **

On March 22, 2009, the Board of Directors of Interline adopted a shareholder rights plan and authorized and declared a dividend distribution of one preferred stock purchase right (a “Right”) for each outstanding share of the Company’s common stock. The Rights are not exercisable unless an entity becomes, or launches a tender offer to become, the beneficial owner of 15% or more of the Company’s outstanding common stock (including derivative positions), subject to certain exceptions. The distribution was paid on April 2, 2009 to shareholders of record as of the close of business on April 2, 2009. Each Right, if and when it becomes exercisable, entitles the holder to buy 1/1000 of a share of our preferred stock, designated as Series A Junior Preferred Stock, par value $0.01 per share, at a price of $30.00 per 1/1000 of a share subject to adjustment (the “Exercise Price”). If any person or group becomes the beneficial owner of 15% or more of the Company’s common stock at any time after the date of the plan (with certain limited exceptions), then each Right not owned by such person or group will entitle its holder to purchase, at the Exercise Price, shares of the Company’s common stock or, in certain circumstances, common stock of the acquiring person, having a market value of twice the Exercise Price. The Rights will expire at the close of business on March 22, 2012, unless earlier redeemed or exchanged by the Company. The description and terms of the Rights are set forth in a rights agreement between the Company and Mellon Investor Services LLC, as the Rights Agent.

 

7

----

Table ofContents

 

**5**.             RESTRUCTURINGAND ACQUISITION ACCRUALS

** **

*Restructuring Accruals*

 

During the three months ended September 26, 2008, the Company began undertaking certain significant changes in its cost structure. These operational initiatives focus on reducing the Company’s overall operating cost structure. The Company took the following specific actions during the nine months ended September 25, 2009:

 

·                  reduced its workforce; and

·                  closed and consolidated certain facilities.

 

The restructuring charges related to these various initiatives, which are included as part of selling, general and administrative expenses, were $4.6 million during the nine months ended September 25, 2009. The following table summarizes the changes to accruals related to the Company’s restructuring, which are included in accrued expenses and other current liabilities (in thousands):

 
| ** **                          | ** ** | **Employee  Separation  Costs** | ** ** | **Facility  Closing and  Other Costs** | ** ** | **Total**   | ** ** |
|-------------------------------------|------------|---------------------------------|------------|----------------------------------------|------------|-------------|------------|
| Balance  at December 26, 2008  |       | $                               |  330  |                                   | $          |  844   |       | $ |  1,174 |   |
| Provisions                          |       | 1,065                           |       | 3,576                                  |       | 4,641       |       |
| Payments                            |       | (1,129                          | )          | (2,181                                 | )          | (3,310      | )          |
| Asset  write-offs                   |       | —                          |       | (636                                   | )          | (636        | )          |
| Balance  at September 25, 2009 |       | $                               |  266  |                                   | $          |  1,603 |       | $ |  1,869 |   |

 

Employee separation costs include severance pay and other related benefits associated with the termination of selling, administrative and warehouse personnel. Facility closing and other costs include lease tails, property and equipment disposals and other shut-down expenses associated with distribution center and professional contractor showroom consolidations.

 

*Acquisition Accruals*

 

The following table summarizes the changes to accruals assumed in connection with the Company’s business combinations, which are included in accrued expenses and other current liabilities (in thousands):

 
| ** **                          | ** ** | **Employee  Severance and  Relocation** | ** ** | **Facility  Closing and  Other Costs** | ** ** | **Total**   | ** ** |
|-------------------------------------|------------|-----------------------------------------|------------|----------------------------------------|------------|-------------|------------|
| Balance  at December 26, 2008  |       | $                                       |  95   |                                   | $          |  1,982 |       | $ |  2,077 |   |
| Payments                            |       | —                                  |       | (625                                   | )          | (625        | )          |
| Additions  to reserve               |       | —                                  |       | 1,176                                  |       | 1,176       |       |
| Balance  at September 25, 2009 |       | $                                       |  95   |                                   | $          |  2,533 |       | $ |  2,628 |   |

 

**6**.             EARNINGSPER SHARE

** **

Basic earnings per share is computed by dividing netincome by the weighted-average number of shares of common stock andparticipating securities outstanding during the period. Participatingsecurities are unvested share-based payment awards that contain rights toreceive non-forfeitable dividends (whether paid or unpaid), such as deferredstock units.

 

Diluted earnings per share is computed by dividing netincome by the weighted-average number of shares of common stock andparticipating securities outstanding during the period as adjusted for thepotential dilutive effect of stock options and non-vested shares of restrictedstock and restricted share units using the treasury stock method.

 

8

----

 

Table ofContents

 

The following summarizes the shares of common stockused to calculate earnings per share including the potentially dilutive impactof stock options, restricted stock and restricted share units, calculated usingthe treasury stock method, as included in the calculation of dilutedweighted-average shares:

 
| ** **                                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                     | ** ** | **September 25,** | ** ** | **September 26,** | ** ** | **September 25,** | ** ** | **September 26,** | ** ** |
| ** **                                     | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Weighted  average shares outstanding - basic   |       | 32,511,597             |       | 32,412,280             |       | 32,493,797 |   | 32,387,865 |   |
| Dilutive  shares resulting from:               |       |                   |       |                   |       |   |   |   |   |
| Stock  options                                 |       | 256,724                |       | 46,038                 |       | 115,929 |   | 136,512 |   |
| Restricted  stock                              |       | 594                    |       | 1,214                  |       | 205 |   | 2,782 |   |
| Restricted  share units                        |       | 301,126                |       | 93,986                 |       | 216,535 |   | 91,211 |   |
| Weighted  average shares outstanding - diluted |       | 33,070,041             |       | 32,553,518             |       | 32,826,466 |   | 32,618,370 |   |

 

During the three months ended September 25, 2009and September 26, 2008, stock options to purchase 1,848,540 shares and1,837,313 shares of common stock, respectively, were excluded from thecomputations of diluted weighted-average shares outstanding because theireffect would be anti-dilutive. During the nine months ended September 25,2009 and September 26, 2008, stock options to purchase 2,998,537 sharesand 1,823,099 shares of common stock, respectively, were excluded from thecomputations of diluted weighted-average shares outstanding because theireffect would be anti-dilutive.

 

**7.             COMPREHENSIVE INCOME**

 

Comprehensiveincome refers to revenues, expenses, gains and losses that under US GAAP areincluded in comprehensive income but are excluded from net income as theseamounts are recorded directly as an adjustment to shareholders’ equity, net oftax. The components of comprehensive income for the three and nine months endedSeptember 25, 2009 and September 26, 2008 are as follows (inthousands):

 
|   | ** **                                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|--------|---------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
|   | ** **                                              | ** ** | **September 25,** | ** ** | **September 26,** | ** ** | **September 25,** | ** ** | **September 26,** | ** ** |
|   | ** **                                              | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
|   | Net  income                                             |       | $                      | 10,431     |                   | $          | 13,736 |   | $ | 19,775 |   | $ | 33,585 |   |
|   | Other  comprehensive income (loss):                     |       |                   |       |                   |       |   |   |   |   |
|   | Amortization  of unrecognized gain on employee benefits |       | 3                      |       | 3                      |       | 9 |   | 9 |   |
|   | Foreign  currency translation                           |       | 305                    |       | (116                   | )          | 545 |   | (275 | ) |
|   | Total  comprehensive income                             |       | $                      | 10,739     |                   | $          | 13,623 |   | $ | 20,329 |   | $ | 33,319 |   |

 

**8.             SHARE-BASED COMPENSATION**

** **

During the threemonths ended September 25, 2009 and September 26, 2008, share-basedcompensation expense was $1.1 million and $0.6 million, respectively. Duringthe nine months ended September 25, 2009 and September 26, 2008,share-based compensation expense was $3.1 million and $3.0 million,respectively. As of September 25, 2009, there was $7.4 million of totalunrecognized share-based compensation expense related to unvested share-basedpayment awards. The expense is expected to be recognized over aweighted-average period of 2.5 years.

 

During the threemonths ended September 25, 2009 and September 26, 2008, the Companydid not grant any stock options. During the nine months ended September 25,2009 and September 26, 2008, the Company granted 503,026 and 451,274 stockoptions, respectively, with a weighted-average grant date fair value of $3.46and $6.65, respectively. The fair values of stock options were estimated usingthe Black-Scholes option-pricing model. Expected volatility is based onhistorical performance of the Company’s stock. The Company also considershistorical data to estimate the timing and amount of stock option exercises andforfeitures. The expected life represents the period of time that stock optionsare expected to remain outstanding and is based on the contractual term of thestock options and expected exercise behavior. The risk-free interest rate isbased on U.S. Treasury zero-coupon issues with a remaining term equal to theexpected option life assumed at the date of grant.

 

9

----

Table ofContents

 

The Black-Scholesweighted-average assumptions were as follows:

 
| ** **                | ** ** | **Nine Months Ended**  | ** ** |
|---------------------------|------------|------------------------|------------|
| ** **                | ** ** | **September 25,** | ** ** | **September 26,** | ** ** |
| ** **                | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Expected  volatility      |       | 43.0                   | %          | 33.6 | % |
| Expected  dividends       |       | 0.0                    | %          | 0.0 | % |
| Risk-free  interest rate  |       | 2.1                    | %          | 2.9 | % |
| Expected  life (in years) |       | 5.0                    |       | 5.0 |   |

 

Stock optionsexercised during the three months ended September 25, 2009 were 1,150 withan intrinsic value of less than $0.1 million. There were no stock optionsexercised during the three months ended September 26, 2008. Stock optionsexercised during the nine months ended September 25, 2009 and September 26,2008 were 1,150 and 38,595, respectively, with an intrinsic value of less than$0.1 million and $0.1 million, respectively.

 

A summary statusof restricted stock, restricted share units and deferred stock units as of September 25,2009 and changes during the nine months then ended is presented below:

 
| ** **                              | ** ** | **Restricted Stock** | ** ** | **Restricted Share Units** | ** ** | **Deferred Stock Units** | ** ** |
|-----------------------------------------|------------|----------------------|------------|----------------------------|------------|--------------------------|------------|
| ** **                              | ** ** | ** **           | ** ** | **Weighted-**              | ** ** | ** **               | ** ** | **Weighted-** | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| ** **                              | ** ** | ** **           | ** ** | **Average**                | ** ** | ** **               | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                              | ** ** | ** **           | ** ** | **Grant Date**             | ** ** | ** **               | ** ** | **Grant Date** | ** ** | ** ** | ** ** | **Grant Date** | ** ** |
| ** **                              | ** ** | **Shares**           | ** ** | **Fair Value**             | ** ** | **Shares**               | ** ** | **Fair Value** | ** ** | **Shares** | ** ** | **Fair Value** | ** ** |
| Outstanding  at December 26, 2008  |       | 19,200               |       | $                          | 23.69      |                     | 254,256    |   | $ | 17.82 |   | 42,060 |   | $ | 21.08 |   |
| Granted                                 |       | —               |       | —                     |       | 385,495                  |       | 7.94 |   | 26,250 |   | 14.77 |   |
| Vested                                  |       | (2,550               | )          | 22.92                      |       | (9,500                   | )          | 23.55 |   | — |   | — |   |
| Forfeited                               |       | (1,550               | )          | 22.92                      |       | (17,744                  | )          | 12.77 |   | — |   | — |   |
| Outstanding  at September 25, 2009 |       | 15,100               |       | $                          | 23.90      |                     | 612,507    |   | $ | 11.66 |   | 68,310 |   | $ | 18.66 |   |

 

Restricted stockvested during the nine months ended September 25, 2009 and September 26,2008 were 2,550 and 57,082, respectively, with a fair value of less than $0.1million and $1.1 million, respectively. Restricted share units vested duringthe nine months ended September 25, 2009 and September 26, 2008 were9,500 and 93,376, respectively, with a fair value of $0.1 million and $1.8million, respectively.

 

**9.             INCOME TAXES**

** **

During the nine months ended September 25, 2009,the Company reduced the liability for unrecognized tax benefits related tocertain state income tax matters as a result of favorable resolutions. Of the$0.2 million reduction, substantially all was related to gross unrecognized taxbenefits and less than $0.1 million was related to interest and penalties. Ofthese amounts, $0.1 million reduced the Company’s effective tax rate.

 

Areconciliation of the gross beginning and ending amounts of unrecognized taxbenefits is as follows (in thousands):

 
| Balance  at December 26, 2008                    |   | $    | 320    |   |
|-------------------------------------------------------|--------|------|--------|--------|
| Additions  for tax positions taken during prior years |   | 13   |   |
| Settlements  with taxing authorities                  |   | (176 | )      |
| Balance  at September 25, 2009                   |   | $    | 157    |   |

 

**10.          GUARANTOR SUBSIDIARIES**

** **

In June 2006, Interline New Jersey, the Company’sprincipal operating subsidiary, (“Interline New Jersey” or the “SubsidiaryIssuer”) issued $200.0 million of 81/8% senior subordinated notes due 2014 and entered intoa $330.0 million bank credit facility. The 81/8% senior subordinated notes and the bank creditfacility are fully and unconditionally guaranteed, jointly and severally, on asenior subordinated basis by the Company (the “Parent Company”) and all ofInterline New Jersey’s 100% owned domestic subsidiaries: Wilmar Holdings, Inc.,Wilmar Financial, Inc., Glenwood Acquisition LLC and Eagle MaintenanceSupply, Inc. (collectively the “Guarantor Subsidiaries”). Effective December 26,2008, AmSan LLC was merged into Interline New Jersey.

 

10

----

Tableof Contents

 

The guarantees by the Parent Company and the GuarantorSubsidiaries are senior to any of their existing and future subordinatedobligations, equal in right of payment with any of their existing and futuresenior subordinated indebtedness and subordinated to any of their existing andfuture senior indebtedness.

 

The Parent Company is a holding company whose onlyasset is the stock of its subsidiaries. The Company conducts virtually all ofits business 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. Through September 25,2009, no dividends have been paid.

 

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 condensed consolidated financial statements. The non-guarantorsubsidiaries are minor and are included in the condensed financial data of theSubsidiary Issuer. The Subsidiary Issuer does not allocate integrationexpenses, corporate overhead or other expenses for shared services to theGuarantor Subsidiaries; therefore, the following tables do not reflect any suchallocation.

 

11

----

Table ofContents

 

**CONDENSEDCONSOLIDATING BALANCE SHEET (UNAUDITED)**

**ASOF SEPTEMBER 25, 2009**

**(inthousands)**

 
| ** **                                      | ** ** | **Parent**      | ** ** | ** **     | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** |
|-------------------------------------------------|------------|-----------------|------------|----------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                      | ** ** | **Company**     | ** ** | **Subsidiary** | ** ** | **Guarantor**    | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
| ** **                                      | ** ** | **(Guarantor)** | ** ** | **Issuer**     | ** ** | **Subsidiaries** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                      |       |            |       |           |       |             |       |              |       |             |       |
| Current Assets:                                 |       |            |       |           |       |             |       |              |       |             |       |
| Cash and cash equivalents                       |       | $               | —     |           | $          | 63,459           |       | $                 | 232        |             | $          | — |   | $ | 63,691 |   |
| Short-term investments                          |       | —          |       | 1,623          |       | —           |       | —            |       | 1,623            |       |
| Accounts receivable - trade                     |       | —          |       | 137,653        |       | 3,637            |       | —            |       | 141,290          |       |
| Inventory                                       |       | —          |       | 182,606        |       | 2,101            |       | —            |       | 184,707          |       |
| Intercompany receivable                         |       | —          |       | —         |       | 129,089          |       | (129,089          | )          | —           |       |
| Other current assets                            |       | —          |       | 32,284         |       | 190              |       | 2,070             |       | 34,544           |       |
| Total current assets                            |       | —          |       | 417,625        |       | 135,249          |       | (127,019          | )          | 425,855          |       |
|                                            |       |            |       |           |       |             |       |              |       |             |       |
| Property and equipment, net                     |       | —          |       | 48,293         |       | 168              |       | —            |       | 48,461           |       |
| Goodwill                                        |       | —          |       | 312,952        |       | 5,277            |       | —            |       | 318,229          |       |
| Other intangible assets, net                    |       | —          |       | 124,099        |       | 2,499            |       | —            |       | 126,598          |       |
| Investment in subsidiaries                      |       | 443,461         |       | 147,532        |       | —           |       | (590,993          | )          | —           |       |
| Other assets                                    |       | —          |       | 2,175          |       | 6,516            |       | (18               | )          | 8,673            |       |
| Total assets                                    |       | $               | 443,461    |           | $          | 1,052,676        |       | $                 | 149,709    |             | $          | (718,030 | ) | $ | 927,816 |   |
|                                            |       |            |       |           |       |             |       |              |       |             |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**  |       |            |       |           |       |             |       |              |       |             |       |
| Current Liabilities:                            |       |            |       |           |       |             |       |              |       |             |       |
| Accounts payable                                |       | $               | —     |           | $          | 84,356           |       | $                 | —     |             | $          | — |   | $ | 84,356 |   |
| Accrued expenses and other current liabilities  |       | —          |       | 44,086         |       | 2,177            |       | 2,070             |       | 48,333           |       |
| Intercompany payable                            |       | —          |       | 129,089        |       | —           |       | (129,089          | )          | —           |       |
| Debt and capital lease - short-term             |       | —          |       | 1,898          |       | —           |       | —            |       | 1,898            |       |
| Total current liabilities                       |       | —          |       | 259,429        |       | 2,177            |       | (127,019          | )          | 134,587          |       |
|                                            |       |            |       |           |       |             |       |              |       |             |       |
| Long-Term Liabilities:                          |       |            |       |           |       |             |       |              |       |             |       |
| Term debt and capital lease - long-term         |       | —          |       | 309,079        |       | —           |       | —            |       | 309,079          |       |
| Other liabilities                               |       | —          |       | 40,707         |       | —           |       | (18               | )          | 40,689           |       |
| Total liabilities                               |       | —          |       | 609,215        |       | 2,177            |       | (127,037          | )          | 484,355          |       |
|                                            |       |            |       |           |       |             |       |              |       |             |       |
| Senior preferred stock                          |       | —          |       | 731,812        |       | —           |       | (731,812          | )          | —           |       |
|                                            |       |            |       |           |       |             |       |              |       |             |       |
| Shareholders’ equity (deficit)             |       | 443,461         |       | (288,351       | )          | 147,532          |       | 140,819           |       | 443,461          |       |
| Total liabilities and shareholders’ equity |       | $               | 443,461    |           | $          | 1,052,676        |       | $                 | 149,709    |             | $          | (718,030 | ) | $ | 927,816 |   |

 

12

----

Table ofContents

 

**CONDENSEDCONSOLIDATING BALANCE SHEET (UNAUDITED)**

**ASOF DECEMBER 26, 2008**

**(inthousands)**

 
| ** **                                      | ** ** | **Parent**      | ** ** | ** **     | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** |
|-------------------------------------------------|------------|-----------------|------------|----------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                      | ** ** | **Company**     | ** ** | **Subsidiary** | ** ** | **Guarantor**    | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
| ** **                                      | ** ** | **(Guarantor)** | ** ** | **Issuer**     | ** ** | **Subsidiaries** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                      |       |            |       |           |       |             |       |              |       |             |       |
| Current Assets:                                 |       |            |       |           |       |             |       |              |       |             |       |
| Cash and cash equivalents                       |       | $               | —     |           | $          | 61,741           |       | $                 | 983        |             | $          | — |   | $ | 62,724 |   |
| Accounts receivable - trade                     |       | —          |       | 110,964        |       | 28,558           |       | —            |       | 139,522          |       |
| Inventory                                       |       | —          |       | 188,622        |       | 22,578           |       | —            |       | 211,200          |       |
| Intercompany receivable                         |       | —          |       | —         |       | 123,615          |       | (123,615          | )          | —           |       |
| Other current assets                            |       | —          |       | 40,448         |       | 2,898            |       | —            |       | 43,346           |       |
| Total current assets                            |       | —          |       | 401,775        |       | 178,632          |       | (123,615          | )          | 456,792          |       |
|                                            |       |            |       |           |       |             |       |              |       |             |       |
| Property and equipment, net                     |       | —          |       | 42,730         |       | 3,303            |       | —            |       | 46,033           |       |
| Goodwill                                        |       | —          |       | 246,657        |       | 70,460           |       | —            |       | 317,117          |       |
| Other intangible assets, net                    |       | —          |       | 90,035         |       | 42,752           |       | —            |       | 132,787          |       |
| Investment in subsidiaries                      |       | 420,073         |       | 294,476        |       | —           |       | (714,549          | )          | —           |       |
| Other assets                                    |       | —          |       | 1,839          |       | 8,280            |       | —            |       | 10,119           |       |
| Total assets                                    |       | $               | 420,073    |           | $          | 1,077,512        |       | $                 | 303,427    |             | $          | (838,164 | ) | $ | 962,848 |   |
|                                            |       |            |       |           |       |             |       |              |       |             |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**  |       |            |       |           |       |             |       |              |       |             |       |
| Current Liabilities:                            |       |            |       |           |       |             |       |              |       |             |       |
| Accounts payable                                |       | $               | —     |           | $          | 68,552           |       | $                 | —     |             | $          | (297 | ) | $ | 68,255 |   |
| Accrued expenses and other current liabilities  |       | —          |       | 26,506         |       | 5,960            |       | —            |       | 32,466           |       |
| Intercompany payable                            |       | —          |       | 123,615        |       | —           |       | (123,615          | )          | —           |       |
| Debt and capital lease - short-term             |       | —          |       | 1,859          |       | 5                |       | —            |       | 1,864            |       |
| Total current liabilities                       |       | —          |       | 220,532        |       | 5,965            |       | (123,912          | )          | 102,585          |       |
|                                            |       |            |       |           |       |             |       |              |       |             |       |
| Long-Term Liabilities:                          |       |            |       |           |       |             |       |              |       |             |       |
| Term debt and capital lease - long-term         |       | —          |       | 399,707        |       | 2,284            |       | —            |       | 401,991          |       |
| Other liabilities                               |       | —          |       | 37,497         |       | 702              |       | —            |       | 38,199           |       |
| Total liabilities                               |       | —          |       | 657,736        |       | 8,951            |       | (123,912          | )          | 542,775          |       |
|                                            |       |            |       |           |       |             |       |              |       |             |       |
| Senior preferred stock                          |       | —          |       | 660,236        |       | —           |       | (660,236          | )          | —           |       |
|                                            |       |            |       |           |       |             |       |              |       |             |       |
| Shareholders’ equity (deficit)             |       | 420,073         |       | (240,460       | )          | 294,476          |       | (54,016           | )          | 420,073          |       |
| Total liabilities and shareholders’ equity |       | $               | 420,073    |           | $          | 1,077,512        |       | $                 | 303,427    |             | $          | (838,164 | ) | $ | 962,848 |   |

 

13

----

 

 

Table ofContents

 

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)**

**FORTHE THREE MONTHS ENDED SEPTEMBER 25, 2009**

**(inthousands)**

 
| ** **                                             | ** ** | **Parent**      | ** **   | ** **     | ** ** | ** **          | ** ** | ** **        | ** **  | ** **       | ** ** |
|--------------------------------------------------------|------------|-----------------|--------------|----------------|------------|---------------------|------------|-------------------|-------------|------------------|------------|
| ** **                                             | ** ** | **Company**     | ** **   | **Subsidiary** | ** ** | **Guarantor**       | ** ** | **Consolidating** | ** **  | ** **       | ** ** |
| ** **                                             | ** ** | **(Guarantor)** | ** **   | **Issuer**     | ** ** | **Subsidiaries(1)** | ** ** | **Adjustments**   | ** **  | **Consolidated** | ** ** |
| ** **                                             | ** ** | ** **      | ** **   | ** **     | ** ** | ** **          | ** ** | ** **        | ** **  | ** **       | ** ** |
| Net sales                                              |       | $               |  — |           | $          |  272,251       |       | $                 |  5,697 |             | $          |  — |   | $ |  277,948 |   |
| Cost of sales                                          |       | —          |         | 172,189        |       | 3,537               |       | —            |        | 175,726          |       |
| Gross profit                                           |       | —          |         | 100,062        |       | 2,160               |       | —            |        | 102,222          |       |
|                                                   |       |            |         |           |       |                |       |              |        |             |       |
| Operating Expenses:                                    |       |            |         |           |       |                |       |              |        |             |       |
| Selling, general and administrative expenses           |       | —          |         | 74,893         |       | 1,298               |       | —            |        | 76,191           |       |
| Depreciation and amortization                          |       | —          |         | 4,378          |       | 157                 |       | —            |        | 4,535            |       |
| Equity earnings of subsidiaries                        |       | (17,225         | )            | (3,237         | )          | —              |       | 20,462            |        | —           |       |
| Total operating expense                                |       | (17,225         | )            | 76,034         |       | 1,455               |       | 20,462            |        | 80,726           |       |
| Operating income                                       |       | 17,225          |         | 24,028         |       | 705                 |       | (20,462           | )           | 21,496           |       |
|                                                   |       |            |         |           |       |                |       |              |        |             |       |
| Loss on extinguishment of debt, net                    |       | —          |         | (248           | )          | —              |       | —            |        | (248             | )          |
| Interest and other (expense) income, net               |       | —          |         | (4,912         | )          | 5,015               |       | (4,126            | )           | (4,023           | )          |
| Income before income taxes                             |       | 17,225          |         | 18,868         |       | 5,720               |       | (24,588           | )           | 17,225           |       |
| Income tax provision                                   |       | 6,794           |         | 4,735          |       | 2,059               |       | (6,794            | )           | 6,794            |       |
| Net income                                             |       | 10,431          |         | 14,133         |       | 3,661               |       | (17,794           | )           | 10,431           |       |
| Preferred stock dividends                              |       | —          |         | (24,682        | )          | —              |       | 24,682            |        | —           |       |
| Net income (loss) attributable to common  shareholders |       | $               |  10,431 |           | $          |  (10,549       | )          | $                 |  3,661 |             | $          |  6,888 |   | $ |  10,431 |   |

 

----

(1)          The Subsidiary Issuer doesnot allocate integration expenses, corporate overhead or other expenses forshared services to the Guarantor Subsidiaries; therefore, the results for theGuarantor Subsidiaries do not reflect any such allocation.

 

14

----

Table ofContents

 

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)**

**FORTHE THREE MONTHS ENDED SEPTEMBER 26, 2008**

**(inthousands)**

 
| ** **                                             | ** ** | **Parent**      | ** **   | ** **     | ** ** | ** **          | ** ** | ** **        | ** **   | ** **       | ** ** |
|--------------------------------------------------------|------------|-----------------|--------------|----------------|------------|---------------------|------------|-------------------|--------------|------------------|------------|
| ** **                                             | ** ** | **Company**     | ** **   | **Subsidiary** | ** ** | **Guarantor**       | ** ** | **Consolidating** | ** **   | ** **       | ** ** |
| ** **                                             | ** ** | **(Guarantor)** | ** **   | **Issuer**     | ** ** | **Subsidiaries(1)** | ** ** | **Adjustments**   | ** **   | **Consolidated** | ** ** |
| ** **                                             | ** ** | ** **      | ** **   | ** **     | ** ** | ** **          | ** ** | ** **        | ** **   | ** **       | ** ** |
| Net sales                                              |       | $               |  — |           | $          |  242,807       |       | $                 |  74,697 |             | $          |  — |   | $ |  317,504 |   |
| Cost of sales                                          |       | —          |         | 149,412        |       | 47,156              |       | —            |         | 196,568          |       |
| Gross profit                                           |       | —          |         | 93,395         |       | 27,541              |       | —            |         | 120,936          |       |
|                                                   |       |            |         |           |       |                |       |              |         |             |       |
| Operating Expenses:                                    |       |            |         |           |       |                |       |              |         |             |       |
| Selling, general and administrative expenses           |       | —          |         | 73,055         |       | 14,773              |       | —            |         | 87,828           |       |
| Depreciation and amortization                          |       | —          |         | 3,642          |       | 677                 |       | —            |         | 4,319            |       |
| Equity earnings of subsidiaries                        |       | (22,445         | )            | (9,168         | )          | —              |       | 31,613            |         | —           |       |
| Total operating expense                                |       | (22,445         | )            | 67,529         |       | 15,450              |       | 31,613            |         | 92,147           |       |
| Operating income                                       |       | 22,445          |         | 25,866         |       | 12,091              |       | (31,613           | )            | 28,789           |       |
|                                                   |       |            |         |           |       |                |       |              |         |             |       |
| Interest and other (expense) income, net               |       | —          |         | (5,252         | )          | (533                | )          | (559              | )            | (6,344           | )          |
| Income before income taxes                             |       | 22,445          |         | 20,614         |       | 11,558              |       | (32,172           | )            | 22,445           |       |
| Income tax provision                                   |       | 8,709           |         | 4,601          |       | 4,108               |       | (8,709            | )            | 8,709            |       |
| Net income                                             |       | 13,736          |         | 16,013         |       | 7,450               |       | (23,463           | )            | 13,736           |       |
| Preferred stock dividends                              |       | —          |         | (21,516        | )          | —              |       | 21,516            |         | —           |       |
| Net income (loss) attributable to common  shareholders |       | $               |  13,736 |           | $          |  (5,503        | )          | $                 |  7,450  |             | $          |  (1,947 | ) | $ |  13,736 |   |

 

----

(1)          The Subsidiary Issuer doesnot allocate integration expenses, corporate overhead or other expenses forshared services to the Guarantor Subsidiaries; therefore, the results for theGuarantor Subsidiaries do not reflect any such allocation.

 

15

----

Table ofContents

 

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)**

**FORTHE NINE MONTHS ENDED SEPTEMBER 25, 2009**

**(inthousands)**

 
| ** **                                             | ** ** | **Parent**      | ** **   | ** **     | ** ** | ** **          | ** ** | ** **        | ** **   | ** **       | ** ** |
|--------------------------------------------------------|------------|-----------------|--------------|----------------|------------|---------------------|------------|-------------------|--------------|------------------|------------|
| ** **                                             | ** ** | **Company**     | ** **   | **Subsidiary** | ** ** | **Guarantor**       | ** ** | **Consolidating** | ** **   | ** **       | ** ** |
| ** **                                             | ** ** | **(Guarantor)** | ** **   | **Issuer**     | ** ** | **Subsidiaries(1)** | ** ** | **Adjustments**   | ** **   | **Consolidated** | ** ** |
| ** **                                             | ** ** | ** **      | ** **   | ** **     | ** ** | ** **          | ** ** | ** **        | ** **   | ** **       | ** ** |
| Net sales                                              |       | $               |  — |           | $          |  790,707       |       | $                 |  13,954 |             | $          |  — |   | $ |  804,661 |   |
| Cost of sales                                          |       | —          |         | 498,686        |       | 8,842               |       | —            |         | 507,528          |       |
| Gross profit                                           |       | —          |         | 292,021        |       | 5,112               |       | —            |         | 297,133          |       |
|                                                   |       |            |         |           |       |                |       |              |         |             |       |
| Operating Expenses:                                    |       |            |         |           |       |                |       |              |         |             |       |
| Selling, general and administrative expenses           |       | —          |         | 235,363        |       | 3,646               |       | —            |         | 239,009          |       |
| Depreciation and amortization                          |       | —          |         | 13,075         |       | 486                 |       | —            |         | 13,561           |       |
| Equity earnings of subsidiaries                        |       | (32,469         | )            | (9,241         | )          | —              |       | 41,710            |         | —           |       |
| Total operating expense                                |       | (32,469         | )            | 239,197        |       | 4,132               |       | 41,710            |         | 252,570          |       |
| Operating income                                       |       | 32,469          |         | 52,824         |       | 980                 |       | (41,710           | )            | 44,563           |       |
|                                                   |       |            |         |           |       |                |       |              |         |             |       |
| Gain on extinguishment of debt, net                    |       | —          |         | 1,295          |       | —              |       | —            |         | 1,295            |       |
| Interest and other (expense) income, net               |       | —          |         | (16,046        | )          | 14,691              |       | (12,034           | )            | (13,389          | )          |
| Income before income taxes                             |       | 32,469          |         | 38,073         |       | 15,671              |       | (53,744           | )            | 32,469           |       |
| Income tax provision                                   |       | 12,694          |         | 7,317          |       | 5,377               |       | (12,694           | )            | 12,694           |       |
| Net income                                             |       | 19,775          |         | 30,756         |       | 10,294              |       | (41,050           | )            | 19,775           |       |
| Preferred stock dividends                              |       | —          |         | (71,576        | )          | —              |       | 71,576            |         | —           |       |
| Net income (loss) attributable to common  shareholders |       | $               |  19,775 |           | $          |  (40,820       | )          | $                 |  10,294 |             | $          |  30,526 |   | $ |  19,775 |   |

 

----

(1)          The Subsidiary Issuer doesnot allocate integration expenses, corporate overhead or other expenses forshared services to the Guarantor Subsidiaries; therefore, the results for theGuarantor Subsidiaries do not reflect any such allocation.

 

16

----

Table ofContents

 

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)**

**FORTHE NINE MONTHS ENDED SEPTEMBER 26, 2008**

**(inthousands)**

 
| ** **                                             | ** ** | **Parent**      | ** **   | ** **     | ** ** | ** **          | ** ** | ** **        | ** **    | ** **       | ** ** |
|--------------------------------------------------------|------------|-----------------|--------------|----------------|------------|---------------------|------------|-------------------|---------------|------------------|------------|
| ** **                                             | ** ** | **Company**     | ** **   | **Subsidiary** | ** ** | **Guarantor**       | ** ** | **Consolidating** | ** **    | ** **       | ** ** |
| ** **                                             | ** ** | **(Guarantor)** | ** **   | **Issuer**     | ** ** | **Subsidiaries(1)** | ** ** | **Adjustments**   | ** **    | **Consolidated** | ** ** |
| ** **                                             | ** ** | ** **      | ** **   | ** **     | ** ** | ** **          | ** ** | ** **        | ** **    | ** **       | ** ** |
| Net sales                                              |       | $               |  — |           | $          |  707,703       |       | $                 |  210,376 |             | $          |  — |   | $ |  918,079 |   |
| Cost of sales                                          |       | —          |         | 439,266        |       | 132,027             |       | —            |          | 571,293          |       |
| Gross profit                                           |       | —          |         | 268,437        |       | 78,349              |       | —            |          | 346,786          |       |
|                                                   |       |            |         |           |       |                |       |              |          |             |       |
| Operating Expenses:                                    |       |            |         |           |       |                |       |              |          |             |       |
| Selling, general and administrative expenses           |       | —          |         | 217,668        |       | 43,758              |       | —            |          | 261,426          |       |
| Depreciation and amortization                          |       | —          |         | 10,295         |       | 2,005               |       | —            |          | 12,300           |       |
| Equity earnings of subsidiaries                        |       | (53,373         | )            | (18,128        | )          | —              |       | 71,501            |          | —           |       |
| Total operating expense                                |       | (53,373         | )            | 209,835        |       | 45,763              |       | 71,501            |          | 273,726          |       |
| Operating income                                       |       | 53,373          |         | 58,602         |       | 32,586              |       | (71,501           | )             | 73,060           |       |
|                                                   |       |            |         |           |       |                |       |              |          |             |       |
| Interest and other (expense) income, net               |       | —          |         | (16,262        | )          | (2,236              | )          | (1,189            | )             | (19,687          | )          |
| Income before income taxes                             |       | 53,373          |         | 42,340         |       | 30,350              |       | (72,690           | )             | 53,373           |       |
| Income tax provision                                   |       | 19,788          |         | 8,755          |       | 11,033              |       | (19,788           | )             | 19,788           |       |
| Net income                                             |       | 33,585          |         | 33,585         |       | 19,317              |       | (52,902           | )             | 33,585           |       |
| Preferred stock dividends                              |       | —          |         | (62,397        | )          | —              |       | 62,397            |          | —           |       |
| Net income (loss) attributable to common  shareholders |       | $               |  33,585 |           | $          |  (28,812       | )          | $                 |  19,317  |             | $          |  9,495 |   | $ |  33,585 |   |

 

----

(1)          The Subsidiary Issuer doesnot allocate integration expenses, corporate overhead or other expenses forshared services to the Guarantor Subsidiaries; therefore, the results for theGuarantor Subsidiaries do not reflect any such allocation.

 

17

----

Table ofContents

 

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

**FORTHE NINE MONTHS ENDED SEPTEMBER 25, 2009**

**(inthousands)**

 
| ** **                                                    | ** ** | **Parent**      | ** **   | ** **     | ** ** | ** **       | ** ** | ** **        | ** **   | ** **       | ** ** |
|---------------------------------------------------------------|------------|-----------------|--------------|----------------|------------|------------------|------------|-------------------|--------------|------------------|------------|
| ** **                                                    | ** ** | **Company**     | ** **   | **Subsidiary** | ** ** | **Guarantor**    | ** ** | **Consolidating** | ** **   | ** **       | ** ** |
| ** **                                                    | ** ** | **(Guarantor)** | ** **   | **Issuer**     | ** ** | **Subsidiaries** | ** ** | **Adjustments**   | ** **   | **Consolidated** | ** ** |
| ** **                                                    | ** ** | ** **      | ** **   | ** **     | ** ** | ** **       | ** ** | ** **        | ** **   | ** **       | ** ** |
| Net cash provided by (used in) operating activities           |       | $               |  — |           | $          |  105,297    |       | $                 |  (3,114 | )                | $          |  — |   | $ |  102,183 |   |
| Cash Flows from Investing Activities:                         |       |            |         |           |       |             |       |              |         |             |       |
| Purchase of property and equipment, net                       |       | —          |         | (8,991         | )          | (87              | )          | —            |         | (9,078           | )          |
| Purchase of short-term investments                            |       | —          |         | (1,830         | )          | —           |       | —            |         | (1,830           | )          |
| Proceeds from sales and maturities of short-term  investments |       | —          |         | 203            |       | —           |       | —            |         | 203              |       |
| Purchase of businesses, net of cash acquired                  |       | —          |         | (381           | )          | —           |       | —            |         | (381             | )          |
| Other                                                         |       | —          |         | (3,002         | )          | —           |       | 3,002             |         | —           |       |
| Net cash (used in) provided by investing activities           |       | —          |         | (14,001        | )          | (87              | )          | 3,002             |         | (11,086          | )          |
| Cash Flows from Financing Activities:                         |       |            |         |           |       |             |       |              |         |             |       |
| Increase in purchase card payable, net                        |       | —          |         | 492            |       | —           |       | —            |         | 492              |       |
| Repayment of debt and capital lease obligations               |       | —          |         | (56,665        | )          | —           |       | —            |         | (56,665          | )          |
| Repayment of 81/8% senior subordinated notes                  |       | —          |         | (34,157        | )          | —           |       | —            |         | (34,157          | )          |
| Other                                                         |       | —          |         | (16            | )          | 3,002            |       | (3,002            | )            | (16              | )          |
| Net cash (used in) provided by financing activities           |       | —          |         | (90,346        | )          | 3,002            |       | (3,002            | )            | (90,346          | )          |
| Effect of exchange rate changes on cash and cash  equivalents |       | —          |         | 216            |       | —           |       | —            |         | 216              |       |
| Net increase in cash and cash equivalents                     |       | —          |         | 1,166          |       | (199             | )          | —            |         | 967              |       |
| Cash and cash equivalents at beginning of period              |       | —          |         | 62,293         |       | 431              |       | —            |         | 62,724           |       |
| Cash and cash equivalents at end of period                    |       | $               |  — |           | $          |  63,459     |       | $                 |  232    |             | $          |  — |   | $ |  63,691 |   |

 

18

----

Table of Contents

 

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

**FORTHE NINE MONTHS ENDED SEPTEMBER 26, 2008**

**(inthousands)**

 
| ** **                                                    | ** ** | **Parent**      | ** ** | ** **     | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** |
|---------------------------------------------------------------|------------|-----------------|------------|----------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                    | ** ** | **Company**     | ** ** | **Subsidiary** | ** ** | **Guarantor**    | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
| ** **                                                    | ** ** | **(Guarantor)** | ** ** | **Issuer**     | ** ** | **Subsidiaries** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
| ** **                                                    | ** ** | ** **      | ** ** | ** **     | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** |
| Net cash provided by (used in) operating activities           |       | $               | —     |           | $          | 32,239           |       | $                 | (18,194    | )                | $          | — |   | $ | 14,045 |   |
| Cash Flows from Investing Activities:                         |       |            |       |           |       |             |       |              |       |             |       |
| Purchase of property and equipment, net                       |       | —          |       | (17,506        | )          | (1,206           | )          | —            |       | (18,712          | )          |
| Purchase of short-term investments                            |       | —          |       | (35,531        | )          | —           |       | —            |       | (35,531          | )          |
| Proceeds from sales and maturities of short-term  investments |       | —          |       | 82,121         |       | —           |       | —            |       | 82,121           |       |
| Purchase of businesses, net of cash acquired                  |       | —          |       | (10,306        | )          | (24              | )          | —            |       | (10,330          | )          |
| Other                                                         |       | —          |       | (19,708        | )          | —           |       | 19,708            |       | —           |       |
| Net cash provided by (used in) investing activities           |       | —          |       | (930           | )          | (1,230           | )          | 19,708            |       | 17,548           |       |
| Cash Flows from Financing Activities:                         |       |            |       |           |       |             |       |              |       |             |       |
| Increase in purchase card payable, net                        |       | —          |       | 2,324          |       | —           |       | —            |       | 2,324            |       |
| Repayment of debt and capital lease obligations               |       | —          |       | (2,650         | )          | (3               | )          | —            |       | (2,653           | )          |
| Other                                                         |       | —          |       | (57            | )          | 19,708           |       | (19,708           | )          | (57              | )          |
| Net cash (used in) provided by financing activities           |       | —          |       | (383           | )          | 19,705           |       | (19,708           | )          | (386             | )          |
| Effect of exchange rate changes on cash and cash  equivalents |       | —          |       | (70            | )          | —           |       | —            |       | (70              | )          |
| Net increase in cash and cash equivalents                     |       | —          |       | 30,856         |       | 281              |       | —            |       | 31,137           |       |
| Cash and cash equivalents at beginning of period              |       | —          |       | 7,564          |       | 18               |       | (2,607            | )          | 4,975            |       |
| Cash and cash equivalents at end of period                    |       | $               | —     |           | $          | 38,420           |       | $                 | 299        |             | $          | (2,607 | ) | $ | 36,112 |   |

 

19

----

Table of Contents

 

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

 

*References to “us” and “we” are to the Company. Youshould read the following discussion in conjunction with our unauditedcondensed consolidated financial statements and related notes included in thisquarterly report, and our audited consolidated financial statements and relatednotes and Management’s Discussion and Analysis of Financial Condition andResults of Operations included in our Annual Report on Form 10-K filedwith the Securities and Exchange Commission (“SEC”).*

 

**Forward-Looking Statements**

 

This report contains forward-looking statements withinthe meaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934 (the “Exchange Act”) that are subject torisks and uncertainties. You should not place undue reliance on thosestatements because they are subject to numerous uncertainties and factorsrelating to our operations and business environment, all of which are difficultto predict and many of which are beyond our control. Forward-looking statementsinclude information concerning our possible or assumed future results ofoperations, including descriptions of our business strategy. These statementsoften include words such as “may,” “believe,” “expect,” “anticipate,” “intend,”“plan,” “estimate” or similar expressions. These statements are based onassumptions that we have made in light of our experience in the industry aswell as our perceptions of historical trends, current conditions, expectedfuture developments and other factors we believe are appropriate under thecircumstances. As you read and consider this report, you should understand thatthese statements are not guarantees of performance or results. They involverisks, uncertainties and assumptions. Although we believe that theseforward-looking statements are based on reasonable assumptions, you should beaware that many factors could affect our actual financial results or results ofoperations and could cause actual results to differ materially from those inthe forward-looking statements. These factors include:

 

·                  economic slowdowns,

·                  general market conditions,

·                  credit market contractions,

·                  the loss of significant customers,

·                  product cost and price fluctuations dueto market conditions,

·                  consumer spending and debt levels,

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

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

·                  material facilities and systemsdisruptions and shutdowns,

·                  failure to realize expected benefits fromacquisitions,

·                  our ability to purchase products fromsuppliers on favorable terms,

·                  the length of our supply chains,

·                  work stoppages or other businessinterruptions at transportation centers or shipping ports,

·                  fluctuations in the cost of commodity-basedproducts, raw materials and fuel prices,

·                  currency exchange rates,

·                  our ability to accurately predict markettrends,

·                  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,

·                  weather conditions, and

·                  the other factors described under “Part I.Item 1A—Risk Factors” in our Annual Report on Form 10-K filed with theSEC.

 

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

 

20

----

Table of Contents

 

**Overview**

 

We are a leadingnational distributor and direct marketer of maintenance, repair and operations(“MRO”) products. We have one operating segment, the distribution of MROproducts. We stock approximately 100,000 MRO products in the followingcategories: plumbing, janitorial and sanitary, electrical, lighting, hardware,security, heating, ventilation and air conditioning and other miscellaneousproducts. Our products are primarily used for the repair, maintenance,remodeling and refurbishment of properties and non-industrial facilities. Weare able to realize high 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 twelve distinct and targeted brands, each ofwhich is nationally recognized in the markets we serve for providing premiumproducts at competitive prices with reliable same-day and/or next-day delivery.Our Wilmar, AmSan, Sexauer, Maintenance USA and Trayco brands generally serveour facilities maintenance customers; our Barnett, Copperfield, U.S. Lock, SunStar and Leran brands generally serve our professional contractor customers;and our 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 600 field sales representatives and over 350 inside salesand 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 oftwo national distribution centers (“NDCs”), 59 regional distribution centers,21 professional contractor showrooms located throughout the United States andCanada, 27 vendor-managed inventory locations at large customer locations and adedicated fleet of trucks. Our broad distribution network allows us the abilityto provide reliable, next-day delivery service to at least 98% of the U.S.population and same-day delivery service to most major metropolitan markets.

 

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.

 

21

----

Table of Contents

 

**Resultsof Operations**

 

The following tablepresents information derived from the condensed consolidated statements ofearnings expressed as a percentage of revenues for the three and nine monthsended September 25, 2009 and September 26, 2008:

 
| ** **                                   | ** ** | **%  of Net Sales**     | ** ** | **%  Increase**        | ** ** | **%  of Net Sales**    | ** ** | **%  Increase**        | ** ** |
|----------------------------------------------|------------|-------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                   | ** ** | **Three  Months Ended** | ** ** | **(Decrease)**         | ** ** | **Nine  Months Ended** | ** ** | **(Decrease)**         | ** ** |
| ** **                                   | ** ** | **September 25,**  | ** ** | **September 26,** | ** ** | **2009**               | ** ** | **September 25,** | ** ** | **September 26,** | ** ** | **2009** | ** ** |
| ** **                                   | ** ** | **2009**                | ** ** | **2008**               | ** ** | **vs.  2008 (1)**      | ** ** | **2009**               | ** ** | **2008** | ** ** | **vs.  2008 (1)** | ** ** |
|                                         |       |                    |       |                   |       |                   |       |                   |       |   |   |   |   |
| Net sales                                    |       | 100.0                   | %          | 100.0                  | %          | (12.5                  | )%         | 100.0                  | %          | 100.0 | % | (12.4 | )% |
| Cost of sales                                |       | 63.2                    |       | 61.9                   |       | (10.6                  | )          | 63.1                   |       | 62.2 |   | (11.2 | ) |
| Gross profit                                 |       | 36.8                    |       | 38.1                   |       | (15.5                  | )          | 36.9                   |       | 37.8 |   | (14.3 | ) |
|                                         |       |                    |       |                   |       |                   |       |                   |       |   |   |   |   |
| Operating Expenses:                          |       |                    |       |                   |       |                   |       |                   |       |   |   |   |   |
| Selling, general and administrative expenses |       | 27.4                    |       | 27.7                   |       | (13.2                  | )          | 29.7                   |       | 28.5 |   | (8.6 | ) |
| Depreciation and amortization                |       | 1.6                     |       | 1.4                    |       | 5.0                    |       | 1.7                    |       | 1.3 |   | 10.3 |   |
| Total operating expense                      |       | 29.0                    |       | 29.0                   |       | (12.4                  | )          | 31.4                   |       | 29.8 |   | (7.7 | ) |
| Operating income                             |       | 7.7                     |       | 9.1                    |       | (25.3                  | )          | 5.5                    |       | 8.0 |   | (39.0 | ) |
|                                         |       |                    |       |                   |       |                   |       |                   |       |   |   |   |   |
| (Loss) Gain on extinguishment of debt, net   |       | (0.1                    | )          | —                 |       | (100.0                 | )          | 0.2                    |       | — |   | 100.0 |   |
| Interest expense                             |       | (1.6                    | )          | (2.2                   | )          | (35.1                  | )          | (1.8                   | )          | (2.4 | ) | (32.7 | ) |
| Interest income and other income             |       | 0.2                     |       | 0.2                    |       | (22.0                  | )          | 0.2                    |       | 0.2 |   | (39.2 | ) |
| Income before income taxes                   |       | 6.2                     |       | 7.1                    |       | (23.3                  | )          | 4.0                    |       | 5.8 |   | (39.2 | ) |
| Income tax provision                         |       | (2.4                    | )          | (2.7                   | )          | (22.0                  | )          | (1.6                   | )          | (2.2 | ) | (35.9 | ) |
| Net income                                   |       | 3.8                     | %          | 4.3                    | %          | (24.1                  | )%         | 2.5                    | %          | 3.7 | % | (41.1 | )% |

 

----

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

 

*Overview.*During the three months ended September 25,2009, our net sales declined 12.5%. We believe this decline is associated withthe widely reported and prolonged general economic downturn. Demand fromcustomers in our facilities maintenance end-markets, which make up 75% of ourtotal sales and includes residential multi-family housing and institutional MROcustomers, declined 6.2% during the third quarter of 2009 compared to the thirdquarter of 2008. Demand from our professional contractor and specialtydistributor customers, which represent 15% and 10% of our total sales,respectively, declined 28.5% and 24.0%, respectively. Demand from thesecustomers continues to be negatively impacted by recessionary declines inresidential new construction and renovations activity.

 

Net income as a percentage of sales was 3.8% in thethird quarter compared to 4.3% in the comparable prior year period. The declinein net income as a percent of sales is primarily a result of lower sales andlower gross margins. These declines were offset in part by lower interestexpense associated with $105.8 million in lower debt balances compared to lastyear and a lower interest rate environment as well as the cost savings derivedfrom operational initiatives such as cost containment and closings ofunderperforming professional contractor centers and the consolidation ofcertain distribution centers.

 

We are continuing to focus on keeping our operatingcosts low in the near term while continuing to invest in our operating platformfor the long term. Accordingly, in addition to the operational initiatives suchas headcount reductions, the closing of underperforming professional contractorshowrooms and the consolidation of distribution centers, most of which havebeen completed, our plans include continued investments in the consolidation ofour distribution network and in information technology solutions to optimizecustomer service.

 

22

----

Table of Contents

 

*Three Months Ended September 25, 2009 Compared to ThreeMonths Ended September 26, 2008*

 

*Net Sales.*Our net sales decreased by $39.6 million, or12.5%, to $277.9 million in the three months ended September 25, 2009from $317.5 million in the three months ended September 26, 2008. Thedecline in sales resulted from the net impact of a 6.2% decrease in sales toour facilities maintenance customers and a continued decline in sales to ourprofessional contractor and specialty distributor customers of 28.5% and 24.0%,respectively. We expect sales to our facilities maintenance, professionalcontractor and specialty distributor end-markets to remain weak during theremainder of 2009 as the general economic downturn and credit crisis is expected to continue to affect ourcustomers and demand in our end-markets.

 

*GrossProfit.*Grossprofit decreased by $18.7 million, or 15.5%, to $102.2 million in thethree months ended September 25, 2009 from $120.9 million in thethree months ended September 26, 2008 as a direct result of the decreasein sales. Our gross profit margin decreased 130 basis points to 36.8% for thethree months ended September 25, 2009 compared to 38.1% for the threemonths ended September 26, 2008. The decrease in gross margin is primarilydue to heightened competition associated with the decrease in sales demand, ashift in sales mix across various product categories and costs associated withour NDC operations on a lower sales base.

 

*Selling, General and Administrative Expenses.*SG&A expenses decreased by $11.6million, or 13.2%, to $76.2 million in the three months ended September 25,2009 from $87.8 million in the three months ended September 26, 2008. As apercent of sales, SG&A decreased to 27.4% for the three months ended September 25,2009 compared to 27.7% for the three months ended September 26, 2008. Thedecrease in SG&A expenses is primarily due to cost savings derived fromthe reduction in workforce during September of 2008 and the first quarterof 2009, the closing of underperforming professional contractor centers and theconsolidation of certain distribution centers during the last six months of2008 and the first nine months of 2009 and various efforts aimed at controllingcosts. Accordingly, SG&A expenses for the three months ended September 26,2008, included $2.1 million of costs associated with severance costs related toa reduction in workforce and closing of underperforming professional contractorcenters as well as project expenses associated with the consolidation ofcertain distribution centers into our Auburn, Massachusetts, and Richmond,Virginia, locations.

 

*Depreciationand Amortization.*Depreciation and amortization expense increased by$0.2 million to $4.5 million in the three months ended September 25,2009 from $4.3 million in the three months ended September 26, 2008. As apercentage of sales, depreciation and amortization was 1.6% or 20 basis pointshigher than the 1.4% in the comparable prior year period. These increases weredue to higher depreciation resulting from our higher capital spending during2008 and 2009 associated with our information systems infrastructure anddistribution center consolidation and integration efforts and our EagleMaintenance Supply, Inc. acquisition in the third quarter of 2008.

 

*OperatingIncome.*As aresult of the foregoing, operating income decreased by $7.3 million, or 25.3%,to $21.5 million in the three months ended September 25, 2009 from$28.8 million in the three months ended September 26, 2008. As a percentof sales, operating income decreased to 7.7% in the three months ended September 25,2009 compared to 9.1% in the three months ended September 26, 2008.

 

*Loss onExtinguishment of Debt*. Loss on extinguishment of debt was $0.2 million in thethree months ended September 25, 2009. During the three months ended September 25,2009, we repaid $30.0 million of our term loan ahead of schedule. In connectionwith the term loan payment, we recorded a loss on extinguishment of debt of$0.2 million associated with the write-off of deferred financing costs. We did not extinguish debt in the threemonths ended September 26, 2008.

 

*InterestExpense.*Interestexpense decreased by $2.5 million in the three months ended September 25,2009 to $4.6 million from $7.1 million in the three months ended September 26,2008. This decrease was primarily due to $105.8 million in lower debt balancesoutstanding compared to last year associated with the repayments of our termloan and the repurchase of our 81/8% senior subordinated notes andlower interest rates.

 

*Interest andOther Income.*Interest and other income decreased $0.2 million to $0.6 million in the threemonths ended September 25, 2009 compared to $0.7 million in the threemonths ended September 26, 2008. The decrease was primarily attributableto lower interest income earned resulting from lower interest rates and lowershort-term investment balances.

 

*Provisionfor Income Taxes.*Theeffective tax rate for the three months ended September 25, 2009 was 39.4%compared to 38.8% for the three months ended September 26, 2008. Theincrease in the effective tax rate was primarily due to an increase in statetaxes and a relative increase of non-deductible expenses as a percent oftaxable income.

 

23

----

Table ofContents

 

*Nine Months Ended September 25, 2009 Compared to NineMonths Ended September 26, 2008*

 

*Net Sales.*Our net sales decreased by $113.4 million, or12.4%, to $804.7 million in the nine months ended September 25, 2009from $918.1 million in the nine months ended September 26, 2008. Thedecline in sales resulted from the net impact of a 7.0% decrease in sales toour facilities maintenance customers and a continued decline in sales to ourprofessional contractor and specialty distributor customers of 26.9% and 19.7%,respectively. We expect sales to our facilities maintenance, professionalcontractor and specialty distributor end-markets to remain weak during theremainder of 2009 as the general economic downturn and credit crisis is expected to continue to affect ourcustomers and demand in our end-markets.

 

*GrossProfit.*Grossprofit decreased by $49.7 million, or 14.3%, to $297.1 million in thenine months ended September 25, 2009 from $346.8 million in the ninemonths ended September 26, 2008 as a direct result of the decrease insales. Our gross profit margin decreased 90 basis points to 36.9% for the ninemonths ended September 25, 2009 compared to 37.8% for the nine monthsended September 26, 2008. The decrease in gross margin is primarily due toheightened competition associated with the decrease in sales demand, a shift insales mix across various product categories and higher costs associated withopening our new NDC on the west coast.

 

*Selling,General and Administrative Expenses.*SG&A expenses decreased by $22.4 million, or 8.6%,to $239.0 million in the nine months ended September 25, 2009 from$261.4 million in the nine months ended September 26, 2008. As a percentof sales, SG&A increased to 29.7% for the nine months ended September 25,2009 compared to 28.5% for the nine months ended September 26, 2008. Theincrease in SG&A expenses as a percent of sales is primarily due to $3.8million in increased bad debt expense primarily associated with a customerseeking Chapter 11 bankruptcy protection in March, $4.6 million in severanceand distribution center closing costs associated with our previously discussedoperational initiatives, such as headcount reductions, consolidation of certaindistribution centers and closing of underperforming professional contractorcenters and the write-off of $0.7 million in deferred acquisition costs due tothe adoption of a new accounting standard on business combinations. We have increasedour accounts receivable reserve to adjust for higher levels of risk in ourportfolio stemming from an unprecedented market environment. These costs werepartially offset by the cost savings derived from the reduction in workforce inthe fourth quarter of 2008 and the first quarter of 2009, the closing ofunderperforming professional contractor centers and the consolidation ofcertain distribution centers during the last nine months of 2008 and the firstnine months of 2009 and various efforts aimed at controlling costs. Accordingly,SG&A expenses for the three months ended September 26, 2008, included $2.1million of costs associated with severance costs related to a reduction inworkforce and closing of underperforming professional contractor centers aswell as project expenses associated with the consolidation of certaindistribution centers into our Auburn, Massachusetts, and Richmond, Virginia,locations.

 

*Depreciationand Amortization.*Depreciation and amortization expense increased by$1.3 million to $13.6 million in the nine months ended September 25,2009 from $12.3 million in the nine months ended September 26, 2008. As apercentage of sales, depreciation and amortization was 1.7% or 40 basis pointshigher than the 1.3% in the comparable prior year period. These increases weredue to higher depreciation resulting from higher capital spending during 2008associated with our information systems infrastructure and distribution centerconsolidation and integration efforts and our Eagle Maintenance Supply, Inc.acquisition in the third quarter of 2008.

 

*OperatingIncome.*As aresult of the foregoing, operating income decreased by $28.5 million, or 39.0%,to $44.6 million in the nine months ended September 25, 2009 from$73.1 million in the nine months ended September 26, 2008. As a percent ofsales, operating income decreased to 5.5% in the nine months ended September 25,2009 compared to 8.0% in the nine months ended September 26, 2008.

 

*Gain onExtinguishment of Debt*. Gain on extinguishment of debt was $1.3 million in the ninemonths ended September 25, 2009. During the nine months ended September 25,2009, we repurchased $36.4 million of our 81/8% senior subordinated notes atan average of 93.8% of par, or $34.2 million. In addition, we repaid $55.2 millionof our term loan ahead of schedule. In connection with the repurchase of our 81/8% senior subordinated notes and the term loan payment, werecorded a gain on extinguishment of debt of $1.3 million net of $0.1 millionand $0.9 million in original issue discount and deferred financing costswritten-off, respectively. We did notextinguish debt in the nine months ended September 26, 2008.

 

*InterestExpense.*Interestexpense decreased by $7.1 million in the nine months ended September 25,2009 to $14.7 million from $21.8 million in the nine months ended September 26,2008. This decrease was primarily due to $105.8 million in lower debt balancesoutstanding compared to last year associated with the repayment of our termloan and the repurchase of our 81/8% senior subordinated notes andlower interest rates.

 

*Interest andOther Income.*Interest and other income decreased $0.8 million to $1.3 million in the ninemonths ended September 25, 2009 compared to $2.1 million in the ninemonths ended September 26, 2008. The decrease was primarily attributableto lower interest income earned resulting from lower interest rates and lowershort-term investment balances.

 

24

----

Table of Contents

 

*Provisionfor Income Taxes.*Theeffective tax rate for the nine months ended September 25, 2009 was 39.1%compared to 37.1% for the nine months ended September 26, 2008. Theincrease in the effective tax rate was primarily due to the decrease in aliability associated with previously unrecognized tax benefits partially offsetby an increase in state taxes. During the nine monthsended September 25, 2009 and September 26, 2008, we obtained resolution related to uncertainstate tax positions and accordingly we adjusted the accrual previouslyestablished. As such, we made the appropriate adjustments, of which $0.1million and $0.8 million favorably impacted our effective tax rate for the ninemonths ended September 25, 2009 and September 26, 2008, respectively.

 

**Liquidityand Capital Resources**

 

*Overview*

 

We are a holding company whose only asset is the stockof our subsidiaries. We conduct virtually all of our business operationsthrough Interline New Jersey. Accordingly, our only material sources of cashare dividends and distributions with respect to our ownership interests inInterline New Jersey that are derived from the earnings and cash flow generatedby Interline New Jersey.

 

We have outstanding $150.7 million of 81/8% seniorsubordinated notes due 2014 and we have a $330.0 million bank credit facility.The 81/8%senior subordinated notes mature on June 15, 2014 and interest is payableon June 15 and December 15 of each year. As of September 25,2009, the 81/8%senior subordinated notes had an estimated fair market value of $147.3 million,or 97.75% of par. The bank credit facility consists of a $230.0 million 7-yearterm loan and a $100.0 million 6-year revolving credit facility of which aportion not exceeding $40.0 million is available in the form of letters ofcredit. As of September 25, 2009, Interline New Jersey had$8.5 million of letters of credit issued under the revolving loan facilityand $159.2 million of aggregate principal outstanding under the term loanfacility.

 

The debt instruments of Interline New Jersey,primarily the credit facility entered into on June 23, 2006 and theindenture governing the terms of the 81/8% senior subordinated notes, contain significantrestrictions on the payment of dividends and distributions to us by InterlineNew Jersey. Interline New Jersey’s credit facility allows it to pay dividends,make distributions to us or make investments in us in an aggregate amount notto exceed $2.0 million during any fiscal year, so long as Interline New Jerseyis not in default or would be in default as a result of such payments. Inaddition, ordinary course distributions for overhead (up to $3.0 millionannually) and taxes are permitted, as are annual payments of up to $7.5 millionin respect of our stock option or other benefit plans for management oremployees and (provided Interline New Jersey is not in default) aggregatepayments of up to $40.0 million depending on the pro forma net leverage ratioas of the last day of the previous quarter. In addition, the indenture for the81/8%senior subordinated notes generally restricts the ability of Interline NewJersey to pay distributions to us and to make advances to, or investments in,us to an amount generally equal to 50% of the net income of Interline NewJersey, plus an amount equal to the net proceeds from certain equity issuances,subject to compliance with a leverage ratio and no default having occurred andcontinuing. The indenture also contains certain permitted exceptions including (1) 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 certainpermitted distributions up to $75 million. For further description of thecredit facility, see “—Credit Facility” below.

 

*FinancialCondition*

 

Working capital decreased by $62.9 million to $291.3million as of September 25, 2009 from $354.2 million as of December 26,2008. The decrease in working capital generated cash flows from operatingactivities which was used to fund day-to-day operations and pay down debt.

 

*Cash Flow*

 

*OperatingActivities.* Netcash provided by operating activities was $102.2 million in the ninemonths ended September 25, 2009 compared to net cash provided by operatingactivities of $14.0 million in the nine months ended September 26,2008.

 

Net cash provided byoperating activities of $102.2 million in the nine months ended September 25,2009 primarily consisted of net income of $19.8 million, adjustments fornon-cash items of $31.0 million and cash provided by working capital items of$50.8 million. Adjustments for non-cash items primarily consisted of $14.2million in depreciation and amortization of property, equipment and intangibleassets, $7.3 million in bad debt expense, $6.1 million in deferred incometaxes, $3.1 million in share-based compensation, $0.8 million in amortizationof debt issuance costs and the write-off of $0.7 million in deferredacquisition costs due to the adoption of a new accounting standard on businesscombinations offset by $1.3 million in net gain from the repurchase of $36.4million of our 81/8%senior subordinated notes and the repayment of $55.2 million of our term debt.The cash provided by working capital items primarily consisted of $26.7 millionfrom decreased inventory levels as a result of decreased purchases associatedwith 

 

25

----

Table of Contents

 

lower demand, $16.1million from increased trade payables balances as a result of the timing ofpurchases and related payments, $8.8 million from accrued expenses arising fromthe timing of the payment of certain expenses primarily from severance anddistribution center closing costs associated with our previously discussedoperational initiatives, such as headcount reductions, consolidation of certaindistribution centers and closing of underperforming professionalcontractor centers aswell as higher accrued compensation and related benefits at period-end, $4.5million from decreased prepaid expenses and other current assets primarily fromthe collection of rebates from vendors, $1.3 million from the increase inincome taxes and $2.4 million from timing of interest payments. These itemswere partially offset by $9.0 million in higher trade receivables resultingfrom increased sales activity during the three months ended September 25,2009 compared to the three months ended December 26, 2008.

 

Net cash provided byoperating activities of $14.0 million in the nine months ended September 26,2008 primarily consisted of net income of $33.6 million and adjustments fornon-cash items of $19.5 million offset by cash used in working capital items of$38.3 million. Adjustments for non-cash items primarily consisted of $12.7million in depreciation and amortization of property, equipment and intangibleassets, $3.0 million in share-based compensation, $3.6 million in bad debtexpense and $0.9 million in amortization of debt issuance costs offset by $0.7million in deferred income taxes. The cash used in working capital itemsprimarily consisted of $39.0 million increased inventory levels to stock $12.7million of inventory in our west coast NDC in Salt Lake City, Utah, $7.0million to support our growing janitorial and sanitary product group and $2.9million in other new MRO product offerings, and $16.2 million in higher tradereceivables resulting from increased sales activity during the three monthsended September 26, 2008 compared to the three months ended December 28,2007. These items were partially offset by $8.4 million from increased tradepayables balances as a result of increased inventory levels and the timing ofpurchases and related payments, $4.1 million from timing of interest payments,$2.2 million from increased accrued expenses and other current liabilitiesprimarily from higher accrued compensation and related benefits at period-end,$1.7 million from decreased prepaid expenses and other current assets primarilyfrom the collection of rebates from vendors and $0.5 million from the increasein income taxes.

 

*InvestingActivities.* Net cash used in investing activities was $11.1million in the nine months ended September 25, 2009 compared to net cashprovided by investing activities of $17.5 million in the nine months ended September 26,2008.

 

Net cash used in investingactivities in the nine months ended September 25, 2009 was primarily attributable to capitalexpenditures associated with our distribution center consolidation projects aswell as those made in the ordinary course of business of $9.1 million, net purchasesof short-term investments of $1.6 million and $0.4 million in costs related to purchases ofbusinesses, net of cash acquired.

 

Net cash provided byinvesting activities in the nine months ended September 26, 2008 wasattributable to net proceeds from sales and maturities of short-terminvestments of $46.6 million offset by capital expenditures made in theordinary course of business of $18.7 million and $10.3 million in costs related to purchases ofbusinesses, net of cash acquired.

 

*Financing Activities.* Net cash used in financing activitiestotaled $90.3 million in the nine months ended September 25, 2009compared to net cash used in financing activities of $0.4 million in thenine months ended September 26, 2008.

 

Net cash used in financing activities in the ninemonths ended September 25, 2009 was attributable to our debt reduction of$90.8 million primarily comprised of our repurchase of $36.4 million of our 81/8% seniorsubordinated notes at an average of 93.8% of par, or $34.2 million and ourrepayment of $56.7 million of borrowings on our term debt and capital leaseobligations offset by the net increase in purchase card payable of $0.5million.

 

Net cash used in financing activities in the ninemonths ended September 26, 2008 was attributable to our repayment of $2.7million of borrowings on our term debt and capital lease obligations and $0.8million in treasury stock acquired via payments to satisfy minimum statutorytax withholding requirements offset by the net increase in purchase cardpayable of $2.3 million and $0.8 million of proceeds from stock optionsexercised and excess tax benefits from share-based compensation.

 

*CapitalExpenditures*

 

Capitalexpenditures were $9.1 million in the nine months ended September 25, 2009compared to $18.7 million in the nine months ended September 26, 2008. In addition,during the nine months ended September 25, 2009, we acquired $3.0 millionof property through lease incentives. Capital expenditures as a percentage of sales were1.1% in the nine months ended September 25, 2009 compared to 2.0% in thenine months ended September 26, 2008. The decrease in capital expendituresis the result of the higher than normal levels of capital expenditures incurredduring the nine months ended September 26, 2008 to upgrade ourtelecommunications network, the expansion of our distribution centernetwork, the purchase of warehouse equipment and investments in our informationtechnology systems necessary for the integration of our AmSan acquisition.

 

26

----

Table of Contents

 

*Credit Facility*

 

Borrowings under the term loan and the delayed drawfacility 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%. Borrowings under therevolving credit facility bear interest, at Interline New Jersey’s option, ateither LIBOR plus 1.75% or at the alternate base rate plus 0.50%. As of September 25,2009, the weighted average interest rate in effect with respect to the termloan and the delayed draw facility was 2.03% for the LIBOR option and 4.00% forthe alternate base rate option. Outstanding letters of credit under therevolving credit facility are subject to a per annum fee equal to theapplicable margin under the revolving credit facility. The interest rate spreadis subject to a pricing grid that is based on the ratio of net totalindebtedness to consolidated earnings before interest, taxes, depreciation andamortization (“EBITDA”), as defined by the credit facility. The term loan andthe delayed draw facility mature on June 23, 2013 and the revolving loanfacility matures on June 23, 2012. In accordance with the terms of ourcredit facility, amounts under the term loan and the delayed draw facility aredue and payable in quarterly installments equal to 1.0% of the originalprincipal amount on an annual basis through June 23, 2013, with thebalance payable in one final installment at the maturity date. As a result ofour repayments of borrowings on our term debt, we are not required to makeanother principal payment until the debt matures in 2013.

 

The bank credit facility, which is secured bysubstantially all of the assets of Interline New Jersey and is guaranteed by usand by the domestic subsidiaries of Interline New Jersey, contains affirmative,negative and financial covenants that limit Interline New Jersey’s ability toincur additional indebtedness, pay dividends on its common stock or redeem,repurchase or retire its common stock or subordinated indebtedness, makecertain investments, sell assets, and consolidate, merge or transfer assets,and that require Interline New Jersey to maintain certain financial ratios asof the last day of each fiscal quarter, including a minimum ratio based on anadjusted consolidated EBITDA, as defined by the credit facility, toconsolidated cash interest expense and a maximum ratio of net totalindebtedness to an adjusted consolidated EBITDA, as defined by the creditfacility. The maximum ratio of net total indebtedness to adjusted consolidatedEBITDA, as defined by the credit facility, was 3.5 times. Interline New Jerseyand the Company were in compliance with all covenants at September 25,2009.

 

In connection with the bank credit facility, InterlineNew Jersey is required to pay administrative fees, commitment fees, letter ofcredit issuance and administration fees and certain expenses and to providecertain indemnities, all of which are customary for financings of this type.The bank credit facility also allows for certain incremental term loans andincremental commitments under the revolving credit facility which are availableto Interline New Jersey to repay indebtedness and make acquisitions if certainconditions, including various financial ratios are met.

 

*Liquidity*

 

Historically, ourcapital requirements have been for debt service obligations, working capitalrequirements, including inventory, accounts receivable and accounts payable,acquisitions, the expansion and maintenance of our distribution network andupgrades of our information systems. We expect this to continue in theforeseeable future. Historically, we have funded these requirements throughcash flow generated from operating activities and funds borrowed under ourcredit facility. We expect our cash on hand, cash flow from operations and loanavailability under our credit facility to be our primary source of funds in thefuture. Letters of credit, which are issued under the revolving creditfacility, are used to support payment obligations incurred for our generalcorporate purposes.

 

As of September 25, 2009, we had $31.8 million ofavailability under Interline New Jersey’s $100.0 million revolving creditfacility after the limitation under the bank credit facility’s ratio of nettotal indebtedness to adjusted consolidated EBITDA, as defined by the creditfacility. Prior to December 26, 2008, one of the financial institutionsthat support our revolving credit facility failed, effectively limiting thesize of the revolver commitment to $83.0 million. In the fourth quarter of2009, that institution’s commitment was assigned to another lender. As aresult, our current revolver commitment is again $100.0 million. As of September 25,2009, we had $65.3 million of total cash on hand and permitted investments(including $25.0 million to be netted against debt for purposes of covenantcompliance).

 

We believe thatcash and cash equivalents, cash flow from operations and available borrowingcapacity under our credit facility will be adequate to finance our ongoingoperational cash flow needs and debt service obligations for the next twelvemonths.

 

*ContractualObligations*

 

Our contractualobligations are disclosed in our Annual Report on Form 10-K for the yearended December 26, 2008 filed with the SEC. Except for the repurchase of$36.4 million of our 81/8% senior subordinated notes and repayment of $55.2 million of ourterm debt as discussed above and in Note 3 to our unaudited condensedconsolidated financial statements, there have been no material changes to ourcontractual obligations since December 26, 2008.

 

27

----

Table of Contents

 

The following table setsforth our contractual obligations with respect to our 81/8% senior subordinated notes and term debt as of September 25, 2009(in thousands):

 
| ** **                       | ** ** | ** ** | ** **    | **Less  than** | ** ** | **2  - 3**   | ** ** | **4  - 5** | ** **   | **After  5** | ** ** |
|----------------------------------|------------|------------|---------------|----------------|------------|--------------|------------|------------|--------------|--------------|------------|
| ** **                       | ** ** | **Total**  | ** **    | **1  year**    | ** ** | **years**    | ** ** | **years**  | ** **   | **years**    | ** ** |
|                             |       |       |          |           |       |         |       |       |         |         |       |
| 81/8% senior  subordinated notes |       | $          |  150,681 |           | $          |  — |       | $          |  — |         | $          |  150,681 |   | $ |  — |   |
| Term debt                        |       | 160,863    |          | 1,638          |       | —       |       | 159,225    |         | —       |       |
|                             |       | $          |  311,544 |           | $          |  1,638  |       | $          |  — |         | $          |  309,906 |   | $ |  — |   |

 

**Critical Accounting Policies**

 

In preparing theunaudited condensed consolidated financial statements in conformity withaccounting principles generally accepted in the United States of America,management is required to make certain estimates, judgments and assumptions.These estimates, judgments and assumptions affect the reported amounts ofassets and liabilities, including the disclosure of contingent assets andliabilities, at the date of the financial statements and the reported amountsof revenues and expenses during the periods presented. On an ongoing basis,management evaluates these estimates and assumptions. Management bases itsestimates and assumptions on historical experience and on various other factorsthat are believed to be reasonable at the time the estimates and assumptionsare made. Actual results may differ from these estimates and assumptions underdifferent circumstances or conditions.

 

Our critical accountingpolicies are included in our Annual Report on Form 10-K for the year endedDecember 26, 2008 filed with the SEC. During the three months ended September 25,2009, there were no significant changes to any of our critical accountingpolicies.

 

**Recently Adopted Accounting Standards**

 

Effective December 27, 2008, we adopted FinancialAccounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)820-10-65, *Fair Value Measurements and Disclosures: Transitionrelated to FASB Staff Position FAS 157-2, Effective Date of FASB Statement No. 157*(formerly FASB Staff Position 157-2, *Effective Date of FASBStatement No. 157*). ASC 820-10-65 amends prior guidance todefer the effective date of fair value measurements and disclosures fornon-financial assets and non-financial liabilities, except for items that arerecognized or disclosed at fair value in the financial statements on arecurring basis (at least annually) until fiscal years beginning after November 15,2008 and interim periods within those fiscal years. The adoption of ASC820-10-65 did not have any impact on our financial position, results ofoperations and cash flows.

 

EffectiveDecember 27, 2008, we adopted ASC 805-10, *BusinessCombinations* (formerly FASB Statement No. 141 (revised2007), *Business Combinations*). ASC 805-10replaces prior guidance on business combinations and establishes principles andrequirements for how an acquirer recognizes and measures in its financialstatements the identifiable assets acquired, the liabilities assumed, anynoncontrolling interest in the acquiree and the goodwill acquired. ASC 805-10also establishes disclosure requirements that enable users to evaluate thenature and financial effects of the business combination. As a result of theadoption of, and in accordance with ASC 805-10, we expensed $0.7 million indeferred acquisition costs during the three months ended March 27, 2009,which are included as part of selling, general and administrative expense.

 

Effective December 27, 2008, we adopted ASC810-10-65, *Consolidation: Transition Related to FASB StatementNo. 160, Noncontrolling Interests in Consolidated Financial Statements—anamendment of ARB No. 51* (formerly FASB Statement No. 160, *Noncontrolling Interests in Consolidated Financial Statements—anamendment of ARB No. 51*). ASC 810-10-65 establishes accountingand reporting standards for ownership interests in subsidiaries held by partiesother than the parent, the amount of consolidated net income attributable tothe parent and to the noncontrolling interest, changes in a parent’s ownershipinterest, and the valuation of retained noncontrolling equity investments whena subsidiary is deconsolidated. ASC 810-10-65 also establishes disclosurerequirements that clearly identify and distinguish between the interests of theparent and the interests of the noncontrolling owners. ASC 810-10-65 applies toall entities that prepare consolidated financial statements, exceptnot-for-profit organizations, but affects only those entities that have anoutstanding noncontrolling interest in one or more subsidiaries or thatdeconsolidate a subsidiary. The adoption of ASC 810-10-65 did not have anyimpact on our financial position, results of operations and cash flows.

 

EffectiveDecember 27, 2008, we adopted ASC 815-10-65, *Derivativesand Hedging: Transition and Effective Date Related to FASB Statement No. 161,Disclosures about Derivative Instruments and Hedging Activities—an amendment ofFASB Statement No. 133* (formerly FASB Statement No. 161, *Disclosures about Derivative Instruments and Hedging Activities—anamendment of FASB Statement No. 133*). ASC 815-10-65 is intendedto improve financial reporting about derivative instruments and hedgingactivities by requiring enhanced disclosures to enable investors to betterunderstand their effects on an entity’s financial position, financial

 

28

----

Table of Contents

 

performanceand cash flows. The adoption of ASC 815-10-65 did not have any impact on ourfinancial position, results of operations and cash flows.

 

In April 2009, the FASB issued ASC 825-10-65, *Financial Instruments: Transition Related to FSP FAS 107-1 and APB28-1, Interim Disclosures about Fair Value of Financial Instruments*(formerly FASB Staff Position No. FAS 107-1 and APB 28-1, *Interim Disclosures about Fair Value of Financial Instruments*).ASC 825-10-65 extends the disclosure requirements regarding the fair value offinancial instruments to interim financial statements of publicly tradedcompanies. We adopted the provisions of ASC 825-10-65 for the interim periodended June 26, 2009. The adoption of ASC 825-10-65 did not have any impacton our financial position, results of operations and cash flows.

 

In May 2009, the FASB issued ASC 855-10, *Subsequent Events* (formerly FASB Statement No. 165, *Subsequent Events*). ASC 855-10 establishes general standardsof accounting for and disclosure of events that occur after the balance sheetdate but before the financial statements are issued or are available to beissued. ASC 855-10 sets forth the period after the balance sheet date duringwhich management should evaluate events or transactions that may occur forpotential recognition or disclosure in the financial statements; thecircumstances under which an entity should recognize events or transactionsoccurring after the balance sheet date in its financial statements; and thedisclosures that an entity should make about events or transactions thatoccurred after the balance sheet date. ASC 855-10 also requires disclosure ofthe date through which an entity has evaluated subsequent events. We adoptedthe provisions of ASC 855-10 for the interim period ended June 26, 2009.The adoption of ASC 855-10 did not have any impact on our financial position,results of operations and cash flows.

 

In June 2009, the FASBissued ASC 105-10, *Generally AcceptedAccounting Standards* (formerly FASB Statement No. 168, *The FASB Accounting Standards CodificationTM and the Hierarchy ofGenerally Accepted Accounting Principles — a replacement of FASB Statement No. 162*).ASC 105-10 establishes the FASB Accounting Standards Codification (the “Codification”)as the single source of authoritative nongovernmental accounting principlesgenerally accepted in the United States (“US GAAP”). The Codification iseffective for interim and annual periods ending after September 15, 2009.After the Codification launch on July 1, 2009 only one level ofauthoritative US GAAP exists, other than guidance issued by the SEC. All otheraccounting literature excluded from the Codification is considerednon-authoritative. While not intended to change US GAAP, the Codificationsignificantly changes the way in which the accounting literature is organized.It is structured by accounting topic to help accountants and auditors morequickly identify the guidance that applies to a specific accounting issue. Weadopted the provisions of ASC 105-10 for the interim period ended September 25,2009. The adoption of the provisions of ASC 105-10 did not have a materialimpact on our financial position, results of operations or cash flows. However,because the Codification completely replaces existing standards, it affects theway US GAAP is referenced by us in our financial statements and accountingpolicies.

 

**Accounting Standards Not Yet Adopted**

 

In June 2009, the FASB issued FASB Statement No. 167,*Amendments to FASB Interpretation No. 46(R) *(FAS167). FAS 167 changes how a company determines when an entity that isinsufficiently capitalized or is not controlled through voting (or similarrights) should be consolidated. The determination of whether a company isrequired to consolidate an entity is based on, among other things, an entity’spurpose and design and a company’s ability to direct the activities of theentity that most significantly impact the entity’s economic performance. FAS 167is effective for periods beginning after November 15, 2009. The provisionsof FAS 167 will not have any impact on our financial position, results oroperations or cash flows.

 

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

 

*Commodity Price Risk*

 

We are aware of the potentially unfavorable effectsinflationary pressures may create through higher product and material costs,higher asset replacement costs and related depreciation and higher interestrates. In addition, our operating performance is affected by price fluctuationsin copper, oil, stainless steel, aluminum, zinc, plastic and PVC and othercommodities and raw materials. We seek to minimize the effects of inflation andchanging prices through economies of purchasing and inventory managementresulting in cost reductions and productivity improvements as well as priceincreases to maintain reasonable profit margins. However, such commodity pricefluctuations have from time to time created cyclicality in our financialperformance, and could continue to do so in the future. In addition, our use ofpriced catalogs may not allow us to offset such cost increases quickly,resulting in a decrease in gross margins and profit.

 

29

----

Table of Contents

 

*InterestRate Risk*

 

Our variable rate term debt is sensitive to changes inthe general level of interest rates. As of September 25, 2009, theweighted average interest rate in effect with respect to our $159.2 millionvariable rate term debt was 2.03% for the LIBOR option and 4.00% for thealternate base rate option. While our variable rate term debt obligationsexpose us to the risk of rising interest rates, we do not believe that thepotential exposure is material to our overall financial performance or resultsof operations. Based on the outstanding variable rate term debt as of September 25,2009, a 1.0% annual increase or decrease in current market interest rates wouldhave the effect of causing a $1.2 million pre-tax change to our statement ofoperations for the nine months ended September 25, 2009.

 

The fair market value of ourfixed rate debt is subject to interest rate risk. As of September 25,2009, the fair market value of our $150.7 million 81/8% senior subordinated notes was approximately $147.3 million, or 97.75% ofpar.

 

*ForeignCurrency Exchange Risk*

 

The majority of our purchases from foreign-basedsuppliers are from China and other countries in Asia and are transacted in U.S.dollars. Accordingly, our exposure to risk from foreign currency exchange rateswas not material as of September 25, 2009.

 

*DerivativeFinancial Instruments*

 

As of September 25, 2009, we did not have anyinterest rate swap exchange agreements, or swaps. Historically, we entered intoderivative financial instruments from time to time, including interest rateexchange agreements, or swaps, to manage our exposure to fluctuations ininterest rates on our debt. Under our former swap agreements, we paid a fixedrate on the notional amount to our banks and the banks paid us a variable rateon the notional amount equal to a base LIBOR rate.

 

We periodically evaluate the costs and benefits of anychanges in our interest rate risk. Based on such evaluation, we may enter intonew interest rate swaps to manage our interest rate exposure. Our derivativeactivities, all of which are for purposes other than trading, are initiatedwithin the guidelines of corporate risk-management policies.

 

**ITEM 4.Controls and Procedures**

 

*Evaluation of Disclosure Controlsand Procedures*

 

Our management, with the participation of our ChiefExecutive Officer and Chief Financial Officer (our principal executive officerand principal financial officer), evaluated the effectiveness of our disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Exchange Act) as of September 25, 2009. Based on this evaluation, ourChief Executive Officer and Chief Financial Officer concluded that, as of September 25,2009, our disclosure controls and procedures were effective to (1) ensurethat material information disclosed by us in the reports that we file or submitunder the Exchange Act is accumulated and communicated to our management,including our Chief Executive Officer and Chief Financial Officer, to allowtimely decisions regarding required disclosure and (2) ensure thatinformation required to be disclosed by us in the reports that we file orsubmit under the Exchange Act is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms.

 

*Changes in Internal Control overFinancial Reporting*

 

No change in our internal control over financialreporting (as defined in Rules 13a-15(f) and 15d-15(f) under theExchange Act) occurred during the quarter ended September 25, 2009 thathas materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

30

----

Table of Contents

 

**PART II. OTHERINFORMATION**

 

**ITEM1. Legal Proceedings**

 

We are involved in variouslegal proceedings that have arisen in the ordinary course of our business andhave not been fully adjudicated. These actions, when ultimately concluded anddetermined, will not, in the opinion of management, have a material effect uponour consolidated financial position, results of operations or liquidity.

 

**ITEM 1A. Risk Factors**

 

For information regarding factors that couldaffect our financial position, results of operations and cash flows, see therisk factors discussion provided in our Annual Report on Form 10-K for theyear ended December 26, 2008 in Part I. Item 1A. Risk Factors. See also “Part I. Item 2—ForwardLooking Statements” above.

 

There have been nomaterial changes from the risk factors previously disclosed in our AnnualReport on Form 10-K for the year ended December 26, 2008.

 

**ITEM2. Unregistered Sales of Equity Securities and Use of Proceeds**

 

*Unregistered Sales of EquitySecurities*

 

None.

 

*Purchases of Equity Securities bythe Issuer*

 

The following table summarizes repurchases ofour stock during the three months ended September 25, 2009, comprisingentirely of (i) shares sold to us to satisfy employee tax withholdingobligations that arose upon the vesting of restricted share units andrestricted stock awards; and (ii) shares of unvested forfeited restrictedstock awards returned to us:

 
| **Period**                                | ** ** | **Total  Number of  Shares  Purchased** | ** ** | **Average  Price  Paid per  Share** | ** ** | **Total  Number of  Shares Purchased as  Part of Publicly  Announced Plans or  Programs** | ** ** | **Maximum  Number of  Shares that May Yet  Be Purchased Under  the Plans or Programs** | ** ** |
|-------------------------------------------|------------|-----------------------------------------|------------|-------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| July 2009                            |       |                                    |       |                                |       |                                                                                           |       |                                                                                        |       |
| (June 27 — July 24)        |       | 1,598                                   |       | $                                   | 13.05      |                                                                                           | —     |                                                                                        | —     |   |
| August 2009                          |       |                                    |       |                                |       |                                                                                           |       |                                                                                        |       |
| (July 25 — August 21)      |       | —                                  |       | —                              |       | —                                                                                         |       | —                                                                                      |       |
| September 2009                       |       |                                    |       |                                |       |                                                                                           |       |                                                                                        |       |
| (August 22 — September 25) |       | 2,295                                   |       | 21.29                               |       | —                                                                                         |       | —                                                                                      |       |
| Total                                     |       | 3,893                                   |       | $                                   | 17.91      |                                                                                           | —     |                                                                                        | —     |   |

 

**ITEM 3. Defaults Upon Senior Securities**

 

None.

 

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

 

None.

 

**ITEM 5. Other Information**

 

None.

 

31

----

Table of Contents

 

**ITEM 6. Exhibits**

 

Thefollowing exhibits are being filed as part of this Quarterly 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). |

 

32

----

Table of Contents

 

**SIGNATURES**

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the Registrant has duly caused this reportto be signed on its behalf by the undersigned hereunto duly authorized.

 
|                         |   | **INTERLINE  BRANDS, INC.**                                              |
|------------------------------|--------|--------------------------------------------------------------------------|
|                         |   | Registrant                                                               |
|                         |   |                                                                     |
|                         |   |                                                                     |
| Date: November 2,  2009 | By:    | /S/ THOMAS J.  TOSSAVAINEN                                               |
|                         |   | Thomas J. Tossavainen                                                    |
|                         |   | Chief Financial Officer                                                  |
|                         |   | (Duly Authorized  Signatory, Principal Financial and Accounting Officer) |

 

33

----