Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

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

 
| ****x****                                                                                                                                                                                                                    | **** **** | ****QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------|------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                         |
| ****For  the quarterly period ended June 26, 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.)**** |
| **** ****                                   | **** **** | **** ****              |
| ****801  West Bay Street****                     | ** **     | ** **                  |
| ****Jacksonville,  Florida****                   | **** **** | ****32204****               |
| ****(Address of principal executive offices)**** | **** **** | ****(Zip code)****          |

 

**(904) 421-1400**

(Registrant’s telephone number, including area code)

 

**Not Applicable**

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant 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

 

Indicate by check mark whetherthe registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

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

(Do not check if smaller reporting company) |   | Smaller reporting company o |

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of July 31, 2009, there were 32,459,699 shares of the registrant’s common stock outstanding (excluding 113,012 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 June 26, 2009 and December 26, 2008****                                  | ****1****    |
|                                       | ****Condensed Consolidated Statements of Earnings  for the Three and Six Months Ended June 26, 2009 and June 27, 2008**** | ****2****    |
|                                       | ****Condensed Consolidated Statements of Cash Flows  for the Six Months Ended June 26, 2009 and June 27, 2008****         | ****3****    |
| **** ****                             | ****Notes to Condensed Consolidated Financial Statements****                                                                        | ****5****    |
| ****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                                                                                                                   | 32           |
| ****6.****                                 | ****Exhibits****                                                                                                                    | ****32****   |
|                                       |                                                                                                                                |         |
| ****SIGNATURES****                         | ****33****                                                                                                                          |

 

Table of Contents

 

**PART I. FINANCIAL INFORMATION**

 

**ITEM 1. Financial Statements**

 

**INTERLINE BRANDS, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS (UNAUDITED)**

**AS OF JUNE 26, 2009 AND DECEMBER 26, 2008**

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

 
| ** **                                                                                                                                                                                                    | ** ** | **June 26,** | ** ** | **December 26,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                    | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| **ASSETS**                                                                                                                                                                                                    |       |              |       |                  |       |
| Current Assets:                                                                                                                                                                                               |       |              |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                                     |       | $                 | 69,374     |                  | $          | 62,724 |   |
| Accounts receivable - trade (net of allowance for doubtful  accounts of $12,703 and $12,140)                                                                                                                  |       | 137,934           |       | 139,522               |       |
| Inventory                                                                                                                                                                                                     |       | 198,476           |       | 211,200               |       |
| Income tax receivable                                                                                                                                                                                         |       | —            |       | 1,452                 |       |
| Prepaid expenses and other current assets                                                                                                                                                                     |       | 20,461            |       | 22,884                |       |
| Deferred income taxes                                                                                                                                                                                         |       | 19,564            |       | 19,010                |       |
| Total current assets                                                                                                                                                                                          |       | 445,809           |       | 456,792               |       |
|                                                                                                                                                                                                          |       |              |       |                  |       |
| Property and equipment, net                                                                                                                                                                                   |       | 48,085            |       | 46,033                |       |
| Goodwill                                                                                                                                                                                                      |       | 318,229           |       | 317,117               |       |
| Other intangible assets, net                                                                                                                                                                                  |       | 128,604           |       | 132,787               |       |
| Other assets                                                                                                                                                                                                  |       | 9,637             |       | 10,119                |       |
| Total assets                                                                                                                                                                                                  |       | $                 | 950,364    |                  | $          | 962,848 |   |
|                                                                                                                                                                                                          |       |              |       |                  |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                                                                                                |       |              |       |                  |       |
| Current Liabilities:                                                                                                                                                                                          |       |              |       |                  |       |
| Accounts payable                                                                                                                                                                                              |       | $                 | 95,701     |                  | $          | 68,255 |   |
| Accrued expenses and other current liabilities                                                                                                                                                                |       | 40,337            |       | 31,394                |       |
| Accrued interest                                                                                                                                                                                              |       | 388               |       | 1,072                 |       |
| Income tax payable                                                                                                                                                                                            |       | 506               |       | —                |       |
| Current portion of long-term debt                                                                                                                                                                             |       | 1,963             |       | 1,625                 |       |
| Capital lease - current                                                                                                                                                                                       |       | 253               |       | 239                   |       |
| Total current liabilities                                                                                                                                                                                     |       | 139,148           |       | 102,585               |       |
|                                                                                                                                                                                                          |       |              |       |                  |       |
| Long-Term Liabilities:                                                                                                                                                                                        |       |              |       |                  |       |
| Deferred income taxes                                                                                                                                                                                         |       | 39,645            |       | 37,210                |       |
| Long-term debt, net of current portion                                                                                                                                                                        |       | 339,015           |       | 401,765               |       |
| Capital lease - long term                                                                                                                                                                                     |       | 96                |       | 226                   |       |
| Other liabilities                                                                                                                                                                                             |       | 842               |       | 989                   |       |
| Total liabilities                                                                                                                                                                                             |       | 518,746           |       | 542,775               |       |
| Commitments and contingencies                                                                                                                                                                                 |       |              |       |                  |       |
| Senior preferred stock; $0.01 par value, 20,000,000  shares authorized; no shares outstanding as of June 26, 2009 and  December 26, 2008                                                            |       | —            |       | —                |       |
|                                                                                                                                                                                                          |       |              |       |                  |       |
| Shareholders’ Equity:                                                                                                                                                                                    |       |              |       |                  |       |
| Common stock; $0.01 par value, 100,000,000  authorized; 32,563,211 issued and 32,451,797 outstanding as of June 26,  2009 and 32,561,360 issued and 32,449,946 outstanding as of December 26,  2008 |       | 326               |       | 326                   |       |
| Additional paid-in capital                                                                                                                                                                                    |       | 573,823           |       | 571,868               |       |
| Accumulated deficit                                                                                                                                                                                           |       | (141,489          | )          | (150,833              | )          |
| Accumulated other comprehensive income                                                                                                                                                                        |       | 941               |       | 695                   |       |
| Treasury stock, at cost, 111,414 shares as of  June 26, 2009 and December 26, 2008                                                                                                                  |       | (1,983            | )          | (1,983                | )          |
| Total shareholders’ equity                                                                                                                                                                               |       | 431,618           |       | 420,073               |       |
| Total liabilities and shareholders’ equity                                                                                                                                                               |       | $                 | 950,364    |                  | $          | 962,848 |   |

 

*See accompanying notes to condensed consolidatedfinancial statements.*

 

1

Tableof Contents

 

**INTERLINE BRANDS, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)**

**THREE AND SIX MONTHS ENDED JUNE 26, 2009 AND JUNE 27,2008**

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

 
| ** **                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                   | ** ** | **June 26,**      | ** ** | **June 27,**    | ** ** | **June 26,** | ** ** | **June 27,** | ** ** |
| ** **                                   | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                   | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                    |       | $                      | 269,920    |                 | $          | 311,429 |   | $ | 526,713 |   | $ | 600,575 |   |
| Cost of sales                                |       | 171,605                |       | 195,629              |       | 331,802 |   | 374,725 |   |
| Gross profit                                 |       | 98,315                 |       | 115,800              |       | 194,911 |   | 225,850 |   |
|                                         |       |                   |       |                 |       |   |   |   |   |
| Operating Expenses:                          |       |                   |       |                 |       |   |   |   |   |
| Selling, general and administrative expenses |       | 78,898                 |       | 88,585               |       | 162,818 |   | 173,598 |   |
| Depreciation and amortization                |       | 4,392                  |       | 4,102                |       | 9,026 |   | 7,981 |   |
| Total operating expense                      |       | 83,290                 |       | 92,687               |       | 171,844 |   | 181,579 |   |
| Operating income                             |       | 15,025                 |       | 23,113               |       | 23,067 |   | 44,271 |   |
|                                         |       |                   |       |                 |       |   |   |   |   |
| (Loss) Gain on extinguishment of debt, net   |       | (177                   | )          | —               |       | 1,543 |   | — |   |
| Interest expense                             |       | (4,717                 | )          | (7,004               | )          | (10,096 | ) | (14,746 | ) |
| Interest and other income                    |       | 440                    |       | 708                  |       | 730 |   | 1,403 |   |
| Income before income taxes                   |       | 10,571                 |       | 16,817               |       | 15,244 |   | 30,928 |   |
| Income tax provision                         |       | 4,149                  |       | 5,642                |       | 5,900 |   | 11,079 |   |
| Net income                                   |       | $                      | 6,422      |                 | $          | 11,175 |   | $ | 9,344 |   | $ | 19,849 |   |
|                                         |       |                   |       |                 |       |   |   |   |   |
| Earnings Per Share:                          |       |                   |       |                 |       |   |   |   |   |
| Basic                                        |       | $                      | 0.20       |                 | $          | 0.35 |   | $ | 0.29 |   | $ | 0.61 |   |
| Diluted                                      |       | $                      | 0.20       |                 | $          | 0.34 |   | $ | 0.29 |   | $ | 0.61 |   |
|                                         |       |                   |       |                 |       |   |   |   |   |
| Weighted-Average Shares Outstanding:         |       |                   |       |                 |       |   |   |   |   |
| Basic                                        |       | 32,441,081             |       | 32,369,031           |       | 32,440,035 |   | 32,348,109 |   |
| Diluted                                      |       | 32,856,916             |       | 32,657,047           |       | 32,704,682 |   | 32,650,806 |   |

 

*See accompanying notes to condensed consolidatedfinancial statements.*

 

2

Tableof Contents

 

**INTERLINE BRANDS, INC. AND SUBSIDIARIES**

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

**SIX MONTHS ENDED JUNE 26, 2009 AND JUNE 27, 2008**

**(in thousands)**

**** ****
| ** **                                                                         | ** ** | **Six  Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                         | ** ** | **June 26,**     | ** ** | **June 27,** | ** ** |
| ** **                                                                         | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Cash Flows from Operating Activities:                                              |       |                  |       |   |   |
| Net income                                                                         |       | $                     | 9,344      |   | $ | 19,849 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                  |       |   |   |
| Depreciation and amortization                                                      |       | 9,322                 |       | 8,238 |   |
| Gain on extinguishment of debt, net of original  issue discount                    |       | (2,165                | )          | — |   |
| Write-off of debt issuance costs                                                   |       | 622                   |       | — |   |
| Amortization of debt issuance costs                                                |       | 562                   |       | 565 |   |
| Amortization of discount on 81/8% senior subordinated notes                        |       | 72                    |       | 72 |   |
| Write-off of deferred acquisition costs                                            |       | 672                   |       | — |   |
| Share-based compensation                                                           |       | 1,955                 |       | 2,353 |   |
| Excess tax benefits from share-based compensation                                  |       | —                |       | (147 | ) |
| Deferred income taxes                                                              |       | 2,340                 |       | (1,003 | ) |
| Provision for doubtful accounts                                                    |       | 6,324                 |       | 2,255 |   |
| Loss on disposal of property and equipment                                         |       | 12                    |       | 19 |   |
|                                                                               |       |                  |       |   |   |
| Changes in assets and liabilities which provided  (used) cash:                     |       |                  |       |   |   |
| Accounts receivable - trade                                                        |       | (4,673                | )          | (15,480 | ) |
| Inventory                                                                          |       | 12,830                |       | (19,533 | ) |
| Prepaid expenses and other current assets                                          |       | 2,747                 |       | 1,663 |   |
| Other assets                                                                       |       | (190                  | )          | 1,573 |   |
| Accounts payable                                                                   |       | 27,428                |       | 31,071 |   |
| Accrued expenses and other current liabilities                                     |       | 4,002                 |       | (3,758 | ) |
| Accrued interest                                                                   |       | (684                  | )          | 7 |   |
| Income taxes                                                                       |       | 1,957                 |       | 832 |   |
| Other liabilities                                                                  |       | (141                  | )          | (1,402 | ) |
| Net cash provided by operating activities                                          |       | 72,336                |       | 27,174 |   |
|                                                                                    |            |                       |            |  |  |  |  |

 

*****(Continued)*****

 

3

Tableof Contents

 

**INTERLINE BRANDS, INC. AND SUBSIDIARIES**

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

**SIX MONTHS ENDED JUNE 26, 2009 AND JUNE 27, 2008**

**(in thousands)**

**** ****
| ** **                                                                         | ** ** | **Six  Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                         | ** ** | **June 26,**     | ** ** | **June 27,** | ** ** |
| ** **                                                                         | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Cash Flows from Investing Activities:                                              |       |                  |       |   |   |
| Purchase of property and equipment, net                                            |       | (5,688                | )          | (13,540 | ) |
| Purchase of short-term investments                                                 |       | —                |       | (35,531 | ) |
| Proceeds from sales and maturities of short-term  investments                      |       | —                |       | 80,121 |   |
| Purchase of businesses, net of cash acquired                                       |       | (381                  | )          | (536 | ) |
| Net cash (used in) provided by investing activities                                |       | (6,069                | )          | 30,514 |   |
| Cash Flows from Financing Activities:                                              |       |                  |       |   |   |
| Increase (Decrease) in purchase card payable, net                                  |       | 726                   |       | (643 | ) |
| Repayment of term debt                                                             |       | (26,162               | )          | (2,150 | ) |
| Repayment of 81/8% senior subordinated notes                                       |       | (34,157               | )          | — |   |
| Payments on capital lease obligations                                              |       | (116                  | )          | (108 | ) |
| Proceeds from stock options exercised                                              |       | —                |       | 586 |   |
| Excess tax benefits from share-based compensation                                  |       | —                |       | 147 |   |
| Treasury stock acquired to satisfy minimum  statutory tax withholding requirements |       | —                |       | (772 | ) |
| Net cash used in financing activities                                              |       | (59,709               | )          | (2,940 | ) |
| Effect of exchange rate changes on cash and cash  equivalents                      |       | 92                    |       | (40 | ) |
| Net increase in cash and cash equivalents                                          |       | 6,650                 |       | 54,708 |   |
| Cash and cash equivalents at beginning of period                                   |       | 62,724                |       | 4,975 |   |
| Cash and cash equivalents at end of period                                         |       | $                     | 69,374     |   | $ | 59,683 |   |
|                                                                               |       |                  |       |   |   |
| Supplemental Disclosure of Cash Flow Information:                                  |       |                  |       |   |   |
| Cash paid during the period for:                                                   |       |                  |       |   |   |
| Interest                                                                           |       | $                     | 10,196     |   | $ | 14,431 |   |
| Income taxes, net of refunds                                                       |       | $                     | 1,749      |   | $ | 12,315 |   |
|                                                                               |       |                  |       |   |   |
| 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 consolidatedfinancial statements.*

 

4

Table of Contents

 

**INTERLINEBRANDS, INC. AND SUBSIDIARIES**

**NOTES TO UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**THREEAND SIX MONTHS ENDED JUNE 26, 2009 AND JUNE 27, 2008**

 

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

** **

*Business*

 

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

 

The Company markets and 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 condensed consolidatedfinancial statements of Interline have been prepared in accordance withaccounting principles generally accepted in the United States of America andinstructions to the Quarterly Report on Form 10-Q and Article 10 ofRegulation 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*

 

Financial Accounting Standards Board (“FASB”)Statement No. 157, *Fair Value Measurements*,(“FAS 157”) defines fair value as “the price that would be received to sell anasset or paid to transfer a liability in an orderly transaction between marketparticipants at the measurement date.” FAS 157 requires disclosure about howfair value is determined for assets and liabilities and establishes a hierarchyfor which these assets and liabilities must be grouped, based on significantlevels 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.                                                           |

 

Thedetermination of where assets and liabilities fall within this hierarchy isbased upon the lowest level of input that is significant to the fair valuemeasurement. 

 

The fair value of cash and cash equivalents, accountsreceivable, and accounts payable approximate the carrying amount because of theshort maturities of these items. The fair value of term debt approximates thecarrying amount because it bears interest at variable rates. The fair value ofthe 81/8%senior subordinated notes is determined by quoted market prices as the 81/8% seniorsubordinated notes are publicly traded.

 

*Subsequent Events*

 

The Company evaluated events and transactions thatoccurred during the period from June 26, 2009, the date of the balancesheet, through August 3, 2009, the date the unaudited interim condensedfinancial statements were issued, for potential recognition or disclosure inthe accompanying unaudited interim condensed consolidated financial statementsand did not identify any that should be recognized or disclosed in theaccompanying unaudited interim condensed consolidated financial statements.

 

5

----

Table of Contents

 

*Segment Information*

 

In accordance with FASB Statement No. 131, *Disclosure about Segments of an Enterprise and Related Information*,the Company has one operating segment and one reportable segment, thedistribution of MRO products.

 

TheCompany’s net sales for the three and six months ended June 26, 2009 and June 27,2008 by product category were as follows (in thousands):

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                 | ** ** | **June 26,**      | ** ** | **June 27,**    | ** ** | **June 26,** | ** ** | **June 27,** | ** ** |
| **Product Category**                       | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Janitorial  and sanitary                   |       | $                      | 76,657     |                 | $          | 75,989 |   | $ | 148,559 |   | $ | 145,095 |   |
| Plumbing                                   |       | 71,799                 |       | 87,511               |       | 147,039 |   | 177,147 |   |
| Heating,  ventilation and air conditioning |       | 31,709                 |       | 36,126               |       | 52,248 |   | 59,808 |   |
| Electrical  and lighting                   |       | 21,594                 |       | 28,963               |       | 43,421 |   | 57,878 |   |
| Appliances  and parts                      |       | 15,925                 |       | 18,374               |       | 31,076 |   | 33,988 |   |
| Security                                   |       | 12,957                 |       | 15,571               |       | 26,053 |   | 31,474 |   |
| Hardware  and tools                        |       | 12,956                 |       | 14,014               |       | 24,255 |   | 27,026 |   |
| Other                                      |       | 26,323                 |       | 34,881               |       | 54,062 |   | 68,159 |   |
| Total                                      |       | $                      | 269,920    |                 | $          | 311,429 |   | $ | 526,713 |   | $ | 600,575 |   |

 

*Recently Adopted Accounting Standards*

 

Effective December 27, 2008, the Company adoptedFASB Staff Position 157-2, *Effective Date of FASBStatement No. 157*, (“FSP 157-2”). FSP 157-2 amends FAS 157 todefer the effective date of FAS 157 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 fiscal yearsbeginning after November 15, 2008 and interim periods within those fiscalyears. The adoption of FSP 157-2 did not have any impact on the Company’sfinancial position, results of operations and cash flows.

 

EffectiveDecember 27, 2008, the Company adopted FASB Statement No. 141(revised 2007), *Business Combinations*, (“FAS 141R”),which replaces FASB Statement No. 141, *Business Combinations*.FAS 141R establishes principles and requirements for how an acquirerrecognizes and measures in its financial statements the identifiable assetsacquired, the liabilities assumed, any noncontrolling interest in the acquireeand the goodwill acquired. FAS 141R also establishes disclosure requirementsthat will enable users to evaluate the nature and financial effects of thebusiness combination. As a result of the adoption of, and in accordance withFAS 141R, the Company expensed $0.7 million in deferred acquisition costsduring the three months ended March 27, 2009, which are included as partof selling, general and administrative expense.

 

Effective December 27, 2008, the Company adoptedFASB Statement No. 160, *Noncontrolling Interestsin Consolidated Financial Statements—an amendment of ARB No. 51*,(“FAS 160”). FAS 160 establishes accounting and reporting standards forownership interests in subsidiaries held by parties other than the parent, theamount of consolidated net income attributable to the parent and to thenoncontrolling interest, changes in a parent’s ownership interest, and thevaluation of retained noncontrolling equity investments when a subsidiary isdeconsolidated. FAS 160 also establishes disclosure requirements that clearlyidentify and distinguish between the interests of the parent and the interestsof the noncontrolling owners. FAS 160 applies to all entities that prepareconsolidated financial statements, except not-for-profit organizations, butwill affect only those entities that have an outstanding noncontrollinginterest in one or more subsidiaries or that deconsolidate a subsidiary. Theadoption of FAS 160 did not have any impact on the Company’s financialposition, results of operations and cash flows.

 

Effective December 27,2008, the Company adopted FASB Statement No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities*, (“FAS 161”).FAS 161 is intended to improve financial reporting about derivative instrumentsand hedging activities by requiring enhanced disclosures to enable investors tobetter understand their effects on an entity’s financial position, financialperformance, and cash flows. The adoption of FAS 161 did not have any impact onthe Company’s financial position, results of operations and cash flows.

 

6

----

Table of Contents

 

Effective December 27, 2008, the Company adoptedFASB Statement No. 162, *The Hierarchy of GenerallyAccepted Accounting Principles*, (“FAS 162”). FAS 162 isintended to improve financial reporting by identifying a consistent framework,or hierarchy, for selecting accounting principles to be used in preparingfinancial statements that are presented in conformity with generally acceptedaccounting principles (“GAAP”) for nongovernmental entities in the UnitedStates. The adoption of FAS 162 did not have any impact on the Company’sfinancial position, results of operations and cash flows.

 

In April 2009, the FASB issued FASB StaffPosition No. FAS 107-1 and APB 28-1, *Interim Disclosures aboutFair Value of Financial Instruments*, (“FSP 107-1”). FSP 107-1extends the disclosure requirements regarding the fair value of financialinstruments under FAS 107, *Disclosures about FairValue of Financial Instruments*, to interim financial statements ofpublicly traded companies. The Company adopted the provisions of FSP 107-1 forthe interim period ended June 26, 2009. The adoption of FSP 107-1 didnot have any impact on the Company’s financial position, results of operationsand cash flows.

 

In May 2009, the FASB issued FASB Statement No. 165,*Subsequent Events*, (“FAS 165”). FAS 165establishes general standards of accounting for and disclosure of events thatoccur after the balance sheet date but before the financial statements areissued or are available to be issued. FAS 165 sets forth the period after thebalance sheet date during which management should evaluate events ortransactions that may occur for potential recognition or disclosure in thefinancial statements; the circumstances under which an entity should recognizeevents or transactions occurring after the balance sheet date in its financialstatements; and the disclosures that an entity should make about events ortransactions that occurred after the balance sheet date. FAS 165 also requiresdisclosure of the date through which an entity has evaluated subsequent events.The Company adopted the provisions of FAS 165 for the interim period ended June 26,2009. The adoption of FAS 165 did not have any impact on the Company’sfinancial position, results of operations and cash flows.

 

*Accounting Standards Not Yet Adopted*

 

In June 2009, the FASB issued FASB Statement No. 168,*The FASB Accounting Standards CodificationTM and theHierarchy of Generally Accepted Accounting Principles — a replacement of FASBStatement No. 162*, (“FAS 168”). FAS 168 establishes the FASBAccounting Standards Codification (the “Codification”) as the single source ofauthoritative nongovernmental accounting principles generally accepted in theUnited States (“US GAAP”). The Codification is effective for interim and annualperiods ending after September 15, 2009. After the Codification launch on July 1,2009, only one level of authoritative US GAAP will exist, other than guidanceissued by the SEC. All other accounting literature excluded from theCodification will be considered non-authoritative. While not intended to changeUS GAAP, the Codification significantly changes the way in which the accountingliterature is organized. It is structured by accounting topic to helpaccountants and auditors more quickly identify the guidance that applies to aspecific accounting issue. The Company does not expect the adoption of theprovisions of FAS 168 to have a material impact on the Company’s financialposition, results of operations or cash flows. However, because the Codificationcompletely replaces existing standards, it will affect the way US GAAP isreferenced by the Company in its financial statements and accounting policies.

 

**2**.                                      ACCOUNTS RECEIVABLE

** **

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  June 26,  2009** | ** ** |
|-----------------------------------------|------------|----------------------------|------------|-------------------|------------|-------------------------------------|------------|
| $                                       | 12,140     |                       | $          | 6,324             |       | $                                   | (5,761     | ) | $ | 12,703 |   |
|                                         |            |                            |            |                   |            |                                     |            |  |  |  |  |

 

----

(1)   Provision for doubtful accounts includes $3.0 millionassociated with a customer seeking Chapter 11 bankruptcy protection in March 2009.

 

(2)   Accounts receivable written-off as uncollectible, net ofrecoveries.

 

7

----

Table of Contents

 

**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 June 26,2009, the fair market value of the $150.7 million of 81/8% seniorsubordinated notes was approximately $147.7 million or 98% of par.

 

During the three and six months ended June 26,2009, the Company repaid $20.0 million and $25.2 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 associated with thewrite-off of deferred financing costs. As a result of these repayments of termdebt, the Company is not required to make another principal payment until thedebt matures in 2013.

 

**4**.                                      SHAREHOLDER RIGHTS 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.

 

**5**.                                      RESTRUCTURING AND 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 three and six months ended June 26, 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 $2.1 million and $4.5 million during the three and six months ended June 26, 2009, respectively. 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                         |       | 1,472                           |       | 3,048                                  |       | 4,520     |       |
| Payments                           |       | (1,012                          | )          | (1,383                                 | )          | (2,395    | )          |
| Asset  write-offs                  |       | —                          |       | (473                                   | )          | (473      | )          |
| Balance  at June 26, 2009     |       | $                               | 790        |                                   | $          | 2,036     |       | $ | 2,826 |   |

 

8

----

Table of Contents

 

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                           |       | —                                  |       | (595                                   | )          | (595      | )          |
| Additions  to reserve              |       | —                                  |       | 1,176                                  |       | 1,176     |       |
| Balance  at June 26, 2009     |       | $                                       | 95         |                                   | $          | 2,563     |       | $ | 2,658 |   |

 

**6**.                                      EARNINGS PER SHARE

** **

Earnings per share for all periods has been computedin accordance with FASB Statement No. 128, *Earnings perShare*, (“FAS 128”). Basic earnings per share is computed by dividingnet income by the weighted-average number of shares of common stock outstandingduring the period. Diluted earnings per share is computed by dividing netincome by the weighted-average number of shares of common stock outstandingduring the period as adjusted for the potential dilutive effect of stockoptions and non-vested shares of restricted stock, restricted share units anddeferred stock units using the treasury stock method.

 

The following summarizes the shares of common stockused to calculate earnings per share including the potentially dilutive impactof stock options, restricted stock, restricted share units and deferred stockunits, calculated using the treasury stock method, as included in thecalculation of diluted weighted-average shares:

 
| ** **                                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                     | ** ** | **June 26,**      | ** ** | **June 27,**    | ** ** | **June 26,** | ** ** | **June 27,** | ** ** |
| ** **                                     | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Weighted  average shares outstanding - basic   |       | 32,441,081             |       | 32,369,031           |       | 32,440,035 |   | 32,348,109 |   |
| Dilutive  shares resulting from:               |       |                   |       |                 |       |   |   |   |   |
| Stock  options                                 |       | 91,061                 |       | 152,420              |       | 45,531 |   | 181,750 |   |
| Restricted  stock                              |       | 22                     |       | 2,869                |       | 11 |   | 3,568 |   |
| Restricted  share units                        |       | 277,089                |       | 102,486              |       | 174,243 |   | 89,829 |   |
| Deferred  stock units                          |       | 47,663                 |       | 30,241               |       | 44,862 |   | 27,550 |   |
| Weighted  average shares outstanding - diluted |       | 32,856,916             |       | 32,657,047           |       | 32,704,682 |   | 32,650,806 |   |

 

During the three months ended June 26, 2009 and June 27,2008, stock options to purchase 3,774,522 shares and 1,863,328 shares of commonstock, respectively, were excluded from the computations of dilutedweighted-average shares outstanding because their effect would beanti-dilutive. During the six months ended June 26, 2009 and June 27,2008, stock options to purchase 3,573,535 shares and 1,815,992 shares of commonstock, respectively, were excluded from the computations of dilutedweighted-average shares outstanding because their effect would beanti-dilutive.

 

9

----

Table of Contents

 

**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 six months ended June 26,2009 and June 27, 2008 are as follows (in thousands):

 
| ** **                                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                              | ** ** | **June 26,**      | ** ** | **June 27,**    | ** ** | **June 26,** | ** ** | **June 27,** | ** ** |
| ** **                                              | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net  income                                             |       | $                      | 6,422      |                 | $          | 11,175 |   | $ | 9,344 |   | $ | 19,849 |   |
| Other  comprehensive income (loss):                     |       |                   |       |                 |       |   |   |   |   |
| Amortization  of unrecognized gain on employee benefits |       | 3                      |       | 3                    |       | 6 |   | 6 |   |
| Foreign  currency translation                           |       | 346                    |       | 57                   |       | 240 |   | (159 | ) |
| Total  comprehensive income                             |       | $                      | 6,771      |                 | $          | 11,235 |   | $ | 9,590 |   | $ | 19,696 |   |

 

**8.**                                      SHARE-BASED COMPENSATION

** **

During the threemonths ended June 26, 2009 and June 27, 2008, share-based compensationexpense was $1.1 million and $1.8 million, respectively. During the six monthsended June 26, 2009 and June 27, 2008, share-based compensationexpense was $1.9 million and $2.4 million, respectively. As of June 26,2009, there was $8.5 million of total unrecognized share-based compensationexpense related to unvested share-based equity awards. The expense is expectedto be recognized over a weighted-average period of 2.8 years.

 

During the threemonths ended June 26, 2009 and June 27, 2008, the Company granted52,500 and 52,500 stock options, respectively, with a weighted-average grantdate fair value of $6.13 and $5.89, respectively. During the six months ended June 26,2009 and June 27, 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. As permitted by FASB Statement No. 123 (revised2004), *Share-Based Compensation*, (“FAS 123R”)the fair values of stock options were estimated using the Black-Scholes option-pricingmodel. Expected volatility is based on historical performance of the Company’sstock. The Company also considers historical data to estimate the timing andamount of stock option exercises and forfeitures. The expected life representsthe period of time that stock options are expected to remain outstanding and isbased on the contractual term of the stock options and expected exercisebehavior. The risk-free interest rate is based on U.S. Treasury zero-couponissues with a remaining term equal to the expected option life assumed at thedate of grant. The Black-Scholes weighted-average assumptions were as follows:

 
| ** **                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                | ** ** | **June 26,**      | ** ** | **June 27,**    | ** ** | **June 26,** | ** ** | **June 27,** | ** ** |
| ** **                | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Expected  volatility      |       | 44.6                   | %          | 35.0                 | %          | 42.6 | % | 33.6 | % |
| Expected  dividends       |       | 0.0                    | %          | 0.0                  | %          | 0.0 | % | 0.0 | % |
| Risk-free  interest rate  |       | 2.2                    | %          | 3.0                  | %          | 2.1 | % | 2.9 | % |
| Expected  life (in years) |       | 5.0                    |       | 5.0                  |       | 5.0 |   | 5.0 |   |

 

There were nostock options exercised during the three and six months ended June 26,2009. Stock options exercised during the three and six months ended June 27,2008 were 4,950 and 38,595, respectively, with an intrinsic value of less than$0.1 million and $0.1 million, respectively.

 

10

----

Table of Contents

 

A summary statusof restricted stock, restricted share units and deferred stock units as of June 26,2009 and changes during the six 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                                |       | —               |       | —                     |       | 383,554                  |       | 7.89 |   | 26,250 |   | 14.77 |   |
| Outstanding  at June 26, 2009     |       | 19,200               |       | $                          | 23.69      |                     | 637,810    |   | $ | 11.85 |   | 68,310 |   | $ | 18.66 |   |

 

No restrictedstock or restricted share units vested during the three and six months ended June 26,2009 and the three months ended June 27, 2008. During the six months endedJune 27, 2008, 52,082 shares of restricted stock vested. The total fairvalue of restricted stock vested during the six months ended June 27, 2008was $1.0 million. During the six months ended June 27, 2008, 81,876 sharesof restricted share units vested. The total fair value of restricted shareunits vested during the three months ended June 27, 2008 was $1.6 million.

 

**9.**                                      INCOME TAXES

** **

The Company accounts for uncertainty in income taxesin accordance with FASB Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109*,(“FIN 48”). During the six months ended June 26, 2009, the Company reducedthe liability for unrecognized tax benefits related to certain state income taxmatters as a result of favorable resolutions in one state. Of the $0.2 millionreduction, substantially all was related to gross unrecognized tax benefits andless than $0.1 million was related to interest and penalties. Of these 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 |   | 9    |   |
| Settlements  with taxing authorities                  |   | (176 | )      |
| Balance  at June 26, 2009                        |   | $    | 153    |   |

 

**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.

 

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 June 26,2009, 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 of Contents

 

**CONDENSEDCONSOLIDATING BALANCE SHEET (UNAUDITED)**

**ASOF JUNE 26, 2009**

**(inthousands)**

 
| ** **                                      | ** ** | **Parent**      | ** ** | ** **     | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** |
|-------------------------------------------------|------------|-----------------|------------|----------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                      | ** ** | **Company**     | ** ** | **Subsidiary** | ** ** | **Guarantor**    | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
| ** **                                      | ** ** | **(Guarantor)** | ** ** | **Issuer**     | ** ** | **Subsidiaries** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                      |       |            |       |           |       |             |       |              |       |             |       |
| Current Assets:                                 |       |            |       |           |       |             |       |              |       |             |       |
| Cash and cash equivalents                       |       | $               | —     |           | $          | 69,247           |       | $                 | 127        |             | $          | — |   | $ | 69,374 |   |
| Accounts receivable - trade                     |       | —          |       | 135,669        |       | 2,265            |       | —            |       | 137,934          |       |
| Inventory                                       |       | —          |       | 196,253        |       | 2,223            |       | —            |       | 198,476          |       |
| Intercompany receivable                         |       | —          |       | —         |       | 124,207          |       | (124,207          | )          | —           |       |
| Other current assets                            |       | —          |       | 39,839         |       | 186              |       | —            |       | 40,025           |       |
| Total current assets                            |       | —          |       | 441,008        |       | 129,008          |       | (124,207          | )          | 445,809          |       |
|                                            |       |            |       |           |       |             |       |              |       |             |       |
| Property and equipment, net                     |       | —          |       | 47,937         |       | 148              |       | —            |       | 48,085           |       |
| Goodwill                                        |       | —          |       | 312,952        |       | 5,277            |       | —            |       | 318,229          |       |
| Other intangible assets, net                    |       | —          |       | 125,966        |       | 2,638            |       | —            |       | 128,604          |       |
| Investment in subsidiaries                      |       | 431,618         |       | 144,272        |       | —           |       | (575,890          | )          | —           |       |
| Other assets                                    |       | —          |       | 2,341          |       | 7,277            |       | 19                |       | 9,637            |       |
| Total assets                                    |       | $               | 431,618    |           | $          | 1,074,476        |       | $                 | 144,348    |             | $          | (700,078 | ) | $ | 950,364 |   |
|                                            |       |            |       |           |       |             |       |              |       |             |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**  |       |            |       |           |       |             |       |              |       |             |       |
| Current Liabilities:                            |       |            |       |           |       |             |       |              |       |             |       |
| Accounts payable                                |       | $               | —     |           | $          | 95,700           |       | $                 | 1          |             | $          | — |   | $ | 95,701 |   |
| Accrued expenses and other current liabilities  |       | —          |       | 41,156         |       | 75               |       | —            |       | 41,231           |       |
| Intercompany payable                            |       | —          |       | 124,207        |       | —           |       | (124,207          | )          | —           |       |
| Debt and capital lease - short-term             |       | —          |       | 2,216          |       | —           |       | —            |       | 2,216            |       |
| Total current liabilities                       |       | —          |       | 263,279        |       | 76               |       | (124,207          | )          | 139,148          |       |
|                                            |       |            |       |           |       |             |       |              |       |             |       |
| Long-Term Liabilities:                          |       |            |       |           |       |             |       |              |       |             |       |
| Term debt and capital lease - long-term         |       | —          |       | 339,111        |       | —           |       | —            |       | 339,111          |       |
| Other liabilities                               |       | —          |       | 40,468         |       | —           |       | 19                |       | 40,487           |       |
| Total liabilities                               |       | —          |       | 642,858        |       | 76               |       | (124,188          | )          | 518,746          |       |
|                                            |       |            |       |           |       |             |       |              |       |             |       |
| Senior preferred stock                          |       | —          |       | 707,130        |       | —           |       | (707,130          | )          | —           |       |
|                                            |       |            |       |           |       |             |       |              |       |             |       |
| Shareholders’ equity (deficit)             |       | 431,618         |       | (275,512       | )          | 144,272          |       | 131,240           |       | 431,618          |       |
| Total liabilities and shareholders’ equity |       | $               | 431,618    |           | $          | 1,074,476        |       | $                 | 144,348    |             | $          | (700,078 | ) | $ | 950,364 |   |

 

12

----

Table of Contents

 

**CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)**

**AS OF DECEMBER 26, 2008**

**(in thousands)**

 
| ** **                                      | ** ** | **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

----

Tableof Contents

 

**CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS(UNAUDITED)**

**FOR THE THREE MONTHS ENDED JUNE 26, 2009**

**(in thousands)**

 
| ** **                                             | ** ** | **Parent**      | ** ** | ** **     | ** ** | ** **          | ** ** | ** **        | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|-----------------|------------|----------------|------------|---------------------|------------|-------------------|------------|------------------|------------|
| ** **                                             | ** ** | **Company**     | ** ** | **Subsidiary** | ** ** | **Guarantor**       | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
| ** **                                             | ** ** | **(Guarantor)** | ** ** | **Issuer**     | ** ** | **Subsidiaries(1)** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
| ** **                                             | ** ** | ** **      | ** ** | ** **     | ** ** | ** **          | ** ** | ** **        | ** ** | ** **       | ** ** |
| Net sales                                              |       | $               | —     |           | $          | 265,500             |       | $                 | 4,420      |             | $          | — |   | $ | 269,920 |   |
| Cost of sales                                          |       | —          |       | 168,719        |       | 2,886               |       | —            |       | 171,605          |       |
| Gross profit                                           |       | —          |       | 96,781         |       | 1,534               |       | —            |       | 98,315           |       |
|                                                   |       |            |       |           |       |                |       |              |       |             |       |
| Operating Expenses:                                    |       |            |       |           |       |                |       |              |       |             |       |
| Selling, general and administrative expenses           |       | —          |       | 77,693         |       | 1,205               |       | —            |       | 78,898           |       |
| Depreciation and amortization                          |       | —          |       | 4,228          |       | 164                 |       | —            |       | 4,392            |       |
| Equity earnings of subsidiaries                        |       | (10,571         | )          | (2,992         | )          | —              |       | 13,563            |       | —           |       |
| Total operating expense                                |       | (10,571         | )          | 78,929         |       | 1,369               |       | 13,563            |       | 83,290           |       |
| Operating income                                       |       | 10,571          |       | 17,852         |       | 165                 |       | (13,563           | )          | 15,025           |       |
|                                                   |       |            |       |           |       |                |       |              |       |             |       |
| Loss on extinguishment of debt, net                    |       | —          |       | (177           | )          | —              |       | —            |       | (177             | )          |
| Interest and other (expense) income, net               |       | —          |       | (5,090         | )          | 4,863               |       | (4,050            | )          | (4,277           | )          |
| Income before income taxes                             |       | 10,571          |       | 12,585         |       | 5,028               |       | (17,613           | )          | 10,571           |       |
| Income tax provision                                   |       | 4,149           |       | 2,424          |       | 1,725               |       | (4,149            | )          | 4,149            |       |
| Net income                                             |       | 6,422           |       | 10,161         |       | 3,303               |       | (13,464           | )          | 6,422            |       |
| Preferred stock dividends                              |       | —          |       | (23,849        | )          | —              |       | 23,849            |       | —           |       |
| Net income (loss) attributable to common  shareholders |       | $               | 6,422      |           | $          | (13,688             | )          | $                 | 3,303      |             | $          | 10,385 |   | $ | 6,422 |   |

 

----

(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

----

Tableof Contents

 

**CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS(UNAUDITED)**

**FOR THE THREE MONTHS ENDED JUNE 27, 2008**

**(in thousands)**

 
| ** **                                             | ** ** | **Parent**      | ** ** | ** **     | ** ** | ** **          | ** ** | ** **        | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|-----------------|------------|----------------|------------|---------------------|------------|-------------------|------------|------------------|------------|
| ** **                                             | ** ** | **Company**     | ** ** | **Subsidiary** | ** ** | **Guarantor**       | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
| ** **                                             | ** ** | **(Guarantor)** | ** ** | **Issuer**     | ** ** | **Subsidiaries(1)** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
| ** **                                             | ** ** | ** **      | ** ** | ** **     | ** ** | ** **          | ** ** | ** **        | ** ** | ** **       | ** ** |
| Net sales                                              |       | $               | —     |           | $          | 240,320             |       | $                 | 71,109     |             | $          | — |   | $ | 311,429 |   |
| Cost of sales                                          |       | —          |       | 150,685        |       | 44,944              |       | —            |       | 195,629          |       |
| Gross profit                                           |       | —          |       | 89,635         |       | 26,165              |       | —            |       | 115,800          |       |
|                                                   |       |            |       |           |       |                |       |              |       |             |       |
| Operating Expenses:                                    |       |            |       |           |       |                |       |              |       |             |       |
| Selling, general and administrative expenses           |       | —          |       | 73,969         |       | 14,616              |       | —            |       | 88,585           |       |
| Depreciation and amortization                          |       | —          |       | 3,437          |       | 665                 |       | —            |       | 4,102            |       |
| Equity earnings of subsidiaries                        |       | (16,817         | )          | (3,600         | )          | —              |       | 20,417            |       | —           |       |
| Total operating expense                                |       | (16,817         | )          | 73,806         |       | 15,281              |       | 20,417            |       | 92,687           |       |
| Operating income                                       |       | 16,817          |       | 15,829         |       | 10,884              |       | (20,417           | )          | 23,113           |       |
|                                                   |       |            |       |           |       |                |       |              |       |             |       |
| Interest and other (expense) income, net               |       | —          |       | (5,150         | )          | (799                | )          | (347              | )          | (6,296           | )          |
| Income before income taxes                             |       | 16,817          |       | 10,679         |       | 10,085              |       | (20,764           | )          | 16,817           |       |
| Income tax provision                                   |       | 5,642           |       | 1,781          |       | 3,861               |       | (5,642            | )          | 5,642            |       |
| Net income                                             |       | 11,175          |       | 8,898          |       | 6,224               |       | (15,122           | )          | 11,175           |       |
| Preferred stock dividends                              |       | —          |       | (20,791        | )          | —              |       | 20,791            |       | —           |       |
| Net income (loss) attributable to common  shareholders |       | $               | 11,175     |           | $          | (11,893             | )          | $                 | 6,224      |             | $          | 5,669 |   | $ | 11,175 |   |

 

----

(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

----

Tableof Contents

 

**CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS(UNAUDITED)**

**FOR THE SIX MONTHS ENDED JUNE 26, 2009**

**(in thousands)**

 
| ** **                                             | ** ** | **Parent**      | ** ** | ** **     | ** ** | ** **          | ** ** | ** **        | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|-----------------|------------|----------------|------------|---------------------|------------|-------------------|------------|------------------|------------|
| ** **                                             | ** ** | **Company**     | ** ** | **Subsidiary** | ** ** | **Guarantor**       | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
| ** **                                             | ** ** | **(Guarantor)** | ** ** | **Issuer**     | ** ** | **Subsidiaries(1)** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
| ** **                                             | ** ** | ** **      | ** ** | ** **     | ** ** | ** **          | ** ** | ** **        | ** ** | ** **       | ** ** |
| Net sales                                              |       | $               | —     |           | $          | 518,456             |       | $                 | 8,257      |             | $          | — |   | $ | 526,713 |   |
| Cost of sales                                          |       | —          |       | 326,497        |       | 5,305               |       | —            |       | 331,802          |       |
| Gross profit                                           |       | —          |       | 191,959        |       | 2,952               |       | —            |       | 194,911          |       |
|                                                   |       |            |       |           |       |                |       |              |       |             |       |
| Operating Expenses:                                    |       |            |       |           |       |                |       |              |       |             |       |
| Selling, general and administrative expenses           |       | —          |       | 160,470        |       | 2,348               |       | —            |       | 162,818          |       |
| Depreciation and amortization                          |       | —          |       | 8,697          |       | 329                 |       | —            |       | 9,026            |       |
| Equity earnings of subsidiaries                        |       | (15,244         | )          | (6,004         | )          | —              |       | 21,248            |       | —           |       |
| Total operating expense                                |       | (15,244         | )          | 163,163        |       | 2,677               |       | 21,248            |       | 171,844          |       |
| Operating income                                       |       | 15,244          |       | 28,796         |       | 275                 |       | (21,248           | )          | 23,067           |       |
|                                                   |       |            |       |           |       |                |       |              |       |             |       |
| Gain on extinguishment of debt, net                    |       | —          |       | 1,543          |       | —              |       | —            |       | 1,543            |       |
| Interest and other (expense) income, net               |       | —          |       | (11,134        | )          | 9,676               |       | (7,908            | )          | (9,366           | )          |
| Income before income taxes                             |       | 15,244          |       | 19,205         |       | 9,951               |       | (29,156           | )          | 15,244           |       |
| Income tax provision                                   |       | 5,900           |       | 2,582          |       | 3,318               |       | (5,900            | )          | 5,900            |       |
| Net income                                             |       | 9,344           |       | 16,623         |       | 6,633               |       | (23,256           | )          | 9,344            |       |
| Preferred stock dividends                              |       | —          |       | (46,894        | )          | —              |       | 46,894            |       | —           |       |
| Net income (loss) attributable to common  shareholders |       | $               | 9,344      |           | $          | (30,271             | )          | $                 | 6,633      |             | $          | 23,638 |   | $ | 9,344 |   |

 

----

(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

----

Tableof Contents

 

**CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS(UNAUDITED)**

**FOR THE SIX MONTHS ENDED JUNE 27, 2008**

**(in thousands)**

 
| ** **                                             | ** ** | **Parent**      | ** ** | ** **     | ** ** | ** **          | ** ** | ** **        | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|-----------------|------------|----------------|------------|---------------------|------------|-------------------|------------|------------------|------------|
| ** **                                             | ** ** | **Company**     | ** ** | **Subsidiary** | ** ** | **Guarantor**       | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
| ** **                                             | ** ** | **(Guarantor)** | ** ** | **Issuer**     | ** ** | **Subsidiaries(1)** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
| ** **                                             | ** ** | ** **      | ** ** | ** **     | ** ** | ** **          | ** ** | ** **        | ** ** | ** **       | ** ** |
| Net sales                                              |       | $               | —     |           | $          | 464,896             |       | $                 | 135,679    |             | $          | — |   | $ | 600,575 |   |
| Cost of sales                                          |       | —          |       | 289,854        |       | 84,871              |       | —            |       | 374,725          |       |
| Gross profit                                           |       | —          |       | 175,042        |       | 50,808              |       | —            |       | 225,850          |       |
|                                                   |       |            |       |           |       |                |       |              |       |             |       |
| Operating Expenses:                                    |       |            |       |           |       |                |       |              |       |             |       |
| Selling, general and administrative expenses           |       | —          |       | 144,613        |       | 28,985              |       | —            |       | 173,598          |       |
| Depreciation and amortization                          |       | —          |       | 6,653          |       | 1,328               |       | —            |       | 7,981            |       |
| Equity earnings of subsidiaries                        |       | (30,928         | )          | (8,960         | )          | —              |       | 39,888            |       | —           |       |
| Total operating expense                                |       | (30,928         | )          | 142,306        |       | 30,313              |       | 39,888            |       | 181,579          |       |
| Operating income                                       |       | 30,928          |       | 32,736         |       | 20,495              |       | (39,888           | )          | 44,271           |       |
|                                                   |       |            |       |           |       |                |       |              |       |             |       |
| Interest and other (expense) income, net               |       | —          |       | (11,010        | )          | (1,703              | )          | (630              | )          | (13,343          | )          |
| Income before income taxes                             |       | 30,928          |       | 21,726         |       | 18,792              |       | (40,518           | )          | 30,928           |       |
| Income tax provision                                   |       | 11,079          |       | 4,154          |       | 6,925               |       | (11,079           | )          | 11,079           |       |
| Net income                                             |       | 19,849          |       | 17,572         |       | 11,867              |       | (29,439           | )          | 19,849           |       |
| Preferred stock dividends                              |       | —          |       | (40,881        | )          | —              |       | 40,881            |       | —           |       |
| Net income (loss) attributable to common  shareholders |       | $               | 19,849     |           | $          | (23,309             | )          | $                 | 11,867     |             | $          | 11,442 |   | $ | 19,849 |   |

 

----

(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

----

Tableof Contents

 

**CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW(UNAUDITED)**

**FOR THE SIX MONTHS ENDED JUNE 26, 2009**

**(in thousands)**

 
| ** **                                                    | ** ** | **Parent**      | ** ** | ** **     | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** |
|---------------------------------------------------------------|------------|-----------------|------------|----------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                    | ** ** | **Company**     | ** ** | **Subsidiary** | ** ** | **Guarantor**    | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
| ** **                                                    | ** ** | **(Guarantor)** | ** ** | **Issuer**     | ** ** | **Subsidiaries** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
| ** **                                                    | ** ** | ** **      | ** ** | ** **     | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** |
| Net  cash provided by (used in) operating activities          |       | $               | —     |           | $          | 75,327           |       | $                 | (2,991     | )                | $          | — |   | $ | 72,336 |   |
| Cash  Flows from Investing Activities:                        |       |            |       |           |       |             |       |              |       |             |       |
| Purchase  of property and equipment, net                      |       | —          |       | (5,639         | )          | (49              | )          | —            |       | (5,688           | )          |
| Purchase  of businesses, net of cash acquired                 |       | —          |       | (381           | )          | —           |       | —            |       | (381             | )          |
| Other                                                         |       | —          |       | (2,736         | )          | —           |       | 2,736             |       | —           |       |
| Net  cash (used in) provided by investing activities          |       | —          |       | (8,756         | )          | (49              | )          | 2,736             |       | (6,069           | )          |
| Cash  Flows from Financing Activities:                        |       |            |       |           |       |             |       |              |       |             |       |
| Increase  in purchase card payable, net                       |       | —          |       | 726            |       | —           |       | —            |       | 726              |       |
| Repayment  of debt and capital lease obligations              |       | —          |       | (26,278        | )          | —           |       | —            |       | (26,278          | )          |
| Repayment  of 81/8% senior subordinated notes                 |       | —          |       | (34,157        | )          | —           |       | —            |       | (34,157          | )          |
| Other                                                         |       | —          |       | —         |       | 2,736            |       | (2,736            | )          | —           |       |
| Net  cash (used in) provided by financing activities          |       | —          |       | (59,709        | )          | 2,736            |       | (2,736            | )          | (59,709          | )          |
| Effect  of exchange rate changes on cash and cash equivalents |       | —          |       | 92             |       | —           |       | —            |       | 92               |       |
| Net  increase in cash and cash equivalents                    |       | —          |       | 6,954          |       | (304             | )          | —            |       | 6,650            |       |
| Cash  and cash equivalents at beginning of period             |       | —          |       | 62,293         |       | 431              |       | —            |       | 62,724           |       |
| Cash  and cash equivalents at end of period                   |       | $               | —     |           | $          | 69,247           |       | $                 | 127        |             | $          | — |   | $ | 69,374 |   |

 

18

----

Table of Contents

 

**CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW(UNAUDITED)**

**FOR THE SIX MONTHS ENDED JUNE 27, 2008**

**(in thousands)**

 
| ** **                                                    | ** ** | **Parent**      | ** ** | ** **     | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** |
|---------------------------------------------------------------|------------|-----------------|------------|----------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                    | ** ** | **Company**     | ** ** | **Subsidiary** | ** ** | **Guarantor**    | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
| ** **                                                    | ** ** | **(Guarantor)** | ** ** | **Issuer**     | ** ** | **Subsidiaries** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
| ** **                                                    | ** ** | ** **      | ** ** | ** **     | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** |
| Net  cash provided by (used in) operating activities          |       | $               | —     |           | $          | 35,598           |       | $                 | (9,984     | )                | $          | 1,560 |   | $ | 27,174 |   |
| Cash  Flows from Investing Activities:                        |       |            |       |           |       |             |       |              |       |             |       |
| Purchase  of property and equipment, net                      |       | —          |       | (12,782        | )          | (758             | )          | —            |       | (13,540          | )          |
| Purchase  of short-term investments                           |       | —          |       | (35,531        | )          | —           |       | —            |       | (35,531          | )          |
| Proceeds  from sales and maturities of short-term investments |       | —          |       | 80,121         |       | —           |       | —            |       | 80,121           |       |
| Purchase  of businesses, net of cash acquired                 |       | —          |       | (528           | )          | (8               | )          | —            |       | (536             | )          |
| Other                                                         |       | —          |       | (10,775        | )          | —           |       | 10,775            |       | —           |       |
| Net  cash provided by (used in) investing activities          |       | —          |       | 20,505         |       | (766             | )          | 10,775            |       | 30,514           |       |
| Cash  Flows from Financing Activities:                        |       |            |       |           |       |             |       |              |       |             |       |
| Decrease  in purchase card payable, net                       |       | —          |       | (643           | )          | —           |       | —            |       | (643             | )          |
| Repayment  of debt and capital lease obligations              |       | —          |       | (2,251         | )          | (7               | )          | —            |       | (2,258           | )          |
| Other                                                         |       | —          |       | (39            | )          | 10,775           |       | (10,775           | )          | (39              | )          |
| Net  cash (used in) provided by financing activities          |       | —          |       | (2,933         | )          | 10,768           |       | (10,775           | )          | (2,940           | )          |
| Effect  of exchange rate changes on cash and cash equivalents |       | —          |       | (40            | )          | —           |       | —            |       | (40              | )          |
| Net  increase in cash and cash equivalents                    |       | —          |       | 53,130         |       | 18               |       | 1,560             |       | 54,708           |       |
| Cash  and cash equivalents at beginning of period             |       | —          |       | 7,564          |       | 18               |       | (2,607            | )          | 4,975            |       |
| Cash  and cash equivalents at end of period                   |       | $               | —     |           | $          | 60,694           |       | $                 | 36         |             | $          | (1,047 | ) | $ | 59,683 |   |

 

19

----

Tableof 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-LookingStatements**

 

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 due tomarket 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 systems disruptionsand 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 and successfullyintegrate 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.

 

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

 

20

----

Table of Contents

 

**Overview**

 

We are a leading national distributor and direct marketer ofmaintenance, repair and operations (“MRO”) products. We have one operatingsegment, the distribution of MRO products. We stock approximately 100,000 MROproducts in the following categories: plumbing, janitorial and sanitary,electrical, lighting, hardware, security, heating, ventilation and airconditioning and other miscellaneous products. Our products are primarily usedfor the repair, maintenance, remodeling and refurbishment of properties andnon-industrial facilities. We are able to realize high margins by focusing onrepair, maintenance, remodeling and refurbishment customers, who generally makesmaller, more frequent purchases and require high levels of service. Ourdiverse customer base includes facilities maintenance customers, which consistof multi-family housing facilities, educational institutions, lodging andhealth care facilities, government properties and building service contractors;professional contractors who are primarily involved in the repair, remodelingand construction of residential and non-industrial facilities; and specialtydistributors, including plumbing and hardware retailers. Our customers range insize from individual contractors and independent hardware stores to apartmentmanagement companies and national purchasing groups.

 

We market and sell our products primarily through twelve distinct andtargeted brands, each of which is nationally recognized in the markets we servefor providing premium products at competitive prices with reliable same-dayand/or next-day delivery. Our Wilmar, AmSan, Sexauer, Maintenance USA andTrayco brands generally serve our facilities maintenance customers; ourBarnett, Copperfield, U.S. Lock, Sun Star and Leran brands generally serve ourprofessional contractor customers; and our Hardware Express and AF Lightingbrands generally serve our specialty distributors customers. Our multi-brandoperating model, which we believe is unique in the industry, allows us to use asingle platform to deliver tailored products and services to meet theindividual needs of each respective customer group served. We reach our marketsusing a variety of sales channels, including a sales force of over 600 fieldsales representatives and over 350 telesales and customer servicerepresentatives, a direct marketing program of approximately five millionpieces annually, brand-specific websites and a national accounts sales program.We deliver our products through our network of two national distributioncenters (“NDCs”), 61 regional distribution centers, 22 professional contractorshowrooms located throughout the United States and Canada, 26 vendor-managedinventory locations at large customer locations and a dedicated fleet oftrucks. Our broad distribution network allows us the ability to providereliable, next-day delivery service to at least 98% of the U.S. population andsame-day delivery service to most major metropolitan markets.

 

Our information technology and logistics platform supports our majorbusiness functions, allowing us to market and sell our products at varyingprice points depending on the customer’s service requirements. While we marketour products under a variety of branded catalogs, generally our brands drawfrom the same inventory within common distribution centers and share associatedemployee and transportation costs. In addition, we have centralized marketing,purchasing and catalog production operations to support our brands. We believethat our information technology and logistics platform also benefits ourcustomers by allowing us to offer a broad product selection at highlycompetitive prices while maintaining the unique customer appeal of each of ourtargeted brands. Overall, our common operating platform has enabled us toimprove customer service, maintain lower operating costs, efficiently manageworking capital and support our growth initiatives.

 

21

----

Table of Contents

 

**Resultsof Operations**

 

Thefollowing table presents information derived from the condensed consolidatedstatements of earnings expressed as a percentage of revenues for the three andsix months ended June 26, 2009 and June 27, 2008:

 
| ** **                                   | ** ** | **%  of Net Sales**     | ** ** | **%  Increase**   | ** ** | **%  of Net Sales**   | ** ** | **%  Increase**   | ** ** |
|----------------------------------------------|------------|-------------------------|------------|-------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                   | ** ** | **Three  Months Ended** | ** ** | **(Decrease)**    | ** ** | **Six  Months Ended** | ** ** | **(Decrease)**    | ** ** |
| ** **                                   | ** ** | **June 26,**       | ** ** | **June 27,** | ** ** | **2009**              | ** ** | **June 26,** | ** ** | **June 27,** | ** ** | **2009** | ** ** |
| ** **                                   | ** ** | **2009**                | ** ** | **2008**          | ** ** | **vs.  2008 (1)**     | ** ** | **2009**          | ** ** | **2008** | ** ** | **vs.  2008 (1)** | ** ** |
|                                         |       |                    |       |              |       |                  |       |              |       |   |   |   |   |
| Net sales                                    |       | 100.0                   | %          | 100.0             | %          | (13.3                 | )%         | 100.0             | %          | 100.0 | % | (12.3 | )% |
| Cost of sales                                |       | 63.6                    |       | 62.8              |       | (12.3                 | )          | 63.0              |       | 62.4 |   | (11.5 | ) |
| Gross profit                                 |       | 36.4                    |       | 37.2              |       | (15.1                 | )          | 37.0              |       | 37.6 |   | (13.7 | ) |
|                                         |       |                    |       |              |       |                  |       |              |       |   |   |   |   |
| Operating Expenses:                          |       |                    |       |              |       |                  |       |              |       |   |   |   |   |
| Selling, general and administrative expenses |       | 29.2                    |       | 28.4              |       | (10.9                 | )          | 30.9              |       | 28.9 |   | (6.2 | ) |
| Depreciation and amortization                |       | 1.6                     |       | 1.3               |       | 7.1                   |       | 1.7               |       | 1.3 |   | 13.1 |   |
| Total operating expense                      |       | 30.9                    |       | 29.8              |       | (10.1                 | )          | 32.6              |       | 30.2 |   | (5.4 | ) |
| Operating income                             |       | 5.6                     |       | 7.4               |       | (35.0                 | )          | 4.4               |       | 7.4 |   | (47.9 | ) |
|                                         |       |                    |       |              |       |                  |       |              |       |   |   |   |   |
| (Loss) Gain on extinguishment of debt, net   |       | (0.1                    | )          | —            |       | (100.0                | )          | 0.3               |       | — |   | 100.0 |   |
| Interest expense                             |       | (1.7                    | )          | (2.2              | )          | (32.7                 | )          | (1.9              | )          | (2.5 | ) | (31.5 | ) |
| Interest income and other income             |       | 0.2                     |       | 0.2               |       | (37.9                 | )          | 0.1               |       | 0.2 |   | (48.0 | ) |
| Income before income taxes                   |       | 3.9                     |       | 5.4               |       | (37.1                 | )          | 2.9               |       | 5.1 |   | (50.7 | ) |
| Income tax provision                         |       | (1.5                    | )          | (1.8              | )          | (26.5                 | )          | (1.1              | )          | (1.8 | ) | (46.7 | ) |
| Net income                                   |       | 2.4                     | %          | 3.6               | %          | (42.5                 | )%         | 1.8               | %          | 3.3 | % | (52.9 | )% |

 

----

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

 

*Overview.*During the three months ended June 26,2009, our sales declined 13.3%. We believe this decline is associated with thewidely reported general economic downturn and credit crisis. Demand fromcustomers in our facilities maintenance end-markets, which make up 74% of ourtotal sales and includes residential multi-family housing and institutional MROcustomers, declined 7.8% during the second quarter of 2009 compared to thesecond quarter of 2008. Demand from our professional contractor and specialtydistributor customers, which represent 16% and 10% of our total sales,respectively, declined 28.4% and 20.6%, respectively. Demand from thesecustomers continues to be impacted by the prolonged declines in residential newconstruction activity and renovations activity.

 

Net income as a percentage of sales was 2.4% in thesecond quarter compared to 3.6% in the comparable prior year period. Thedecline in net income is primarily a result of lower sales, lower grossmargins, severance and distribution center closing costs associated with ourpreviously discussed operational initiatives, such as headcount reductions,consolidation of certain distribution centers and closing of underperformingprofessional contractor centers as well as higher fixed costs as a percent ofsales, such as rent expense and other occupancy costs, driven by our Auburn,Massachusetts, and Richmond, Virginia distribution center consolidations andour new NDC in Salt Lake City, Utah, which opened during the third quarter of2008. These costs were offset in part by lower interest expense associated withlower debt balances and a lower interest rate environment as well as the costsavings derived from the closing of underperforming professional contractorcenters in 2008 and the consolidation of certain distribution centers asmentioned above.

 

We are continuing to focus on lowering our operatingcosts in the near term while continuing to invest in our operating platform forthe long term. Accordingly, in addition to the operational initiatives such asheadcount reductions, the closing of underperforming professional contractorshowrooms and the consolidation of distribution centers, some of which havebeen completed, our plans include continued investments in informationtechnology solutions to optimize customer service.

 

22

----

Table of Contents

 

*Three Months Ended June 26, 2009 Compared to ThreeMonths Ended June 27, 2008*

 

*Net Sales.*Our net sales decreased by $41.5 million, or13.3%, to $269.9 million in the three months ended June 26, 2009 from$311.4 million in the three months ended June 27, 2008. The declinein sales resulted from the net impact of a 7.8% decrease in sales to ourfacilities maintenance customers and a continued decline in sales to ourprofessional contractor and specialty distributor customers of 28.4% and 20.6%,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 $17.5 million, or 15.1%, to $98.3 million in thethree months ended June 26, 2009 from $115.8 million in the threemonths ended June 27, 2008 as a direct result of the decrease in sales.Our gross profit margin decreased 80 basis points to 36.4% for the three monthsended June 26, 2009 compared to 37.2% for the three months ended June 27,2008. The decrease in gross margin is primarily due to heightened competitionassociated with the decrease in sales demand and a shift in sales mix acrossvarious product categories.

 

*Selling, General and Administrative Expenses.*SG&A expenses decreased by $9.7 million,or 10.9%, to $78.9 million in the three months ended June 26, 2009from $88.6 million in the three months ended June 27, 2008. As a percentof sales, SG&A increased to 29.2% for the three months ended June 26,2009 compared to 28.4% for the three months ended June 27, 2008. Theincrease in SG&A expenses as a percent of sales is primarily due to $2.1million in severance and distribution center closing costs associated with ourpreviously discussed operational initiatives, such as headcount reductions,consolidation of certain distribution centers and closing of underperformingprofessional contractor centers. These costs were offset by the cost savingsderived from the reduction in workforce in the fourth quarter of 2008 and thefirst quarter of 2009, the closing of underperforming professional contractorcenters and the consolidation of certain distribution centers during the lastsix months of 2008 and the first six months of 2009 and various efforts aimedat controlling variable costs.

 

*Depreciationand Amortization.*Depreciation and amortization expense increased by$0.3 million to $4.4 million in the three months ended June 26, 2009from $4.1million in the three months ended June 27, 2008. As a percentageof sales, depreciation and amortization was 1.6% or 30 basis points higher thanthe 1.3% in the comparable prior year period. These increases were due tohigher depreciation resulting from our 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 $8.1 million, or 35.0%,to $15.0 million in the three months ended June 26, 2009 from $23.1million in the three months ended June 27, 2008. As a percent of sales,operating income decreased to 5.6% in the three months ended June 26, 2009compared to 7.4% in the three months ended June 27, 2008.

 

*Loss onExtinguishment of Debt*. Loss on extinguishment of debt was $0.2 million in thethree months ended June 26, 2009. During the three months ended June 26,2009, we repaid $20.0 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 June 27, 2008.

 

*InterestExpense.*Interestexpense decreased by $2.3 million in the three months ended June 26, 2009to $4.7 million from $7.0 million in the three months ended June 27,2008. This decrease was primarily due to lower debt balances outstandingassociated with the repayments of our term loan and the repurchase of our 81/8% senior subordinated notes and lower interest rates.

 

*Interest andOther Income.*Interest and other income decreased $0.3 million to $0.4 million in the threemonths ended June 26, 2009 compared to $0.7 million in the three monthsended June 27, 2008. The decrease was primarily attributable to lowerinterest income earned resulting from lower interest rates and lower short-terminvestment balances.

 

*Provisionfor Income Taxes.*Theeffective tax rate for the three months ended June 26, 2009 was 39.2% comparedto 33.5% for the three months ended June 27, 2008. The increase in theeffective tax rate was primarily due to the decrease in a liability associatedwith previously unrecognized tax benefits partially offset by an increase instate taxes. During the three months ended June 27, 2008,we obtainedresolutions related to the uncertain state tax positions that we took for twostates and determined that we no longer needed the full amount of the accrualsthat we had established. As such, we made the appropriate adjustments, of which$0.8 million favorably impacted our effective tax rate for the three-monthperiod ended June 27, 2008.

 

23

----

Table of Contents

 

*Six Months Ended June 26, 2009 Compared to Six MonthsEnded June 27, 2008*

 

*Net Sales.*Our net sales decreased by $73.9 million, or12.3%, to $526.7 million in the six months ended June 26, 2009 from$600.6 million in the six months ended June 27, 2008. The decline insales resulted from the net impact of a 7.4% decrease in sales to ourfacilities maintenance customers and a continued decline in sales to ourprofessional contractor and specialty distributor customers of 26.0% and 17.4%,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 $30.9 million, or 13.7%, to $194.9 million in thesix months ended June 26, 2009 from $225.9 million in the six monthsended June 27, 2008 as a direct result of the decrease in sales. Our grossprofit margin decreased 60 basis points to 37.0% for the six months ended June 26,2009 compared to 37.6% for the six months ended June 27, 2008. Thedecrease in gross margin is primarily due to heightened competition associated withthe decrease in sales demand and a shift in sales mix across various productcategories.

 

*Selling, General and Administrative Expenses.*SG&A expenses decreased by $10.8million, or 6.2%, to $162.8 million in the six months ended June 26,2009 from $173.6 million in the six months ended June 27, 2008. As apercent of sales, SG&A increased to 30.9% for the six months ended June 26,2009 compared to 28.9% for the six months ended June 27, 2008. Theincrease in SG&A expenses as a percent of sales is primarily due to $4.1million in increased bad debt expense primarily associated with a customerseeking Chapter 11 bankruptcy protection in March, $4.5 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 professionalcontractor centersand the write-off of $0.7 million in deferred acquisition costs due to theadoption of Financial Accounting Standard Board (“FASB”) Statement No. 141(revised 2007), *Business Combinations*, (“FAS 141R”). We haveincreased our accounts receivable reserve to adjust for higher levels of riskin our portfolio stemming from an unprecedented market environment. These costswere partially offset by the cost savings derived from the reduction inworkforce in the fourth quarter of 2008 and the first quarter of 2009, theclosing of underperforming professional contractor centers and theconsolidation of certain distribution centers during the last six months of2008 and the first six months of 2009 and various efforts aimed at controllingvariable costs.

 

*Depreciationand Amortization.*Depreciation and amortization expense increased by$1.0 million to $9.0 million in the six months ended June 26, 2009from $8.0 million in the six months ended June 27, 2008. As a percentageof sales, depreciation and amortization was 1.7% or 40 basis points higher thanthe 1.3% in the comparable prior year period. These increases were due tohigher depreciation resulting from our 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 $21.2 million, or 47.9%,to $23.1 million in the six months ended June 26, 2009 from $44.3million in the six months ended June 27, 2008. As a percent of sales,operating income decreased to 4.4% in the six months ended June 26, 2009compared to 7.4% in the six months ended June 27, 2008.

 

*Gain onExtinguishment of Debt*. Gain on extinguishment of debt was $1.5 million in the sixmonths ended June 26, 2009. During the six months ended June 26,2009, 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 $25.2million of our term loan ahead of schedule. In connection with the repurchaseof our 81/8% senior subordinated notes and the term loan payment, werecorded a gain on extinguishment of debt of $1.5 million net of $0.1 millionand $0.6 million in original issue discount and deferred financing costswritten-off, respectively. We did notextinguish debt in the six months ended June 27, 2008.

 

*InterestExpense.*Interestexpense decreased by $4.7 million in the six months ended June 26, 2009 to$10.1 million from $14.7 million in the six months ended June 27,2008. This decrease was primarily due to lower debt balances outstandingassociated with the repayment of our term loan and the repurchase of our 81/8% senior subordinated notes and lower interest rates.

 

*Interest andOther Income.*Interest and other income decreased $0.7 million to $0.7 million in the sixmonths ended June 26, 2009 compared to $1.4 million in the six monthsended June 27, 2008. The decrease was primarily attributable to lowerinterest income earned resulting from lower interest rates and lower short-terminvestment balances.

 

*Provisionfor Income Taxes.*Theeffective tax rate for the six months ended June 26, 2009 was 38.7%compared to 35.8% for the six months ended June 27, 2008. The increase inthe effective tax rate was primarily due to the decrease in a liabilityassociated with previously unrecognized tax benefits partially offset by anincrease in state taxes. During the six months ended June 26, 2009 and

 

24

----

Table of Contents

 

June 27,2008, we obtainedresolution related to uncertain state tax positions and accordingly we adjustedthe accrual previously established. As such, we made the appropriateadjustments, of which $0.1 million and $0.8 million favorably impacted oureffective tax rate for the six months ended June 26, 2009 and June 27,2008, 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 June 26, 2009,the 81/8%senior subordinated notes had an estimated fair market value of $147.7 millionor 98% 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 June 26, 2009, Interline New Jersey had $10.2 millionof letters of credit issued under the revolving loan facility and$189.2 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 $47.5 million to $306.7million as of June 26, 2009 from $354.2 million as of December 26,2008. The decrease in working capital was primarily used to generate cash flowsfrom operating activities and pay down debt.

 

*Cash Flow*

 

*OperatingActivities.* Netcash provided by operating activities was $72.3 million in the six monthsended June 26, 2009 compared to net cash provided by operating activitiesof $27.2 million in the six months ended June 27, 2008.

 

Net cash provided byoperating activities of $72.3 million in the six months ended June 26,2009 primarily consisted of net income of $9.3 million, adjustments fornon-cash items of $19.7 million and cash provided by working capital items of$43.6 million. Adjustments for non-cash items primarily consisted of $9.3million in depreciation and amortization of property, equipment and intangibleassets, $6.3 million in bad debt expense, $2.0 million in share-basedcompensation, $2.3 million in deferred income taxes, $0.6 million inamortization of debt issuance costs and the write-off of $0.7 million indeferred acquisition costs due to the adoption of FAS 141R offset by $1.5million in net gain from the repurchase of $36.4 million of our 81/8% seniorsubordinated notes and the repayment of $25.2 million of our term debt. Thecash provided by working capital items primarily consisted of $27.4 millionfrom increased trade payables balances as a result of the timing of purchasesand related payments, $12.8 million from decreased inventory levels as a resultof decreased purchases associated with lower demand, $4.0 million from accruedexpenses arising primarily from severance and distribution center closing costsassociated with our previously discussed operational initiatives, such asheadcount reductions, consolidation of certain distribution centers and closing ofunderperforming professional contractor centers, $2.7 million 

 

25

----

Table of Contents

 

from decreased prepaidexpenses and other current assets primarily from the collection of rebates fromvendors and $2.0 million from the increase in income taxes. These items werepartially offset by $4.7 million in lower trade receivables resulting fromincreased collections and the decline in sales and $0.7 million from accruedinterest.

 

Net cash provided byoperating activities of $27.2 million in the six months ended June 27,2008 primarily consisted of net income of $19.8 million and adjustments fornon-cash items of $12.4 million offset cash provided by working capital itemsof $5.2 million. Adjustments for non-cash items primarily consisted of $8.2million in depreciation and amortization of property, equipment and intangibleassets, $2.4 million in share-based compensation, $2.3 million in bad debtexpense and $0.6 million in amortization of debt issuance costs offset by $1.0million in deferred income taxes. The cash provided by working capital itemsprimarily consisted of $31.1 million from increased trade payables balances asa result of increased inventory levels and the timing of purchases and relatedpayments, $1.7 million from decreased prepaid expenses and other current assetsprimarily from the collection of rebates from vendors and $0.8 million from theincrease in income taxes. These items were partially offset by $15.5 million inhigher trade receivables resulting from increase in sales, $19.5 millionincreased inventory levels to stock $7.0 million of inventory in our west coastNDC in Salt Lake City, Utah, and temporarily increase general inventory levelsby another $9.2 million to prepare for the busier summer months as well asprepare against the possibility of a potential west coast port strike, and $3.8million from decreased accrued expenses and other current liabilities primarilyfrom lower accrued compensation and related benefits at period-end.

 

*Investing Activities.* Net cash used in investingactivities was $6.1 million in the six months ended June 26, 2009 comparedto net cash provided by investing activities of $30.5 million in the six monthsended June 27, 2008.

 

Net cash used in investingactivities in the six months ended June 26, 2009 was primarily attributable to capitalexpenditures made in the ordinary course of business of $5.7 million and $0.4million in costs related to purchases of businesses, net of cash acquired.

 

Net cash provided byinvesting activities in the six months ended June 27, 2008 wasattributable to net proceeds from sales and maturities of short-terminvestments of $44.6 million offset by capital expenditures made in theordinary course of business of $13.5 million and $0.5 million in costs related to purchases ofbusinesses, net of cash acquired.

 

*Financing Activities.* Net cash used in financing activitiestotaled $59.7 million in the six months ended June 26, 2009 comparedto net cash used in financing activities of $2.9 million in the six monthsended June 27, 2008.

 

Net cash used in financing activities in the sixmonths ended June 26, 2009 was attributable to our repurchase of $36.4million of our 81/8%senior subordinated notes at an average of 93.8% of par, or $34.2 million andour repayment of $26.3 million of borrowings on our credit facility and capitallease obligations offset by the net increase in purchase card payable of $0.7million.

 

Net cash used in financing activities in the sixmonths ended June 27, 2008 was attributable to our repayment of $2.3million of borrowings on our credit facility and capital lease obligations, thenet decrease in purchase card payable of $0.6 million and $0.8 million intreasury stock acquired via payments to satisfy minimum statutory tax withholdingrequirements offset by $0.7 million of proceeds from stock options exercisedand excess tax benefits from share-based compensation.

 

*CapitalExpenditures*

 

Capitalexpenditures were $5.7 million in the six months ended June 26, 2009compared to $13.5 million in the six months ended June 27, 2008. In addition,during the six months ended June 26, 2009, we acquired $3.0 million ofproperty through lease incentives. Capital expenditures as a percentage of sales were1.1% in the six months ended June 26, 2009 compared to 2.3% in the sixmonths ended June 27, 2008. The decrease in capital expenditures is theresult of the higher than normal levels of capital expenditures incurred duringthe six months ended June 27, 2008 to upgrade our telecommunicationsnetwork, the expansion of our distribution center network, the purchase ofwarehouse equipment and investments in our information technology systemsnecessary for the integration of our AmSan acquisition.

 

*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 1.50% or at the alternate base rate plus 0.50%. As of June 26,2009, the interest rate in effect with respect to the term loan and the delayeddraw facility was 2.01% for the LIBOR option and 4.00% for the alternate baserate option. Outstanding letters of credit under the revolving credit facilityare subject to a per annum fee equal to the applicable margin under therevolving credit facility. The interest rate margin 

 

26

----

Table of Contents

 

issubject to pricing adjustments at the end of each fiscal quarter based on nettotal indebtedness to consolidated earnings before interest, taxes,depreciation and amortization (“EBITDA”), as defined by the credit facility.The term loan and the delayed draw facility mature on June 23, 2013 andthe revolving loan facility matures on June 23, 2012. Amounts under theterm loan and the delayed draw facility are due and payable in quarterlyinstallments equal to 1.0% of the original principal amount on an annual basisthrough June 23, 2013, with the balance payable in one final installmentat the maturity date.

 

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. Interline New Jersey andthe Company were in compliance with all covenants at June 26, 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 June 26, 2009, we had $26.0 million of availabilityunder Interline New Jersey’s $100.0 million revolving credit facilityafter the limitation under the bank credit facility’s ratio of net totalindebtedness 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 current revolver commitment to $83.0 million. Also as of June 26,2009, we had $69.4 million of total cash on hand (including $25.0 million to benetted against debt for purposes of covenant compliance).

 

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 $25.2 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. The following table setsforth our contractual obligations with respect to our 81/8% senior subordinated notes and term debt as of June 26, 2009 (inthousands):

 
| ** **                       | ** ** | ** ** | ** ** | **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                        |       | 189,225    |       | —         |       | —     |       | 189,225    |       | —       |       |
|                             |       | $          | 339,906    |           | $          | —     |       | $          | —     |         | $          | 339,906 |   | $ | — |   |

 

27

----

Table of Contents

 

**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 June 26,2009, there were no significant changes to any of our critical accountingpolicies.

 

**Recently Adopted Accounting Standards**

 

Effective December 27, 2008, we adopted FASBStaff Position 157-2, *Effective Date of FASBStatement No. 157*, (“FSP157-2”). FSP 157-2 amends FASB Statement No. 157, *Fair ValueMeasurements,* (“FAS 157”) to defer the effective date of FAS 157 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 FSP 157-2did not have any impact on our financial position, results of operations andcash flows.

 

EffectiveDecember 27, 2008, we adopted FASB Statement No. 141(revised 2007), *Business Combinations*, (“FAS 141R”),which replaces FASB Statement No. 141, *Business Combinations*.FAS 141R establishes principles and requirements for how an acquirerrecognizes and measures in its financial statements the identifiable assetsacquired, the liabilities assumed, any noncontrolling interest in the acquireeand the goodwill acquired. FAS 141R also establishes disclosure requirementsthat will enable users to evaluate the nature and financial effects of thebusiness combination. As a result of the adoption of, and in accordance withFAS 141R, we expensed $0.7 million in deferred acquisition costs during thethree months ended March 27, 2009, which are included as part of selling,general and administrative expense.

 

Effective December 27, 2008,we adopted FASBStatement No. 160, *Noncontrolling Interestsin Consolidated Financial Statements—an amendment of ARB No. 51*,(“FAS 160”). FAS 160 establishes accounting and reporting standards forownership interests in subsidiaries held by parties other than the parent, theamount of consolidated net income attributable to the parent and to thenoncontrolling interest, changes in a parent’s ownership interest, and thevaluation of retained noncontrolling equity investments when a subsidiary isdeconsolidated. FAS 160 also establishes disclosure requirements that clearlyidentify and distinguish between the interests of the parent and the interestsof the noncontrolling owners. FAS 160 applies to all entities that prepareconsolidated financial statements, except not-for-profit organizations, butwill affect only those entities that have an outstanding noncontrollinginterest in one or more subsidiaries or that deconsolidate asubsidiary. The adoption of FAS 160 did not have any impact on ourfinancial position, results of operations and cash flows.

 

EffectiveDecember 27, 2008, we adopted FASB Statement No. 161, *Disclosures about Derivative Instruments and Hedging Activities*,(“FAS 161”). FAS 161 is intended to improve financial reporting aboutderivative instruments and hedging activities by requiring enhanced disclosuresto enable investors to better understand their effects on an entity’s financialposition, financial performance, and cash flows. The adoption of FAS 161 didnot have any impact on our financial position, results of operations and cashflows.

 

Effective December 27, 2008, we adopted FASBStatement No. 162, *The Hierarchy of GenerallyAccepted Accounting Principles*, (“FAS 162”). FAS 162 isintended to improve financial reporting by identifying a consistent framework,or hierarchy, for selecting accounting principles to be used in preparingfinancial statements that are presented in conformity with generally acceptedaccounting principles (“GAAP”) for nongovernmental entities in the UnitedStates. The adoption of FAS 162 did not have any impact on our financialposition, results of operations and cash flows.

 

In April 2009, the FASB issued FASB StaffPosition No. FAS 107-1 and APB 28-1, *Interim Disclosures aboutFair Value of Financial Instruments*, (“FSP 107-1”). FSP 107-1extends the disclosure requirements regarding the fair value of financialinstruments under FAS 107, *Disclosures about FairValue of Financial Instruments*, to interim financial statements ofpublicly traded companies. We adopted the provisions of FSP 107-1 for theinterim period ended June 26, 2009. The adoption of FSP 107-1 did not haveany impact on our financial position, results of operations and cash flows.

 

28

----

Table of Contents

 

In May 2009, the FASB issued FASB Statement No. 165,*Subsequent Events*, (“FAS 165”). FAS 165establishes general standards of accounting for and disclosure of events thatoccur after the balance sheet date but before the financial statements areissued or are available to be issued. FAS 165 sets forth the period after thebalance sheet date during which management should evaluate events ortransactions that may occur for potential recognition or disclosure in thefinancial statements; the circumstances under which an entity should recognizeevents or transactions occurring after the balance sheet date in its financialstatements; and the disclosures that an entity should make about events ortransactions that occurred after the balance sheet date. FAS 165 also requiresdisclosure of the date through which an entity has evaluated subsequent events.We adopted the provisions of FAS 165 for the interim period ended June 26,2009. The adoption of FAS 165 did not have any impact on our financialposition, results of operations and cash flows.

 

**Accounting Standards Not Yet Adopted**

 

In June 2009, the FASBissued FASB Statement No. 168, *The FASB AccountingStandards CodificationTM and the Hierarchy of Generally Accepted AccountingPrinciples — a replacement of FASB Statement No. 162*, (“FAS 168”).FAS 168 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 will exist, other than guidance issued by the SEC. Allother accounting literature excluded from the Codification will be considerednon-authoritative. While not intended to change US GAAP, the Codification significantlychanges the way in which the accounting literature is organized. It isstructured by accounting topic to help accountants and auditors more quicklyidentify the guidance that applies to a specific accounting issue. We do notexpect the adoption of the provisions of FAS 168 to have a material impact onour financial position, results of operations or cash flows. However, becausethe Codification completely replaces existing standards, it will affect the wayUS GAAP is referenced by us in our financial statements and accountingpolicies.

 

**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, resultingin a decrease in gross margins and profit.

 

*InterestRate Risk*

 

Our variable rate term debt is sensitive to changes inthe general level of interest rates. As of June 26, 2009, the interestrate in effect with respect to our $189.2 million variable rate term debt was2.01% for the LIBOR option and 4.00% for the alternate base rate option. Whileour variable rate term debt obligations expose us to the risk of risinginterest rates, we do not believe that the potential exposure is material toour overall financial performance or results of operations. Based on theoutstanding variable rate term debt as of June 26, 2009, a 1.0% annualincrease or decrease in current market interest rates would have the effect ofcausing a $0.9 million pre-tax change to our statement of operations for thesix months ended June 26, 2009.

 

The fair market value of ourfixed rate debt is subject to interest rate risk. As of June 26, 2009, thefair market value of our $150.7 million 81/8% senior subordinated notes was approximately $147.7 million or98% of par.

 

*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 June 26, 2009.

 

29

----

Table of Contents

 

*DerivativeFinancial Instruments*

 

As of June 26, 2009, we did not have any interestrate 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 in interestrates on our debt. Under our former swap agreements, we paid a fixed rate onthe notional amount to our banks and the banks paid us a variable rate on thenotional 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 June 26, 2009. Based on this evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that, as of June 26,2009, 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 June 26, 2009 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol 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*

 

None.

 

**ITEM 3. Defaults Upon Senior Securities**

 

None.

 

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

 

Our 2009 Annual Meeting ofShareholders (the “2009 Annual Meeting”) was held on Thursday, May 9,2009. The matters submitted to our shareholders for approval at the 2009 AnnualMeeting included (1) the election of three Class II members ofthe Board of Directors for a term of three years; and (2) a proposalto ratify the selection of Deloitte & Touche, LLP as independentregistered public accounting firm for the fiscal year ending December 25,2009.

 

As of March 10, 2009, therecord date for the 2009 Annual Meeting, there were 32,561,360 shares issued,32,449,946 shares outstanding and 32,430,746 shares entitled to vote at the2008 Annual Meeting. There were 30,495,942 shares present in person or byproxy, which constitutes approximately 94 percent of the shares entitled tovote at the 2009 Annual Meeting.

 

The tabulation of the votespresent in person or by proxy at the 2009 Annual Meeting with respect to theabove matters was as follows:

 

*DirectorElections*

 
| **Nominee**         | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|---------------------|------------|------------|------------|--------------|------------|
| Barry  J. Goldstein |       | 11,838,816 |       | 18,657,126   |       |
| Charles  W. Santoro |       | 11,840,969 |       | 18,654,973   |       |
| Drew  T. Sawyer     |       | 11,826,983 |       | 18,668,959   |       |

 

The nominees for election tothe board were elected to serve until the annual meeting in 2012, and untiltheir respective successors are elected and qualified.

 

Those directors whose term ofoffice continued after the Annual Meeting were as follows: Gideon Argov,Michael E. DeDomenico, John J. Gavin, Ernest K. Jacquet and Michael J. Grebe.

 

31

----

Table of Contents

 

*Approval toratify the selection of Deloitte & Touche LLP*

 
| **For**    | ** ** | **Against** | ** ** | **Abstained** | ** ** |
|------------|------------|-------------|------------|---------------|------------|
| 30,376,409 |       | 106,764     |       | 12,768        |       |

 

**ITEM 5. Other Information**

 

None.

 

**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: August 3,  2009 | By:                         | /S/ THOMAS J.  TOSSAVAINEN |
|                       |                        | Thomas J. Tossavainen |
|                       |                        | Chief Financial Officer |
|                       |                        | (Duly Authorized  Signatory, Principal Financial and Accounting Officer) |

 

33

----