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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 26, 2003
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 333-106801
INTERLINE BRANDS, INC.
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-2232386
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
801 WEST BAY STREET, JACKSONVILLE, FLORIDA 32204
(Address of principal executive offices) (Zip Code)
(904) 421-1400 (Registrant's
telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes { } No {X}
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).
Yes { } No {X}
As of the close of business on November 10, 2003, there were
5,385,189 shares outstanding of the registrant's common stock, no par value.
TABLE OF CONTENTS
PAGE
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Statements of Operations
for the Three and Nine Months Ended September 26, 2003 and
September 27, 2002................................................................3
Unaudited Condensed Consolidated Balance Sheets as of September
26, 2003 and December 27, 2002....................................................4
Condensed Consolidated Statements of Stockholders'
Equity (Deficiency) for the Nine Months Ended September 26, 2003..................5
Unaudited Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 26, 2003 and
September 27, 2002................................................................6
Notes to Unaudited Condensed Consolidated Financial
Statements for the Three and Nine Months Ended September 26, 2003
and September 27, 2002............................................................7
Item 2. Management's Discussions and Analysis of Financial Condition
and Results of Operations.............................................................21
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................27
Item 4. Controls and Procedures...............................................................27
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................28
Item 6. Exhibits and Reports on Form 8-K......................................................28
SIGNATURES.......................................................................................29
-2-
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
INTERLINE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 26, 2003 AND SEPTEMBER 27, 2002
(In thousands, except share data)
Three Months Ended Nine Months Ended
September 26, September 27, September 26, September 27,
2003 2002 2003 2002
------------- ------------- ------------- -------------
NET SALES............................................. $ 166,676 $ 166,025 $ 481,235 $ 486,302
COST OF SALES......................................... 103,308 105,674 298,241 307,629
---------- ---------- ----------- -----------
Gross Profit...................................... 63,368 60,351 182,994 178,673
---------- ---------- ----------- -----------
OPERATING EXPENSES:
Selling, general and administrative expenses...... 43,693 41,469 126,678 124,258
Depreciation and amortization..................... 3,134 2,906 8,759 8,707
Special costs and expenses........................ 132 1,535 510 2,750
---------- ---------- ----------- -----------
Total Operating Expense........................ 46,959 45,910 135,947 135,715
---------- ---------- ----------- -----------
OPERATING INCOME...................................... 16,409 14,441 47,047 42,958
CHANGE IN FAIR VALUE OF INTEREST RATE SWAPS........... (2,201) 4,442 (3,284) 5,855
LOSS ON EARLY EXTINGUISHMENT OF DEBT.................. -- -- 14,893 --
INTEREST EXPENSE, net................................. 10,297 9,523 30,046 28,766
OTHER (INCOME) EXPENSE................................ (54) -- (46) --
---------- ---------- ----------- -----------
Income before income taxes........................ 8,367 476 5,438 8,337
PROVISION FOR INCOME TAXES............................ 3,563 177 2,565 3,095
---------- ---------- ----------- -----------
NET INCOME............................................ 4,804 299 2,873 5,242
PREFERRED STOCK DIVIDENDS............................. (12,381) (10,792) (35,905) (31,301)
---------- ---------- ----------- -----------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS............ $ (7,577) $ (10,493) $ (33,032) $ (26,059)
========== ========== =========== ===========
(LOSS) PER COMMON SHARE - BASIC....................... $ (1.41) $ (1.95) $ (6.13) $ (4.84)
========== ========== =========== ===========
(LOSS) PER COMMON SHARE - DILUTED..................... $ (1.41) $ (1.95) $ (6.13) $ (4.84)
========== ========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
-3-
INTERLINE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 26, 2003 AND DECEMBER 27, 2002
(In thousands, except share data)
September 26, December 27,
2003 2002
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 22,702 $ 5,557
Cash - restricted -- 329
Accounts receivable - trade (net of allowance for doubtful accounts
of $5,840 and $5,322) 93,462 83,087
Accounts receivable - other 10,461 13,052
Inventory 111,904 124,479
Prepaid expenses and other current assets 6,403 5,953
Deferred income taxes 9,101 10,933
------------- ------------
Total current assets 254,033 243,390
PROPERTY AND EQUIPMENT, net 30,293 33,585
GOODWILL, net 195,669 195,669
OTHER INTANGIBLE ASSETS, net 80,008 77,423
OTHER ASSETS 8,353 1,652
------------- ------------
TOTAL ASSETS $ 568,356 $ 551,719
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Current portion of long-term debt $ 7,000 $ 22,750
Revolving credit facility -- 18,500
Accounts payable 50,230 53,417
Accrued expenses and other current liabilities 11,826 13,603
Accrued interest payable 11,201 4,409
Accrued merger expenses 6,216 7,427
------------- ------------
Total current liabilities 86,473 120,106
LONG-TERM LIABILITIES:
Deferred income taxes 19,844 21,253
Interest rate swaps 14,783 18,067
Long-term debt, net of current portion 336,275 284,774
------------- ------------
TOTAL LIABILITIES 457,375 444,200
------------- ------------
COMMITMENTS AND CONTINGENCIES
SENIOR PREFERRED STOCK, $0.01 par value, 27,000,000 shares
authorized; 23,619,888 shares issued and outstanding; at liquidation value 367,108 331,203
------------- ------------
STOCKHOLDERS' EQUITY (DEFICIENCY):
Common stock, no par value, 7,500,000 shares authorized; 5,385,189
shares issued and outstanding 1,994 1,994
Accumulated deficit (257,109) (224,077)
Stockholder loans (1,518) (1,440)
Accumulated other comprehensive income (loss) 506 (161)
------------- ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (256,127) (223,684)
------------- ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 568,356 $ 551,719
============= ============
See accompanying notes to condensed consolidated financial statements.
-4-
INTERLINE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE NINE MONTHS ENDED SEPTEMBER 26, 2003
(In thousands, except share data)
Retained Accumulated Total
Common Stock Earnings Other Stockholders'
----------------------- Shareholder (Accumulated Comprehensive Equity
Shares Amount Loans Deficit) Income (Loss) (Deficiency)
--------- -------- ------------ ------------ -------------- -------------
BALANCE, DECEMBER 27, 2002 5,385,189 $ 1,994 $ (1,440) $ (224,077) $ (161) $ (223,684)
Preferred stock dividends -- -- -- (35,905) -- (35,905)
Interest accrual on stockholder loans -- -- (78) -- -- (78)
Comprehensive income:
Net income -- -- -- 2,873 -- --
Foreign currency translation -- -- -- -- 667 --
Total comprehensive income -- -- -- -- -- 3,540
----------- ---------- -------------- -------------- ---------------- ----------------
BALANCE, SEPTEMBER 26, 2003 5,385,189 $ 1,994 $ (1,518) $ (257,109) $ 506 $ (256,127)
=========== ========== ============== ============== ================ ================
See accompanying notes to condensed consolidated financial statements.
-5-
INTERLINE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 26, 2003 AND SEPTEMBER 27, 2002
(In thousands, except share data)
For The Nine Months Ended
September 26, September 27,
2003 2002
------------- -------------
OPERATING ACTIVITIES :
Net income $ 2,874 $ 5,242
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 8,759 8,707
Amortization of debt issuance costs 7,855 1,240
Deferred compensation -- 765
Change in fair value of interest rate swaps (3,284) 5,855
Loss on disposal of property and equipment 3 --
Interest income on shareholder notes (78) (73)
Deferred income taxes 423 (2,648)
Senior subordinated notes issued for interest due 1,674 2,385
Changes in assets and liabilities, net of effects of acquisition:
Accounts receivable - trade (10,375) (11,781)
Accounts receivable - other 2,590 (799)
Inventory 12,576 (2,839)
Prepaid expenses and other current assets (450) 808
Other assets (73) (69)
Accrued interest payable 6,792 (1,488)
Accounts payable (3,187) 8,772
Cash - restricted 329 --
Accrued expenses and other current liabilities (1,779) (5,449)
Accrued merger expenses (1,210) (1,472)
Income taxes payable -- 435
------------- -------------
Net cash provided by operating activities 23,439 7,591
------------- -------------
INVESTING ACTIVITIES:
Purchase of property and equipment, net (3,495) (4,133)
Purchase of investment and other assets (3,747) --
------------- -------------
Net cash used in investing activities (7,242) (4,133)
------------- -------------
FINANCING ACTIVITIES:
(Decrease) Increase in revolver and swingline, net (18,500) 9,500
Repayment of long-term debt (309,198) (12,375)
Proceeds from refinancing transactions 340,000 --
Payment of debt issuance costs (12,020) --
------------- -------------
Net cash provided by (used in) financing activities 282 (2,875)
------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 666 25
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 17,145 608
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,557 3,327
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 22,702 $ 3,935
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for :
Interest $ 18,082 $ 26,322
============= =============
Income taxes (net of refunds) $ 1,404 $ 5,135
============= =============
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Dividends on preferred stock $ 35,905 $ 31,301
============= =============
See accompanying notes to condensed consolidated financial statements.
-6-
INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 26, 2003 AND SEPTEMBER 27, 2002
(In thousands, except share data)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of Interline Brands,
Inc. ("Interline" or the "Company") reflect all adjustments which are, in the
opinion of management, necessary to a fair statement of the results for the
interim periods presented. The results of operations for the interim periods
presented are not necessarily indicative of the results to be expected for the
full year.
The Company is in one industry, the distribution of maintenance, repair and
operations, or MRO, products. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosure about Segments of an
Enterprise and Related Information", the Company has one operating segment. Our
net sales for the nine month periods ended September 26, 2003 and September 27,
2002 by product category were as follows (in millions):
NINE MONTHS NINE MONTHS
ENDED ENDED
PRODUCT CATEOGORY 9/26/03 9/27/02
- ----------------- ----------- -----------
Plumbing.................................... $226.2 $233.4
Electrical.................................. 52.9 58.4
Hardware.................................... 33.7 34.0
HVAC........................................ 28.9 29.2
Appliances and Parts........................ 33.7 29.2
Security Hardware........................... 38.5 38.9
Other....................................... 67.4 63.2
------ ------
Total....................................... $481.2 $486.3
====== ======
2. ACCOUNTING POLICIES
Further information regarding the basis of presentation and significant
accounting policies is included in the Company's consolidated annual financial
statements, contained in the Company's Registration Statement on Form S-4 filed
with the United States Securities and Exchange Commission as amended (File No.
333-106801).
INTANGIBLE ASSETS
Effective July 1, 2003 the Company changed the estimated useful life of certain
customer lists from 40 years to 17 years. The effect of this change in the
estimated remaining useful life is not considered to be material to the
Company's consolidated financial statements.
FREIGHT COSTS
During the third quarter of 2003 the Company reclassified freight costs paid by
its customers ("freight revenue") from selling, general and administrative costs
to net sales. This reclassification did not have an effect on operating income.
However, it did increase both net sales and selling, general and administrative
costs by $1.3 million for the three months ended September 2003.
-7-
3. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued SFAS No. 149, AMENDMENT OF STATEMENT 133 ON
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS 149"). SFAS 149 amends and
clarifies the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
In addition, the statement clarifies when a contract is a derivative and when a
derivative contains a financing component that warrants special reporting in the
statement of cash flows. SFAS 149 is generally effective prospectively for
contracts entered into or modified, and hedging relationships designated, after
June 30, 2003. Management adopted the statement effective June 28, 2003 and it
did not have a material impact on the Company's consolidated financial position,
results of operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL
INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY ("SFAS 150").
SFAS 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity, and
imposes certain additional disclosure requirements. The provisions of SFAS 150
are generally effective for financial instruments entered into or modified after
May 31, 2003. Additionally, the Company must apply the provisions of SFAS 150 to
all financial instruments on July 1, 2003. Management adopted the statement
effective June 28, 2003 and does not expect adoption to have a material impact
on the Company's consolidated financial position, results of operations or cash
flows.
4. EARNINGS PER SHARE
Net income per share for all periods has been computed in accordance with SFAS
No. 128, "Earnings per Share". Basic net income per share is computed by
dividing net income by the weighted-average number of shares outstanding during
the year. Diluted net income per share is computed by dividing net income by the
weighted-average number of shares outstanding during the year, assuming
dilution.
-8-
INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTH AND NINE MONTH PERIODS ENDED SEPTEMBER 26, 2003 AND
SEPTEMBER 27, 2002
(CONTINUED)
(In thousands, except share data)
- --------------------------------------------------------------------------------
The amounts used in calculating net income (loss) per share data are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 26, SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 27,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net income $ 4,804 $ 299 $ 2,873 $ 5,242
Preferred stock dividends (12,381) (10,792) (35,905) (31,301)
---------- ---------- ---------- -----------
Net loss applicable to common shareholders $ (7,577) $ (10,493) $ (33,032) $ (26,059)
========== ========== ========== ===========
Weighted average shares outstanding - basic 5,385 5,385 5,385 5,385
Effect of dilutive stock options -- -- -- --
---------- ---------- ---------- -----------
Weighted average shares outstanding - diluted 5,385 5,385 5,385 5,385
========== ========== ========== ===========
Options to purchase 172,150 and 125,805 shares of common stock which were
outstanding during 2003 and 2002, respectively, were not included in the
computation of weighted average shares outstanding-diluted because the options
exercise price was greater than the average market price of common stock and the
effect would be antidilutive.
5. DEBT
Long-term debt at September 26, 2003 and December 27, 2002 consists of the
following:
SEPTEMBER 26, DECEMBER 27,
2003 2002
------------- ------------
Term Loan A -- $ 70,000
Term Loan B -- 146,625
Term Loan $ 140,000 --
Note payable 3,275 --
Senior Subordinated Notes - 16% -- 90,899
Senior Subordinated Notes - 11.5% 200,000 --
------------- ------------
343,275 307,524
Less current portion (7,000) (22,750)
------------- ------------
$ 336,275 $ 284,774
============= ============
-9-
INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 26, 2003 AND SEPTEMBER 27, 2002
(CONTINUED)
(In thousands, except share data)
- --------------------------------------------------------------------------------
In May 2003, the Company completed an offering of $200 million principal amount
of 11.5% Senior Subordinated Notes due 2011 and entered into a new $205.0
million senior secured credit facility which consists of a $140.0 million term
loan facility and a $65.0 million revolving loan facility, a portion of which is
available in the form of letters of credit. The net proceeds from the offering
of Senior Subordinated Notes and the refinancing of the former credit facility
with the new credit facility were used to: (1) repay all outstanding
indebtedness under our former credit facility, (2) redeem all of the 16% senior
subordinated notes, (3) pay accrued interest and related redemption premiums on
our former debt and (4) pay transaction fees and expenses related to the
offering and new credit facility. These transactions are referred to
collectively as the "Refinancing Transactions".
The $200 million principal amount 11.5% Senior Subordinated Notes due 2011 pay
interest each May 15 and November 15, with the first payment due on November 15,
2003. Prior to May 15, 2006, the Company may redeem up to 35% of the Senior
Subordinated Notes using proceeds of certain equity offerings. The Company may
redeem all or a portion of the notes after May 15, 2007, subject to redemption
premiums unless redeemed after May 15, 2009.
Borrowings under the term loan facility and revolving loan facility bear
interest, at the Company's option, at either LIBOR plus a spread or at the
alternate base rate plus a spread. Interest rates in effect on borrowings under
the term loan facility at September 26, 2003 ranged from 5.62% for LIBOR based
borrowings and 7.50% for prime based borrowings. Outstanding letters of credit
under the revolving loan facility are subject to a per annum fee equal to the
applicable spread over the adjusted LIBOR for revolving loans. The term loan
facility matures on November 30, 2009 and the revolving loan facility matures on
May 31, 2008.
As of September 26, 2003, the Company had $5.5 million of letters of credit
issued and $48.2 million available under the revolving loan facility. There were
no borrowings under the revolving loan facility at September 26, 2003. The new
credit facility is secured by substantially all of the assets of the Company.
Debt issuance costs capitalized in connection with the Refinancing Transactions
were approximately $12.0 million. An expense of approximately $14.9 million for
the early extinguishment of debt resulted from the write-off of the unamortized
loan fees and loan discount relating to the Company's former credit facility and
the redemption premium incurred upon redemption of the 16% Senior Subordinated
Notes, as part of the Refinancing Transactions.
Periodically, the Company enters into derivative financial instruments,
including interest rate exchange agreements, to manage its exposure to
fluctuations in interest rates on its debt. At December 27, 2002 and September
26, 2003, the Company had interest rate exchange agreements, or swaps,
outstanding with a total notional amount of $151.0 million. These agreements,
which mature between April and October of 2005, effectively fix the interest
rate on the Company's variable rate borrowings under the term loan facility at a
weighted average rate of 6.56%. The change in market value of the outstanding
interest rate exchange agreements has been recorded as a long-term liability of
$14.8 million at September 26, 2003. The Company's derivative activities are for
purposes other than trading and as such the Company intends to hold these
instruments until their respective maturities.
The new credit facility contains customary affirmative and negative covenants
that limit the Company's ability to incur additional indebtedness, pay dividends
on its common stock or redeem, repurchase or retire its common stock or
subordinated indebtedness, make certain investments, sell assets, and
consolidate, merge or transfer assets, and that require the Company to maintain
its debt to cash flow ratio and interest expense coverage ratio. The Company was
in compliance with all covenants at September 26, 2003.
In April 2003, the Company issued a non-recourse note payable in the principal
amount of $3.3 million for the purchase of an investment. This note, which is
secured only by the investment, bears interest at a rate of 4% per annum, with
principal due in full in April 2010.
-10-
INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 26, 2003 AND SEPTEMBER 27, 2002
(CONTINUED)
(In thousands, except share data)
- --------------------------------------------------------------------------------
The maturities of long-term debt subsequent to September 26, 2003 are as
follows:
2003 $ 1,750
2004 7,000
2005 7,875
2006 11,375
2007 14,000
Thereafter 301,275
------------
$ 343,275
============
6. STOCK OPTION PLANS
During 2000, the Company established a Stock Award Plan, (the "2000 Plan"),
under which the Company may award a total of 525,000 shares of common stock in
the form of incentive stock options (which may be awarded to key employees
only), nonqualified stock options, stock appreciation rights, or SARs, and
restricted stock awards, all of which may be awarded to directors, officers, key
employees and consultants. The exercise price per share for an incentive stock
option may not be less than 100% of the fair market value of a share of common
stock on the grant date. The exercise price per share for an incentive stock
option granted to a person owning stock possessing more than 10% of the total
combined voting power of all classes of stock may not be less than 110% of the
fair market value of a share of common stock on the grant date, and may not be
exercisable after the expiration of five years from the date of grant. The
options generally vest ratably over their five-year term. The Company's
compensation committee will determine in its sole discretion whether a SAR is
settled in cash, shares or a combination of cash and shares.
A summary of the status of the Company's stock option plans is as follows:
NUMBER EXERCISE PRICE AVERAGE EXERCISE
OF SHARES PER SHARE PRICE PER SHARE
--------- -------------- ----------------
Outstanding at December 29, 2002 125,805 $ 1.67 - $ 20.33 $ 9.00
2003:
Granted 46,345 $ 0.50 $ 0.50
Outstanding at September 26, 2003 172,150 $ 1.67 - $ 20.33 $ 6.71
All stock options granted were at prices no less than the fair market value of
the common stock at the grant date.
The Company accounted for the option plans in accordance with APB Opinion No.
25, under which no compensation cost has been recognized for stock option
awards.
Compensation cost for options granted in 2003, determined based on the fair
value at the grant date consistent with the method prescribed by SFAS 123, did
not have a material effect on net income. The fair value of each option was
estimated on the date of grant using the Black-Scholes option pricing model,
with the following assumptions used for options granted in 2003: dividend yield
of 0%, expected volatility of 0%, risk-free interest rate of 3.48% and expected
life of 5 years.
-11-
INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 26, 2003 AND SEPTEMBER 27, 2002
(CONTINUED)
(In thousands, except share data)
- --------------------------------------------------------------------------------
7. SUBSIDIARY GUARANTORS
The Company completed an offering of $200 million principal amount of Senior
Subordinated Notes in connection with its Refinancing Transactions. The Company
has filed a registration statement with the Securities and Exchange Commission
with respect to an exchange offer for the Senior Subordinated Notes and with
respect to resales of the Senior Subordinated Notes by an affiliate of the
Company for market-making purposes. The registration statement has been declared
effective by the SEC. The Company's new Senior Subordinated Notes are fully and
unconditionally guaranteed, jointly and severally, on a subordinated basis by
Wilmar Holdings, Inc., Wilmar Financial, Inc., and Glenwood Acquisition LLC
(wholly-owned subsidiaries of Interline). The guarantees by these subsidiary
guarantors will be senior to any of their existing and future subordinated
obligations, equal in right of payment with any of their existing and future
senior subordinated indebtedness and subordinated to any of their existing and
future senior indebtedness. Accordingly, condensed consolidating financial
statements for Interline Brands, Inc. and the Subsidiary Guarantors are
presented below.
-12-
INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 26, 2003 AND SEPTEMBER 27, 2002
(In thousands, except share data)
CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
As of September 26, 2003
Parent Subsidiary
Company Guarantors Eliminations Consolidated
------- ---------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 22,608 $ 94 $ -- $ 22,702
Accounts receivable-- trade, net 93,462 -- -- 93,462
Accounts receivable-- other 10,461 -- -- 10,461
Inventory 111,904 -- -- 111,904
Prepaid expenses and other current assets 6,401 2 -- 6,403
Deferred income taxes 9,101 -- -- 9,101
Due from Parent -- 43,649 (43,649) --
Investment in subsidiaries 62,258 -- (62,258) --
---------------------------------------------------------------
Total current assets 316,195 43,745 (105,907) 254,033
PROPERTY AND EQUIPMENT, net 30,293 -- -- 30,293
GOODWILL, net 195,669 -- -- 195,669
OTHER INTANGIBLE ASSETS, net 80,008 -- -- 80,008
OTHER ASSETS 5,054 6,620 (3,321) 8,353
---------------------------------------------------------------
TOTAL ASSETS $ 627,219 $ 50,365 $ (109,228) $ 568,356
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Current portion of long-term debt $ 7,000 $ -- $ -- $ 7,000
Revolving credit facility --
Accounts payable 50,230 -- -- 50,230
Accrued expenses and other current liabilities 11,822 4 -- 11,826
Accrued interest payable 11,201 -- -- 11,201
Accrued merger expenses 6,216 -- -- 6,216
Income taxes payable (1,200) 1,200 -- --
Due to subsidiaries 43,695 -- (43,695) --
---------------------------------------------------------------
Total current liabilities 128,964 1,204 (43,695) 86,473
LONG-TERM LIABILITIES:
Deferred income taxes 19,844 -- -- 19,844
Interest rate swaps 14,783 -- -- 14,783
Long-term debt, net of current portion 333,000 3,275 -- 336,275
---------------------------------------------------------------
TOTAL LIABILITIES 496,591 4,479 (43,695) 457,375
---------------------------------------------------------------
SENIOR PREFERRED STOCK, $0.01 par value, 27,000,000
shares authorized; 23,619,888 shares issued and outstanding; 367,108 -- -- 367,108
at liquidation value
STOCKHOLDERS' EQUITY (DEFICIENCY):
Common stock, no par value, 7,500,000 shares authorized,
5,385,189 shares issued and outstanding 1,994 -- -- 1,994
Additional paid-in-capital -- 43,285 (43,285) --
Accumulated deficit (257,109) 22,248 (22,248) (257,109)
Shareholder loans (1,518) -- -- (1,518)
Dividends 19,647 (19,647) -- --
Accumulated other comprehensive income (loss) 506 -- -- 506
---------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (236,480) 45,886 (65,533) (256,127)
---------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 627,219 $ 50,365 $ (109,228) $ 568,356
===============================================================
-13-
INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 26, 2003 AND SEPTEMBER 27, 2002
(In thousands, except share data)
CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
As of December 27, 2002
Parent Subsidiary
Company Guarantors Eliminations Consolidated
------- ---------- ------------ ------------
(In thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,459 $ 98 $ -- $ 5,557
Cash-- restricted 329 329
Accounts receivable-- trade, net 83,087 -- -- 83,087
Accounts receivable-- other 13,052 -- -- 13,052
Inventory 124,479 -- -- 124,479
Prepaid expenses and other current assets 5,946 7 -- 5,953
Deferred income taxes 10,933 -- -- 10,933
Due from Parent -- 54,929 (54,929) --
Investment in subsidiaries 55,030 -- (55,030) --
----------------------------------------------------------------
Total current assets 298,315 55,034 (109,959) 243,390
PROPERTY AND EQUIPMENT, net 33,585 -- -- 33,585
GOODWILL, net 195,669 -- -- 195,669
INTANGIBLE ASSETS, net 77,423 -- -- 77,423
OTHER ASSETS 1,652 -- -- 1,652
----------------------------------------------------------------
TOTAL ASSETS $ 606,644 $ 55,034 $ (109,959) $ 551,719
================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Current portion of long-term debt $ 22,750 $ -- $ -- $ 22,750
Revolving credit facility 18,500 18,500
Accounts payable 53,417 -- -- 53,417
Accrued expenses and other current liabilities 13,599 4 -- 13,603
Accrued interest payable 4,409 -- -- 4,409
Accrued merger expenses 7,427 -- -- 7,427
Due to subsidiaries 54,929 -- (54,929) --
----------------------------------------------------------------
Total current liabilities 175,031 4 (54,929) 120,106
LONG-TERM LIABILITIES:
Deferred income taxes 21,253 -- -- 21,253
Interest rate swaps 18,067 -- -- 18,067
Long-term debt, net of current portion 284,774 -- -- 284,774
----------------------------------------------------------------
TOTAL LIABILITIES 499,125 4 (54,929) 444,200
----------------------------------------------------------------
SENIOR PREFERRED STOCK, $0.01 par value, 27,000,000 shares
authorized; 23,619,888 shares issued and outstanding;
at liquidation value 331,203 -- -- 331,203
STOCKHOLDERS' EQUITY (DEFICIENCY):
Common stock, no par value, 7,500,000 shares authorized,
5,385,189 shares issued and outstanding 1,994 -- -- 1,994
Additional paid-in-capital -- 40,010 (40,010) --
Accumulated deficit (224,077) 15,020 (15,020) (224,077)
Stockholder loans (1,440) -- -- (1,440)
Accumulated other comprehensive income (loss) (161) -- -- (161)
----------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (223,684) 55,030 (55,030) (223,684)
----------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 606,644 $ 55,034 $ (109,959) $ 551,719
================================================================
-14-
INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 26, 2003 AND SEPTEMBER 27, 2002
(In thousands, except share data)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
For the Three Months Ended September 26, 2003
Parent Subsidiary
Company Guarantors Eliminations Consolidated
------- ---------- ------------ ------------
(In thousands)
NET SALES $ 166,676 $ -- $ -- $ 166,676
COST OF SALES 103,308 -- -- 103,308
------------------------------------------------------------------------
Gross profit 63,368 -- -- 63,368
OPERATING EXPENSES:
Selling, general and administrative expenses 43,689 4 -- 43,693
Depreciation and amortization 3,134 -- -- 3,134
Special costs and expenses 132 -- -- 132
------------------------------------------------------------------------
Total operating expenses 46,955 4 -- 46,959
------------------------------------------------------------------------
OPERATING INCOME 16,413 (4) -- 16,409
CHANGE IN FAIR VALUE OF INTEREST
RATE SWAPS (2,201) -- -- (2,201)
OTHER INCOME (54) -- -- (54)
INTEREST EXPENSE, net 13,983 (3,686) -- 10,297
EQUITY IN EARNINGS OF SUSIDIARIES (2,482) -- 2,482 --
------------------------------------------------------------------------
Income before income taxes 7,167 3,682 (2,482) 8,367
PROVISION FOR INCOME TAXES 2,363 1,200 -- 3,563
------------------------------------------------------------------------
NET INCOME 4,804 2,482 (2,482) 4,804
PREFERRED STOCK DIVIDENDS (12,381) -- -- (12,381)
------------------------------------------------------------------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (7,577) $ 2,482 $ (2,482) $ (7,577)
========================================================================
-15-
INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 26, 2003 AND SEPTEMBER 27, 2002
(In thousands, except share data)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
For the Three Months Ended September 27, 2002
Parent Subsidiary
Company Guarantors Eliminations Consolidated
------- ---------- ------------ ------------
(In thousands)
NET SALES $ 166,025 $ -- $ -- $ 166,025
COST OF SALES 105,674 -- -- 105,674
------------------------------------------------------------------
Gross profit 60,351 -- -- 60,351
OPERATING EXPENSES:
Selling, general and administrative expenses 41,463 6 -- 41,469
Depreciation and amortization 2,906 -- -- 2,906
Special costs and expenses 1,535 -- -- 1,535
------------------------------------------------------------------
Total operating expenses 45,904 6 -- 45,910
------------------------------------------------------------------
OPERATING INCOME 14,447 (6) -- 14,441
CHANGE IN FAIR VALUE OF INTEREST
RATE SWAPS 4,442 -- -- 4,442
INTEREST EXPENSE, net 12,581 (3,058) -- 9,523
EQUITY IN EARNINGS OF SUSIDIARIES (2,052) -- 2,052 -
------------------------------------------------------------------
Income before income taxes (524) 3,052 (2,052) 476
PROVISION FOR INCOME TAXES (823) 1,000 -- 177
------------------------------------------------------------------
NET INCOME 299 2,052 (2,052) 299
PREFERRED STOCK DIVIDENDS (10,792) -- -- (10,792)
------------------------------------------------------------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $(10,493) $ 2,052 $ (2,052) $ (10,493)
==================================================================
-16-
INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 26, 2003 AND SEPTEMBER 27, 2002
(In thousands, except share data)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
For the Nine Months Ended September 26, 2003
Parent Subsidiary
Company Guarantors Eliminations Consolidated
------- ---------- ------------ ------------
(In thousands)
NET SALES $ 481,235 $ -- $ -- $ 481,235
COST OF SALES 298,241 -- -- 298,241
-----------------------------------------------------------------
Gross profit 182,994 -- -- 182,994
OPERATING EXPENSES:
Selling, general and administrative expenses 126,651 27 -- 126,678
Depreciation and amortization 8,759 -- -- 8,759
Special costs and expenses 510 -- -- 510
-----------------------------------------------------------------
Total Operating Expense 135,920 27 -- 135,947
-----------------------------------------------------------------
OPERATING INCOME 47,074 (27) -- 47,047
CHANGE IN FAIR VALUE OF INTEREST
RATE SWAPS (3,284) -- -- (3,284)
LOSS ON EARLY EXTINGUISHMENT OF DEBT 14,893 -- -- 14,893
OTHER (INCOME) EXPENSE (46) (46) 46 (46)
INTEREST EXPENSE, net 40,955 (10,909) -- 30,046
EQUITY IN EARNINGS OF SUSIDIARIES (7,182) -- 7,182 -
-----------------------------------------------------------------
Income before income taxes 1,738 10,928 (7,228) 5,438
PROVISION FOR INCOME TAXES (1,135) 3,700 -- 2,565
-----------------------------------------------------------------
NET INCOME 2,873 7,228 (7,228) 2,873
PREFERRED STOCK DIVIDENDS (35,905) -- -- (35,905)
-----------------------------------------------------------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (33,032) $ 7,228 $ (7,228) $ (33,032)
=================================================================
-17-
INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 26, 2003 AND SEPTEMBER 27, 2002
(In thousands, except share data)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
For the Nine Months Ended September 27, 2002
Parent Subsidiary
Company Guarantors Eliminations Consolidated
------- ---------- ------------ ------------
(In thousands)
NET SALES $ 486,302 $ -- $ -- $ 486,302
COST OF SALES 307,629 -- -- 307,629
---------------------------------------------------------------------
Gross profit 178,673 -- -- 178,673
OPERATING EXPENSES:
Selling, general and administrative expenses 124,239 19 -- 124,258
Depreciation and amortization 8,707 -- -- 8,707
Special costs and expenses 2,750 -- -- 2,750
---------------------------------------------------------------------
Total Operating Expense 135,696 19 -- 135,715
---------------------------------------------------------------------
OPERATING INCOME 42,977 (19) -- 42,958
CHANGE IN FAIR VALUE OF INTEREST
RATE SWAPS 5,855 -- -- 5,855
INTEREST EXPENSE, net 37,446 (8,680) -- 28,766
EQUITY IN EARNINGS OF SUSIDIARIES (5,761) -- 5,761 -
---------------------------------------------------------------------
Income before income taxes 5,437 8,661 (5,761) 8,337
PROVISION FOR INCOME TAXES 195 2,900 -- 3,095
---------------------------------------------------------------------
NET INCOME 5,242 5,761 (5,761) 5,242
PREFERRED STOCK DIVIDENDS (31,301) -- -- (31,301)
---------------------------------------------------------------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (26,059) $ 5,761 $ (5,761) $ (26,059)
=====================================================================
-18-
INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 26, 2003 AND SEPTEMBER 27, 2002
(In thousands, except share data)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended September 26, 2003
Parent Subsidiary
Company Guarantors Eliminations Consolidated
------- ---------- ------------ ------------
OPERATING ACTIVITIES:
Net income $ 2,874 $ 7,228 $ (7,228) $ 2,874
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in earnings of subsidiaries (7,228) -- 7,228 --
Depreciation and amortization 8,759 -- -- 8,759
Amortization of debt issuance costs 7,855 -- -- 7,855
Change in fair value of interest rate swaps (3,284) -- -- (3,284)
Loss on disposal of property and equipment 3 -- -- 3
Interest income on shareholder loans (78) -- -- (78)
Deferred income taxes 423 -- -- 423
Senior subordinated notes issued for interest due 1,674 -- -- 1,674
Changes in assets and liabilities which provided (used) cash,
net of effects of acquisition:
Accounts receivable-- trade (10,375) -- -- (10,375)
Accounts receivable-- other 2,590 -- -- 2,590
Inventory 12,576 -- -- 12,576
Prepaid expenses and other current assets (455) 5 -- (450)
Due from parent -- 11,280 (11,280) --
Other assets (3) (70) -- (73)
Accrued interest payable 6,792 -- -- 6,792
Accounts payable (3,187) -- -- (3,187)
Cash-- restricted 329 -- -- 329
Accrued expenses and other current liabilities (1,779) -- -- (1,779)
Accrued merger expenses (1,210) -- -- (1,210)
Due to subsidiaries (11,280) -- 11,280 --
Income taxes payable (1,200) 1,200 -- --
---------------------------------------------------------
Net cash provided by operating activities 3,796 19,643 -- 23,439
---------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of property and equipment, net (3,495) -- -- (3,495)
Purchase of investment and other assets (472) (3,275) -- (3,747)
---------------------------------------------------------
Net cash used in investing activities (3,967) (3,275) -- (7,242)
---------------------------------------------------------
FINANCING ACTIVITIES:
(Decrease) Increase in revolver and swingline, net (18,500) -- -- (18,500)
Repayment of long-term debt (309,198) -- -- (309,198)
Proceeds from refinancing transactions 340,000 -- -- 340,000
Payment of debt issuance costs (12,020) -- -- (12,020)
Dividends Paid 19,647 (19,647) -- --
Contribution from Parent (3,275) 3,275 -- --
---------------------------------------------------------
Net cash provided by (used in) financing activities 16,654 (16,372) -- 282
---------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS 666 -- -- 666
---------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 17,149 (4) -- 17,145
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,459 98 -- 5,557
---------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 22,608 $ 94 $ -- $ 22,702
=========================================================
-19-
INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 26, 2003 AND SEPTEMBER 27, 2002
(In thousands, except share data)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended September 27, 2002
Parent Subsidiary
Company Guarantors Eliminations Consolidated
------- ---------- ------------ ------------
OPERATING ACTIVITIES:
Net income $ 5,242 $ 5,761 $ (5,761) $ 5,242
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in earnings of subsidiaries (5,761) -- 5,761 --
Depreciation and amortization 8,707 -- -- 8,707
Amortization of debt issuance costs 1,240 -- -- 1,240
Deferred compensation 765 -- -- 765
Change in fair value of interest rate swaps 5,855 -- -- 5,855
Interest income on shareholder notes (73) -- -- (73)
Deferred income taxes (2,648) -- -- (2,648)
Senior subordinated notes issued for interest due 2,385 -- -- 2,385
Changes in assets and liabilities, net of effects of acquisition:
Accounts receivable-- trade (11,781) -- -- (11,781)
Accounts receivable-- other (799) -- -- (799)
Inventory (2,839) -- -- (2,839)
Prepaid expenses and other current assets 806 2 -- 808
Due from parent -- (5,779) 5,779 --
Other assets (69) -- -- (69)
Accrued interest payable (1,488) -- -- (1,488)
Accounts payable 8,772 -- -- 8,772
Accrued expenses and other current liabilities (5,450) 1 -- (5,449)
Accrued merger expenses (1,472) -- -- (1,472)
Due to subsidiaries 5,779 -- (5,779) --
Income taxes payable 435 -- -- 435
----------------------------------------------------------
Net cash provided by operating activities 7,606 (15) -- 7,591
----------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of property and equipment, net (4,133) -- -- (4,133)
Investment in subsidiaries (10) 10 -- --
Purchase of investment and other assets -- -- -- --
----------------------------------------------------------
Net cash used in investing activities (4,143) 10 -- (4,133)
----------------------------------------------------------
FINANCING ACTIVITIES:
(Decrease) Increase in revolver and swingline, net 9,500 -- -- 9,500
Repayment of long-term debt (12,375) -- -- (12,375)
----------------------------------------------------------
Net cash provided by (used in) financing activities (2,875) -- -- (2,875)
----------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS 25 -- -- 25
----------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS 613 (5) -- 608
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,221 106 -- 3,327
----------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,834 $ 101 $ -- $ 3,935
==========================================================
-20-
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
YOU SHOULD READ THE FOLLOWING DISCUSSION IN CONJUNCTION WITH OUR UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED IN THIS QUARTERLY
REPORT, AND OUR AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES
INCLUDED IN OUR REGISTRATION STATEMENT ON FORM S-4 FILED WITH THE SEC, AS
AMENDED (FILE NO. 333-106801).
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This quarterly report contains forward-looking statements that are
subject to risks and uncertainties. You should not place undue reliance on those
statements because they are subject to numerous uncertainties and factors
relating to our operations and business environment, all of which are difficult
to predict and many of which are beyond our control. Forward-looking statements
include information concerning our possible or assumed future results of
operations, including descriptions of our business strategy. These statements
often include words such as "may," "believe," "expect," "anticipate," "intend,"
"plan," "estimate" or similar expressions. These statements are based on
assumptions that we have made in light of our experience in the industry as well
as our perceptions of historical trends, current conditions, expected future
developments and other factors we believe are appropriate under the
circumstances. As you read and consider this quarterly report, you should
understand that these statements are not guarantees of performance or results.
They involve risks, uncertainties and assumptions. Although we believe that
these forward-looking statements are based on reasonable assumptions, you should
be aware that many factors could affect our actual financial results or results
of operations and could cause actual results to differ materially from those in
the forward-looking statements. These factors include:
o material facilities and systems disruptions and shutdowns,
o dependence on key employees,
o failure to locate and acquire acquisition candidates,
o our level of debt,
o interest rate fluctuations,
o future cash flows,
o the highly competitive nature of the maintenance, repair and
operations distribution industry,
o general market conditions,
o changes in consumer preferences,
o adverse publicity and litigation, and
o labor and benefit costs and
o the other factors listed under "Risk Factors" in our Registration
Statement on Form S-4 filed with the SEC, as amended (File No.
333-106801).
You should keep in mind that any forward-looking statement made by us
in this quarterly report speaks only as of the date on which we make it. New
risks and uncertainties arise from time to time, and it is impossible for us to
predict these events or how they may affect us. In light of these risks and
uncertainties, you should keep in mind that any forward-looking statement made
in this quarterly report might not occur.
OVERVIEW
- --------
We are a leading direct marketer and specialty distributor of
maintenance, repair and operations, or MRO, products, according to recent
industry publications. We sell plumbing, electrical, hardware, security
hardware, heating, ventilation and air conditioning, or HVAC, and other MRO
products. Our customer base includes multi-family housing, educational,
lodging and health care facilities, professional contractors and other
distributors. Our customers range in size from individual contractors and
independent hardware stores to large institutional real estate owners.
-21-
The MRO distribution industry is approximately $300 billion in size,
and encompasses the supply of a wide range of MRO products, including
hand-tools, janitorial supplies and safety equipment. The MRO distribution
industry is also highly fragmented and comprised primarily of small, local and
regional companies. Within the MRO distribution industry, we focus on serving
customers in three principal end markets: facilities maintenance, professional
contractors and other distributors. We estimate that the markets we serve within
the overall MRO distribution market are approximately $80 billion in size in the
aggregate. Our customers are primarily engaged in the repair, maintenance,
remodeling and refurbishment of properties and facilities, as opposed to new
construction projects or the maintenance of heavy industrial facilities and
machinery, and therefore have historically been less impacted by negative
cyclical business trends affecting the new construction and heavy industrial
markets.
We market and sell our products primarily through six distinct and
targeted brands. The product and service offerings of each brand are tailored to
the unique needs of the customer groups it serves. We reach our markets using a
variety of sales channels, including a direct sales force of over 400 field
sales representatives, over 280 telesales representatives, a direct mail program
of over five million pieces annually, six brand-specific e-commerce websites and
a national accounts sales program.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
In preparing the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America,
management is required to make certain estimates, judgments and assumptions.
These estimates, judgments and assumptions affect the reported amounts of assets
and liabilities, including the disclosure of contingent assets and liabilities,
at the date of the financial statements and the reported amounts of revenues and
expenses during the periods presented. On an ongoing basis, management evaluates
these estimates and assumptions. Management bases its estimates and assumptions
on historical experience and on various other factors that are believed to be
reasonable at the time the estimates and assumptions are made. Actual results
may differ from these estimates and assumptions under different circumstances or
conditions. The significant accounting policies that management and the audit
committee of our board of directors believe are the most critical in order to
fully understand and evaluate our financial position and results of operations
include the following policies.
ESTIMATING ALLOWANCES FOR DOUBTFUL ACCOUNTS
We maintain allowances for doubtful accounts for estimated losses
resulting from the inability to collect outstanding amounts from customers. The
allowances include specific amounts for those accounts that are likely to be
uncollectible, such as accounts of customers in bankruptcy and general
allowances for those accounts that management currently believes to be
collectible but later become uncollectible. Estimates are used to determine the
allowances for bad debts and are based on historical collection experience,
current economic trends, credit-worthiness of customers and changes in customer
payment terms. Adjustments to credit limits are made based upon payment history
and our customers' current credit-worthiness. If the financial condition of our
customers were to deteriorate, additional allowances may be needed which will
increase selling, general and administrative expenses and decrease accounts
receivable.
ESTIMATING ALLOWANCES FOR EXCESS AND OBSOLETE INVENTORY
Inventories are valued at the lower of cost or market. Prior to 2002,
we determined inventory cost using the first-in, first-out and average cost
methods. Effective December 29, 2001, we changed accounting methods to use
average cost for all inventory. The effect of this change was not material. We
maintain allowances for excess and obsolete inventory and for the difference by
which the cost of the inventory exceeds the estimated market value. Changes to
these allowances are reflected in cost of sales in the period the revision is
made. In order to determine the allowances, management reviews inventory
quantities on hand, slow movement reports and sales history reports. Management
estimates the required reserve based on estimated demand for products and market
conditions. If actual market conditions are less favorable than those estimated
by management and if there is a decrease in demand for certain products,
additional allowances may be required which will increase cost of sales and
decrease the value of inventories.
-22-
IMPAIRMENT OF GOODWILL, INTANGIBLES AND OTHER LONG-LIVED ASSETS
On January 1, 2002, we adopted SFAS 142 "Goodwill and Other Intangible
Assets," which states that goodwill should not be amortized but should be tested
for impairment at a reporting unit level, and a charge should be taken to the
extent of any impairment. Prior to the adoption of SFAS 142, goodwill was
amortized annually over estimated useful lives ranging from 30 to 40 years.
During 2002, we completed the first step of the transitional goodwill
impairment tests, which resulted in a finding of no impairment. We are required
to perform goodwill impairment tests at least annually, and we have elected to
perform our annual goodwill impairment test as of the last day of each fiscal
year. Based upon the timing and satisfactory results of our initial impairment
analysis and due to the absence of significant changes in our financial
condition and events or circumstances that would indicate a deterioration in the
value of the entity, management determined that a detailed determination of fair
value at the end of fiscal 2002 was not necessary. A goodwill impairment test
will be performed as of December 26, 2003.
Management assesses the recoverability of our goodwill, identifiable
intangibles and other long-lived assets whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. The
following factors, if present, may trigger an impairment review: (1) significant
underperformance relative to expected historical or projected future operating
results; (2) significant negative industry or economic trends; (3) a significant
increase in competition; and (4) a significant increase in interest rates on
debt. If the recoverability of these assets is unlikely because of the existence
of one or more of the above-mentioned factors, an impairment analysis is
performed using a projected discounted cash flow method. Management must make
assumptions regarding estimated future cash flows and other factors to determine
the fair value of these respective assets. If these estimates or related
assumptions change in the future, we may be required to record an impairment
charge. Impairment charges would be included in corporate general and
administrative expenses in our statements of operations, and would result in
reduced carrying amounts of the related assets in our balance sheets.
LEGAL CONTINGENCIES
From time to time, in the course of our business, we become involved in
legal proceedings. In accordance with SFAS 5 "Accounting for Contingencies," if
it is probable that, as a result of a pending legal claim, an asset had been
impaired or a liability had been incurred at the date of the financial
statements and the amount of the loss is estimable, an accrual for the costs to
resolve the claim is recorded in accrued expenses in our balance sheets.
Professional fees related to legal claims are included in general and
administrative expenses in our statements of operations. Management, with the
assistance of outside counsel, determines whether it is probable that a
liability from a legal claim has been incurred and estimates the amount of loss.
The analysis is based upon potential results, assuming a combination of
litigation and settlement strategies. Management does not believe that currently
pending proceedings will have a material adverse effect on our consolidated
financial position. It is possible, however, that future results of operations
for any particular period could be materially affected by changes in our
assumptions related to these proceedings.
DERIVATIVE FINANCIAL INSTRUMENTS
We periodically enter into derivative financial instruments, including
interest rate exchange agreements, or swaps, to manage exposure to fluctuations
in interest rates on our debt. Under our current swap agreements, we pay a fixed
rate on the notional amount to a bank and the bank pays us a variable rate on
the notional amount equal to a base LIBOR rate. Our existing interest rate swaps
do not qualify for hedge accounting under SFAS 133 "Accounting for Derivative
Statements and Hedging Activities," and are recorded at fair value in our
balance sheet with changes in the fair value reflected in non-operating expense.
The fair market value of these instruments is determined by quotes obtained from
the related counter parties. The valuation of these derivative instruments is a
significant estimate that is largely affected by changes in interest rates and
market volatility. If interest rates significantly increase or decrease or
interest rate volatility increases or decreases, the value of these instruments
will significantly change, resulting in an impact on our earnings.
-23-
RESULTS OF OPERATIONS
- ---------------------
The following discussion refers to the term daily sales. Daily sales
are defined as sales for a period of time divided by the number of shipping days
in that period of time.
THREE MONTHS ENDED SEPTEMBER 26, 2003 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 27, 2002
NET SALES. Our net sales increased by $0.7 million, or 0.4%, to $166.7
million in the three months ended September 2003 from $166.0 million in the
comparable period for the prior year. Daily sales were $2.6 million in the three
months ended September 2003 and 2002. During the third quarter of 2003 we
reclassified freight costs paid by our customers, or freight revenue, from
selling, general and administrative expenses to net sales. This reclassification
did not have an effect on operating income. However, it did increase both net
sales and selling, general and administrative expenses by $1.3 million for the
three months ended September 2003. Excluding the effect of this
reclassification, net sales for the three months ended September 2003 were 0.4%
lower than the comparable prior year period. This net sales decrease was
primarily due to continued weakness in the multi-family housing and professional
contractor markets, which are our two largest customer groups.
GROSS PROFIT. Gross profit increased by $3.0 million, or 5.0%, to $63.4
million in the three months ended September 2003 from $60.4 million in the
comparable period for the prior year. The increase in gross margin to 38.0% for
the three months ended September 2003 from 36.4% for the three months ended
September 2002 was primarily due to continued success in obtaining more
favorable relationships with key suppliers, expanding our import sourcing and
private label programs, eliminating lower margin products from our catalog and
the reclassification of freight revenue described above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, or SG&A expenses, increased by $2.2 million, or 5.4%,
to $43.7 million in the three months ended September 2003 from $41.5 million in
the comparable period for the prior year. Excluding the effect of the $1.3
million freight reclassification referred to above, SG&A expenses increased $0.9
million. This increase was primarily associated with higher health care and
compensation costs, as well as consulting costs related to long term cost
reduction measures.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by $0.2 million, or 7.8%, to $3.1 million in the three months ended
September 2003 from $2.9 million in the comparable period for the prior year.
This was primarily due to a change in accounting estimate made in the third
quarter of 2003 to change the estimated useful life of certain acquired customer
lists, described in Note 2 to the financial statements contained in this
quarterly report, to 17 years. The effect of this change in accounting estimate
was to increase amortization expense by $0.3 million in the three month period
ended September 2003.
SPECIAL COSTS AND EXPENSES. Special costs and expenses were $0.1
million during the three months ended September 2003 and $1.5 million in the
comparable period for the prior year. Special costs and expenses consist of
non-recurring costs incurred in connection with our acquisition of Barnett Inc.,
or Barnett, and related integration activities. Included are expenses related to
the cost to terminate leases for real property, write off inventory associated
with our planned vendor consolidation efforts, relocate executive and
administrative functions, pay employee severance, integrate management
information systems, physically relocate inventory and related consulting costs.
OPERATING INCOME. As a result of the foregoing, operating income
increased by $2.0 million, or 13.6%, to $16.4 million in the three months ended
September 2003 from $14.4 million in the comparable period for the prior year.
INTEREST EXPENSE. Interest expense increased by $0.8 million in the
three months ended September 2003 to $10.3 million from $9.5 million in the
comparable period for the prior year. The increase in interest expense resulted
primarily from higher average debt balances associated with the Refinancing
Transactions (defined below).
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CHANGE IN FAIR VALUE OF INTEREST RATE SWAPS. We recorded an increase in
fair value of our interest rate swaps resulting in a gain of $2.2 million in the
three months ended September 2003 compared to a decrease in fair value resulting
in a loss of $4.4 million in the comparable period for the prior year. These
non-cash increases and decreases in value were attributable to changes in
interest rates and market volatility. As of September 26, 2003 the fair value of
interest rate swaps was recorded as a long-term liability in the amount of $14.8
million. We intend to hold these interest rate swaps until their respective
maturities.
PROVISION FOR INCOME TAXES. The provision for income taxes was $3.6
million in the three months ended September 2003 compared to $0.2 million in the
comparable period for the prior year. The effective tax rate for the three
months ended September 2003 was 42.6% compared to 37.2% in the comparable period
for the prior year. The increase in the effective tax rate was primarily due to
ordinary course adjustments to our fiscal year 2002 tax returns.
NINE MONTHS ENDED SEPTEMBER 26, 2003 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 27, 2002
NET SALES. Our net sales decreased by $5.1 million, or 1.0%, to $481.2
million in the nine months ended September 2003 from $486.3 million in the
comparable period for the prior year. Daily sales were $2.5 million in the nine
months ended September 2003 and 2002. As mentioned above, during the third
quarter of 2003 we reclassified freight revenue from SG&A expenses to net sales.
This reclassification did not have an effect on operating income. However it did
increase both net sales and SG&A expenses by $1.3 million for the nine months
ended September 2003. Excluding the effect of this reclassification, net sales
for the nine months ended September 2003 were 1.3% lower than the comparable
prior year period. This net sales decrease was primarily due to continued
weakness in the multi-family housing and professional contractor markets, which
are our two largest customer groups, and severe weather conditions in certain
parts of the United States during the first quarter of 2003.
GROSS PROFIT. Gross profit increased by $4.3 million, or 2.4%, to
$183.0 million in the nine months ended September 2003 from $178.7 million in
the comparable period for the prior year. The increase in gross margin to 38.0%
for the nine months ended September 2003 from 36.7% for the nine months ended
September 2002 was primarily due to continued success in obtaining more
favorable relationships with key suppliers, expanding our import sourcing and
private label programs, eliminating lower margin products from our catalog and
the reclassification of freight revenue described above.
SG&A EXPENSES. SG&A expenses increased by $2.4 million, or 1.9%, to
$126.7 million in the nine months ended September 2003 from $124.3 million in
the comparable period for the prior year. Our SG&A expense increase was
primarily a result of higher health care and compensation costs and the
reclassification of freight revenue described above.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by $0.1 million, or 0.6%, to $8.8 million in the nine months ended
September 2003 from $8.7 million in the comparable period for the prior year.
This was primarily due to a change in accounting estimate made in the third
quarter of 2003, as described above. The effect of this change in accounting
estimate was to increase amortization expense by $0.3 million in the three and
nine-month periods ended September 2003.
SPECIAL COSTS AND EXPENSES. Special costs and expenses were $0.5
million during the nine months ended September 2003 and $2.8 million in the
comparable period for the prior year. Special costs and expenses consist of
non-recurring costs incurred in connection with our acquisition of Barnett and
related integration activities. Included are expenses related to the cost to
terminate leases for real property, write off inventory associated with our
planned vendor consolidation efforts, relocate executive and administrative
functions, pay employee severance, integrate management information systems,
physically relocate inventory and related consulting costs.
LOSS ON EXTINGUISHMENT OF DEBT. In connection with our Refinancing
Transactions, we recorded an expense of $14.9 million in the second quarter of
2003 for the early extinguishments of debt. This expense results from the
write-off of the unamortized loan fees and discount relating to our former
credit facility and the redemption premium incurred upon redemption of our 16%
Senior Subordinated Notes due September 29, 2008, as part of the Refinancing
Transactions.
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OPERATING INCOME. As a result of the foregoing, operating income
increased by $4.1 million, or 9.5%, to $47.0 million in the nine months ended
September 2003 from $42.9 million in the comparable period for the prior year.
INTEREST EXPENSE. Interest expense increased by $1.2 million in the
nine months ended September 2003 to $30.0 million from $28.8 million in the
comparable period for the prior year. The increase in interest expense resulted
primarily from higher average debt balances associated with the Refinancing
Transactions.
CHANGE IN FAIR VALUE OF INTEREST RATE SWAPS. We recorded an increase in
fair value of our interest rate swaps resulting in a gain of $3.3 million in the
nine months ended September 2003 compared to a decrease in fair value resulting
in a loss of $5.9 million in the comparable period for the prior year. These
non-cash increases and decreases in value were attributable to changes in
interest rates and market volatility.
PROVISION FOR INCOME TAXES. The provision for income taxes was $2.6
million in the nine months ended September 2003 compared to $3.1 million in the
comparable period for the prior year. The effective tax rate for the nine months
ended September 2003 was 47.2% compared to 37.1% in the comparable period for
the prior year. The increase in the effective tax rate was primarily due to
ordinary course adjustments to our fiscal year 2002 tax returns.
LIQUIDITY AND CAPITAL RESOURCES
As of September 26, 2003, we had $48.2 million of availability under
our new $65.0 million revolving credit facility. Historically, our capital
requirements have been for debt service obligations, acquisitions, the expansion
and maintenance of our distribution network, upgrades of our proprietary
information systems software and working capital requirements. We expect this to
continue in the foreseeable future. Historically, we have funded these
requirements through internally generated cash flow and funds borrowed under our
former credit facility. We expect our cash flow from operations and the loan
availability under our new credit facility to be our primary source of funds in
the future. Letters of credit, which are issued under the revolving loan
facility under our new credit facility, will be used to support payment
obligations incurred for our general corporate purposes. As of September 26,
2003, we had $5.5 million of letters of credit issued under the new credit
facility. With respect to borrowings under our new credit facility, we have the
option to borrow at an adjusted LIBOR or an alternative base rate. Interest on
the new credit facility is payable quarterly and began on June 30, 2003, and
with respect to any LIBOR borrowings, on the last day of the interest period
applicable to the term of the borrowing.
Net cash provided by operating activities was $23.4 million in the nine
months ended September 2003 compared to net cash provided by operating
activities of $7.6 million in the comparable period for the prior year. Net cash
provided by operating activities in the nine months ended September 2003 was
higher than the prior year period primarily as a result of improved working
capital trends.
Net cash used in investing activities was $7.2 million in the nine
months ended September 2003 compared to $4.1 million in the comparable period
for the prior year. Net cash used in investing activities in the nine months
ended September 2003 was primarily attributable to capital expenditures made in
the ordinary course of business and the purchase of other investment assets.
Capital expenditures were $3.5 million and $4.1 million in the nine months ended
September 26, 2003 and the comparable period for the prior year, respectively.
Capital expenditures for the nine months ended September 2003 were 0.7% of net
sales. Our business acquisition expenditures were $3.7 million in the nine
months ended September 2003.
Net cash provided by financing activities totaled $0.3 million in the
nine months ended September 2003 compared to net cash used in financing
activities of $2.9 million in the comparable period for the prior year. Net cash
provided by financing activities in the nine months ended September 2003 was
attributable to the Refinancing Transactions (described below). In the
comparable period for the prior year, net cash used in financing activities was
related to the repayment of long-term debt, partially offset by an increase in
borrowings under our former revolving credit facility.
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The $200.0 million aggregate principal amount of our 11.5% Senior
Subordinated Notes due 2011, or the 11.5% notes, was issued as part of the
Refinancing Transactions. On May 29, 2003, we entered into a new $205.0 million
senior secured credit facility which consists of a $140.0 million term loan
facility and a $65.0 million revolving loan facility. The net proceeds from the
offering of the 11.5% notes and the refinancing of our former credit facility
with the new credit facility were used to: (1) repay all outstanding
indebtedness under our former credit facility, (2) redeem all of our outstanding
16% senior subordinated notes due 2008, (3) pay accrued interest and related
redemption premiums on our former debt and (4) pay transaction fees and expenses
related to the offering and the new credit facility. We refer to these
transactions collectively as the "Refinancing Transactions". As of September 26,
2003, our total debt was $343.3 million, and our senior indebtedness was $145.5
million (of which $5.5 million was outstanding in the form of letters of
credit). Interest on the 11.5% notes is payable semiannually, with the first
payment due November 15, 2003.
We believe that cash flow from operations and available borrowing
capacity under our new credit facility will be adequate to finance our ongoing
operational cash flow needs and debt service obligations for the next twelve
months.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Periodically, we enter into derivative financial instruments, including
interest rate exchange agreements, or swaps, to manage our exposure to
fluctuations in interest rates on our debt. Under our existing swaps, we pay a
fixed rate on the notional amount to our banks and the banks pays us a variable
rate on the notional amount equal to a base LIBOR rate. The total notional
amount of these transactions was $151.0 million at September 26, 2003. These
agreements, which mature between April and October of 2005, effectively fix the
interest at a weighted average rate of 6.56%. In the nine months ended September
26, 2003 we have recognized a non-cash gain of $3.3 million from the change in
value of our interest rate swaps. This increase in value of the interest rate
swaps is a direct result of changes in interest rates and market volatility.
ITEM 4. CONTROLS AND PROCEDURES.
Our management, with the participation of our Chief Executive Officer
and Chief Financial Officer (our principal executive officer and principal
financial officer), evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act)
as of September 26, 2003. Based on this evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that, as of September 26, 2003, our
disclosure controls and procedures were (1) designed to ensure that material
information relating to us, including our consolidated subsidiaries, is made
known to our Chief Executive Officer and Chief Financial Officer by others
within those entities, particularly during the period in which this report was
being prepared and (2) effective, in that they provide reasonable assurance that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms.
No change in our internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the
quarter ended September 26, 2003 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are involved in various legal proceedings that have arisen in the
ordinary course of our business and have not been fully adjudicated. These
actions, when ultimately concluded and determined, will not, in the opinion of
management, have a material adverse effect upon our consolidated financial
position, results of operations or liquidity.
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ITEM 2. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
The following exhibits are being filed as part of this Quarterly Report on
Form 10-Q:
31.1 Certification of Michael J. Grebe as President and Chief Executive
Officer of Interline Brands, Inc., pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of William E. Sanford as Executive Vice President and
Chief Financial Officer of Interline Brands, Inc., pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Michael J. Grebe as President and Chief Executive
Officer of Interline Brands, Inc., pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of William E. Sanford as Executive Vice President and
Chief Financial Officer of Interline Brands, Inc., pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
B. REPORTS ON FORM 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
INTERLINE BRANDS, INC.
By: /s/ William E. Sanford
---------------------------------------
William E. Sanford
Executive Vice President, Chief
Financial Officer and Secretary
(Duly Authorized Signatory and
Principal Financial Officer)
Date: November 10, 2003
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