Table of Contents

 

 

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

**x  QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended June 25, 2010**

 

**or**

 

**o  TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from                to               **

 

**Commission File Number: 001-32380**

 

**INTERLINE BRANDS, INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                    | ** ** | **03-0542659**      |
|---------------------------------|------------|---------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer    |
| incorporation or organization)  |       | Identification No.) |

 

| **701 San Marco Boulevard**              |       |       |
|------------------------------------------|------------|------------|
| **Jacksonville, Florida**                | ** ** | **32207**  |
| (Address of principal executive offices) |       | (Zip code) |

** **

**(904) 421-1400**

(Registrant’s telephone number, including area code)

 

**Not Applicable**

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

 

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

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files).  Yes o  No o

 

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

 

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

 

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

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date. As of July 30,2010, there were 33,004,911 shares of the registrant’s common stock outstanding(excluding 122,300 shares held in treasury), par value $0.01.

 

 

 

----

Table of Contents

 

**TABLE OFCONTENTS**

 
| **ITEM**                            | ** ** | ** **                                                                                                                   | **PAGE** |
|-------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------|----------|
|                                |       |                                                                                                                         |     |
| PART I.  FINANCIAL INFORMATION |       |
|                                |       |                                                                                                                         |     |
| 1.                                  |       | Financial  Statements (Unaudited)                                                                                            |     |
|                                |       | Condensed  Consolidated Balance Sheets as of June 25, 2010 and December 25,  2009                                  | 1        |
|                                |       | Condensed  Consolidated Statements of Earnings for the Three and Six Months Ended  June 25, 2010 and June 26, 2009 | 2        |
|                                |       | Condensed  Consolidated Statements of Cash Flows for the Six Months Ended June 25,  2010 and June 26, 2009         | 3        |
|                                |       | Notes to  Condensed Consolidated Financial Statements                                                                        | 4        |
| 2.                                  |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                  | 19       |
| 3.                                  |       | Quantitative  and Qualitative Disclosures about Market Risk                                                                  | 26       |
| 4.                                  |       | Controls and  Procedures                                                                                                     | 27       |
|                                |       |                                                                                                                         |     |
| PART II. OTHER  INFORMATION    |       |
|                                |       |                                                                                                                         |     |
| 1.                                  |       | Legal Proceedings                                                                                                            | 28       |
| 1A.                                 |       | Risk Factors                                                                                                                 | 28       |
| 2.                                  |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                 | 28       |
| 3.                                  |       | Defaults  Upon Senior Securities                                                                                             | 28       |
| 4.                                  |       | (Removed and  Reserved)                                                                                                      | 28       |
| 5.                                  |       | Other Information                                                                                                            | 28       |
| 6.                                  |       | Exhibits                                                                                                                     | 29       |
|                                |       |                                                                                                                         |     |
| SIGNATURES                          | 30         |

 

----

Tableof Contents

 

**PART I. FINANCIAL INFORMATION**

 

**ITEM 1. Financial Statements**

 

**INTERLINE BRANDS, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS (UNAUDITED)**

**AS OF JUNE 25, 2010 AND DECEMBER 25, 2009**

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

 
| ** **                                                                                                                                                                                                    | ** ** | **June 25,** | ** ** | **December 25,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                    | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| **ASSETS**                                                                                                                                                                                                    |       |              |       |                  |       |
| Current Assets:                                                                                                                                                                                               |       |              |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                                     |       | $                 | 111,622    |                  | $          | 99,223 |   |
| Short-term investments                                                                                                                                                                                        |       | 1,312             |       | 1,479                 |       |
| Accounts receivable - trade (net of allowance for doubtful  accounts of $10,485 and $12,975)                                                                                                                  |       | 135,608           |       | 120,004               |       |
| Inventory                                                                                                                                                                                                     |       | 191,453           |       | 173,422               |       |
| Prepaid expenses and other current assets                                                                                                                                                                     |       | 20,252            |       | 18,552                |       |
| Deferred income taxes                                                                                                                                                                                         |       | 17,085            |       | 16,459                |       |
| Total current assets                                                                                                                                                                                          |       | 477,332           |       | 429,139               |       |
|                                                                                                                                                                                                          |       |              |       |                  |       |
| Property and equipment, net                                                                                                                                                                                   |       | 49,582            |       | 46,804                |       |
| Goodwill                                                                                                                                                                                                      |       | 319,151           |       | 319,006               |       |
| Other intangible assets, net                                                                                                                                                                                  |       | 121,413           |       | 124,835               |       |
| Other assets                                                                                                                                                                                                  |       | 9,004             |       | 9,054                 |       |
| Total assets                                                                                                                                                                                                  |       | $                 | 976,482    |                  | $          | 928,838 |   |
|                                                                                                                                                                                                          |       |              |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                                |       |              |       |                  |       |
| Current Liabilities:                                                                                                                                                                                          |       |              |       |                  |       |
| Accounts payable                                                                                                                                                                                              |       | $                 | 108,387    |                  | $          | 85,982 |   |
| Accrued expenses and other current liabilities                                                                                                                                                                |       | 42,909            |       | 41,715                |       |
| Accrued interest                                                                                                                                                                                              |       | 980               |       | 1,050                 |       |
| Income taxes payable                                                                                                                                                                                          |       | 2,637             |       | 1,285                 |       |
| Current portion of long-term debt                                                                                                                                                                             |       | —            |       | 1,590                 |       |
| Capital lease - current                                                                                                                                                                                       |       | 94                |       | 222                   |       |
| Total current liabilities                                                                                                                                                                                     |       | 155,007           |       | 131,844               |       |
|                                                                                                                                                                                                          |       |              |       |                  |       |
| Long-Term Liabilities:                                                                                                                                                                                        |       |              |       |                  |       |
| Deferred income taxes                                                                                                                                                                                         |       | 40,374            |       | 40,369                |       |
| Long-term debt and capital lease, net of current  portion                                                                                                                                                     |       | 304,164           |       | 304,092               |       |
| Other liabilities                                                                                                                                                                                             |       | 794               |       | 798                   |       |
| Total liabilities                                                                                                                                                                                             |       | 500,339           |       | 477,103               |       |
| Commitments and contingencies                                                                                                                                                                                 |       |              |       |                  |       |
| Senior preferred stock; $0.01 par value,  20,000,000 authorized; none outstanding as of June 25, 2010 and  December 25, 2009                                                                        |       | —            |       | —                |       |
|                                                                                                                                                                                                          |       |              |       |                  |       |
| Stockholders’ Equity:                                                                                                                                                                                    |       |              |       |                  |       |
| Common stock; $0.01 par value, 100,000,000  authorized; 33,127,211 issued and 33,004,911 outstanding as of June 25,  2010 and 32,640,957 issued and 32,524,251 outstanding as of December 25,  2009 |       | 331               |       | 326                   |       |
| Additional paid-in capital                                                                                                                                                                                    |       | 586,490           |       | 576,747               |       |
| Accumulated deficit                                                                                                                                                                                           |       | (110,084          | )          | (124,745              | )          |
| Accumulated other comprehensive income                                                                                                                                                                        |       | 1,579             |       | 1,483                 |       |
| Treasury stock, at cost, 122,300 shares as of  June 25, 2010 and 116,706 as of December 25, 2009                                                                                                    |       | (2,173            | )          | (2,076                | )          |
| Total stockholders’ equity                                                                                                                                                                               |       | 476,143           |       | 451,735               |       |
| Total liabilities and stockholders’ equity                                                                                                                                                               |       | $                 | 976,482    |                  | $          | 928,838 |   |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

1

----

Table of Contents

 

**INTERLINE BRANDS, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)**

**THREE AND SIX MONTHS ENDED JUNE 25, 2010 AND JUNE 26,2009**

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

 
| ** **                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                   | ** ** | **June 25,**      | ** ** | **June 26,**    | ** ** | **June 25,** | ** ** | **June 26,** | ** ** |
| ** **                                   | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                   | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                    |       | $                      | 270,154    |                 | $          | 269,920 |   | $ | 515,372 |   | $ | 526,713 |   |
| Cost of sales                                |       | 168,587                |       | 171,605              |       | 318,658 |   | 331,802 |   |
| Gross profit                                 |       | 101,567                |       | 98,315               |       | 196,714 |   | 194,911 |   |
|                                         |       |                   |       |                 |       |   |   |   |   |
| Operating Expenses:                          |       |                   |       |                 |       |   |   |   |   |
| Selling, general and administrative expenses |       | 77,470                 |       | 78,898               |       | 154,699 |   | 162,818 |   |
| Depreciation and amortization                |       | 4,935                  |       | 4,392                |       | 9,686 |   | 9,026 |   |
| Total operating expenses                     |       | 82,405                 |       | 83,290               |       | 164,385 |   | 171,844 |   |
| Operating income                             |       | 19,162                 |       | 15,025               |       | 32,329 |   | 23,067 |   |
|                                         |       |                   |       |                 |       |   |   |   |   |
| (Loss) Gain on extinguishment of debt, net   |       | —                 |       | (177                 | )          | — |   | 1,543 |   |
| Interest expense                             |       | (4,366                 | )          | (4,717               | )          | (8,719 | ) | (10,096 | ) |
| Interest and other income                    |       | 301                    |       | 440                  |       | 725 |   | 730 |   |
| Income before income taxes                   |       | 15,097                 |       | 10,571               |       | 24,335 |   | 15,244 |   |
| Income taxes                                 |       | 6,006                  |       | 4,149                |       | 9,674 |   | 5,900 |   |
| Net income                                   |       | $                      | 9,091      |                 | $          | 6,422 |   | $ | 14,661 |   | $ | 9,344 |   |
|                                         |       |                   |       |                 |       |   |   |   |   |
| Earnings Per Share:                          |       |                   |       |                 |       |   |   |   |   |
| Basic                                        |       | $                      | 0.28       |                 | $          | 0.20 |   | $ | 0.45 |   | $ | 0.29 |   |
| Diluted                                      |       | $                      | 0.27       |                 | $          | 0.20 |   | $ | 0.44 |   | $ | 0.29 |   |
|                                         |       |                   |       |                 |       |   |   |   |   |
| Weighted-Average Shares Outstanding:         |       |                   |       |                 |       |   |   |   |   |
| Basic                                        |       | 33,036,531             |       | 32,488,744           |       | 32,855,343 |   | 32,484,897 |   |
| Diluted                                      |       | 33,888,918             |       | 32,856,916           |       | 33,629,770 |   | 32,704,682 |   |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

2

----

Table of Contents

 

**INTERLINE BRANDS, INC. AND SUBSIDIARIES**

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

**SIX MONTHS ENDED JUNE 25, 2010 AND JUNE 26, 2009**

**(in thousands)**

 
| ** **                                                                               | ** ** | **June 25,** | ** ** | **June 26,** | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                                               | ** ** | **2010**          | ** ** | **2009**          | ** ** |
| Cash Flows from Operating Activities:                                                    |       |              |       |              |       |
| Net income                                                                               |       | $                 | 14,661     |              | $          | 9,344 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:       |       |              |       |              |       |
| Depreciation and amortization                                                            |       | 9,930             |       | 9,322             |       |
| Amortization of debt issuance costs                                                      |       | 515               |       | 562               |       |
| Amortization of discount on 81/8% senior subordinated  notes                             |       | 74                |       | 72                |       |
| Gain on extinguishment of debt, net of discount                                          |       | —            |       | (2,165            | )          |
| Write-off of debt issuance costs                                                         |       | —            |       | 622               |       |
| Write-off of deferred acquisition costs                                                  |       | —            |       | 672               |       |
| Share-based compensation                                                                 |       | 2,021             |       | 1,955             |       |
| Excess tax benefits from share-based compensation                                        |       | (754              | )          | —            |       |
| Deferred income taxes                                                                    |       | (579              | )          | 2,340             |       |
| Provision for doubtful accounts                                                          |       | 2,419             |       | 6,324             |       |
| Loss on disposal of property and equipment                                               |       | 54                |       | 12                |       |
|                                                                                     |       |              |       |              |       |
| Changes in assets and liabilities which provided  (used) cash, net of business acquired: |       |              |       |              |       |
| Accounts receivable - trade                                                              |       | (18,002           | )          | (4,673            | )          |
| Inventory                                                                                |       | (17,997           | )          | 12,830            |       |
| Prepaid expenses and other current assets                                                |       | (1,699            | )          | 2,747             |       |
| Other assets                                                                             |       | 50                |       | (190              | )          |
| Accounts payable                                                                         |       | 22,399            |       | 27,428            |       |
| Accrued expenses and other current liabilities                                           |       | 1,033             |       | 4,002             |       |
| Accrued interest                                                                         |       | (70               | )          | (684              | )          |
| Income taxes                                                                             |       | 2,065             |       | 1,957             |       |
| Other liabilities                                                                        |       | 4                 |       | (141              | )          |
| Net cash provided by operating activities                                                |       | 16,124            |       | 72,336            |       |
| Cash Flows from Investing Activities:                                                    |       |              |       |              |       |
| Purchase of property and equipment, net                                                  |       | (8,228            | )          | (5,688            | )          |
| Purchase of short-term investments                                                       |       | (2,678            | )          | —            |       |
| Proceeds from sales and maturities of short-term  investments                            |       | 2,845             |       | —            |       |
| Purchase of businesses, net of cash acquired                                             |       | (145              | )          | (381              | )          |
| Net cash used in investing activities                                                    |       | (8,206            | )          | (6,069            | )          |
| Cash Flows from Financing Activities:                                                    |       |              |       |              |       |
| (Decrease) Increase in purchase card payable, net                                        |       | (1,463            | )          | 726               |       |
| Repayment of term debt                                                                   |       | (1,590            | )          | (26,162           | )          |
| Repayment of 81/8% senior subordinated  notes                                            |       | —            |       | (34,157           | )          |
| Payments on capital lease obligations                                                    |       | (130              | )          | (116              | )          |
| Proceeds from stock options exercised                                                    |       | 6,972             |       | —            |       |
| Excess tax benefits from share-based compensation                                        |       | 754               |       | —            |       |
| Treasury stock acquired to satisfy minimum tax  withholding requirements                 |       | (97               | )          | —            |       |
| Net cash provided by (used in) financing  activities                                     |       | 4,446             |       | (59,709           | )          |
| Effect of exchange rate changes on cash and cash  equivalents                            |       | 35                |       | 92                |       |
| Net increase in cash and cash equivalents                                                |       | 12,399            |       | 6,650             |       |
| Cash and cash equivalents at beginning of period                                         |       | 99,223            |       | 62,724            |       |
| Cash and cash equivalents at end of period                                               |       | $                 | 111,622    |              | $          | 69,374 |   |
|                                                                                     |       |              |       |              |       |
| Supplemental Disclosure of Cash Flow Information:                                        |       |              |       |              |       |
| Cash paid during the period for:                                                         |       |              |       |              |       |
| Interest                                                                                 |       | $                 | 8,066      |              | $          | 10,196 |   |
| Income taxes, net of refunds                                                             |       | $                 | 7,938      |              | $          | 1,749 |   |
|                                                                                     |       |              |       |              |       |
| Schedule of Non-Cash Investing and Financing  Activities:                                |       |              |       |              |       |
| Property acquired through lease incentives                                               |       | $                 | 1,620      |              | $          | 3,009 |   |
| Adjustments to liabilities assumed and goodwill on  businesses acquired                  |       | $                 | —     |              | $          | 732 |   |

 

*See accompanying notes to condensed consolidatedfinancial statements.*

 

3

----

Table of Contents

 

**INTERLINE BRANDS, INC. AND SUBSIDIARIES**

**NOTES TOUNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**THREE AND SIX MONTHS ENDED JUNE 25, 2010 AND JUNE 26,2009**

 

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

 

*Business*

 

Interline Brands, Inc., a Delaware corporation, and itssubsidiaries (“Interline” or the “Company”) is a direct marketer and specialtydistributor of maintenance, repair and operations (“MRO”) products. The Companysells plumbing, electrical, hardware, security, heating, ventilation and airconditioning (“HVAC”), janitorial and sanitary supplies and other MRO products.Interline’s highly diverse customer base consists of multi-family housing,educational, lodging, government and health care facilities, professionalcontractors and specialty distributors.

 

The Company markets and sells its products primarily through twelvedistinct and targeted brands. The Company utilizes a variety of sales channels,including a direct sales force, telesales representatives, a direct marketingprogram, brand-specific websites and a national accounts sales program. TheCompany delivers its products through its network of distribution centers andprofessional contractor showrooms located throughout the United States andCanada, vendor managed inventory locations at large professional contractorcustomer locations and its dedicated fleet of trucks. Through its broaddistribution network, the Company is able to provide next-day delivery serviceto approximately 98% of the U.S. population and same-day delivery service tomost major metropolitan markets in the U.S.

 

*Basis of Presentation*

 

The accompanying unaudited interim condensed consolidated financialstatements of Interline have been prepared in accordance with accountingprinciples generally accepted in the United States of America and instructionsto the Quarterly Report on Form 10-Q and Article 10 of Regulation S-Xpromulgated by the Securities and Exchange Commission (“SEC”). Accordingly,certain information and footnote disclosures normally included in financialstatements included in the Company’s Annual Report on Form 10-K have beencondensed or omitted. The accompanying unaudited interim condensed consolidatedfinancial statements should be read in conjunction with the auditedconsolidated financial statements and related notes included in the Company’sAnnual Report on Form 10-K for the fiscal year ended December 25,2009 filed with the SEC.

 

All adjustments, consisting of normal recurring adjustments, which are,in the opinion of management, necessary for a fair statement of the results forthe interim periods presented have been recorded. The results of operations forthe interim periods presented are not necessarily indicative of the results tobe expected for the full year.

 

The preparation of condensed consolidated financial statements inconformity with accounting principles generally accepted in the United Statesof America (“US GAAP”) 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 and income taxes, lower of cost or market and obsolescencereserves for inventory, reserves for self-insurance programs and valuation ofgoodwill and other intangible assets. Actual results could differ from thoseestimates.

 

The Company evaluated subsequent events through the date of the filingof this Quarterly Report on Form 10-Q with the SEC.

 

4

----

Table of Contents

 

*Fair Value of Financial Instruments*

 

TheCompany defines fair value as the price that would be received to sell an assetor paid to transfer a liability in an orderly transaction between marketparticipants at the measurement date. Disclosure about how fair value isdetermined for assets and liabilities is based on a hierarchy established fromthe significant levels of inputs as follows:

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

 

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, accounts receivable, andaccounts payable approximate the carrying amount because of the shortmaturities of these items.

 

The Company’s short-term investments, which are classified asavailable-for-sale, are comprised of pre-refunded municipal bonds. Pre-refundedmunicipal bonds are bonds that are refinanced by the issuer and remainoutstanding in the marketplace until a specific call date or maturity date isreached. Pre-refunded municipal bonds are secured by U.S. Treasury securitiesplaced in an irrevocable escrow account. As of June 25, 2010, all of theCompany’s pre-refunded municipal bonds have contractual maturities of less thanone year. The following table shows the original cost and fair value of theCompany’s short-term investments as of June 25, 2010 and December 25,2009 (in thousands):

 
| ** **                       | ** ** | **June 25, 2010** | ** ** | **December 25, 2009** | ** ** |
|----------------------------------|------------|------------------------|------------|----------------------------|------------|
| **Description**                  | ** ** | **Original  Cost**     | ** ** | **Fair  Value**            | ** ** | **Original  Cost** | ** ** | **Fair  Value** | ** ** |
| Pre-refunded municipal bonds (1) |       | $                      | 1,312      |                       | $          | 1,312 |   | $ | 1,478 |   | $ | 1,479 |   |
|                                  |            |                        |            |                            |            |  |  |  |  |  |  |  |  |

 

----

(1)         Fairvalue estimated using Level 1 inputs. The fair value of the pre-refundedmunicipal bonds is determined by quoted market prices as they are publiclytraded.

 

 

The following table shows the carrying amount and the fair value ofterm debt and the 81/8% senior subordinated notesas of June 25, 2010 and December 25, 2009 (in thousands):

 
| ** **                                                        | ** ** | **June 25, 2010** | ** ** | **December 25, 2009** | ** ** |
|-------------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| **Description**                                                   | ** ** | **Carrying  Amount**   | ** ** | **Fair  Value**            | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** |
| Term debt (1)                                                     |       | $                      | 154,225    |                       | $          | 147,945 |   | $ | 154,225 |   | $ | 145,771 |   |
| 81/8% senior subordinated  notes, net of unamortized discount (2) |       | 149,938                |       | 149,928                    |       | 149,863 |   | 151,434 |   |
| ** **                                                        |       | $                      | 304,163    |                       | $          | 297,873 |   | $ | 304,088 |   | $ | 297,205 |   |

 

----

(1)         Fairvalue estimated using Level 2 inputs. The fair value of term loans is estimatedusing a discounted cash flow analysis based on borrowing rates available tocompanies with similar credit ratings for loans with similar terms andmaturity.

(2)         Fairvalue estimated using Level 1 inputs. The fair value of the 81/8%senior subordinated notes is determined by quoted market prices as they arepublicly traded.

 

*SegmentInformation*

 

TheCompany has one operating segment and, therefore, one reportable segment, thedistribution of MRO products.

 

5

----

Table of Contents

 

TheCompany’s net sales for the three and six months ended June 25, 2010 and June 26,2009 by product category were as follows (in thousands):

 
| ** **                                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                | ** ** | **June 25,**      | ** ** | **June 26,**    | ** ** | **June 25,** | ** ** | **June 26,** | ** ** |
| **Product Category**                      | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| Janitorial and sanitary                   |       | $                      | 76,006     |                 | $          | 76,657 |   | $ | 148,109 |   | $ | 148,559 |   |
| Plumbing                                  |       | 71,170                 |       | 71,799               |       | 141,571 |   | 147,039 |   |
| Heating, ventilation and air conditioning |       | 34,647                 |       | 31,709               |       | 53,247 |   | 52,248 |   |
| Electrical and lighting                   |       | 20,197                 |       | 21,594               |       | 40,142 |   | 43,421 |   |
| Appliances and parts                      |       | 16,200                 |       | 15,925               |       | 30,574 |   | 31,076 |   |
| Security                                  |       | 12,311                 |       | 12,957               |       | 24,559 |   | 26,053 |   |
| Hardware and tools                        |       | 12,020                 |       | 12,956               |       | 23,149 |   | 24,255 |   |
| Other                                     |       | 27,603                 |       | 26,323               |       | 54,021 |   | 54,062 |   |
| Total                                     |       | $                      | 270,154    |                 | $          | 269,920 |   | $ | 515,372 |   | $ | 526,713 |   |

 

**2****.             ACCOUNTSRECEIVABLE**

 

TheCompany’s trade receivables are exposed to credit risk. The majority of themarkets served by the Company are comprised of numerous individual accounts.The Company monitors the creditworthiness of its customers on an ongoing basisand provides a reserve for estimated bad debt losses. If the financialcondition of the Company’s customers were to deteriorate, increases in itsallowance for doubtful accounts may be needed.

 

Theactivity in the allowance for doubtful accounts consisted of the following (inthousands):

 
| **Balance at  December 25,  2009** | ** ** | **Charged to  Expense** | ** ** | **Deductions(1)** | ** ** | **Balance at  June 25,  2010** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|-------------------|------------|-------------------------------------|------------|
| $                                       | 12,975     |                    | $          | 2,419             |       | $                                   | (4,909     | ) | $ | 10,485 |   |
|                                         |            |                         |            |                   |            |                                     |            |  |  |  |  |

 

----

(1)         Accountsreceivable written-off as uncollectible, net of recoveries. The majority of theaccounts written-off had been fully reserved for in prior periods.

 

**3****.             RESTRUCTURINGAND ACQUISITION ACCRUALS**

 

*RestructuringAccruals*

 

During the three months ended September 26, 2008, the Companybegan undertaking certain significant changes in its cost structure. Theseoperational initiatives focus on reducing the Company’s overall operating coststructure. The following table summarizes the changes to accruals related tothe Company’s restructuring, which are included in accrued expenses and othercurrent liabilities (in thousands):

 
| ** **                        | ** ** | **Employee  Separation  Costs** | ** ** | **Facility  Closing and  Other Costs** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|---------------------------------|------------|----------------------------------------|------------|-----------|------------|
| Balance at December 25, 2009 |       | $                               | 177        |                                   | $          | 1,324     |       | $ | 1,501 |   |
| Payments                          |       | (72                             | )          | (594                                   | )          | (666      | )          |
| Balance at June 25, 2010     |       | $                               | 105        |                                   | $          | 730       |       | $ | 835 |   |

 

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

 

6

----

Table of Contents

 

*AcquisitionAccruals*

 

Thefollowing table summarizes the accruals assumed in connection with the Company’sbusiness combinations, which are included in accrued expenses and other currentliabilities (in thousands):

 
| ** **                   | ** ** | **Employee  Severance and  Relocation** | ** ** | **Facility  Closing and  Other Costs** | ** ** | **Total** | ** ** |
|------------------------------|------------|-----------------------------------------|------------|----------------------------------------|------------|-----------|------------|
| Balance at December 25, 2009 |       | $                                       | 55         |                                   | $          | 1,340     |       | $ | 1,395 |   |
| Payments                     |       | (11                                     | )          | (39                                    | )          | (50       | )          |
| Balance at June 25, 2010     |       | $                                       | 44         |                                   | $          | 1,301     |       | $ | 1,345 |   |

 

**4****.             EARNINGSPER SHARE**

 

Basicearnings per share is computed by dividing net income by the weighted-averagenumber of shares of common stock and participating securities outstandingduring the period. Participating securities are unvested share-based paymentawards that contain rights to receive non-forfeitable dividends (whether paidor unpaid), such as deferred stock units.

 

Dilutedearnings per share is computed by dividing net income by the weighted-averagenumber of shares of common stock and participating securities outstandingduring the period as adjusted for the potential dilutive effect of stockoptions and non-vested shares of restricted stock and restricted share unitsusing the treasury stock method.

 

The following summarizes the shares of common stock used to calculateearnings per share including the potentially dilutive impact of stock options,restricted stock and restricted share units, calculated using the treasurystock method, as included in the calculation of diluted weighted-averageshares:

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                    | ** ** | **June 25,**           | ** ** | **June 26,**         | ** ** | **June 25,** | ** ** | **June 26,** | ** ** |
| ** **                                    | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| Weighted average shares outstanding - basic   |       | 33,036,531             |       | 32,488,744           |       | 32,855,343 |   | 32,484,897 |   |
| Dilutive shares resulting from:               |       |                   |       |                 |       |   |   |   |   |
| Stock options                                 |       | 442,182                |       | 91,061               |       | 399,850 |   | 45,531 |   |
| Restricted stock                              |       | 1,106                  |       | 22                   |       | 1,004 |   | 11 |   |
| Restricted share units                        |       | 409,099                |       | 277,089              |       | 373,573 |   | 174,243 |   |
| Weighted average shares outstanding - diluted |       | 33,888,918             |       | 32,856,916           |       | 33,629,770 |   | 32,704,682 |   |

 

During the three months ended June 25, 2010 and June 26, 2009, stockoptions to purchase 1,754,605 shares and 3,774,522 shares of common stock,respectively, were excluded from the computations of diluted weighted-averageshares outstanding because their effect would be anti-dilutive. During the sixmonths ended June 25, 2010 and June 26, 2009, stock options to purchase1,940,975 shares and 3,573,535 shares of common stock, respectively, wereexcluded from the computations of diluted weighted-average shares outstandingbecause their effect would be anti-dilutive.

 

7

----

Table of Contents

 

**5.             COMPREHENSIVE INCOME**

 

Comprehensiveincome refers to revenues, expenses, gains and losses that are included incomprehensive income but are excluded from net income as these amounts arerecorded directly as an adjustment to stockholders’ equity, net of tax. Thecomponents of comprehensive income for the three and six months ended June 25,2010 and June 26, 2009 are as follows (in thousands):

 
| ** **                                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                              | ** ** | **June 25,**           | ** ** | **June 26,**         | ** ** | **June 25,** | ** ** | **June 26,** | ** ** |
| ** **                                              | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net income                                              |       | $                      | 9,091      |                 | $          | 6,422 |   | $ | 14,661 |   | $ | 9,344 |   |
| Other comprehensive income (loss):                      |       |                   |       |                 |       |   |   |   |   |
| Amortization of unrecognized gain on employee  benefits |       | 4                      |       | 3                    |       | 8 |   | 6 |   |
| Foreign currency translation                            |       | (54                    | )          | 346                  |       | 89 |   | 240 |   |
| Unrealized loss on short-term investments               |       | —                 |       | —               |       | (1 | ) | — |   |
| Total comprehensive income                              |       | $                      | 9,041      |                 | $          | 6,771 |   | $ | 14,757 |   | $ | 9,590 |   |

 

**6.             SHARE-BASED COMPENSATION**

 

Duringthe three months ended June 25, 2010 and June 26, 2009, share-basedcompensation expense was $1.2 million and $1.1 million, respectively. Duringthe six months ended June 25, 2010 and June 26, 2009, share-based compensationexpense was $2.0 million and $1.9 million, respectively. As of June 25, 2010,there was $9.2 million of total unrecognized share-based compensation expenserelated to unvested share-based payment awards. The expense is expected to berecognized over a weighted-average period of 2.2 years.

 

During the three months ended June 25, 2010 and June 26, 2009, theCompany granted 36,736 and 52,500 stock options, respectively, with aweighted-average grant date fair value of $8.00 and $6.13, respectively. Duringthe six months ended June 25, 2010 and June 26, 2009, the Company granted294,473 and 503,026 stock options, respectively, with a weighted-average grantdate fair value of $7.21 and $3.46, respectively. The fair values of stockoptions were estimated using the Black-Scholes option-pricing model. Expectedvolatility is based on historical performance of the Company’s stock. TheCompany also considers historical data to estimate the timing and amount ofstock option exercises and forfeitures. The expected life represents the periodof time that stock options are expected to remain outstanding and is based onthe contractual term of the stock options and expected exercise behavior. Therisk-free interest rate is based on U.S. Treasury zero-coupon issues with aremaining term equal to the expected option life assumed at the date of grant.

 

The Black-Scholes weighted-average assumptions were as follows:

 
| ** **               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------|------------|------------------------|------------|----------------------|------------|
| ** **               | ** ** | **June 25,**           | ** ** | **June 26,**         | ** ** | **June 25,** | ** ** | **June 26,** | ** ** |
| ** **               | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| Expected volatility      |       | 40.5                   | %          | 44.6                 | %          | 41.5 | % | 42.6 | % |
| Expected dividends       |       | 0.0                    | %          | 0.0                  | %          | 0.0 | % | 0.0 | % |
| Risk-free interest rate  |       | 2.2                    | %          | 2.2                  | %          | 2.4 | % | 2.1 | % |
| Expected life (in years) |       | 5.0                    |       | 5.0                  |       | 5.0 |   | 5.0 |   |

 

Duringthe three months ended June 25, 2010, there were 118,101 stock optionsexercised with an intrinsic value of $0.7 million. There were no stock optionsexercised during the three months ended June 26, 2009. During the six monthsended June 25, 2010, there were 465,649 stock options exercised with anintrinsic value of $2.0 million. There were no stock options exercised duringthe six months ended June 26, 2009.

 

8

----

Table of Contents

 

A summary status of restricted stock, restricted share units anddeferred stock units as of June 25, 2010 and changes during the six months thenended 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 25, 2009 |       | 10,350               |       | $                          | 23.49      |                     | 452,376    |   | $ | 8.69 |   | 68,310 |   | $ | 18.66 |   |
| Granted                          |       | —               |       | —                     |       | 168,737                  |       | 18.00 |   | 24,824 |   | 20.95 |   |
| Vested                           |       | (2,300               | )          | 22.27                      |       | (19,548                  | )          | 21.92 |   | — |   | — |   |
| Forfeited                        |       | —               |       | —                     |       | (17,773                  | )          | 7.89 |   | — |   | — |   |
| Outstanding at June 25, 2010     |       | 8,050                |       | $                          | 23.84      |                     | 583,792    |   | $ | 11.03 |   | 93,134 |   | $ | 19.27 |   |

 

Duringthe three months ended June 25, 2010 and June 26, 2009, no restricted stockawards vested. During the six months ended June 25, 2010, 2,300 restrictedstock awards vested with a fair value of less than $0.1 million. No restrictedstock awards vested during the six months ended June 26, 2009.

 

Duringthe three months ended June 25, 2010, 10,399 restricted share units vested witha fair value of $0.2 million. During the six months ended June 25, 2010, 19,548restricted share units vested with a fair value of $0.3 million. No restrictedshare units vested during the three and six months ended June 26, 2009.

 

**7.             CONTINGENCIES**

 

*ContingentLiabilities*

 

Asof June 25, 2010 and December 25, 2009, the Company was contingently liable forunused letters of credit aggregating $9.1 million and $9.5 million,respectively.

 

*Legal Proceedings*

 

The Company is involved in various legal proceedings in the ordinarycourse of its business that are not anticipated to have a material adverseeffect on the Company’s results of operations or financial position.

 

**8.             GUARANTORSUBSIDIARIES**

 

InJune 2006, Interline New Jersey, the Company’s principal operating subsidiary (“InterlineNew Jersey” or the “Subsidiary Issuer”), issued $200.0 million of 81/8% senior subordinated notes due 2014 and enteredinto a $330.0 million bank credit facility. The 81/8% senior subordinated notes and the bank credit facility are fully andunconditionally guaranteed, jointly and severally, on a senior subordinatedbasis by the Company (the “Parent Company”) and all of Interline New Jersey’s100% owned domestic subsidiaries: Wilmar Holdings, Inc., Wilmar Financial, Inc.and Glenwood Acquisition LLC (collectively the “Guarantor Subsidiaries”).Effective December 25, 2009, Eagle Maintenance Supply, Inc., which waspreviously one of Interline New Jersey’s 100% owned domestic subsidiaries, wasmerged into Interline New Jersey.

 

Theguarantees by the Parent Company and the Guarantor Subsidiaries are senior toany of their existing and future subordinated obligations, equal in right ofpayment with any of their existing and future senior subordinated indebtednessand subordinated to any of their existing and future senior indebtedness.

 

TheParent Company is a holding company whose only asset is the stock of itssubsidiaries. The Company conducts virtually all of its business operationsthrough Interline New Jersey. Accordingly, the Company’s only material sourcesof cash are dividends and distributions with respect to its ownership interestsin Interline New Jersey that are derived from the earnings and cash flowgenerated by Interline New Jersey. Through June 25, 2010, no dividends havebeen paid.

 

Thefollowing tables set forth, on a condensed consolidating basis, the balancesheets, statements of operations and statements of cash flows for the ParentCompany, Subsidiary Issuer and Guarantor Subsidiaries for all financialstatement periods presented in the Company’s condensed consolidated financialstatements. The non-guarantor subsidiaries are minor and are included

 

9

----

Table of Contents

 

inthe condensed financial data of the Subsidiary Issuer. The Subsidiary Issuerdoes not allocate integration expenses, corporate overhead or other expensesfor shared services to the Guarantor Subsidiaries; therefore, the followingtables do not reflect any such allocation.

 

10

----

Table of Contents

 

**CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)**

**AS OF JUNE 25, 2010**

**(in thousands)**

 
| ** **                                                | ** ** | **Parent**      | ** ** | ** **     | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** |
|-----------------------------------------------------------|------------|-----------------|------------|----------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                | ** ** | **Company**     | ** ** | **Subsidiary** | ** ** | **Guarantor**    | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
| ** **                                                | ** ** | **(Guarantor)** | ** ** | **Issuer**     | ** ** | **Subsidiaries** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                                |       |            |       |           |       |             |       |              |       |             |       |
| Current Assets:                                           |       |            |       |           |       |             |       |              |       |             |       |
| Cash and cash equivalents                                 |       | $               | —     |           | $          | 111,589          |       | $                 | 33         |             | $          | — |   | $ | 111,622 |   |
| Short-term investments                                    |       | —          |       | 1,312          |       | —           |       | —            |       | 1,312            |       |
| Accounts receivable - trade                               |       | —          |       | 135,608        |       | —           |       | —            |       | 135,608          |       |
| Inventory                                                 |       | —          |       | 191,453        |       | —           |       | —            |       | 191,453          |       |
| Intercompany receivable                                   |       | —          |       | —         |       | 134,186          |       | (134,186          | )          | —           |       |
| Other current assets                                      |       | —          |       | 37,335         |       | 2                |       | —            |       | 37,337           |       |
| Total current assets                                      |       | —          |       | 477,297        |       | 134,221          |       | (134,186          | )          | 477,332          |       |
|                                                      |       |            |       |           |       |             |       |              |       |             |       |
| Property and equipment, net                               |       | —          |       | 49,582         |       | —           |       | —            |       | 49,582           |       |
| Goodwill                                                  |       | —          |       | 319,151        |       | —           |       | —            |       | 319,151          |       |
| Other intangible assets, net                              |       | —          |       | 121,413        |       | —           |       | —            |       | 121,413          |       |
| Investment in subsidiaries                                |       | 476,143         |       | 139,035        |       | —           |       | (615,178          | )          | —           |       |
| Other assets                                              |       | —          |       | 2,278          |       | 6,726            |       | —            |       | 9,004            |       |
| Total assets                                              |       | $               | 476,143    |           | $          | 1,108,756        |       | $                 | 140,947    |             | $          | (749,364 | ) | $ | 976,482 |   |
|                                                      |       |            |       |           |       |             |       |              |       |             |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**            |       |            |       |           |       |             |       |              |       |             |       |
| Current Liabilities:                                      |       |            |       |           |       |             |       |              |       |             |       |
| Accounts payable                                          |       | $               | —     |           | $          | 108,387          |       | $                 | —     |             | $          | — |   | $ | 108,387 |   |
| Accrued expenses and other current liabilities            |       | —          |       | 44,614         |       | 1,912            |       | —            |       | 46,526           |       |
| Intercompany payable                                      |       | —          |       | 134,186        |       | —           |       | (134,186          | )          | —           |       |
| Current portion of long-term debt and capital  lease      |       | —          |       | 94             |       | —           |       | —            |       | 94               |       |
| Total current liabilities                                 |       | —          |       | 287,281        |       | 1,912            |       | (134,186          | )          | 155,007          |       |
|                                                      |       |            |       |           |       |             |       |              |       |             |       |
| Long-Term Liabilities:                                    |       |            |       |           |       |             |       |              |       |             |       |
| Long-term debt and capital lease, net of current  portion |       | —          |       | 304,164        |       | —           |       | —            |       | 304,164          |       |
| Other liabilities                                         |       | —          |       | 41,168         |       | —           |       | —            |       | 41,168           |       |
| Total liabilities                                         |       | —          |       | 632,613        |       | 1,912            |       | (134,186          | )          | 500,339          |       |
|                                                      |       |            |       |           |       |             |       |              |       |             |       |
| Senior preferred stock                                    |       | —          |       | 811,147        |       | —           |       | (811,147          | )          | —           |       |
|                                                      |       |            |       |           |       |             |       |              |       |             |       |
| Stockholders’ equity (deficit)                       |       | 476,143         |       | (335,004       | )          | 139,035          |       | 195,969           |       | 476,143          |       |
| Total liabilities and stockholders’ equity           |       | $               | 476,143    |           | $          | 1,108,756        |       | $                 | 140,947    |             | $          | (749,364 | ) | $ | 976,482 |   |

 

11

----

Table of Contents

 

**CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)**

**AS OF DECEMBER 25, 2009**

**(in thousands)**

 
| ** **                                                | ** ** | **Parent**      | ** ** | ** **     | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** |
|-----------------------------------------------------------|------------|-----------------|------------|----------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                | ** ** | **Company**     | ** ** | **Subsidiary** | ** ** | **Guarantor**    | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
| ** **                                                | ** ** | **(Guarantor)** | ** ** | **Issuer**     | ** ** | **Subsidiaries** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                                |       |            |       |           |       |             |       |              |       |             |       |
| Current Assets:                                           |       |            |       |           |       |             |       |              |       |             |       |
| Cash and cash equivalents                                 |       | $               | —     |           | $          | 98,487           |       | $                 | 736        |             | $          | — |   | $ | 99,223 |   |
| Short-term investments                                    |       | —          |       | 1,479          |       | —           |       | —            |       | 1,479            |       |
| Accounts receivable - trade                               |       | —          |       | 117,361        |       | 2,644            |       | (1                | )          | 120,004          |       |
| Inventory                                                 |       | —          |       | 171,063        |       | 2,359            |       | —            |       | 173,422          |       |
| Intercompany receivable                                   |       | —          |       | —         |       | 130,370          |       | (130,370          | )          | —           |       |
| Other current assets                                      |       | —          |       | 34,826         |       | 185              |       | —            |       | 35,011           |       |
| Total current assets                                      |       | —          |       | 423,216        |       | 136,294          |       | (130,371          | )          | 429,139          |       |
|                                                      |       |            |       |           |       |             |       |              |       |             |       |
| Property and equipment, net                               |       | —          |       | 46,619         |       | 185              |       | —            |       | 46,804           |       |
| Goodwill                                                  |       | —          |       | 312,252        |       | 6,754            |       | —            |       | 319,006          |       |
| Other intangible assets, net                              |       | —          |       | 122,457        |       | 2,378            |       | —            |       | 124,835          |       |
| Investment in subsidiaries                                |       | 451,735         |       | 150,593        |       | —           |       | (602,328          | )          | —           |       |
| Other assets                                              |       | —          |       | 2,285          |       | 6,769            |       | —            |       | 9,054            |       |
| Total assets                                              |       | $               | 451,735    |           | $          | 1,057,422        |       | $                 | 152,380    |             | $          | (732,699 | ) | $ | 928,838 |   |
|                                                      |       |            |       |           |       |             |       |              |       |             |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**            |       |            |       |           |       |             |       |              |       |             |       |
| Current Liabilities:                                      |       |            |       |           |       |             |       |              |       |             |       |
| Accounts payable                                          |       | $               | —     |           | $          | 85,983           |       | $                 | —     |             | $          | (1 | ) | $ | 85,982 |   |
| Accrued expenses and other current liabilities            |       | —          |       | 42,308         |       | 1,742            |       | —            |       | 44,050           |       |
| Intercompany payable                                      |       | —          |       | 130,370        |       | —           |       | (130,370          | )          | —           |       |
| Current portion of long-term debt and capital  lease      |       | —          |       | 1,812          |       | —           |       | —            |       | 1,812            |       |
| Total current liabilities                                 |       | —          |       | 260,473        |       | 1,742            |       | (130,371          | )          | 131,844          |       |
|                                                      |       |            |       |           |       |             |       |              |       |             |       |
| Long-Term Liabilities:                                    |       |            |       |           |       |             |       |              |       |             |       |
| Long-term debt and capital lease, net of current  portion |       | —          |       | 304,092        |       | —           |       | —            |       | 304,092          |       |
| Other liabilities                                         |       | —          |       | 41,122         |       | 45               |       | —            |       | 41,167           |       |
| Total liabilities                                         |       | —          |       | 605,687        |       | 1,787            |       | (130,371          | )          | 477,103          |       |
|                                                      |       |            |       |           |       |             |       |              |       |             |       |
| Senior preferred stock                                    |       | —          |       | 757,355        |       | —           |       | (757,355          | )          | —           |       |
|                                                      |       |            |       |           |       |             |       |              |       |             |       |
| Stockholders’ equity (deficit)                       |       | 451,735         |       | (305,620       | )          | 150,593          |       | 155,027           |       | 451,735          |       |
| Total liabilities and stockholders’ equity           |       | $               | 451,735    |           | $          | 1,057,422        |       | $                 | 152,380    |             | $          | (732,699 | ) | $ | 928,838 |   |

 

12

----

Table of Contents

 

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

**FOR THE THREE MONTHS ENDED JUNE 25, 2010**

**(in thousands)**

 
| ** **                                             | ** ** | **Parent**      | ** ** | ** **     | ** ** | ** **          | ** ** | ** **        | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|-----------------|------------|----------------|------------|---------------------|------------|-------------------|------------|------------------|------------|
| ** **                                             | ** ** | **Company**     | ** ** | **Subsidiary** | ** ** | **Guarantor**       | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
| ** **                                             | ** ** | **(Guarantor)** | ** ** | **Issuer**     | ** ** | **Subsidiaries(1)** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
| ** **                                             | ** ** | ** **      | ** ** | ** **     | ** ** | ** **          | ** ** | ** **        | ** ** | ** **       | ** ** |
| Net sales                                              |       | $               | —     |           | $          | 270,154             |       | $                 | —     |             | $          | — |   | $ | 270,154 |   |
| Cost of sales                                          |       | —          |       | 168,587        |       | —              |       | —            |       | 168,587          |       |
| Gross profit                                           |       | —          |       | 101,567        |       | —              |       | —            |       | 101,567          |       |
|                                                   |       |            |       |           |       |                |       |              |       |             |       |
| Operating Expenses:                                    |       |            |       |           |       |                |       |              |       |             |       |
| Selling, general and administrative expenses           |       | —          |       | 81,515         |       | 8                   |       | (4,053            | )          | 77,470           |       |
| Depreciation and amortization                          |       | —          |       | 4,935          |       | —              |       | —            |       | 4,935            |       |
| Other operating income                                 |       | —          |       | —         |       | (4,053              | )          | 4,053             |       | —           |       |
| Equity earnings of subsidiaries                        |       | (9,091          | )          | (3,142         | )          | —              |       | 12,233            |       | —           |       |
| Total operating expenses                               |       | (9,091          | )          | 83,308         |       | (4,045              | )          | 12,233            |       | 82,405           |       |
| Operating income                                       |       | 9,091           |       | 18,259         |       | 4,045               |       | (12,233           | )          | 19,162           |       |
|                                                   |       |            |       |           |       |                |       |              |       |             |       |
| Interest and other (expense) income, net               |       | —          |       | (4,779         | )          | 714                 |       | —            |       | (4,065           | )          |
| Income before income taxes                             |       | 9,091           |       | 13,480         |       | 4,759               |       | (12,233           | )          | 15,097           |       |
| Income taxes                                           |       | —          |       | 4,389          |       | 1,617               |       | —            |       | 6,006            |       |
| Net income                                             |       | 9,091           |       | 9,091          |       | 3,142               |       | (12,233           | )          | 9,091            |       |
| Preferred stock dividends                              |       | —          |       | (27,357        | )          | —              |       | 27,357            |       | —           |       |
| Net income (loss) attributable to common  stockholders |       | $               | 9,091      |           | $          | (18,266             | )          | $                 | 3,142      |             | $          | 15,124 |   | $ | 9,091 |   |

 

----

(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.

 

13

----

Table of Contents

 

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

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

**(in thousands)**

 
| ** **                                             | ** ** | **Parent  Company  (Guarantor)** | ** ** | **Subsidiary  Issuer** | ** ** | **Guarantor  Subsidiarics(1)** | ** **   | **Consolidating  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  taxes                                          |       | 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

----

Table of Contents

 

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

**FOR THE SIX MONTHS ENDED JUNE 25, 2010**

**(in thousands)**

 
| ** **                                             | ** ** | **Parent**      | ** ** | ** **     | ** ** | ** **          | ** ** | ** **        | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|-----------------|------------|----------------|------------|---------------------|------------|-------------------|------------|------------------|------------|
| ** **                                             | ** ** | **Company**     | ** ** | **Subsidiary** | ** ** | **Guarantor**       | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
| ** **                                             | ** ** | **(Guarantor)** | ** ** | **Issuer**     | ** ** | **Subsidiaries(1)** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
| ** **                                             | ** ** | ** **      | ** ** | ** **     | ** ** | ** **          | ** ** | ** **        | ** ** | ** **       | ** ** |
| Net sales                                              |       | $               | —     |           | $          | 515,372             |       | $                 | —     |             | $          | — |   | $ | 515,372 |   |
| Cost of sales                                          |       | —          |       | 318,658        |       | —              |       | —            |       | 318,658          |       |
| Gross profit                                           |       | —          |       | 196,714        |       | —              |       | —            |       | 196,714          |       |
|                                                   |       |            |       |           |       |                |       |              |       |             |       |
| Operating Expenses:                                    |       |            |       |           |       |                |       |              |       |             |       |
| Selling, general and administrative expenses           |       | —          |       | 162,432        |       | 14                  |       | (7,747            | )          | 154,699          |       |
| Depreciation and amortization                          |       | —          |       | 9,686          |       | —              |       | —            |       | 9,686            |       |
| Other operating income                                 |       | —          |       | —         |       | (7,747              | )          | 7,747             |       | —           |       |
| Equity earnings of subsidiaries                        |       | (14,661         | )          | (6,124         | )          | —              |       | 20,785            |       | —           |       |
| Total operating expenses                               |       | (14,661         | )          | 165,994        |       | (7,733              | )          | 20,785            |       | 164,385          |       |
| Operating income                                       |       | 14,661          |       | 30,720         |       | 7,733               |       | (20,785           | )          | 32,329           |       |
|                                                   |       |            |       |           |       |                |       |              |       |             |       |
| Interest and other (expense) income, net               |       | —          |       | (9,417         | )          | 1,423               |       | —            |       | (7,994           | )          |
| Income before income taxes                             |       | 14,661          |       | 21,303         |       | 9,156               |       | (20,785           | )          | 24,335           |       |
| Income taxes                                           |       | —          |       | 6,642          |       | 3,032               |       | —            |       | 9,674            |       |
| Net income                                             |       | 14,661          |       | 14,661         |       | 6,124               |       | (20,785           | )          | 14,661           |       |
| Preferred stock dividends                              |       | —          |       | (53,792        | )          | —              |       | 53,792            |       | —           |       |
| Net income (loss) attributable to common  stockholders |       | $               | 14,661     |           | $          | (39,131             | )          | $                 | 6,124      |             | $          | 33,007 |   | $ | 14,661 |   |

 

----

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

 

15

----

Table ofContents

 

**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 taxes                                           |       | 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  stockholders |       | $               | 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

----

Table of Contents

 

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

**FOR THE SIX MONTHS ENDED JUNE 25, 2010**

**(in thousands)**

 
| ** **                                                    | ** ** | **Parent**      | ** ** | ** **     | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** |
|---------------------------------------------------------------|------------|-----------------|------------|----------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                    | ** ** | **Company**     | ** ** | **Subsidiary** | ** ** | **Guarantor**    | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
| ** **                                                    | ** ** | **(Guarantor)** | ** ** | **Issuer**     | ** ** | **Subsidiaries** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
| ** **                                                    | ** ** | ** **      | ** ** | ** **     | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** |
| Net cash provided by (used in) operating  activities          |       | $               | —     |           | $          | 16,489           |       | $                 | (365       | )                | $          | — |   | $ | 16,124 |   |
| Cash Flows from Investing Activities:                         |       |            |       |           |       |             |       |              |       |             |       |
| Purchase of property and equipment, net                       |       | —          |       | (8,228         | )          | —           |       | —            |       | (8,228           | )          |
| Purchase of short-term investments                            |       | —          |       | (2,678         | )          | —           |       | —            |       | (2,678           | )          |
| Proceeds from sales and maturities of short-term  investments |       | —          |       | 2,845          |       | —           |       | —            |       | 2,845            |       |
| Purchase of businesses, net of cash acquired                  |       | —          |       | (145           | )          | —           |       | —            |       | (145             | )          |
| Other                                                         |       | —          |       | (345           | )          | —           |       | 345               |       | —           |       |
| Net cash used in investing activities                         |       | —          |       | (8,551         | )          | —           |       | 345               |       | (8,206           | )          |
| Cash Flows from Financing Activities:                         |       |            |       |           |       |             |       |              |       |             |       |
| Increase in purchase card payable, net                        |       | —          |       | (1,463         | )          | —           |       | —            |       | (1,463           | )          |
| Repayment of debt and capital lease obligations               |       | —          |       | (1,590         | )          | —           |       | —            |       | (1,590           | )          |
| Proceeds from stock options exercised                         |       | —          |       | 6,972          |       | —           |       | —            |       | 6,972            |       |
| Other                                                         |       | —          |       | 527            |       | 345              |       | (345              | )          | 527              |       |
| Net cash provided by financing activities                     |       | —          |       | 4,446          |       | 345              |       | (345              | )          | 4,446            |       |
| Effect of exchange rate changes on cash and cash  equivalents |       | —          |       | 35             |       | —           |       | —            |       | 35               |       |
| Net increase (decrease) in cash and cash  equivalents         |       | —          |       | 12,419         |       | (20              | )          | —            |       | 12,399           |       |
| Cash and cash equivalents at beginning of period              |       | —          |       | 99,170         |       | 53               |       | —            |       | 99,223           |       |
| Cash and cash equivalents at end of period                    |       | $               | —     |           | $          | 111,589          |       | $                 | 33         |             | $          | — |   | $ | 111,622 |   |

 

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 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 (provided by) 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 ofContents

 

**ITEM 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

*References to “us” and “we” are to the Company. You should read thefollowing discussion in conjunction with our unaudited condensed consolidatedfinancial statements and related notes included in this quarterly report, andour audited consolidated financial statements and related notes and Management’sDiscussion and Analysis of Financial Condition and Results of Operationsincluded in our Annual Report on Form 10-K filed with the Securities andExchange Commission (“SEC”).*

 

**Forward-LookingStatements**

 

Thisreport contains forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934 (the “Exchange Act”) that are subject to risks and uncertainties.You should not place undue reliance on those statements because they aresubject to numerous uncertainties and factors relating to our operations andbusiness environment, all of which are difficult to predict and many of whichare beyond our control. Forward-looking statements include informationconcerning our possible or assumed future results of operations, includingdescriptions of our business strategy. These statements often include wordssuch as “may,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate”or similar expressions, including, without limitation, certain statements inResults of Operations, Liquidity and Capital Resources and Item 3. Quantitativeand Qualitative Disclosures About Market Risk. 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:

 

·                  economicslowdowns,

·                  general marketconditions,

·                  credit marketcontractions,

·                  currencyexchange rates,

·                  labor andbenefit costs,

·                  weatherconditions,

·                  the loss ofsignificant customers,

·                  consumerspending and debt levels,

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

·                  product costand price fluctuations due to market conditions,

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

·                  materialfacilities and systems disruptions and shutdowns,

·                  failure torealize expected benefits from acquisitions,

·                  our ability topurchase products from suppliers on favorable terms,

·                  failure tolocate, acquire and successfully integrate acquisition candidates,

·                  the length ofour supply chains,

·                  work stoppages orother business interruptions at transportation centers or shipping ports,

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

·                  our ability toaccurately predict market trends,

·                  dependence onkey employees,

·                  our inabilityto protect trademarks,

·                  adversepublicity and litigation,

·                  our level ofdebt,

·                  interest ratefluctuations,

·                  our customers’ability to pay us,

·                  future cashflows,

·                  changes inconsumer preferences, and

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

 

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

 

19

----

Table of Contents

 

thisreport or elsewhere might not occur. Notwithstanding the foregoing, allinformation contained in this report is materially accurate as of the date ofthis report.

 

**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: appliances; cabinetry; electrical; floorcoverings; gas; hardware; hearth and chimney; heating, ventilation and airconditioning (“HVAC”); janitorial and sanitary; lighting; paint and sundries;plumbing; pool; security; shop and office supplies; tools and equipment; windowcoverings; and other miscellaneous products. Our products are primarily usedfor the repair, maintenance, remodeling, refurbishment and construction ofproperties and non-industrial facilities.

 

Our highly diverse customer base includes facilities maintenancecustomers, which consist of multi-family housing facilities, educationalinstitutions, lodging and health care facilities, government properties andbuilding service contractors; professional contractors who are primarilyinvolved in the repair, remodeling and construction of residential andnon-industrial facilities; and specialty distributors, including plumbing andhardware retailers. Our customers range in size from individual contractors andindependent hardware stores to apartment management companies and nationalpurchasing 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 quality products at competitive prices with reliable same-day ornext-day delivery. The Wilmar, AmSan, Sexauer, Maintenance USA and Traycobrands generally serve our facilities maintenance customers; the Barnett,Copperfield, U.S. Lock and SunStar brands generally serve our professionalcontractor customers; and the Hardware Express, Leran and AF Lighting brandsgenerally serve our specialty distributors customers. Our multi-brand operatingmodel, which we believe is unique in the industry, allows us to use a singleplatform to deliver tailored products and services to meet the individual needsof each respective customer group served. We reach our markets using a varietyof sales channels, including a sales force of approximately 575 field salesrepresentatives, approximately 325 inside sales 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 58 distribution centers,22 professional contractor showrooms located throughout the United States andCanada, 33 vendor-managed inventory locations at large customer locations and adedicated fleet of trucks. Our broad distribution network enables us to providereliable, next-day delivery service to approximately 98% of the U.S. populationand same-day delivery service to most major metropolitan markets in the U.S.

 

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.

 

20

----

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 25, 2010 and June 26, 2009:

 
| ** **                                   | ** ** | **% of Net Sales**     | ** ** | **% Increase**    | ** ** | **% of Net Sales**   | ** ** | **% Increase**    | ** ** |
|----------------------------------------------|------------|------------------------|------------|-------------------|------------|----------------------|------------|-------------------|------------|
| ** **                                   | ** ** | **Three Months Ended** | ** ** | **(Decrease)**    | ** ** | **Six Months Ended** | ** ** | **(Decrease)**    | ** ** |
| ** **                                   | ** ** | **June 25,**      | ** ** | **June 26,** | ** ** | **2010**             | ** ** | **June 25,** | ** ** | **June 26,** | ** ** | **2010** | ** ** |
| ** **                                   | ** ** | **2010**               | ** ** | **2009**          | ** ** | **vs. 2009 (1)**     | ** ** | **2010**          | ** ** | **2009** | ** ** | **vs. 2009 (1)** | ** ** |
|                                         |       |                   |       |              |       |                 |       |              |       |   |   |   |   |
| Net sales                                    |       | 100.0                  | %          | 100.0             | %          | 0.1                  | %          | 100.0             | %          | 100.0 | % | (2.2 | )% |
| Cost of sales                                |       | 62.4                   |       | 63.6              |       | (1.8                 | )          | 61.8              |       | 63.0 |   | (4.0 | ) |
| Gross profit                                 |       | 37.6                   |       | 36.4              |       | 3.3                  |       | 38.2              |       | 37.0 |   | 0.9 |   |
|                                         |       |                   |       |              |       |                 |       |              |       |   |   |   |   |
| Operating Expenses:                          |       |                   |       |              |       |                 |       |              |       |   |   |   |   |
| Selling, general and administrative expenses |       | 28.7                   |       | 29.2              |       | (1.8                 | )          | 30.0              |       | 30.9 |   | (5.0 | ) |
| Depreciation and amortization                |       | 1.8                    |       | 1.6               |       | 12.4                 |       | 1.9               |       | 1.7 |   | 7.3 |   |
| Total operating expense                      |       | 30.5                   |       | 30.9              |       | (1.1                 | )          | 31.9              |       | 32.6 |   | (4.3 | ) |
| Operating income                             |       | 7.1                    |       | 5.6               |       | 27.5                 |       | 6.3               |       | 4.4 |   | 40.2 |   |
|                                         |       |                   |       |              |       |                 |       |              |       |   |   |   |   |
| (Loss) Gain on extinguishment of debt, net   |       | —                 |       | (0.1              | )          | 100.0                |       | —            |       | 0.3 |   | (100.0 | ) |
| Interest expense                             |       | (1.6                   | )          | (1.7              | )          | (7.4                 | )          | (1.7              | )          | (1.9 | ) | (13.6 | ) |
| Interest income and other income             |       | 0.1                    |       | 0.2               |       | (31.6                | )          | 0.1               |       | 0.1 |   | (0.7 | ) |
| Income before income taxes                   |       | 5.6                    |       | 3.9               |       | 42.8                 |       | 4.7               |       | 2.9 |   | 59.6 |   |
| Income tax provision                         |       | (2.2                   | )          | (1.5              | )          | 44.8                 |       | (1.9              | )          | (1.1 | ) | 64.0 |   |
| Net income                                   |       | 3.4                    | %          | 2.4               | %          | 41.6                 | %          | 2.8               | %          | 1.8 | % | 56.9 | % |

 

----

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

 

*Overview.*During thethree months ended June 25, 2010, our net sales increased 0.1%. We believethis increase is associated with the stabilization of general economicconditions. Sales to customers in our facilities maintenance end-markets, whichmake up 74% of our total sales and include residential multi-family housing andinstitutional MRO customers, declined 0.7% during the second quarter of 2010compared to the second quarter of 2009. Sales to our professional contractorand specialty distributor customers, which represent 15% and 11% of our totalsales, respectively, increased 1.1% and 3.2%, respectively. Although we arestarting to see some signs of stabilization, demand from these customerscontinues to be negatively impacted by recessionary declines in residential newconstruction and renovations activity. We expect continued variability withinour end-markets; however, we believe the impact on sales related to the marketweakness during 2010 will be less severe than we experienced during 2009. Weexpect sales to our facilities maintenance, professional contractor andspecialty distributor end-markets to remain relatively flat during theremainder of 2010 as the general economic downturn and credit crisis isexpected to continue specifically with respect to the housing market.

 

Netincome as a percentage of sales was 3.4% in the second quarter compared to 2.4%in the comparable prior year period. The increase in net income as a percent ofsales is primarily a result of higher gross profit margins, lower occupancyexpenses and lower severance and facility closing costs.

 

Weare continuing to focus on keeping our operating costs low in the near termwhile continuing to invest in our operating platform for the long term.Accordingly, our plans include continued investments in the consolidation ofour distribution network and in information technology solutions to optimizecustomer service.

 

*Three Months Ended June 25, 2010 Compared to ThreeMonths Ended June 26, 2009*

 

*Net Sales.*Our net sales increased by$0.2 million, or 0.1%, to $270.2 million in the three months ended June 25,2010 from $269.9 million in the three months ended June 26, 2009. Theincrease in sales resulted from the net impact of a 0.7% decrease in sales toour facilities maintenance customers offset by an increase in sales to ourprofessional contractor and specialty distributor customers of 1.1% and 3.2%,respectively.

 

*Gross Profit.*Gross profit increased by$3.3 million, or 3.3%, to $101.6 million in the three months ended June 25,2010 from $98.3 million in the three months ended June 26, 2009. Ourgross profit margin increased 120 basis points to 37.6% for the three

 

21

----

Table of Contents

 

monthsended June 25, 2010 compared to 36.4% for the three months ended June 26,2009. The increase in gross margin is primarily due to continued improvement inselling margins from the optimization of product pricing as well as highersupplier rebates.

 

*Selling, General and Administrative Expenses.*SG&Aexpenses decreased by $1.4 million, or 1.8%, to $77.5 million in the threemonths ended June 25, 2010 from $78.9 million in the three months ended June 26,2009. As a percent of sales, SG&A decreased to 28.7% for the three monthsended June 25, 2010 compared to 29.2% for the three months ended June 26,2009. The decrease in SG&A expenses is primarily due to decreases inoccupancy-related expenses resulting from previous closings of underperformingprofessional contractor showrooms and consolidations of distribution centers,as well as lower costs incurred directly related to our distributionconsolidation efforts.

 

*Depreciation andAmortization.*Depreciationand amortization expense increased by $0.5 million to $4.9 million in thethree months ended June 25, 2010 from $4.4 million in the three monthsended June 26, 2009. As a percentage of sales, depreciation andamortization was 1.8% or 20 basis points higher than the 1.6% in the comparableprior year period. This increase was due to higher depreciation resulting fromour higher capital spending over the last three years associated with ourinformation technology infrastructure and distribution center consolidation andintegration efforts.

 

*Operating Income.*As a result of theforegoing, operating income increased by $4.1 million, or 27.5%, to$19.2 million in the three months ended June 25, 2010 from $15.0million in the three months ended June 26, 2009. As a percent of sales,operating income increased to 7.1% in the three months ended June 25, 2010compared to 5.6% in the three months ended June 26, 2009.

 

*Gain (Loss) onExtinguishment of Debt*.We had no gain or loss on extinguishment of debt in the three months ended June 25,2010. During the three months ended June 26, 2009, we repaid $20.0 millionof our term loan ahead of schedule. In connection with the term loan payment,we recorded a loss on extinguishment of debt of $0.2 million associated withthe write-off of deferred financing costs.

 

*Interest Expense.*Interest expense decreasedby $0.4 million in the three months ended June 25, 2010 to$4.4 million from $4.7 million in the three months ended June 26,2009. This decrease was primarily due to $36.8 million in lower debt balancesoutstanding compared to last year associated with the repayments of our termdebt and the repurchase of our 81/8% senior subordinated notes and lower interest rates.

 

*Interest and Other Income.* Interest and other income decreased $0.1 million to $0.3million in the three months ended June 25, 2010 compared to $0.4 millionin the three months ended June 26, 2009. The decrease was primarilyattributable to lower interest income earned from our short-term investmentsresulting from a lower interest-rate environment.

 

*Provision for Income Taxes.*The effectivetax rate for the three months ended June 25, 2010 was 39.8% compared to39.2% for the three months ended June 26, 2009. The increase in theeffective tax rate was due to the write-off of deferred tax assets associatedwith share-based compensation arising from stock options that were forfeiteddue to employee terminations as well as lower tax exempt interest income.

 

*Six Months Ended June 25, 2010 Compared to Six MonthsEnded June 26, 2009*

 

*Net Sales.*Our net sales decreased by$11.3 million, or 2.2%, to $515.4 million in the six months ended June 25,2010 from $526.7 million in the three months ended June 26, 2009. Thedecline in sales resulted from the net impact of a 1.9% decrease in sales toour facilities maintenance customers and a continued decline in sales to ourprofessional contractor and specialty distributor customers of 3.9% and 1.9%,respectively. 

 

*Gross Profit.*Gross profit increased by$1.8 million, or 0.9%, to $196.7 million in the six months ended June 25,2010 from $194.9 million in the six months ended June 26, 2009. Ourgross profit margin increased 120 basis points to 38.2% for the six monthsended June 25, 2010 compared to 37.0% for the six months ended June 26,2009. The increase in gross margin is primarily due to continued improvement inselling margins from the optimization of product pricing as well as highersupplier rebates.

 

*Selling, General and Administrative Expenses.*SG&Aexpenses decreased by $8.1 million, or 5.0%, to $154.7 million in the sixmonths ended June 25, 2010 from $162.8 million in the six months ended June 26,2009. As a percent of sales, SG&A decreased to 30.0% for the six monthsended June 25, 2010 compared to 30.9% for the six months ended June 26,2009. The decrease in SG&A expenses is primarily due to $3.9 million oflower bad debt expense as well as decreases in occupancy and personnel-relatedexpenses

 

22

----

Table of Contents

 

resultingfrom previous closings of underperforming professional contractor showrooms,consolidations of distribution centers and headcount reductions, and lowercosts incurred directly related to our distribution consolidation efforts.

 

*Depreciation andAmortization.*Depreciationand amortization expense increased by $0.7 million to $9.7 million in thesix months ended June 25, 2010 from $9.0 million in the six months ended June 26,2009. As a percentage of sales, depreciation and amortization was 1.9% or 20basis points higher than the 1.7% in the comparable prior year period. Thisincrease was due to higher depreciation resulting from our higher capitalspending over the last three years associated with our information technologyinfrastructure and distribution center consolidation and integration efforts.

 

*Operating Income.*As a result of theforegoing, operating income increased by $9.3 million, or 40.2%, to $32.3million in the six months ended June 25, 2010 from $23.1 million in thesix months ended June 26, 2009. As a percent of sales, operating incomeincreased to 6.3% in the six months ended June 25, 2010 compared to 4.4%in the six months ended June 26, 2009.

 

*Gain (Loss) onExtinguishment of Debt*.We had no gain or loss on extinguishment of debt in the six months ended June 25,2010. During the six months ended June 26, 2009, we repurchased $36.4million of our 81/8% senior subordinated notes at an average of 93.8% of par,or $34.2 million. In addition, we repaid $25.2 million of our term loan aheadof schedule. In connection with the repurchase of our 81/8%senior subordinated notes and the term loan payment, we recorded a gain onextinguishment of debt of $1.5 million net of $0.1 million and $0.6 million inoriginal issue discount and deferred financing costs written-off, respectively.

 

*Interest Expense.*Interest expense decreasedby $1.4 million in the six months ended June 25, 2010 to $8.7 millionfrom $10.1 million in the six months ended June 26, 2009. Thisdecrease was primarily due to $36.8 million in lower debt balances outstandingcompared to last year associated with the repayments of our term debt and therepurchase of our 81/8% senior subordinated notes and lower interest rates.

 

*Interest and Other Income.* Interest and other income decreased less than $0.1 millionto $0.7 million in the six months ended June 25, 2010 compared to $0.7million in the six months ended June 26, 2009.

 

*Provision for Income Taxes.*The effectivetax rate for the six months ended June 25, 2010 was 39.8% compared to38.7% for the six months ended June 26, 2009. The increase in theeffective tax rate was due to the write-off of deferred tax assets associatedwith share-based compensation arising from stock options that were forfeiteddue to employee terminations and the decrease in the benefit recognizedassociated with unrecognized tax benefits. During the six months ended June 26,2009, we obtained resolution related to an uncertain state tax position and weadjusted the accrual previously established, of which $0.1 million favorablyimpacted our effective tax rate.

 

**Liquidity and Capital Resources**

 

*Overview*

 

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

 

Wehave outstanding $150.7 million of 81/8% seniorsubordinated notes due 2014 and we have a $330.0 million bank credit facility.The 81/8% seniorsubordinated notes mature on June 15, 2014 and interest is payable on June 15and December 15 of each year. As of June 25, 2010, the 81/8% senior subordinated noteshad an estimated fair market value of $149.9 million, or 99.5% of par. The bankcredit facility consists of a $230.0 million 7-year term loan and a $100.0million 6-year revolving credit facility of which a portion not exceeding $40.0million is available in the form of letters of credit. As of June 25, 2010, InterlineNew Jersey had $9.1 million of letters of credit issued under therevolving loan facility and $154.2 million of aggregate principaloutstanding under the term loan facility.

 

Thedebt instruments of Interline New Jersey, primarily the credit facility enteredinto on June 23, 2006 and the indenture governing the terms of the 81/8% senior subordinated notes,contain significant restrictions on the payment of dividends and distributionsto us by Interline New Jersey. Interline New Jersey’s credit facility allows itto pay dividends, make distributions to us or make investments in us in anaggregate amount not to exceed $2.0 million during any fiscal year, so long asInterline New Jersey is not in default or would be in default as a result ofsuch payments. In addition, ordinary course distributions for overhead (up to$3.0 million annually) and taxes are permitted, as are annual payments of up to$7.5 million in respect of our stock option or other benefit plans formanagement or employees and (provided Interline New Jersey is not in default)aggregate payments of up to $40.0 million depending on the pro forma netleverage ratio as of the last day of the previous quarter. In addition, theindenture for the 81/8% seniorsubordinated notes generally restricts the ability of Interline New Jersey topay distributions to us and to make advances to, or investments in, us to anamount generally equal to 50% of the net income of Interline New Jersey, plusan amount equal to the net

 

23

----

Table of Contents

 

proceedsfrom certain equity issuances, subject to compliance with a leverage ratio andno default having occurred and continuing. The indenture also contains certainpermitted exceptions including (1) allowing us to pay our franchise taxesand other fees required to maintain our corporate existence, to pay for generalcorporate and overhead expenses and to pay expenses incurred in connection withcertain financing, acquisition or disposition transactions, in an aggregateamount not to exceed $10.0 million per year; (2) allowing certain taxpayments; and (3) allowing certain permitted distributions up to $75million. For further description of the credit facility, see “Credit Facility”below.

 

*FinancialCondition*

 

Workingcapital increased by $25.0 million to $322.3 million as of June 25, 2010from $297.3 million as of December 25, 2009. The increase in workingcapital was primarily funded by cash flows from operating activities.

 

*CashFlow*

 

*Operating Activities.* Net cash provided byoperating activities was $16.1 million in the six months ended June 25,2010 compared to net cash provided by operating activities of$72.3 million in the six months ended June 26, 2009.

 

Netcash provided by operating activities of $16.1 million in the six months ended June 25,2010 primarily consisted of net income of $14.7 million, adjustments fornon-cash items of $13.7 million and cash used in working capital items of $12.3million. Adjustments for non-cash items primarily consisted of $9.9 million indepreciation and amortization of property, equipment and intangible assets, $2.4million in bad debt expense and $2.0 million in share-based compensation. Thecash used in working capital items primarily consisted of $22.4 million fromincreased trade payables balances as a result of the timing of purchases andrelated payments and $2.1 million from the increase in income taxes payableresulting from an increase in income before taxes. These items were partiallyoffset by $18.0 million from increased inventory levels primarily as a resultof the stocking of our new distribution centers in Chicago, Illinois and Philadelphia,Pennsylvania, and $18.0 million from increased trade receivables, net ofchanges in our allowance for doubtful accounts, resulting from increased salesand the timing of collections.

 

Netcash provided by operating 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 in amortizationof debt issuance costs and the write-off of $0.7 million in deferredacquisition costs due to the adoption of FAS 141R offset by $1.5 million in netgain 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 closingof underperforming professional contractor centers, $2.7 million from decreasedprepaid expenses and other current assets primarily from the collection ofrebates from vendors and $2.0 million from the increase in income taxespayable. These items were partially offset by $4.7 million from increased tradereceivables, net of changes in our allowance for doubtful accounts; however,net trade receivables decreased from increased collections and the decline insales.

 

*Investing Activities.* Net cash used in investingactivities was $8.2 million in the six months ended June 25, 2010 comparedto net cash used in investing activities of $6.1 million in the six monthsended June 26, 2009.

 

Net cash used in investingactivities in the six months ended June 25, 2010 was primarily attributable to $8.2 million of capitalexpenditures associated with our distribution center consolidation projects andour information technology infrastructure, as well as those made in theordinary course of business.

 

Net cash used in investingactivities in the six months ended June 26, 2009 was primarily attributable to capital expenditures made inthe ordinary course of business of $5.7 million and $0.4 million in costs relatedto purchases of businesses.

 

*Financing Activities.* Net cashprovided by financing activities totaled $4.4 million in the six monthsended June 25, 2010 compared to net cash used in financing activities of$59.7 million in the six months ended June 26, 2009.

 

24

----

Table of Contents

 

Net cash provided byfinancing activities in the six months ended June 25, 2010 wasattributable to proceeds received from stock options exercised and relatedexcess tax benefits of $7.7 million, partially offset by a $1.7 millionrepayment of term debt and capital lease obligations and a $1.5 million netdecrease in purchase card payable.

 

Net cash used in financing activities in the six months ended June 26,2009 was attributable to our repurchase of $36.4 million of our 81/8% senior subordinated notesat an average of 93.8% of par, or $34.2 million and our repayment of $26.3million of borrowings on our credit facility and capital lease obligationsoffset by the net increase in purchase card payable of $0.7 million.

 

*Capital Expenditures*

 

Capital expenditures were $8.2 million in the six months ended June 25,2010 compared to $5.7 million in the six months ended June 26, 2009.Capital expenditures as a percentage of sales were 1.6% in the six months endedJune 25, 2010 compared to 1.1% in the six months ended June 26, 2009.The increase in capital expenditures was driven primarily by the continuedconsolidation of our distribution center network, including the investments inlarger, more efficient distribution centers. In addition, during the six monthsended June 25, 2010 and June 26, 2009, we acquired leaseholdimprovements through non-cash lease incentives of $1.6 million and $3.0million, respectively.

 

*Credit Facility*

 

Borrowingsunder the term loan and the delayed draw facility bear interest, at InterlineNew Jersey’s option, at either LIBOR plus 1.75% or at the alternate base rate,which is the greater of the Prime Rate or the Federal Funds Effective Rate plus0.50%, plus 0.75%. Borrowings under the revolving credit facility bearinterest, at Interline New Jersey’s option, at either LIBOR plus 1.75% or atthe alternate base rate plus 0.50%. As of June 25, 2010, the weightedaverage interest rate in effect with respect to the term loan and the delayeddraw facility was 2.05% 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 spread is subject to a pricinggrid that is based on the ratio of net total indebtedness to consolidatedearnings before interest, taxes, depreciation and amortization (“EBITDA”), asdefined by the credit facility. The term loan and the delayed draw facilitymature on June 23, 2013 and the revolving loan facility matures on June 23,2012. In accordance with the terms of our credit facility, 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. As a result of our repayments of borrowings on our termdebt, we are not required to make another principal payment until the debtmatures in 2013.

 

Thebank credit facility, which is secured by substantially all of the assets ofInterline New Jersey and is guaranteed by us and by the domestic subsidiaries of Interline NewJersey, contains affirmative, negative and financial covenants that limitInterline New Jersey’s ability to incur additional indebtedness, pay dividendson its common stock or redeem, repurchase or retire its common stock orsubordinated indebtedness, make certain investments, sell assets, andconsolidate, merge or transfer assets, and that require Interline New Jersey tomaintain certain financial ratios as of the last day of each fiscal quarter,including a minimum ratio based on an adjusted consolidated EBITDA, as definedby the credit facility, to consolidated cash interest expense and a maximumratio of net total indebtedness to an adjusted consolidated EBITDA, as definedby the credit facility. The maximum ratio of net total indebtedness to adjustedconsolidated EBITDA, as defined by the credit facility, was 3.5x. Interline NewJersey and the Company were in compliance with all covenants at June 25,2010.

 

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

 

*Liquidity*

 

Historically,our capital requirements have been for debt service obligations, workingcapital requirements, including inventory, accounts receivable and accountspayable, acquisitions, the expansion and maintenance of our distributionnetwork and upgrades of our information systems. We expect this to continue inthe foreseeable future. Historically, we have funded these requirements throughcash flow generated from operating activities and funds borrowed under ourcredit facility. We expect our cash 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 credit facility,are used to support payment obligations incurred for our general corporatepurposes.

 

25

----

Table of Contents

 

As of June 25, 2010, we had $49.2 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 credit facility.As of June 25, 2010, we had $112.9 million of total cash on hand andpermitted investments (including $25.0 million in cash that, for the covenantcompliance ratio, is netted against debt).

 

We believe that cash and cash equivalents, cash flow from operationsand available borrowing capacity under our credit facility will be adequate tofinance our ongoing operational cash flow needs and debt service obligationsfor the next twelve months.

 

*Contractual Obligations*

 

Ourcontractual obligations are disclosed in our Annual Report on Form 10-Kfor the year ended December 25, 2009 filed with the SEC. There have beenno material changes to our contractual obligations since December 25,2009.

 

**CriticalAccounting Policies**

 

In preparing the unaudited condensed consolidated financial statementsin conformity with accounting principles generally accepted in the UnitedStates of America, management is required to make certain estimates, judgmentsand assumptions. These estimates, judgments and assumptions affect the reportedamounts of assets and liabilities, including the disclosure of contingentassets and liabilities, at the date of the financial statements and thereported amounts of revenues and expenses during the periods presented. On anongoing basis, management evaluates these estimates and assumptions. Managementbases its estimates and assumptions on historical experience and on variousother factors that are believed to be reasonable at the time the estimates andassumptions are made. Actual results may differ from these estimates andassumptions under different circumstances or conditions.

 

Our critical accounting policies are included in our Annual Report on Form 10-Kfor the year ended December 25, 2009 filed with the SEC. During the threemonths ended June 25, 2010, there were no significant changes to any ofour critical accounting policies.

 

**ITEM 3. Quantitative andQualitative Disclosures About Market Risk**

 

*Commodity Price Risk*

 

We are aware of thepotentially unfavorable effects inflationary pressures may create throughhigher product and material costs, higher asset replacement costs and relateddepreciation and higher interest rates. In addition, our operating performanceis affected by price fluctuations in copper, oil, stainless steel, aluminum, zinc,plastic and PVC and other commodities and raw materials. We seek to minimizethe effects of inflation and changing prices through economies of purchasingand inventory management resulting in cost reductions and productivityimprovements as well as price increases to maintain reasonable profit margins. However, such commodity price fluctuations have from time totime created cyclicality in our financial performance, and could continue to doso in the future. In addition, our use of priced catalogs may not allow us tooffset such cost increases quickly, resulting in a decrease in gross marginsand profit.

 

*InterestRate Risk*

 

Ourvariable rate term debt is sensitive to changes in the general level ofinterest rates. As of June 25, 2010, the weighted average interest rate ineffect with respect to our $154.2 million variable rate term debt was 2.05% forthe LIBOR option and 4.00% for the alternate base rate option. While ourvariable rate term debt obligations expose us to the risk of rising interestrates, we do not believe that the potential exposure is material to our overallfinancial performance or results of operations. Based on the outstandingvariable rate term debt as of June 25, 2010, a 1.0% annual increase ordecrease in current market interest rates would have the effect of causing a$0.8 million pre-tax change to our statement of operations for the six monthsended June 25, 2010.

 

The fair market value of ourfixed rate debt is subject to interest rate risk. As of June 25, 2010, thefair market value of our $150.7 million 81/8% seniorsubordinated notes was approximately $149.9 million, or 99.5% of par.

 

*Foreign Currency Exchange Risk*

 

Themajority of our purchases from foreign-based suppliers are from China and othercountries in Asia and are transacted in U.S. dollars. Accordingly, our exposureto risk from foreign currency exchange rates was not material as of June 25,2010.

 

26

----

Table ofContents

 

*DerivativeFinancial Instruments*

 

Asof June 25, 2010, we did not have any interest rate exchange agreements orswaps. Historically, we entered into derivative financial instruments from timeto time, including interest rate exchange agreements or swaps, to manage ourexposure to fluctuations in interest rates on our debt.

 

Weperiodically evaluate the costs and benefits of any changes in our interestrate risk. Based on such evaluation, we may enter into new interest rate swapsto manage our interest rate exposure. Our derivative activities, all of whichare for purposes other than trading, are initiated within the guidelines ofcorporate risk-management policies.

 

**ITEM 4. Controls and Procedures**

 

*Evaluationof Disclosure Controls and Procedures*

 

Our management, with theparticipation of our Chief Executive Officer and Chief Financial Officer (ourprincipal executive officer and principal financial officer), evaluated theeffectiveness of our disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) under the Exchange Act) as of June 25, 2010. Based onthis evaluation, our Chief Executive Officer and Chief Financial Officerconcluded that, as of June 25, 2010, our disclosure controls and procedureswere effective to (1) ensure that material information disclosed by us in thereports that we file or submit under the Exchange Act is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, to allow timely decisions regarding required disclosure and(2) ensure that information required to be disclosed by us in the reports thatwe file or submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms.

 

*Changes inInternal Control over Financial Reporting*

 

No change in our internalcontrol over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)under the Exchange Act) occurred during the quarter ended June 25, 2010 thathas materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

27

----

Table of Contents

 

**PART II. OTHER INFORMATION**

 

**ITEM 1. Legal Proceedings**

 

We are involved in various legalproceedings that have arisen in the ordinary course of our business and havenot 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 regardingfactors that could affect our financial position, results of operations andcash flows, see the risk factors discussion provided in our Annual Report onForm 10-K for the year ended December 25, 2009 in Part I. Item 1A. RiskFactors. See also “Part I. Item 2—Forward Looking Statements” above.

 

Therehave been no material changes from the risk factors previously disclosed in ourAnnual Report on Form 10-K for the year ended December 25, 2009.

 

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

 

*UnregisteredSales of Equity Securities*

 

None.

 

*Purchasesof Equity Securities by the Issuer*

 

The following tablesummarizes repurchases of our stock during the three months ended June 25,2010, comprised entirely of shares sold to us to satisfy employee taxwithholding obligations that arose upon the vesting of restricted share units:

 
| **Period**               | ** ** | **Total  Number of  Shares  Purchased** | ** ** | **Average Price  Paid per  Share** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced Plans or  Programs** | ** ** | **Maximum Number of  Shares that May Yet  Be Purchased Under  the Plans or Programs** | ** ** |
|--------------------------|------------|-----------------------------------------|------------|------------------------------------|------------|------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| April 2010               |       |                                    |       |                               |       |                                                                                     |       |                                                                                  |       |
| (March 27 - April 23)    |       | 198                                     |       | $                                  | 19.46      |                                                                                     | —     |                                                                                  | —     |   |
| May 2010                 |       |                                    |       |                               |       |                                                                                     |       |                                                                                  |       |
| (April 24 – May 21) |       | 2,731                                   |       | 20.87                              |       | —                                                                                   |       | —                                                                                |       |
| June 2010                |       |                                    |       |                               |       |                                                                                     |       |                                                                                  |       |
| (May 22 – June 25)  |       | —                                  |       | —                             |       | —                                                                                   |       | —                                                                                |       |
| Total                    |       | 2,929                                   |       | $                                  | 20.78      |                                                                                     | —     |                                                                                  | —     |   |

 

**ITEM 3. Defaults Upon Senior Securities**

 

None.

 

**ITEM 4. (Removed and Reserved)**

 

**ITEM 5. Other Information**

 

None.

 

28

----

Table of Contents

 

**ITEM 6. Exhibits**

 

The following exhibits are beingfiled as part of this Quarterly Report on Form 10-Q:

 
| 12.1 | Computation  of earnings to fixed charges and earnings to combined fixed charges and  preferred dividends of Interline Brands, Inc. (furnished herewith).                                                               |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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).   |

 

29

----

Table of Contents

 

**SIGNATURES**

 

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

 
| ** **           | ** ** | ** ** | **INTERLINE  BRANDS, INC.**                                  |
|----------------------|------------|------------|--------------------------------------------------------------|
|                 |       |       | Registrant                                                   |
|                 |       |       |                                                         |
|                 |       |       |                                                         |
| Date: August 2, 2010 |       | By:        | /S/ JOHN A. EBNER                                            |
|                 |       |       | John A. Ebner                                                |
|                 |       |       | Chief Financial Officer                                      |
|                 |       |       | (Duly Authorized Signatory and  Principal Financial Officer) |

 

30

----