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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________
FORM 10-K
___________________
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 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 ______________
333-106801
Commission File Number
___________________
INTERLINE BRANDS, INC.
(Exact name of registrant as specified in its charter)
___________________
NEW JERSEY 22-2232386
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
801 WEST BAY STREET
JACKSONVILLE, FLORIDA 32204
(Address of principal executive offices)
(904) 421-1400
(Registrant's telephone number, including area code)
___________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
___________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
___________________
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.
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]
Market value of the registrant's voting stock held by non-affiliates of
the registrant -- NOT APPLICABLE AS REGISTRANT'S STOCK IS NOT PUBLICLY TRADED.
As of the close of business on March 25, 2004, there were 5,399,736
shares outstanding of the registrant's common stock, no par value.
DOCUMENTS INCORPORATED BY REFERENCE. NONE.
- --------------------------------------------------------------------------------
ii
TABLE OF CONTENTS
ITEM PAGE
- ---- ----
PART I
1. Business..................................................................1
2. Properties...............................................................12
3. Legal Proceedings........................................................13
4. Submission of Matters to a Vote of Security Holders......................13
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters....13
6. Selected Financial Data..................................................14
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................16
7A. Quantitative and Qualitative Disclosures About Market Risk...............29
8. Financial Statements and Supplementary Data..............................32
9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.....................................................60
9A. Controls and Procedures..................................................60
PART III
10. Directors and Executive Officers of the Registrant.......................60
11. Executive Compensation...................................................63
12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters..............................................71
13. Certain Relationships and Related Transactions...........................73
14. Principal Accountant Fees and Services...................................75
PART IV
15. Exhibits and Reports on Form 8-K.........................................75
16. Signatures..............................................................S-1
iii
PART I
ITEM 1. BUSINESS
OUR COMPANY
We are a leading direct marketer and specialty distributor of
maintenance, repair and operations, or MRO, products according to recent
industry publications. We stock over 45,000 plumbing, electrical, hardware,
security hardware, heating, ventilation and air conditioning, or HVAC, and other
MRO products, and sell to over 140,000 active customer accounts. Our highly
diverse 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. No single customer accounted
for more than 5% of our sales during fiscal 2003.
We market and sell our products primarily through eight distinct and
targeted brands, each of which is nationally recognized in the markets we serve
for providing premium products at competitive prices with reliable same-day or
next-day delivery. The product and service offerings of each of our brands are
tailored to the unique needs of the customer groups it serves. We reach our
markets using a variety of sales channels, including a sales force of over 400
field representatives, over 280 telesales representatives, a direct mail program
of approximately five million pieces annually, brand-specific websites and a
national accounts sales program. We provide same-day or next-day delivery of our
products through our network of 57 regional distribution centers encompassing
approximately 2.1 million square feet located throughout the United States and
Canada, a state-of-the-art national distribution center, or NDC, in Nashville,
Tennessee and our dedicated fleet of trucks.
Our integrated information technology and common operating platform
supports all of our major business functions, allowing us to market and sell our
products at varying price points across our brands, depending on the customer's
service requirements. While we market our products under a variety of brand
names, our brands draw from the same inventory within common distribution
centers and share associated employee and transportation costs. In addition, we
have centralized sales, marketing, purchasing and catalog production operations
that support all brands. We believe that our integrated information technology
and common operating platform also benefit our customers by allowing us to offer
highly competitive prices and broad product selection, while maintaining the
unique customer appeal of each of our targeted brands.
INDUSTRY AND MARKET OVERVIEW
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, safety equipment and many other categories. Customers
served by the MRO distribution industry include heavy industrial manufacturers
that use MRO supplies for repair and overhaul of production facilities and
machinery; institutions such as apartment building complexes, schools, hotels
and health care facilities that use MRO supplies largely for maintenance, repair
and refurbishment of their facilities; and professional contractors. The MRO
distribution industry is highly fragmented and is 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 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. Our facilities maintenance customers are individuals and
entities responsible for the maintenance and repair of various
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commercial properties, including apartment buildings, schools, hotels and health
care facilities. Our professional contractor customers buy our products to
provide plumbing, electrical, heating, ventilation and air conditioning, or
HVAC, and mechanical services to their residential, commercial and industrial
customers. Our distributor customers consist primarily of small specialty
distributors and hardware stores that purchase our products for resale to their
own customers.
OUR BACKGROUND
Wilmar Industries, Inc. (as we were formerly known), was formed in
1978, and initially focused on marketing and distributing MRO products to multi-
family housing facilities. In January 1996, we successfully completed an initial
public offering. During 1999, we completed three acquisitions (Ace Maintenance
Mart USA, Inc., the Mini Blind Company, Inc. and the Sexauer Group), for an
aggregate purchase price of approximately $93.1 million.
In May 2000, an investor group led by our current principal
shareholders, affiliates of Parthenon Capital, Chase Capital Partners (now known
as J.P. Morgan Partners, LLC, or JPMorgan Partners), The Chase Manhattan Bank
(now known as JPMorgan Chase Bank) as trustee for First Plaza Group Trust (a
General Motors Pension Fund), and Sterling Investment Partners, L.P., and
certain other investors, including members of management, acquired Wilmar in a
buy-out of the public shareholders of Wilmar pursuant to a going-private merger
and recapitalization transaction, which we refer to as "the Going-Private
Transaction," for aggregate cash consideration of approximately $300.8 million.
In September 2000, we completed our acquisition of Barnett Inc., which
we refer to as the "Barnett Acquisition", for an aggregate cash purchase price
of approximately $220.8 million. In June 2001, we were renamed Interline Brands,
Inc.
OUR PRINCIPAL SHAREHOLDERS
Parthenon Capital, an affiliate of one of our principal shareholders,
is a Boston-based private equity firm specializing in buyouts, growth equity
investments and recapitalizations of public and private companies. Parthenon
Capital was founded in 1988 and manages approximately $1.1 billion of private
equity capital. Ernest K. Jacquet, Drew T. Sawyer and Gideon Argov of Parthenon
Capital serve on our board of directors.
J.P. Morgan Partners, the investment advisor to J.P. Morgan Partners
(23A SBIC), L.P., one of our principal shareholders, is a global partnership
with approximately $19.0 billion in total capital under management. J.P. Morgan
Partners is a leading provider of private equity and has closed over 1,300
individual transactions since its inception in 1984. J.P. Morgan Partners has
more than 130 investment professionals in nine offices throughout the world.
J.P. Morgan Partners is an affiliate of J.P. Morgan Chase & Co., one of the
largest financial institutions in the world. Christopher C. Behrens and Stephen
V. McKenna of J.P. Morgan Partners serve on our board of directors.
Sterling Investment Partners, L.P., one of our principal shareholders,
is a Connecticut-based private equity firm established to provide growth capital
for middle-market companies valued at $50 million to $300 million. Sterling's
fund exceeds $235 million of committed capital. Charles W. Santoro of Sterling
Investment Partners serves on our board of directors.
2
OUR PRODUCTS
We distribute over 45,000 standard and specialty MRO products in a
number of product categories, including plumbing, electrical, hardware, security
hardware, appliances and parts, HVAC, janitorial chemicals and sanitary
supplies, window and floor coverings and paint and paint accessories. We offer a
broad range of brand name and private label products.
PRODUCT CATEGORIES
The approximate percentages of our net sales for the twelve months
ended December 26, 2003 by product category were as follows:
PRODUCT CATEGORY PERCENTAGE
- ---------------- OF NET SALES
------------
Plumbing........................................................... 47%
Electrical......................................................... 12%
Hardware........................................................... 7%
Security Hardware.................................................. 6%
Appliances and Parts............................................... 6%
HVAC............................................................... 8%
Other.............................................................. 14%
----
Total.............................................................. 100%
----
The following is a discussion of our principal product categories:
PLUMBING PRODUCTS. We sell a broad range of plumbing products, from
individual faucet parts to complete bathroom renovation kits. We sell a number
of brand name products of leading plumbing supply manufacturers, including
Delta, Moen and Price Pfister. We also sell a number of private label plumbing
products under various proprietary trademarks, including Premier faucets and
water heaters, DuraPro tubular products and ProPlus retail plumbing accessories.
ELECTRICAL PRODUCTS. Our comprehensive selection of electrical products
range from items such as ceiling fans to light fixtures and light bulbs. We
offer a number of brand name products of leading electrical supply
manufacturers, including Philips, Westinghouse, Honeywell and General Electric,
as well as a number of private label electrical products, such as Powerworks
switches and Lumina lightbulbs
HARDWARE PRODUCTS. We sell a variety of hardware products, from power
tools to mini blinds. Our brand name products include DAP sealants and caulks,
Rustoleum paints and Milwaukee power tools. Our private label hardware products
include Legend door and window hardware and Anvil Mark fasteners.
SECURITY HARDWARE PRODUCTS. We sell a broad range of security hardware
products, from individual lock-sets to computerized master-key systems. We sell
a number of brand name products of leading security hardware manufacturers,
including Kwikset and Schlage. We also sell a number of private label security
hardware products, such as U.S. Lock hardware, Legend locks and Rx master
keyways.
APPLIANCES AND PARTS. Our comprehensive range of appliances and parts
includes washer/dryer components, garbage disposers, refrigerators and range
hoods. We sell a number of brand name products of
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leading appliance manufacturers, including General Electric and Whirlpool. We
also sell a number of high-quality generic replacement parts.
HVAC PRODUCTS. We offer a variety of HVAC products, including condenser
units, thermostats, fans and motors. Some of these are brand name products of
manufacturers such as York and Janitrol and some are our own private label
products, such as Centurion air conditioners.
PRIVATE LABEL PRODUCTS
Our size and reputation have enabled us to develop and market various
lines of private label products, which we believe offer our customers high
quality, low-cost alternatives to the brand name products we sell. Third party
manufacturers, primarily in China and Southeast Asia, using our proprietary
branding and packaging design, manufacture our private label products to our
specifications. Our sales force, catalogs and monthly promotional flyers
emphasize the comparative value of our private label products. Since our private
label products are typically less expensive for us to purchase from suppliers,
we are able to improve our profit margin with the sale of these products,
despite the fact that we sell them to our customers at a discount to our
non-private label product offerings. In addition, we have found that we develop
strong relationships with our private label customers and generate increased
repeat business, as private label customers generally return to us for future
service and replacement parts on previously purchased products.
NEW PRODUCT OFFERINGS
We constantly monitor and evaluate our product offerings both to assess
the sales performance of our existing products and to discontinue products which
fail to meet specified sales criteria. We also create new product offerings in
response to customer requirements by adjusting our product portfolio within
existing product lines as well as by establishing new product line categories.
Through these efforts, we are able to address our customers' changing product
needs and thereby retain and attract customers. Further, by introducing new
product lines, we provide our customers with additional opportunities for cost
savings and a one-stop shopping outlet with broad product offerings. For
example, we have successfully introduced products such as water heaters, floor
coverings and custom cut mini blinds. We believe that introducing new products
in existing product lines and creating new product lines are both strategies
which enable us to increase penetration of existing customer accounts, as well
as attract new customers to our brands.
OUR BRANDS
We market and sell products to our customers primarily through eight
distinct and targeted brands: Wilmar(R), Sexauer(R), Maintenance USA(R),
Barnett(R), Hardware Express(R), U.S. Lock(R), SunStar(R) and AF LightING(TM).
Each of our brands is focused on serving a particular customer group. Wilmar,
Sexauer and Maintenance USA generally serve facilities maintenance customers,
while Barnett, U.S. Lock, SunStar, AF Lighting and Hardware Express generally
serve professional contractors and other distributors. Our brands are
distinguished not only by the type of products offered, but also by the levels
of service provided to customers. We have brands that market a wide range of
product categories, such as Maintenance USA, as well as brands that specialize
in a particular group of products, such as U.S. Lock, SunStar and AF Lighting.
We have brands that market complementary services to our customers, including
inventory management and technical assistance, and brands that offer products
without support services. Our gross profit margin on product sales varies for
our facilities maintenance and professional contractor and other distributor
brands due to differences in the costs of service levels provided. We believe
that our mix of brands allows us to effectively compete for a broad range of
customers across our industry, regardless of their product requirements,
preferred sales channels or service needs.
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FACILITIES MAINTENANCE BRANDS
We serve our facilities maintenance customers primarily through our
Wilmar, Sexauer and Maintenance USA brands. Facilities maintenance customers buy
our products for maintenance, repair and remodeling, and often need to obtain
products with minimal delay. In many cases, our facilities maintenance customers
also look to us for support services such as inventory maintenance, management
of procurement contracts and technical advice and assistance.
WILMAR. Our Wilmar brand specializes in sales of maintenance products
to the multi-family housing market. Through its Wilmar Master Catalog, Wilmar is
able to act as a one-stop shopping resource for multi-family housing maintenance
managers by offering one of the industry's most extensive selections of standard
and specialty plumbing, hardware, electrical, janitorial and related products.
Wilmar provides free, same-day or next-day delivery in local markets served by
our distribution centers, and ships by parcel delivery services or other
carriers to other areas. Wilmar products are sold primarily through field sales
representatives, as well as through direct mail and telesales. We have also
successfully launched a national accounts program at Wilmar by adding national
account managers who market to high level officers at real estate investment
trusts, or REITS, and other property management companies. Through this program,
we assist large multi-location customers in reducing total supply chain costs.
SEXAUER. Our Sexauer brand markets and sells specialty plumbing and
facility maintenance products to institutional customers, including commercial
real estate, education, lodging, health care and other facilities maintenance
customers. We believe that the catalog of Sexauer products is well known in the
industry as a comprehensive source of specialty plumbing and facility
maintenance products. In addition to a broad product portfolio, Sexauer offers
customers an extensive selection of service and procurement solutions, drawing
upon our product and supply management expertise.
MAINTENANCE USA. Through our Maintenance USA brand, we offer a broad
portfolio of MRO products to facilities, including multi-family housing, lodging
and institutional customers. Since Maintenance USA sells our products
exclusively through a catalog, which is supported by direct mail and telesales,
it represents a low cost supply alternative to smaller property managers and
more cost-conscious customers requiring minimal support services.
PROFESSIONAL CONTRACTOR AND OTHER DISTRIBUTOR BRANDS
We serve our professional contractor and other distributor customers
through our Barnett, Hardware Express, U.S. Lock, SunStar and AF Lighting
brands. Professional contractors generally purchase our products for specific
job assignments and/or to resell the product to end-customers. Our distributor
customers, which consist primarily of local and specialty distributors, hardware
stores and other retail outlets, purchase our products to resell to their
customers.
BARNETT. Our Barnett brand markets and sells a broad range of MRO
products to professional contractors, including plumbing, electrical, building
and HVAC contractors, typically for repair and remodeling applications. The
Barnett brand also sells its products to other distributors, which are generally
smaller and carry fewer products than Barnett. Sales are made primarily through
catalogs, telesales and direct mail. In addition, Barnett has regional sales
managers in select markets throughout the United States. Customers can also
receive technical support and assistance in selecting products by calling our
customer service centers. In addition to next-day delivery, Barnett also offers
customers the convenience of a network of local pick-up counters.
HARDWARE EXPRESS. Our Hardware Express brand markets and sells our full
range of products primarily to retail hardware stores. While Hardware Express
customers may order our products for general inventory purposes, we specialize
in working with independent stores to sell our private label brand products
through custom designed
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retail display sets. We believe that our retail hardware store customers prefer
our private label products because they are priced more competitively than
non-private label products. In addition, our retail display program enables our
hardware customers to present an entire line of products in a professional and
organized manner. Hardware Express sells its products through a catalog,
supplemented by direct mail and telesales personnel, and a specialty display
sales program of private label products which is coordinated by field sales
representatives.
U.S. LOCK. Our U.S. Lock brand sells security hardware products to
professional locksmiths. Our primary marketing vehicle for U.S. Lock products is
our U.S. Lock dealer program, in which professional locksmiths receive
incentives such as rebates and favored pricing on proprietary items in return
for paying an annual membership, guaranteeing annual purchase volume, displaying
our U.S. Lock logo in their stores and assisting in other promotional
activities. Sales are made primarily through catalog, telesales and direct mail.
SUNSTAR/AF LIGHTING. Our SunStar and AF Lighting brands sell
residential lighting and electrical products to electrical contractors,
electrical distributors, lighting showrooms and mass merchants. These brands
sell through direct mail, outbound telesales and a network of manufacturer's
representatives.
SALES AND MARKETING
We market and sell our products nationally and internationally through
a variety of channels. The majority of our sales to facilities maintenance
customers are made through field sales representatives, and the majority of our
sales to professional contractors and other distributors are made through
catalog and promotional mailings, supported by a telesales operation and limited
field sales resources in major metropolitan markets. We also serve our
facilities maintenance and professional contractor customers with brand-specific
websites, though the majority of customer orders are received through the other
channels discussed above. For a more detailed description of our approach to
e-commerce, see "-Management Information System."
Our marketing strategy involves targeting our marketing channels and
efforts to specific customer groups. As a result of our long-standing
relationships with our customers, we have been able to assemble a database of
customer purchasing information, such as end market purchasing trends, product
and pricing preferences and support service requirements. In addition, we are
able to track information such as customer retention and reactivation as well as
new account acquisition costs. We are also able to track the success of a
particular marketing effort once it is implemented by analyzing the purchases of
the customers targeted by that effort. Our information systems allow us to use
this data to develop more effective sales and marketing programs. For example,
our understanding of the preferences of our large, multi-family housing
customers led to our development of a national accounts program, through which
field sales representatives focus on developing contacts with national accounts.
We will continue to leverage our customer knowledge and shared brand information
system to develop successful sales and marketing strategies.
6
CATALOGS AND DIRECT MAIL
Our catalogs and direct mail promotional flyers are key marketing tools
that allow us to communicate our product offerings to both existing and
potential customers. We create catalogs, typically exceeding 1,000 pages, for
each of our brands and mail them on an annual or semi-annual basis. For our
existing customers, we typically mail these catalogs on an annual or semi-annual
basis. We often supplement these catalog mailings by sending our customers
monthly promotional flyers. Most of our branded catalogs have been distributed
for over three decades, and we believe that these catalog titles have achieved a
high degree of recognition among our customers.
In targeting potential direct marketing customers, we typically make
our initial contact through promotional flyers, rather than by sending a
complete catalog. We obtain mailing lists of prospective customers from outside
marketing information services and other sources. We are able to gauge the
effectiveness of our promotional flyer mailings through the use of proprietary
database analysis methods, as well as through our telesales operations. Once
customers begin to place orders with us, we will send an initial catalog and
include the customer on our periodic mailing list for updated catalogs and
promotional materials. We believe that this approach is a cost-effective way for
us to contact large numbers of potential customers and to determine which
customers should be targeted for continuous marketing.
Our in-house art department produces the design and layout for our
catalogs and promotional mailings using a sophisticated catalog content database
and software system. Our catalogs are indexed and illustrated to provide
simplified pricing information and to highlight new product offerings. Our
promotional mailings introduce new product offerings, sale-promotion items and
other periodic offerings. Illustrations, photographs and copy are shared among
brand catalogs and mailings or customized for a specific brand, allowing for
fast and efficient production of multi-branded media. In addition, we frequently
build custom catalogs designed specifically for the needs of some of our larger
customers.
FIELD SALES REPRESENTATIVES
Our direct sales force markets and sells to all levels of the
customer's organization, including senior property management executives, local
and regional property managers and on-site maintenance managers. Our direct
sales force marketing efforts are designed to establish and solidify customer
relationships through frequent contact, while emphasizing our broad product
selection, reliable same-day or next-day delivery, high level of customer
service and competitive pricing.
We maintain one of the largest direct sales forces in our industry,
with over 400 field sales representatives covering markets throughout the United
States, Canada and Central America. We have found that we obtain a greater
percentage of our customers' overall spending on MRO products in markets
serviced by local sales representatives, particularly in regions where these
representatives are supported by a nearby distribution center that enables
same-day or next-day delivery of our product line.
Our field sales representatives are expected not only to generate
orders, but also to act as problem solving customer service representatives. Our
field sales representatives are trained and qualified to assist customers in
shop organization, special orders, part identification and complaint resolution.
We compensate our field sales representatives based on a combination of salary
and commission. Increasingly, we are using these representatives to target
senior management at multi-location companies in order to acquire long-term
customers that make large volume purchases. We will continue to seek additional
opportunities where we can leverage the strength of our field sales force to
generate additional sales from our customers.
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TELESALES
Our telesales operation has been designed to make ordering our products
as convenient and efficient as possible. We divide our telesales staff into
outbound and inbound groups. Our outbound telesales representatives are
responsible for maintaining relationships with existing customers and
prospecting for new customers. These representatives are assigned individual
accounts in specified territories and have frequent contact with existing and
prospective customers in order to make telesales presentations, notify customers
of current promotions and encourage additional purchases. Our inbound telesales
representatives are trained to quickly process orders from existing customers,
provide technical support and expedite and process new customer applications, as
well as handle all other customer service requests. We offer our customers
nationwide toll-free telephone numbers and brand-specific telesales
representatives who are familiar with a particular brand's markets, products and
customers. Our call centers are staffed by over 280 telesales, customer service
and technical support personnel, who utilize our proprietary, on-line order
processing system. This sophisticated software provides the telesales staff with
detailed customer profiles and information about products, pricing, promotions
and competition.
OPERATIONS AND LOGISTICS
DISTRIBUTION NETWORK
We have a network of 57 regional distribution centers strategically
located to serve the largest metropolitan areas throughout the United States and
Canada, and a state-of-the-art national distribution center in Nashville,
Tennessee. We also maintain a dedicated fleet of trucks to assist in local
delivery of products. The geographic scope of our distribution network and the
efficiency of our information system enable us to provide reliable, same-day or
next-day delivery service to over 98% of the U.S. population.
Our regional distribution centers are central to our operations and
range in size from approximately 6,000 square feet to 106,000 square feet. Our
regional distribution centers are typically maintained under operating leases in
commercial or industrial centers, and primarily consist of warehouse and
shipping facilities. We have also had success with opening pick-up counters in
existing distribution centers and in freestanding locations, which allow the
customer to obtain products from a fixed location without ordering in advance.
This service has been especially popular with our professional contractor
customers, as we have found that many of them prefer to pick up products between
jobs. We plan to continue to open select pick-up centers in geographic locations
with high concentrations of professional contractors.
INBOUND LOGISTICS
Historically, our distribution centers were decentralized, with most of
our vendors shipping directly to individual regional distribution centers. In
July 2000, we opened our NDC in Nashville, Tennessee, which we later expanded to
317,000 square feet. Our NDC receives the majority of our vendor shipments and
efficiently re-distributes products to our regional distribution centers. Some
over-sized or seasonal products are directly shipped to regional distribution
centers by suppliers. Our use of the NDC has significantly reduced regional
distribution center replenishment lead times and on-hand inventory, while
simultaneously improving our customer fill rates.
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OUTBOUND LOGISTICS
Once an order is entered into the computer system by a telesales
representative, items within the order are automatically arranged by warehouse
location to facilitate ease of picking within the distribution center. For
customers located within the local delivery radius of a distribution center
(typically 50 miles), our own trucks or third-party carriers will deliver the
products directly to the customer either on the same day or the next day. For
customers located outside the local delivery radius of a distribution center, we
deliver products via UPS or another parcel delivery company or, in the case of
large orders, by common carriers. We arrange for pick-up of returns at no charge
to the customer in the local delivery radius. For customers outside the local
delivery radius, we provide parcel service pick-up of the returns at no charge
and also provide a full refund if the return is the result of our error.
SUPPLIERS
We enjoy long-standing relationships with many of our suppliers. No
single supplier accounted for more than 5% of our inventory purchases in fiscal
2003. In addition, in most cases, we have a number of competitive sources of
supply for any particular product that we sell. Due to our high volume of
purchases and use of foreign suppliers, we are able to obtain purchase terms we
believe to be more favorable than those available to most local suppliers of MRO
products. Approximately 80% of our purchases in fiscal 2003 were from
domestically based suppliers and approximately 20% were from foreign based
suppliers, primarily located in Asia.
Our purchasing process is driven by an inventory management system that
forecasts demand based on customer ordering patterns. This system monitors our
inventory and alerts our purchasing managers of items approaching low stocking
levels. We balance ordering and carrying costs in an effort to minimize total
inventory costs. Forecasting is automated and is based on historical demand or
seasonally adjusted projected demand. Our system assists in determining which
items fit seasonal demand patterns. Demand forecasts are adjusted by trend
factors that reflect changes in expected sales or general business trends.
Automated procedures recommend safety stock levels based on frequency of item
sales. When an item reaches re-order point, our system can automatically
generate a replenishment purchase, the purchasing manager can initiate an
automatic purchase order or the purchasing manager can manually build a purchase
order. System reports prompt the purchasing manager to resolve out-of-stock risk
situations repeatedly until the situation is resolved, either through the
placement of an order or by discontinuing the product.
MANAGEMENT INFORMATION SYSTEMS
We operate a sophisticated customer service and inventory management
system that allows us to manage customer relationships and to administer and
distribute thousands of products. Our systems encompass all major business
functions for each of our main brands and enable us to receive and process
orders, manage inventory, verify credit and payment history, generate customer
invoices, receive payments and manage our proprietary mail order customer lists.
We have consistently invested in our information technology, as we believe that
the efficiency and flexibility of our information system are critical to the
success of our business.
Our information systems have been instrumental in our efforts to
streamline our inventory management processes. Our information systems track
each item of our inventory and its location within our distribution network. By
monitoring inventory levels, we are able to quickly reorder products or shift
inventory through our distribution network in order to ensure product
availability. Our systems also allow us to monitor sales of products, enabling
us to eliminate products that do not perform to our sales targets. Furthermore,
our information systems allow us to maintain shared inventory across all of our
major brands, thereby reducing on-hand inventory requirements and generating
operating efficiencies. Our information systems have also allowed us to create a
more efficient order fulfillment process. All of our local distribution centers
are linked to our information systems, which provide them with real-time access
to inventory availability, order tracking and customer creditworthiness.
9
We constantly seek new ways to generate additional efficiencies, such
as by utilizing e-commerce. With brand-specific websites, our customers can
browse our catalogs and send electronic purchase orders over the Internet
directly to our order entry system. Our customers can integrate this system into
their own purchase order systems, thereby making their supply chain operate more
seamlessly. In addition, we offer our customers the option of receiving invoices
electronically. For customers that place frequent orders and have the ability to
receive electronic invoices, this program can dramatically reduce ordering costs
by eliminating invoice handling and automating the matching and payment process.
We believe that by offering services like electronic purchasing and invoicing,
which remove transaction costs from the supply chain, we encourage our customers
to use us as their single source of MRO supplies.
COMPETITION
The MRO product distribution industry is a large, fragmented industry
that is highly competitive. Competition in our industry is primarily based upon
product line breadth, product availability, service capabilities and price. We
face significant competition from national and regional distributors, such as
Hughes Supply, Hughes MRO, Home Depot Supply, Inc., Ferguson and W.W. Grainger,
Inc. Hughes MRO was formerly known as Chad Supply and has recently acquired
Century Maintenance Supply. Home Depot Supply was formerly known as Maintenance
Warehouse/America Corp. and remains an affiliate of The Home Depot, Inc. Each of
these competitors market their products through the use of direct sales forces
as well as direct mail and catalogs. In addition, we face competition from
traditional channels of distribution such as retail outlets, small dealerships
and large warehouse stores, including Home Depot and Lowe's. We also compete
with buying groups formed by smaller distributors, Internet-based procurement
service companies, auction businesses and trade exchanges.
We expect that competition in our industry will increase in the future.
The MRO product distribution industry is consolidating, as traditional MRO
product distributors attempt to achieve economies of scale and increase
efficiency. Furthermore, MRO product customers are continuing to seek low cost
alternatives to replace traditional methods of purchasing and sources of supply.
We believe that the current trend is for customers to reduce the number of
suppliers and rely on lower cost alternatives such as direct mail and/or
integrated supply arrangements, which will contribute to competition in our
industry. Finally, we expect that new competitors will develop over time as
Internet-based enterprises become more established and reliable and refine their
service capabilities.
ENVIRONMENTAL MATTERS
We are subject to certain federal, state and local environmental laws
and regulations, including those governing the management and disposal of, and
exposure to, hazardous materials and the cleanup of contaminated sites. While we
could incur costs as a result of liabilities under, or violations of, such
environmental laws and regulations or arising out of the presence of hazardous
materials in the environment, including the discovery of any such materials
resulting from historical operations at our sites, we do not believe that we are
subject to any such costs that are material. Furthermore, we believe that we are
in compliance in all material respects with all environmental laws and
regulations applicable to our facilities and operations.
TRADEMARKS AND OTHER INTELLECTUAL PROPERTY
We have registered and nonregistered trade names and trademarks
covering the principal brand names and product lines under which our products
are marketed, including Wilmar(R), Sexauer(R), Maintenance USA(R), Barnett(R),
U.S. Lock(R), HardwareExpress, SunStar(R) and AF Lighting(TM). We believe that
our trademarks and other proprietary rights are important to our success and our
competitive position. Accordingly, our policy is to pursue and maintain
registration of our trade names and trademarks whenever possible and to oppose
vigorously any infringement or dilution of our trade names and trademarks.
10
EMPLOYEES
As of December 26, 2003, we had approximately 2,200 employees, of whom
approximately 100 were unionized. Currently we have two labor agreements in
place: one for our Mt. Laurel, New Jersey distribution center and one for our
Savage, Maryland distribution center. The Mt. Laurel, New Jersey agreement was
entered into in November 8, 2002 and renewed through November 8, 2005. The total
number of employees within this bargaining unit is approximately 70. The Savage,
Maryland agreement was entered into in March 1, 2002 and expires in February 28,
2005. The total number of employees within this bargaining unit is 35. We have
not experienced any work stoppages resulting from management or union
disagreements and believe that our employee relations are good.
11
ITEM 2. PROPERTIES
Our corporate headquarters is located in Jacksonville, Florida.
We operate the following distribution centers and pick-up facilities:
DISTRIBUTION CENTER SQUARE FOOTAGE DISTRIBUTION CENTER SQUARE FOOTAGE
- ------------------- -------------- ------------------- --------------
Birmingham, AL 30,618 Farmington Hills, MI 70,035
Tempe, AZ 42,081 St. Louis, MO 34,975
Cerritos, CA 39,455 Charlotte, NC 45,600
Hayward, CA 26,144 Mt. Laurel, NJ 70,000
Ontario, CA 46,200 Pinebrook, NJ 26,500
Sacramento, CA 48,235 North Las Vegas, NV 36,000
San Diego, CA 24,705 Brentwood, NY* 42,000
Edmonton, CN 7,557 Bronx, NY 78,000
Oakville, CN 17,069 Depew, NY 21,728
Aurora, CO 69,500 Cincinnati, OH 33,711
Hollywood, FL 53,600 Columbus, OH 36,264
Jacksonville, FL 8,400 Oklahoma City, OK 15,340
Jacksonville, FL 47,370 Bristol, PA 55,000
Miami, FL 17,920 Leetsdale, PA 37,000
Orlando, FL 30,000 Pittsburgh, PA 26,662
Tampa, FL 40,000 Hato Tejas, PR 23,657
Doraville, GA 52,320 Florence, SC 34,000
Carol Stream, IL 42,106 Nashville, TN (NDC) 317,085
Crestwood, IL 6,000 Memphis, TN 17,580
Wheeling, IL 5,783 Nashville, TN 24,900
Fishers, IN 44,840 Dallas, TX 15,697
Lenexa, KS 22,482 El Paso, TX 42,837
Jeffersontown, KY 8,700 Fort Worth, TX 20,000
Louisville, KY 38,040 Grand Prairie, TX 106,245
Louisville, KY* 60,000 Houston, TX 64,000
Harahan, LA 33,000 San Antonio, TX 19,200
Worcester, MA 60,108 Richmond, VA 20,861
Baltimore, MD 32,856 Seattle, WA 38,218
Savage, MD 28,511 Butler, WI 27,800
- -----------
* Owned properties
12
ITEM 3. LEGAL PROCEEDINGS
We are involved in various legal proceedings in the normal course of
its business. In the opinion of management, none of the proceedings are material
in relation to our consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the
fourth quarter of the fiscal year ended December 26, 2003.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of March 1, 2004, based upon the number of holders on record, there
were approximately 64 holders of our outstanding common stock. As discussed in
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and Item 8, "Financial Statements and Supplementary Data," the
payment of dividends is subject to various restrictions under the Company's debt
instruments. We have not declared any dividends on our common stock during
fiscal 2003 and 2002. There is not an established public trading market for our
common stock.
13
ITEM 6. SELECTED FINANCIAL DATA
The table below presents our selected historical consolidated financial
data for fiscal 1999, 2000, 2001, 2002 and 2003. The information presented below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Conditions and Results of Operations" and the consolidated financial
statements included elsewhere in this report.
FISCAL YEAR ENDED
-----------------
DECEMBER 31, DECEMBER 29, DECEMBER 28, DECEMBER 27 DECEMBER 26
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
INCOME STATEMENT DATA:
Net sales ...................... $ 225,937 $ 382,108 $ 609,356 $ 637,530 $ 640,138
Cost of sales .................. 141,448 230,783 384,153 401,212 395,894
Gross profit ................... 84,489 151,325 225,203 236,318 244,244
Selling, general and
administrative expenses ...... 60,867 109,758 157,801 164,328 171,091
Depreciation and amortization .. 2,456 8,689 16,526 11,282 10,949
Special costs and expenses(1) .. -- 12,861 3,061 4,893 607
--------- --------- --------- --------- ---------
Operating income ............... 21,166 20,017 47,815 55,815 61,597
Interest expense (income), net . (753) 19,002 40,004 38,625 40,317
Change in fair value of interest
rate swaps ................... -- -- 6,874 5,825 (5,272)
Loss on extinguishment of debt . -- 12,095 -- -- 14,893
Other expense .................. -- -- -- -- (40)
--------- --------- --------- --------- ---------
Income before income taxes ..... 21,919 (11,080) 937 11,365 11,699
Provision (benefit) for income
taxes ........................ 8,545 (1,607) 2,595 4,219 4,547
--------- --------- --------- --------- ---------
Income (loss) before accounting
change ....................... 13,374 (9,473) (1,658) 7,146 7,152
Cumulative effect on change in
accounting principle ......... -- -- 3,221 -- --
--------- --------- --------- --------- ---------
Net income (loss) .............. $ 13,374 $ (9,473) $ (4,879) $ 7,146 $ 7,152
========= ========= ========= ========= =========
CASH FLOW AND OTHER DATA:
Net cash provided by (used in):
Operating activities ......... $ 23,115 $ (12,628) $ 15,697 $ 10,415 $ 33,089
Investing activities ......... (94,997) (217,872) (8,242) (4,944) (26,795)
Financing activities ......... 46,648 231,039 (9,852) (3,285) (10,962)
Adjusted EBITDA(2) ............. 23,622 28,706 64,341 67,097 72,586
Capital expenditures ........... 1,924 5,572 8,214 4,944 4,556
Ratio of earnings to fixed
charges(3) ................... 14.9x 1.0x 1.2x 1.3x
BALANCE SHEET DATA (AS OF END OF
PERIOD):
Cash and cash equivalents ...... $ 5,445 $ 5,909 $ 3,327 $ 5,557 $ 1,612
Total assets ................... 201,259 526,080 546,308 551,718 565,282
Total debt(4) .................. 60,000 331,793 326,070 326,024 341,525
- ---------------------
(1) Special costs and expenses consist of costs associated with acquisition and
recapitalization activities, including integration and assimilation
expenses, severance payments and transaction fees and expenses.
14
(2) Adjusted EBITDA represents net income plus interest expense, change in fair
value of interest rate swaps, cumulative change in accounting principle,
loss on extinguishment of debt, provision for income taxes and depreciation
and amortization. Adjusted EBITDA differs from earnings before interest,
taxes, depreciation and amortization ("EBITDA") and may not be comparable
to EBITDA or Adjusted EBITDA as reported by other companies. The
computation of Adjusted EBITDA is as follows:
FISCAL YEAR ENDED
-----------------
DECEMBER 31, DECEMBER 29, DECEMBER 28, DECEMBER 27 DECEMBER 26
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Net income (loss) .............. $ 13,374 $ (9,473) $ (4,879) $ 7,146 $ 7,152
Interest expense (income), net . (753) 19,002 40,004 38,625 40,317
Change in fair value of interest -- -- 6,874 5,825 (5,272)
rate swaps
Cumulative effect of change in . -- -- 3,221 -- --
accounting principle
Loss on extinguishment of debt . -- 12,095 -- -- 14,893
Provision (benefit) for income . 8,545 (1,607) 2,595 4,219 4,547
taxes
Depreciation and amortization .. 2,456 8,689 16,526 11,282 10,949
-------- -------- -------- -------- ------
Adjusted EBITDA ................ $ 23,622 $ 28,706 $ 64,341 $ 67,097 72,586
======== ======== ======== ======== ======
Adjusted EBITDA is presented herein because we believe it to be relevant
and useful information to our investors because it is used by our
management to evaluate the operating performance of our business and
compare our operating performance with that of our competitors. Management
also uses Adjusted EBITDA for planning purposes, including the preparation
of annual operating budgets, to determine appropriate levels of operating
and capital investments and as one of the target elements in our
compensation incentive programs. Adjusted EBITDA excludes certain items,
including change in fair value of interest rate swaps and loss on
extinguishment of debt, that relate to financing transactions and which we
believe are not indicative of our core operating results. We therefore
utilize Adjusted EBITDA as a useful alternative to net income as an
indicator of our operating performance. However, Adjusted EBITDA is not a
measure of financial performance under GAAP and Adjusted EBITDA should be
considered in addition to, but not as a substitute for, other measures of
financial performance reported in accordance with GAAP, such as net income.
While we believe that some of the items excluded from Adjusted EBITDA are
not indicative of our core operating results, these items do impact our
income statement, and management therefore utilizes Adjusted EBITDA as an
operating performance measure in conjunction with GAAP measures such as net
income and gross margin.
(3) For the purposes of calculating the ratio of earnings to fixed charges,
earnings represent pretax income from continuing operations, plus fixed
charges. Fixed charges consist of interest expense, plus discounts and
capitalized expenses related to indebtedness, and our estimate of the
interest within rental expense. Earnings for fiscal 2000 were inadequate to
cover fixed charges by $11.1 million.
(4) Total debt represents the amount of our short-term debt and long-term debt.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION IN CONJUNCTION WITH "SELECTED
FINANCIAL DATA" AND OUR CONSOLIDATED FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN
THIS REPORT. SOME OF THE STATEMENTS IN THE FOLLOWING DISCUSSION ARE
FORWARD-LOOKING STATEMENTS. SEE "--FORWARD-LOOKING STATEMENTS."
OVERVIEW
We are a leading direct marketer and specialty distributor of MRO
products. We stock over 45,000 plumbing, electrical, hardware, security
hardware, HVAC and other MRO products and sell to over 140,000 active customer
accounts. Our highly diverse 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. No single
customer accounted for more than 5% of our sales during fiscal 2003.
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 eight 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, 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.
16
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
adjust inventory for excess and obsolete inventory and for the difference by
which the cost of the inventory exceeds the estimated market value. In order to
determine the adjustments, management reviews inventory quantities on hand, slow
movement reports and sales history reports. Management estimates the required
adjustment based on estimated demand for products and market conditions.
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. The test performed on December 26, 2003 resulted in a finding of no
impairment.
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.
17
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. As discussed in Note 10 to our audited
consolidated financial statements included in this report, 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.
As of December 26, 2003, the fair value of the interest rate swaps was $12.8
million, which is a liability to us. We recorded a transition adjustment of
approximately $5.4 million upon the adoption of SFAS 133 and an additional
charge of approximately $6.9 million in 2001, $5.8 million in fiscal 2002, and
income of $5.3 million in fiscal 2003 as a result of the change in market value
of the interest rate swaps. 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.
18
RESULTS OF OPERATIONS
The following table sets forth each of the line items of our statement
of operations in dollar amounts and as a percentage of net sales for the periods
indicated.
FISCAL YEAR ENDED
-----------------------------------------------------------------------
DECEMBER 28, DECEMBER 27, DECEMBER 26,
2001 2002 2003
-----------------------------------------------------------------------
$ % $ % $ %
(DOLLARS IN THOUSANDS)
Net sales ................................................ $609,356 100.0% $637,530 100.0% $640,138 100.0%
Cost of sales ............................................ 384,153 63.0% 401,212 62.9% 395,894 61.8%
------------- -------------- -------------
Gross profit ............................................. 225,203 37.0% 236,318 37.1% 244,244 38.2%
Selling, general and administrative expenses ............. 157,801 25.9% 164,328 25.8% 171,091 26.7%
Depreciation and amortization ............................ 16,526 2.7% 11,282 1.8% 10,949 1.7%
Special costs and expenses ............................... 3,061 0.5% 4,893 0.8% 607 0.1%
------------- -------------- -------------
Operating income ......................................... 47,815 7.8% 55,815 8.8% 61,597 9.6%
Change in fair value of interest rate swaps .............. 6,874 1.1% 5,825 0.9% (5,272) -0.8%
Loss on extinguishment of debt............................ -- 0.0% -- 0.0% 14,893 2.3%
Interest expense, net .................................... 40,004 6.6% 38,625 6.1% 40,317 6.3%
Other expense............................................. -- 0.0% -- 0.0% (40) 0.0%
------------- -------------- -------------
Income before income taxes ............................... 937 0.2% 11,365 1.8% 11,699 1.8%
Provision for income taxes ............................... 2,595 0.4% 4,219 0.7% 4,547 0.7%
------------- -------------- -------------
(Loss) income before change in accounting principle....... (1,658) -0.3% 7,146 1.1% 7,152 1.0%
Cumulative effect on change in accounting principle ...... 3,221 0.5% -- 0.0% -- 0.0%
------------- -------------- -------------
Net (loss) income ........................................ $ (4,879) -0.8% $ 7,146 1.1% $ 7,152 1.1%
============= ============== =============
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.
FISCAL YEAR ENDED DECEMBER 26, 2003 COMPARED TO FISCAL YEAR ENDED DECEMBER 27,
2002
OVERVIEW. Net sales in fiscal year 2003 of $640.1 million compared to
$637.5 million in fiscal year 2002. Given the political and economic
uncertainties we faced at the beginning of fiscal year 2003, we approached the
year with a strong emphasis on customer retention, cost control and working
capital management. Our two primary markets, facilities maintenance and
professional contractors, both experienced declining sales for the first two
fiscal quarters. Having completed the integration of Barnett (acquired in 2000)
onto our common information and logistics platform, we focused our efforts on
eliminating cost and gaining efficiencies by standardizing our common products
for all of our brands, eliminating redundant operating expenses and maximizing
the scale efficiencies of our common fulfillment platform. Completing the
Barnett integration also allowed us to focus heavily on working capital
management, and we successfully reduced our inventory investment by $9.2 million
by the end of 2003, excluding the Florida Lighting transaction described below.
By the beginning of the fourth fiscal quarter, several of our key markets began
to recover. Stronger revenue growth in the fourth quarter allowed us to finish
fiscal 2003 with revenues even with 2002 levels. Despite flat sales, operating
income increased 10.4% for the year. In November of 2003, we acquired Florida
19
Lighting, a direct marketer and distributor of lighting and electrical products
based in Pompano Beach, Florida, in an asset purchase. Through its SunStar and
AF Lighting catalog brands, Florida Lighting distributes its products to over
6,000 electrical contractors, lighting showrooms and retailers throughout North
America. During 2003 we consolidated distribution centers in Denver and New
York. We also made additional investments to expand our successful national
accounts program beyond the multi-family housing industry to other facilities
markets, such as healthcare, lodging and commercial office owners.
NET SALES. Our net sales grew by $2.6 million, or 0.4%, to $640.1
million in fiscal 2003 from $637.5 million in fiscal 2002. Daily sales were $2.5
million both in fiscal 2003 and 2002. During the third quarter of 2003, we
reclassified freight costs paid by our customers ("freight revenue") from
selling, general and administrative costs to net sales. This reclassification
did not have an effect on operating income. However, on a prospective basis it
increases both net sales and selling, general and administrative costs. The
effect of this reclassification in fiscal 2003 was $2.3 million. After adjusting
for the effect of this freight reclassification and the Florida Lighting
acquisition, which occurred at the end of November 2003 and represents less than
0.5% of our sales in 2003, sales were relatively level compared with the prior
year.
GROSS PROFIT. Gross profit increased by $7.9 million, or 3.4%, to
$244.2 million in fiscal 2003 from $236.3 million in fiscal 2002. As a
percentage of net sales, gross profit increased by 110 basis points to 38.2% in
fiscal 2003 compared to 37.1% in fiscal 2002. This improvement is due to several
factors including changes in product mix, the expansion of our private label
programs, and the reclassification of freight revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased
by $6.8 million, or 4.1%, to $171.1 million in fiscal 2003 from $164.3 million
in fiscal 2002. As a percentage of net sales, these expenses represented 26.7%
in fiscal 2003 compared to 25.8% in fiscal 2002. SG&A expenses were increased
during the period by the effect of the $2.3 million freight reclassification
referred to above. On a comparable basis, excluding the effect of this
reclassification, SG&A expenses increased $4.5 million, or 2.8%, in fiscal 2003.
This increase is primarily associated with higher freight costs, increases in
health care costs, and an incremental investment in our national accounts
program.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
decreased $0.4 million to $10.9 million in fiscal 2003 from $11.3 million in
fiscal 2002. This was primarily due to the net effect of the roll off of fully
depreciated assets and a change in accounting estimate made in the third quarter
of 2003 to decrease the estimated useful life of certain acquired customer lists
to 17 years, as described in Note 3 to the financial statements contained in
this report.
SPECIAL COSTS AND EXPENSES. Special costs and expenses were $0.6
million during fiscal 2003 compared to $4.9 million in fiscal 2002. Special
costs and expenses in both of these periods consisted of non-recurring costs
incurred in connection with our acquisition of Barnett. These costs included the
termination of leases for real property, write off of inventory associated with
our planned vendor consolidation efforts, relocation of executive and
administrative functions, payment of employee severance, integration of
management information systems, physical relocation of inventory and related
consulting costs. The significant decrease from fiscal 2002 was due to the fact
that the consolidation of the Barnett Acquisition was substantially completed in
fiscal year 2002.
OPERATING INCOME. As a result of the foregoing, operating income
increased by $5.8 million, or 10.4%, to $61.6 million in fiscal 2003 from $55.8
million in fiscal 2002.
CHANGE IN FAIR VALUE OF INTEREST RATE SWAPS. We recorded a gain of $5.3
million in fiscal 2003 and a loss of $5.8 million in fiscal 2002 related to
changes in the market value of our interest rate swap instruments. The non-cash
gain and loss recorded were attributable to changes in market conditions
including but not limited to fluctuations in interest rates, general market
volatility, and the remaining tenor of our instruments.
20
INTEREST EXPENSE. Interest expense increased by $1.7 million in fiscal
2003 to $40.5 million from $38.8 million in fiscal 2002. This increase was
attributable to higher average debt balances and incrementally higher interest
costs associated with our entry into a new credit facility and issuance of
$200.0 million aggregate principal amount 11.5% senior subordinated notes due
2008, or the 11.5% notes, in May 2003 as part of the Refinancing Transactions
(described in Liquidity and Capital Resources).
LOSS ON EXTINGUISHMENT OF DEBT. In connection with our Refinancing
Transactions, we recorded an expense of $14.9 million for the early
extinguishment of debt. This expense resulted 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.
PROVISION FOR INCOME TAXES. The provision for income taxes was $4.5
million and $4.2 million in fiscal 2003 and 2002, respectively. The effective
tax rate for fiscal 2003 was 39%.
FISCAL YEAR ENDED DECEMBER 27, 2002 COMPARED TO FISCAL YEAR ENDED DECEMBER 28,
2001
OVERVIEW. During fiscal 2002, we implemented a number of growth and
integration initiatives, which helped to increase net sales, despite a slowing
U.S. economy. Our sales growth initiatives included the addition of new
telesales representatives and an increase in our national accounts sales staff.
We launched a national mini-blind sales program aimed at the multi-family
housing market, which included the introduction of custom mini-blind cutting
operations in our St. Louis, Missouri and Florence, South Carolina distribution
centers. We also opened two Barnett service centers in the Chicago area to
provide convenient pick-up options for our customers in this important market.
By the end of fiscal 2002, we had substantially completed our Barnett
integration efforts by consolidating Barnett's distribution centers in Dallas,
Boston, Denver and Houston with our existing distribution centers and adding
Barnett's product offerings through all of our combined distribution centers. We
also relocated our import operations from Houston to our national distribution
center in Nashville, Tennessee. Our results of operations for fiscal 2002 and
fiscal 2001 included a comparable full year impact of Barnett.
NET SALES. Our net sales grew by $28.1 million, or 4.6%, to $637.5
million in fiscal 2002 from $609.4 million in fiscal 2001. Daily sales were $2.5
million and $2.4 million in fiscal 2002 and 2001, respectively. Net sales grew
significantly in our professional contractor market, which is primarily served
by our Barnett brand, with particularly strong performance in the electrical,
HVAC and plumbing contractor end markets due to improved response rates to our
direct mail and other marketing efforts. Our facilities maintenance market,
served principally by our Wilmar and Sexauer brands, showed modest growth in
corporate sales, but these results were offset by weakness in the apartment and
hospitality end markets, as high vacancy rates during this period impacted
customer-spending habits.
GROSS PROFIT. Gross profit increased by $11.1 million, or 4.9%, to
$236.3 million in fiscal 2002 from $225.2 million in fiscal 2001. As a
percentage of net sales, gross profit was 37.1% in fiscal 2002 compared to 37.0%
in fiscal 2001. This increase in gross profit margin was chiefly due to our
ongoing vendor consolidation efforts, which has allowed us to increase our
purchasing power and consequently negotiate better prices and terms for the
products we buy. Our higher gross profit margin also resulted, in part, from a
favorable shift in product mix, as sales of lower cost private label products
were proportionally higher for the period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased
by $6.5 million, or 4.1%, to $164.3 million in fiscal 2002 from $157.8 million
in fiscal 2001. As a percentage of net sales, these expenses represented 25.8%
in fiscal 2002 compared to 25.9% in fiscal 2001. The increase in our SG&A
expenses was a result of relative increases in distribution center expenses and
commissions related to our higher net sales, as well as higher costs associated
with numerous growth strategies initiated during fiscal 2002. We also incurred
21
additional expenses during the period as we consolidated six of our distribution
centers, converted 16 distribution centers to our common inventory format and
began adding products for our facilities maintenance customers to our NDC. These
increases were partially offset by real estate, labor and management cost
savings we achieved through the consolidation of our distribution centers.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
decreased $5.2 million to $11.3 million in fiscal 2002 from $16.5 million in
fiscal 2001. This decrease was primarily attributable to the adoption of SFAS
142 effective January 1, 2002, as we no longer amortize goodwill under this
accounting standard.
SPECIAL COSTS AND EXPENSES. Special costs and expenses were $4.9
million during fiscal 2002 compared to $3.1 million in fiscal 2001. Special
costs and expenses in both of these periods consisted of non-recurring costs
incurred in connection with our acquisition of Barnett. These costs included the
termination of leases for real property, write off of inventory associated with
our planned vendor consolidation efforts, relocation of executive and
administrative functions, payment of employee severance, integration of
management information systems, physical relocation of inventory and related
consulting costs.
OPERATING INCOME. As a result of the foregoing, operating income
increased by $8.0 million, or 16.7%, to $55.8 million in fiscal 2002 from $47.8
million in fiscal 2001.
INTEREST EXPENSE. Interest expense decreased by $1.6 million in fiscal
2002 to $38.8 million from $40.4 million in fiscal 2001. The decrease in
interest expense resulted from an overall lower interest rate environment.
CHANGE IN FAIR VALUE OF INTEREST RATE SWAPS. We recorded a loss of $5.8
million and $6.9 million in fiscal 2002 and 2001, respectively. This non-cash
loss is a result of the change in fair value of the interest rate swaps
attributable to lower interest rates, general market volatility and the
remaining tenor of our instruments.
PROVISION FOR INCOME TAXES. The provision for income taxes was $4.2
million and $2.6 million in fiscal 2002 and 2001, respectively. The effective
tax rate for fiscal 2002 was 37%. The provision for income taxes for 2001
differs from the expected amount primarily due to nondeductible goodwill
amortization and merger and recapitalization costs.
LIQUIDITY AND CAPITAL RESOURCES
As of December 26, 2003, we had approximately $59.0 million of
availability under our $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 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
credit facility. We expect our cash flow from operations and the loan
availability under our 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 credit facility, are used to support payment obligations incurred for
our general corporate purposes. As of December 26, 2003, we had $6.0 million of
letters of credit issued under the credit facility. Interest on our 11.5% senior
subordinated notes due 2011, or the 11.5% notes, is payable semiannually. With
respect to borrowings under our credit facility, we have the option to borrow at
an adjusted LIBOR or an alternative base rate. Interest on the credit facility
is payable quarterly, 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 $33.1 million for fiscal
year 2003 compared to net cash provided by operating activities of $10.4 million
in the comparable period for the prior year. Net cash provided by
22
operating activities for fiscal year 2003 was significantly higher than the
prior year as a result of improved working capital trends.
Net cash used in investing activities was $26.8 million in fiscal year
2003 and was primarily attributable to our acquisition of Florida Lighting
during the fourth quarter of 2003 and capital expenditures made in the ordinary
course of business.
Net cash used in financing activities totaled $11.0 million for fiscal
year 2003 compared to net cash used in financing activities of $3.3 million in
the comparable period for the prior year. Net cash used in financing activities
for fiscal year 2003 was primarily attributable to our Refinancing Transactions
(described below).
We issued $200.0 million aggregate principal amount of our 11.5% notes
in May 2003 as part of the Refinancing Transactions as follows. 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 a 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 December 26, 2003, our total indebtedness was $347.5
million (of which $6.0 million was outstanding in the form of letters of
credit), and our senior indebtedness was $144.3 million. On December 19, 2003 we
amended our senior credit facility such that with respect to any term loans, the
applicable rate was reduced from LIBOR plus 4.5% to LIBOR plus 3.5%.
Capital expenditures were $4.6 million in fiscal 2003 as compared to
$4.9 million in fiscal 2002. Capital expenditures as a percentage of sales were
0.7% in fiscal year 2003 and 0.8% in fiscal 2002.
In fiscal year 2003, acquisition expenditures were $18.4 million,
attributable to our acquisition of Florida Lighting. Purchase of investment and
other assets was $3.9 million in fiscal 2003.
Our principal working capital need is for inventory and trade accounts
receivable, which have generally increased with the growth in our business. Our
principal sources of cash to fund our working capital needs are cash generated
from operating activities and borrowings under our revolving credit facility.
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.
CONTRACTUAL OBLIGATIONS AS OF DECEMBER 26, 2003
LESS THAN 1-3 4-5 AFTER 5
TOTAL 1 YEAR YEARS YEARS YEARS
----- ------ ----- ----- -----
Long-term debt $341,525 $ 7,000 $ 19,250 $ 29,750 $285,525
Revolving credit facility (1) -- -- -- -- --
Operating leases 46,437 10,899 17,294 10,556 7,688
Management agreement 438 250 188 -- --
-------- -------- -------- -------- --------
Total contractual cash obligations $388,400 $ 18,149 $ 36,732 $ 40,306 $293,213
======== ======== ======== ======== ========
(1) Our senior secured credit facility includes a $65.0 million revolving loan
facility. As of December 26, 2003 we did not have any amounts outstanding
on this revolving facility.
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SEASONALITY
We experience some seasonal fluctuations as sales of our products
typically increase in the second and third fiscal quarters of the year due to
increased apartment turnover and related maintenance and repairs in the
multi-family residential housing sector during these periods. In addition,
November, December and January sales tend to be lower across most of our brands
because customers may defer purchases at year-end as their budget limits are met
and because of the winter holiday season between Thanksgiving Day and New Year's
Day.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934 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 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 our ability to purchase products from suppliers on favorable
terms,
o product cost and price fluctuations due to market conditions,
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,
o labor and benefit costs and
o the other factors described under "Risk Factors."
You should keep in mind that any forward-looking statement made by us
in this report, or elsewhere, speaks only as of the date on which we make it.
New risks and 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 report or elsewhere might not occur. Notwithstanding the foregoing, all
information contained in this prospectus is materially accurate as of the date
of this report.
24
RISK FACTORS
THE FOLLOWING RISK FACTORS SHOULD BE READ CAREFULLY IN CONNECTION WITH
EVALUATING US AND THIS ANNUAL REPORT ON FORM 10-K. CERTAIN STATEMENTS IN "RISK
FACTORS" ARE FORWARD-LOOKING STATEMENTS. SEE "FORWARD-LOOKING STATEMENTS" ABOVE.
RISKS RELATING TO OUR BUSINESS
DISRUPTION IN OUR INFORMATION TECHNOLOGY SYSTEM COULD ADVERSELY AFFECT
OUR RESULTS OF OPERATIONS. Our operations are dependent upon our integrated
information technology system that encompasses all of our major business
functions. We rely upon our information technology system to manage and
replenish inventory, to fill and ship customer orders on a timely basis and to
coordinate our sales and marketing activities across all of our brands. Any
significant disruption of our information technology system for any significant
time period could result in delays in receiving supplies or filling customer
orders and, accordingly, could have a material adverse effect on our business,
results of operations and financial condition.
DISRUPTION IN OUR NATIONAL DISTRIBUTION CENTER COULD ADVERSELY AFFECT
OUR RESULTS OF OPERATIONS. We currently maintain a national distribution center
located in Nashville, Tennessee, which is essential to the efficient operation
of our national distribution network. Any serious disruption to this
distribution center due to fire, earthquake, act of terrorism or any other cause
could damage a significant portion of our inventory and could materially impair
our ability to distribute our products to customers. In addition, we could incur
significantly higher costs and longer lead times associated with distributing
our products to our customers during the time that it takes for us to reopen or
replace the center. As a result, any such disruption could have a material
adverse affect on our business, results of operations and financial condition.
WE OPERATE IN A HIGHLY COMPETITIVE INDUSTRY AND IF WE ARE UNABLE TO
COMPETE SUCCESSFULLY WE COULD LOSE CUSTOMERS AND OUR SALES MAY DECLINE. The MRO
product distribution industry is a large, fragmented industry that is highly
competitive. We face significant competition from national and regional
distributors which market their products through the use of direct sales forces
as well as direct mail and catalogs. In addition, we face competition from
traditional channels of distribution such as retail outlets, small dealerships
and large warehouse stores, and from buying groups formed by smaller
distributors, Internet-based procurement service companies, auction businesses
and trade exchanges. We expect that new competitors may develop over time as
Internet-based enterprises become more established and reliable and refine their
service capabilities. Moreover, the MRO product distribution industry is
undergoing changes driven by industry consolidation and increased customer
demands. Traditional MRO product distributors are consolidating operations and
acquiring or merging with other MRO product distributors to achieve economies of
scale and increase efficiency. This consolidation trend could cause the industry
to become more competitive and make it more difficult for us to maintain our
operating margins. Furthermore, our competitors may offer a greater variety of
products than we offer or have greater financial and marketing resources than we
do, which may provide them with a competitive advantage over us.
Competition in our industry is primarily based upon product line
breadth, product availability, service capabilities and price. To the extent
that existing or future competitors seek to gain or retain market share by
reducing price or by increasing support service offerings, we may be required to
lower our prices or to make additional expenditures for support services,
thereby adversely affecting our financial results. In addition, it is possible
that competitive pressures resulting from industry consolidation could adversely
affect our rate of growth and profit margins.
SLOWDOWNS IN GENERAL ECONOMIC ACTIVITY AND OTHER UNFORESEEN EVENTS MAY
DETRIMENTALLY IMPACT OUR CUSTOMERS AND THEREBY HAVE AN ADVERSE EFFECT ON OUR
SALES AND PROFITABILITY. The MRO product distribution industry is affected by
changes in economic conditions outside our control, including national, regional
and local slowdowns in general economic activity and job markets, which can
result in increased vacancies in the residential rental housing market.
Specifically, a slowdown in economic activity which results in less apartment
unit
25
refurbishment and renovation can have an adverse affect on the demand for our
products and may result in credit losses. There can be no assurance that
economic slowdowns, adverse economic conditions or cyclical trends in our
customer markets will not have a material adverse affect on our results of
operations and financial condition. In addition, there can be no assurance that
unforeseen events, such as terrorist attacks or armed hostilities, would not
negatively affect our industry or the industries in which our customers operate,
resulting in a material adverse affect on our business.
LOSS OF KEY SUPPLIERS, LACK OF PRODUCT AVAILABILITY OR LOSS OF DELIVERY
SOURCES COULD DECREASE SALES AND EARNINGS. Our ability to offer a wide variety
of products to our customers is dependent upon our ability to obtain adequate
product supply from manufacturers or other suppliers. While in many instances we
have agreements, including supply chain agreements, with our suppliers, these
agreements are generally terminable by either party on limited notice. The loss
of, or a substantial decrease in the availability of, products from certain of
our suppliers, or the loss of key supplier agreements, could have a material
adverse effect on our business, results of operations and financial condition.
In addition, supply interruptions could arise from shortages of raw materials,
labor disputes or weather conditions affecting products or shipments,
transportation disruptions or other factors beyond our control. Furthermore,
since we acquire a portion of our supply from foreign manufacturers, our ability
to obtain supply is subject to the risks inherent in dealing with foreign
suppliers, such as potential adverse changes in laws and regulatory practices,
including trade barriers and tariffs, and the general economic and political
conditions in these foreign markets.
Our ability to both maintain our existing customer base and to attract
new customers is dependent in many cases upon our ability to deliver products
and fulfill orders in a timely and cost-effective manner. To ensure timely
delivery of our products to our customers, we frequently rely on third parties,
including couriers such as UPS and other national shippers as well as various
local and regional trucking contractors. Any sustained inability of these third
parties to deliver our products to our customers could result in the loss of
customers or require us to seek alternative delivery sources, if they are
available, which may result in significantly increased costs and delivery
delays.
THE LOSS OF SIGNIFICANT CUSTOMERS COULD ADVERSELY AFFECT OUR SALES AND
PROFITABILITY. We have over 140,000 active customers, of which the 10 largest
customers generated approximately $56.5 million, or 8.8% of our sales in fiscal
2003 and $52.9 million, or 8.3%, of our sales in fiscal 2002. Our largest
customer accounted for approximately 4.6% of our sales for fiscal 2003. The loss
of one or more of our most significant customers or a deterioration in our
relations with any of them could have a material adverse effect on our business,
results of operations and financial condition.
WE MAY NOT BE ABLE TO IDENTIFY OR COMPLETE TRANSACTIONS WITH ATTRACTIVE
ACQUISITION CANDIDATES TO FACILITATE OUR GROWTH STRATEGY. An important element
of our growth strategy is to continue to seek additional acquisitions of
businesses in order to add new customers within our existing markets and to
acquire brands in new markets. There can be no assurance that we will be able to
identify attractive acquisition candidates or complete the acquisition of any
identified candidates. Furthermore, we believe that our industry is currently in
a process of consolidation, and there can be no assurance that competition for
acquisition candidates will not escalate, thereby limiting the number of
acquisition candidates or increasing the overall costs of making acquisitions.
Difficulties we may face in identifying or completing acquisitions could have a
material adverse affect on our business, results of operations and financial
condition.
WE CANNOT ASSURE YOU THAT WE WILL BE ABLE TO SUCCESSFULLY COMPLETE THE
INTEGRATION OF FUTURE ACQUISITIONS OR MANAGE OTHER CONSEQUENCES OF OUR
ACQUISITIONS. Acquisitions involve significant risks and uncertainties,
including difficulties integrating acquired personnel and other corporate
cultures into our business, the potential loss of key employees, customers or
suppliers, the assumption of liabilities and exposure to unforeseen liabilities
of acquired companies, the difficulties in achieving target synergies and the
diversion of management attention and resources from existing operations. We may
not be able to fully integrate the operations of future acquired businesses with
26
our own in an efficient and cost-effective manner or without significant
disruption to our existing operations. We may also be required to incur
additional debt in order to consummate acquisitions in the future, which debt
may be substantial and may limit our flexibility in using our cash flow from
operations. Our failure to effectively integrate future acquired businesses or
to manage other consequences of our acquisitions, including increased
indebtedness, could have a material adverse effect on our business, results of
operations and financial condition.
IF WE ARE UNABLE TO RETAIN SENIOR EXECUTIVES AND ATTRACT AND RETAIN
OTHER QUALIFIED EMPLOYEES OUR GROWTH MIGHT BE HINDERED. Our success depends in
part on our ability to attract, hire, train and retain qualified managerial,
sales and marketing personnel. Competition for these types of personnel in our
industry is high. We may be unsuccessful in attracting and retaining the
personnel we require to conduct and expand our operations successfully and, in
such an event, our business could be materially and adversely affected. Our
success also depends to a significant extent on the continued service of our
senior management team. The loss of any member of our senior management team
could impair our ability to execute our business plan and growth strategy and
could therefore have a material adverse effect on our business, results of
operations and financial condition.
WE MAY NOT BE ABLE TO PROTECT OUR TRADEMARKS AND OTHER PROPRIETARY
RIGHTS. We believe that our trademarks and other proprietary rights are
important to our success and our competitive position. Accordingly, we devote
resources to the establishment and protection of our trademarks and proprietary
rights, including with respect to our brand names and our private product
labels. However, the actions taken by us may be inadequate to prevent imitation
of our brands and concepts by others or to prevent others from claiming
violations of their trademarks and proprietary rights by us. In addition, others
may assert rights in our trademarks and other proprietary rights. Our exclusive
rights to our trademarks are subject to the common law rights of any other
person who began using the trademark (or a confusingly similar mark) prior to
the date of federal registration. Future actions by third parties may diminish
the strength of our trademarks or restrict our ability to use our trademarks
and, accordingly, adversely affect our competitive position.
WE COULD FACE POTENTIAL PRODUCT QUALITY AND PRODUCT LIABILITY CLAIMS
RELATING TO THE PRODUCTS WE DISTRIBUTE. We rely on manufacturers and other
suppliers to provide us with the products we sell and distribute. As we do not
have direct control over the quality of the products manufactured or supplied by
such third party suppliers, we are exposed to risks relating to the quality of
the products we distribute. It is possible that inventory from a manufacturer or
supplier could be sold to our customers and later be alleged to have quality
problems or to have caused personal injury, subjecting us to potential claims
from customers or third parties. The risk of claims may be greater with respect
to our private label products, as these products are customarily manufactured by
third party suppliers outside the United States. While we currently maintain
insurance coverage to address these types of liabilities, we cannot assure you
that we will be able to obtain such insurance on acceptable terms in the future,
if at all, or that any such insurance will provide adequate coverage against
potential claims. Product liability claims can be expensive to defend and can
divert the attention of management and other personnel for significant time
periods, regardless of the ultimate outcome. An unsuccessful product liability
defense could have a material adverse effect on our business, results of
operations and financial condition. In addition, even if we are successful in
defending any claim relating to the products we distribute, claims of this
nature could negatively impact customer confidence in our products and our
company.
WE ARE CONTROLLED BY AFFILIATES OF PARTHENON CAPITAL, J.P. MORGAN
PARTNERS AND STERLING INVESTMENT PARTNERS, WHOSE INTERESTS IN OUR BUSINESS MAY
BE DIFFERENT THAN YOURS. Approximately 78% of the issued and outstanding shares
of our common stock is beneficially owned by Parthenon Capital, J.P. Morgan
Partners (23A SBIC), L.P. and Sterling Investment Partners and their
respective affiliates. In addition, these shareholders are party to a
shareholders' agreement with us pursuant to which they have the right to elect
six individuals to our eleven-member board of directors (there are currently two
vacancies). Accordingly, these parties can directly and indirectly exercise
significant influence over our affairs, including controlling decisions made by
our board of directors, such as the approval of acquisitions and other
extraordinary business transactions, appointing members of our management and
controlling actions requiring the approval of our shareholders, including the
adoption of
27
amendments to our certificate of incorporation and the approval of mergers or
sales of substantially all of our assets. There can be no assurance that the
interests of these parties in exercising control over our business will not
conflict with your interests.
RISKS RELATING TO OUR INDEBTEDNESS
OUR SUBSTANTIAL INDEBTEDNESS MAY LIMIT OUR CASH FLOW AVAILABLE TO
INVEST IN THE ONGOING NEEDS OF OUR BUSINESS, WHICH COULD PREVENT US FROM
FULFILLING OUR OBLIGATIONS. We have substantial debt service obligations. As of
December 26, 2003, our total indebtedness was $347.5 million, of which $6.0
million was outstanding in the form of letters of credit, our shareholders'
deficiency was $264.5 million, we had approximately $144.3 million of senior
indebtedness outstanding and approximately $59.0 million in additional revolving
loan availability under our $65.0 million revolving loan facility.
Our substantial indebtedness could have important consequences,
including:
o our debt could limit our ability to obtain additional
financing in the future for working capital, capital
expenditures, acquisitions and other general corporate
purposes,
o a significant portion of our cash flow from operations must be
dedicated to the payment of principal and interest on our
debt, which will reduce the funds available to us for our
operations,
o some of our debt is, and will continue to be, at variable
rates of interest, which may result in higher interest expense
in the event of increases in interest rates,
o our debt could limit our flexibility in planning for, or
reacting to, changes in our business,
o our debt may potentially place us at a competitive
disadvantage to the extent we are more highly leveraged than
some of our competitors and
o our debt may make us more vulnerable to a further downturn in
the economy or our business.
DESPITE OUR LEVEL OF INDEBTEDNESS, WE MAY BE ABLE TO INCUR
SUBSTANTIALLY MORE DEBT. THIS COULD FURTHER EXACERBATE THE RISKS DESCRIBED
ABOVE. We may be able to incur significant additional indebtedness in the
future. Although the indenture governing the 11.5% notes and the credit
agreement governing our credit facility contain restrictions on the incurrence
of additional indebtedness, these restrictions are subject to a number of
qualifications and exceptions, and the indebtedness incurred in compliance with
these restrictions could be substantial. Specifically, the indenture permits us
to incur all the indebtedness provided for in our new revolving loan facility.
Furthermore, these restrictions do not prevent us from incurring obligations
that do not constitute indebtedness, as defined in the applicable agreement. To
the extent new debt is added to our current debt levels, the substantial
leverage risks described above would increase.
THE TERMS OF OUR CREDIT FACILITY AND THE INDENTURE GOVERNING THE 11.5%
NOTES MAY RESTRICT OUR CURRENT AND FUTURE OPERATIONS, PARTICULARLY OUR ABILITY
TO RESPOND TO CHANGES IN OUR BUSINESS OR TO TAKE CERTAIN ACTIONS. Our credit
facility and the indenture governing the notes contain, and any future
indebtedness of ours would likely contain, a number of restrictive covenants
that impose significant operating and financial restrictions on us, including
restrictions on our ability to, among other things:
o incur additional debt,
o pay dividends and make other restricted payments,
o create liens,
o make investments,
o engage in sales of assets and subsidiary stock,
o enter into sale and leaseback transactions,
28
o enter into transactions with affiliates,
o transfer all or substantially all of our assets or enter into
merger or consolidation transactions and
o make capital expenditures.
The credit facility also requires us to maintain certain financial
ratios, which become more restrictive over time. A failure by us to comply with
the covenants or financial ratios contained in the credit facility could result
in an event of default under the facility which could materially and adversely
affect our operating results and our financial condition. In the event of any
default under our credit facility, the lenders under our credit facility are not
required to lend any additional amounts to us and could elect to declare all
borrowings outstanding, together with accrued and unpaid interest and fees, to
be due and payable, require us to apply all of our available cash to repay these
borrowings or prevent us from making debt service payments on the 11.5% notes,
any of which could result in an event of default under the 11.5% notes. If the
indebtedness under our credit facility or the 11.5% notes were to be
accelerated, there can be no assurance that our assets would be sufficient to
repay such indebtedness in full.
WE MAY NOT BE ABLE TO GENERATE SUFFICIENT CASH FLOW TO MEET OUR DEBT
SERVICE OBLIGATIONS. Our ability to generate sufficient cash flow from
operations to make scheduled payments on our debt obligations will depend on our
future financial performance, which will be affected by a range of economic,
competitive, regulatory, legislative and business factors, many of which are
beyond our control. Our indebtedness under the credit facility bears interest at
a variable rate.
Historically, we have funded our debt service obligations and other
capital requirements through internally generated cash flow and funds borrowed
under our credit agreement. We expect our cash flow from operations and the loan
availability under our credit agreement to be our primary source of funds in the
future. If we do not generate sufficient cash flow from operations to satisfy
our debt obligations, including payments on the 11.5% notes, we may have to
undertake alternative financing plans, such as refinancing or restructuring our
debt, selling assets, reducing or delaying capital investments or seeking to
raise additional capital. We cannot assure you that any refinancing would be
possible, that any assets could be sold, or, if sold, of the timing of the sales
and the amount of proceeds realized from those sales, or that additional
financing could be obtained on acceptable terms, if at all. Our inability to
generate sufficient cash flow to satisfy our debt obligations, or to refinance
our obligations on commercially reasonable terms, would have an adverse effect
on our business, financial condition and results of operations, as well as on
our ability to satisfy our obligations in respect of the 11.5% notes.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are aware of the potentially unfavorable effects inflationary
pressures may create through higher asset replacement costs and related
depreciation, higher interest rates and higher product and material costs. In
addition, our operating performance is affected by price fluctuations in
stainless steel, copper, aluminum, plastic and other commodities. We seek to
minimize the effects of inflation and changing prices through economies of
purchasing and inventory management resulting in cost reductions and
productivity improvements as well as price increases to maintain reasonable
profit margins.
Management believes that inflation (which has been moderate over the
past few years) did not significantly affect our operating results or markets in
fiscal 2003, 2002, or 2001. Our results of operations in fiscal 2003 and 2002
were favorably and unfavorably impacted by increases and decreases in the
pricing of certain commodity-based products. Such commodity price fluctuations
have from time to time created cyclicality in our financial performance, and
could continue to do so in the future. In addition, our use of priced catalogs
may not allow us to offset such cost increases quickly, resulting in a decrease
in gross margins and profit.
29
DERIVATIVE FINANCIAL INSTRUMENTS
Periodically, we enter into derivative financial instruments, including
interest rate exchange agreements, to manage our exposure to fluctuations in
interest rates on our debt. Under our existing swap agreements, we pay a fixed
rate on the notional amount to a bank and the bank pays to us a variable rate on
the notional amount equal to a base LIBOR rate. Our derivative activities, all
of which are for purposes other than trading, are initiated within the
guidelines of corporate risk-management policies.
Below is a summary of our interest rate swaps as of December 26, 2003:
CONTRACT/NOTIONAL WEIGHTED AVERAGE WEIGHTED AVERAGE
AMOUNT FAIR VALUE PAYING RATES RECEIVING RATES
------ ---------- ------------ ---------------
(IN THOUSANDS)
Interest rate swap agreements $151,000 $(12,793) 6.56% 1.20%
For fiscal 2003, we have recognized a gain of $5.3 million from the
interest rate swaps. This increase in the value of the interest swaps is a
direct result of changes in interest rates and changes in market volatility.
Periodically, we perform an analysis to determine the effect on
interest expense of instantaneous and sustained parallel shifts in interest
rates of plus or minus 100 basis points over a period of twelve months. As of
December 26, 2003, this analysis reflected that a 100 basis point change in
interest rates would have resulted in a change in the fair value of the interest
rate swaps of approximately $4.1 million. While this simulation is a useful
measure of our sensitivity to changing rates, it is not a forecast of the future
results and is based on many assumptions that, if changed, could cause a
different outcome. In addition, a change in U.S. Treasury rates in the
designated amounts accompanied by a change in the shape of the Treasury yield
curve would cause significantly different changes to net interest income than
indicated above.
We periodically evaluate the costs and benefits of any changes in our
interest rate risk. Based on such evaluation, we may modify our existing swaps,
or enter into new swaps, to manage our interest rate exposure.
RECENT ACCOUNTING STANDARDS
In December 2003, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 104 ("SAB 104"). SAB 104 revised and rescinded
portions of Staff Accounting Bulletin No. 101 in order to make the interpretive
guidance consistent with the current authoritative accounting and auditing
guidance and SEC rules and regulations.
SFAS 149, "Amendment to Statement 133 on Derivative Instruments and
Hedging Activities" ("SFAS 149"), addresses certain decisions made by the
Financial Accounting Standards Board as part of the Derivatives Implementation
Group process. In general, SFAS 149 is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after June
30, 2003.
SFAS 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity" ("SFAS 150"), addresses how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. The provisions of SFAS 150 are
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise are effective July 1, 2003.
30
We adopted SFAS 149 and SFAS 150 on July 1, 2003 and SAB 104 in
December 2003. The adoption of these standards did not have a material impact on
our financial position, results of operations or cash flows.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
Board of Directors
Interline Brands, Inc.
Jacksonville, Florida
We have audited the accompanying consolidated balance sheets of Interline
Brands, Inc. and its subsidiaries (the "Company") as of December 26, 2003 and
December 27, 2002, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 26, 2003. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 26, 2003 and December 27, 2002, and the results of its operations and
its cash flows for each of the three years in the period ended December 26,
2003, in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 2 to the consolidated financial statements, in 2001 the
Company adopted SFAS 133 to account for derivative instruments and SFAS 145 to
report the loss on extinguishment of debt as non-operating expense. Also,
discussed in Note 2 to the consolidated financial statements, effective January
1, 2002, the Company changed its method of accounting for goodwill to conform to
SFAS 142.
/s/ Deloitte & Touche, LLP
Certified Public Accountants
March 23, 2004
Jacksonville, Florida
32
INTERLINE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 26, 2003 AND DECEMBER 27, 2002 (In thousands except share data)
- ------------------------------------------------------------------------------------------------------
ASSETS 2003 2002
----------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,612 $ 5,557
Cash - restricted 1,000 329
Accounts receivable - trade (net of allowance for
doubtful accounts of $6,316 and $5,322) 83,684 83,087
Accounts receivable - other 12,932 13,052
Inventory 119,301 124,479
Prepaid expenses and other current assets 4,260 5,953
Deferred income taxes 10,318 10,932
----------- ------------
Total current assets 233,107 243,389
PROPERTY AND EQUIPMENT, net 30,605 33,585
GOODWILL 202,227 195,669
OTHER INTANGIBLE ASSETS, net 90,632 77,423
OTHER ASSETS 8,711 1,652
----------- ------------
TOTAL ASSETS $ 565,282 $ 551,718
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Current portion of long-term debt $ 7,000 $ 22,750
Revolving credit facility -- 18,500.00
Accounts payable 43,180 53,417
Accrued expenses and other current liabilities 19,623 13,603
Accrued interest payable 5,803 4,409
Accrued merger expenses 4,739 7,426
----------- ------------
Total current liabilities 80,345 120,105
DEFERRED INCOME TAXES 22,543 21,253
INTEREST RATE SWAPS 12,793 18,067
LONG-TERM DEBT, NET OF CURRENT PORTION 334,525 284,774
----------- ------------
TOTAL LIABILITIES 450,206 444,199
----------- ------------
COMMITMENTS AND CONTINGENCIES (Note 11)
SENIOR PREFERRED STOCK, $0.01 par value, 27,000,000 shares
authorized; 23,600,014 and 23,619,888 shares issued and
outstanding; at liquidation value 379,612 331,202
STOCKHOLDERS' EQUITY (DEFICIENCY):
Common stock, no par value, 7,500,000 shares authorized;
5,334,546 and 5,385,189 shares issued and outstanding 1,994 1,994
Accumulated deficit (265,548) (224,077)
Stockholder loans (1,545) (1,440)
Accumulated other comprehensive income (loss) 563 (160)
----------- ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (264,536) (223,683)
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $ 565,282 $ 551,718
=========== ============
See accompanying notes to consolidated financial statements.
33
INTERLINE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 26, 2003, DECEMBER 27, 2002 AND DECEMBER 28, 2001 (IN
THOUSANDS EXCEPT SHARE DATA)
- -------------------------------------------------------------------------------------
2003 2002 2001
--------- --------- ---------
NET SALES $ 640,138 $ 637,530 $ 609,356
COST OF SALES 395,894 401,212 384,153
--------- --------- ---------
Gross profit 244,244 236,318 225,203
OPERATING EXPENSES:
Selling, general and administrative expenses 171,091 164,328 157,801
Depreciation and amortization 10,949 11,282 16,526
Special costs and expenses 607 4,893 3,061
--------- --------- ---------
Total operating expenses 182,647 180,503 177,388
--------- --------- ---------
OPERATING INCOME 61,597 55,815 47,815
CHANGE IN FAIR VALUE OF INTEREST
RATE SWAPS 5,272 (5,825) (6,874)
INTEREST EXPENSE (40,516) (38,778) (40,368)
LOSS ON EXTINGUISHMENT OF DEBT (14,893) -- --
INTEREST INCOME 199 -- --
OTHER INCOME (EXPENSE) 40 153 364
--------- --------- ---------
Income before income taxes 11,699 11,365 937
PROVISION FOR INCOME TAXES 4,547 4,219 2,595
--------- --------- ---------
INCOME (LOSS) BEFORE CHANGE IN
ACCOUNTING PRINCIPLE 7,152 7,146 (1,658)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, net of
income tax benefit of $2,147 -- -- (3,221)
--------- --------- ---------
NET INCOME (LOSS) 7,152 7,146 (4,879)
PREFERRED STOCK DIVIDENDS (48,623) (42,470) (37,024)
--------- --------- ---------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (41,471) $ (35,324) $ (41,903)
========= ========= =========
LOSS PER COMMON SHARE - BASIC $ (7.71) $ (6.56) $ (7.78)
========= ========= =========
LOSS PER COMMON SHARE - DILUTED $ (7.71) $ (6.56) $ (7.78)
========= ========= =========
See accompanying notes to consolidated financial statements.
34
INTERLINE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 26, 2003, DECEMBER 27, 2002 AND DECEMBER 28, 2001 (In
thousands except share data)
- --------------------------------------------------------------------------------------------------------
RETAINED
COMMON STOCK EARNINGS
------------------ (ACCUMULATED STOCKHOLDER DEFERRED
SHARES AMOUNT DEFICIT) LOANS COMPENSATION
------ ------ -------- ----- ------------
BALANCE, DECEMBER 29, 2000 5,385,189 $ 1,994 $ (146,850) $ (1,265) $ (1,669)
Preferred stock dividends (37,024)
Interest accrual on stockholder loans (99)
Deferred compensation expense 904
Comprehensive loss:
Net loss (4,879)
Foreign currency translation
Total comprehensive loss
--------- ------- ---------- -------- ----------
BALANCE, DECEMBER 28, 2001 5,385,189 1,994 (188,753) (1,364) (765)
Preferred stock dividends (42,470)
Interest accrual on stockholder loans (76)
Deferred compensation expense 765
Comprehensive income:
Net income 7,146
Foreign currency translation
Total comprehensive income
--------- ------- ---------- -------- ----------
BALANCE, DECEMBER 27, 2002 5,385,189 1,994 (224,077) (1,440)
Preferred stock dividends (48,623)
Retirement of common stock (50,643)
Interest accrual on stockholder loans (105)
Comprehensive income:
Net income 7,152
Foreign currency translation
Total comprehensive income
--------- ------- ---------- -------- ----------
BALANCE, DECEMBER 26, 2003 5,334,546 $ 1,994 $ (265,548) $ (1,545) $
========= ======= ========== ======== ==========
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS'
INCOME (LOSS) EQUITY (DEFICIENCY)
------------- -------------------
BALANCE, DECEMBER 29, 2000 $ (19) $ (147,809)
Preferred stock dividends (37,024)
Interest accrual on stockholder loans (99)
Deferred compensation expense 904
Comprehensive loss:
Net loss
Foreign currency translation (185)
Total comprehensive loss (5,064)
----- ----------
BALANCE, DECEMBER 28, 2001 (204) (189,092)
Preferred stock dividends (42,470)
Interest accrual on stockholder loans (76)
Deferred compensation expense 765
Comprehensive income:
Net income
Foreign currency translation 44
Total comprehensive income 7,190
----- ----------
BALANCE, DECEMBER 27, 2002 (160) (223,683)
Preferred stock dividends (48,623)
Retirement of common stock
Interest accrual on stockholder loans (105)
Comprehensive income:
Net income
Foreign currency translation 723
Total comprehensive income 7,875
----- ----------
BALANCE, DECEMBER 26, 2003 $ 563 $ (264,536)
===== ==========
See accompanying notes to consolidated financial statements.
35
INTERLINE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 26, 2003, DECEMBER 27, 2002 AND DECEMBER 28, 2001
(In thousands)
- -------------------------------------------------------------------------------------------------------------------
2003 2002 2001
-------- ------- -----------
OPERATING ACTIVITIES:
Net income (loss) $ 7,152 $ 7,146 $ (4,879)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 10,949 11,282 16,526
Amortization and writeoff of debt issuance costs 8,374 1,669 1,705
Accretion and write-off of discount on 16% senior
subordinated notes 4,410 391 298
Redemption premium on 16% senior subordinated notes 3,879 -- --
Deferred compensation -- 765 904
Change in fair value of interest rate swaps (5,272) 5,825 12,242
Loss (gain) on disposal of property and equipment 3 438 (48)
Interest income on stockholder loans (105) (76) (99)
Deferred income taxes 1,024 420 (3,848)
Senior subordinated notes issued for interest due 1,674 2,813 2,729
Changes in assets and liabilities which provided (used)
cash, net of effects of acquisition:
Cash - restricted (671) -- (3)
Accounts receivable - trade 449 2,074 (10,167)
Accounts receivable - other 120 (4,293) (3,492)
Inventory 9,050 (7,329) (9,931)
Prepaid expenses and other current assets 1,737 (2,462) 5,179
Other assets (307) (6) (263)
Accrued interest payable 1,394 (1,187) 1,838
Accounts payable (11,106) (610) 1,756
Deferred compensation -- -- (514)
Accrued expenses and other current liabilities 1,718 (1,351) 3,744
Accrued merger expenses (1,383) (3,074) --
Income taxes payable -- (2,020) 2,020
-------- ------- -----------
Net cash provided by operating activities 33,089 10,415 15,697
-------- ------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment (4,556) (4,944) (8,214)
Proceeds from sale of property and equipment -- -- 1,803
Purchase of investment and other assets (3,850) -- --
Acquisition of businesses, net of cash acquired (18,389) -- (1,831)
-------- ------- -----------
Net cash used in investing activities (26,795) (4,944) (8,242)
-------- ------- -----------
FINANCING ACTIVITIES:
(Decrease) increase in revolving credit facility, net (18,500) 14,500 4,000
Repayment of long-term debt (319,236) (17,750) (12,750)
Payment of debt issuance costs (13,011) (35) (1,102)
Redemption of preferred stock (215) -- --
Proceeds from refinancing transaction 340,000 -- --
-------- ------- -----------
Net cash used in financing activities (10,962) (3,285) (9,852)
-------- ------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 723 44 (185)
-------- ------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,945) 2,230 (2,582)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,557 3,327 5,909
-------- ------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,612 $ 5,557 $ 3,327
======== ======= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 33,258 $35,105 $ 33,413
======== ======= ===========
Income taxes (net of refunds) $ 1,353 $ 7,989 $ (3,425)
======== ======= ===========
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Dividends on preferred stock $ 48,623 $42,470 $ 37,024
======== ======= ===========
Note issued for purchase of business and accrual of additional
purchase price $ 4,300 $ -- $ --
======== ======= ===========
Note issued for purchase of investment $ 3,275 $ -- $ --
======== ======= ===========
See notes to consolidated financial statements.
36
INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 26, 2003, DECEMBER 27, 2002 AND DECEMBER 28, 2001 (IN
THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
1. DESCRIPTION OF THE BUSINESS
Interline Brands, Inc. and its subsidiaries (the "Company") is a direct
marketer and specialty distributor of maintenance, repair and operations, or MRO
products. The Company sells plumbing, electrical, hardware, security hardware,
heating, ventilation and air conditioning and other MRO products. Interline's
highly diverse customer base consists of multi-family housing, educational,
lodging and health care facilities, professional contractors and other
distributors.
The Company markets and sells its products primarily through eight
distinct and targeted brands. The Company utilizes a variety of sales channels,
including a direct sales force, telesales representatives, a direct mail
program, brand-specific websites and a national accounts sales program. The
Company provides same day/next day delivery of its products through its network
of regional distribution centers located throughout the United States and
Canada, a national distribution center in Nashville, Tennessee and its dedicated
fleet of trucks.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements
include the accounts of Interline Brands, Inc. and its subsidiaries. These
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America. Intercompany balances and transactions
have been eliminated in consolidation.
FISCAL YEAR--The Company operates on a 52-53 week fiscal year, which
ends on the last Friday in December, and the fiscal years ended December 26,
2003, December 27, 2002 and December 28, 2001 were fifty-two week years.
References herein to 2003, 2002, and 2001 are for the fiscal years ended
December 26, 2003, December 27, 2002 and December 28, 2001, respectively.
CASH AND CASH EQUIVALENTS--Cash and cash equivalents consist of cash
and highly liquid investments with an original maturity of three months or less.
INVENTORY--Inventory is stated at the lower of cost or market. Prior to
2002, the Company determined inventory cost using the first-in, first-out and
average cost methods. Effective December 29, 2001, the Company changed
accounting methods to use average cost for all inventory. The effect of this
change was not material. The Company provides an adjustment to inventory based
on slow-moving and discontinued inventory. This impairment adjustment
establishes a new cost basis for such inventory and is not subsequently
recovered through income.
37
PROPERTY AND EQUIPMENT--Property and equipment is stated at cost, net
of accumulated depreciation and amortization. Expenditures for additions,
renewals and betterments are capitalized; expenditures for maintenance and
repairs are charged to expense as incurred. Upon the retirement or disposal of
assets, the cost and accumulated depreciation or amortization is eliminated from
the accounts and the resulting gain or loss is credited or charged to
operations. Leasehold improvements are amortized, using the straight-line
method, over the lesser of the estimated useful lives or the term of the lease.
Depreciation is computed using the straight-line method based upon estimated
useful lives of the assets as follows:
Buildings 39-40 years
Machinery and equipment 5-7 years
Office furniture and equipment 5-7 years
Vehicles 5 years
Leasehold improvements 1-10 years
COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE--The
Company capitalizes costs related to internally developed software in accordance
with Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". Approximately $0.8 million,
$1.1 million, and $1.2 million, was capitalized in 2003, 2002, and 2001,
respectively.
GOODWILL - Prior to January 1, 2002, goodwill, which represents the
excess of cost over the fair value of net assets acquired, was amortized on a
straight-line basis over estimated useful lives ranging from 30 to 40 years. The
Company assessed the recoverability and the amortization period of goodwill by
determining whether the amounts can be recovered through undiscounted net cash
flows of the businesses acquired over the remaining respective amortization
period. Accumulated amortization was $9.7 million at December 29, 2001.
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") 142, "Goodwill and Other Intangible Assets", and
no longer amortizes goodwill but is required to annually evaluate goodwill for
impairment. As a result of the adoption of SFAS 142, the Company no longer
amortizes goodwill. Goodwill is tested for impairment at least annually, or
whenever events of changes in circumstances indicate that the carrying amount
may not be recoverable. The Company has elected to perform its annual goodwill
impairment test as of the last day of each fiscal year. No impairment was
identified as a result of the most recent impairment test performed as of
December 26, 2003.
The pro forma effect of not amortizing goodwill under SFAS 142 had this
Statement been adopted the first day of fiscal year 2001 is as follows:
2001
Net loss, as reported $ (4,879)
Add back goodwill amortization 5,165
---------
Adjusted net income (loss) $ 286
=========
OTHER INTANGIBLE ASSETS--Other intangible assets include amounts
assigned to customer lists, trademarks, deferred debt issuance costs and
non-compete agreements. Other intangibles are amortized on a straight-line basis
over their useful lives, 13 to 40 years for trademarks and customer lists, and 5
to 10 years for non-compete agreements. Deferred debt issuance costs are
amortized as a component of interest expense over the term of the related debt.
38
IMPAIRMENT OF LONG-LIVED ASSETS--The Company analyzes the carrying
value of its recorded intangible assets and other long-lived assets periodically
or when facts or circumstances indicate that the carrying value may be impaired.
A review includes an assessment of customer retention, cash flow projections and
other factors the Company believes are relevant. The discounted future expected
net cash flows of each identifiable asset is used to measure impairment losses.
The Company has not identified any impairment losses with respect to long-lived
assets for any fiscal years presented.
FOREIGN CURRENCY TRANSLATION--Assets and liabilities of the Company's
foreign subsidiary, where the functional currency is the local currency, are
translated into United States dollars at the fiscal year end exchange rate. The
related translation adjustments are recorded as a component of other
comprehensive income. Revenues and expenses are translated using average
exchange rates prevailing during the year.
RISK INSURANCE--The Company has a $250 self-insured retention per
occurrence in connection with its workers' compensation policy ("Risk
Insurance"). The Company accrues its estimated cost in connection with its
portion of its Risk Insurance losses. Claims paid are charged against the
reserve. Additionally, the Company maintains a reserve for incurred but not
reported claims based on past experience.
ESTIMATES--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from those
estimates and assumptions.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The carrying value of cash and
cash equivalents, restricted cash, accounts receivable, and accounts payable
approximate fair value because of the short maturities of these items. The
carrying values of notes payable and long-term debt are reasonable estimates of
their fair values. Estimated fair values of notes payable and long-term debt are
determined by discounting the future cash flows using rates currently available
to the Company for similar instruments. Interest rate swaps are carried at fair
value, which is determined by quoted market prices.
REVENUE RECOGNITION--Sales are recognized as products are shipped,
F.O.B. point of shipment, and are net of sales returns, allowances and credits.
COST OF SALES--Cost of sales includes merchandise costs, freight-in,
and operating costs related to the Company's National Distribution Center.
SHIPPING AND HANDLING COSTS--Shipping and handling costs have been
included in selling, general and administrative expenses on the consolidated
statements of operations. Such amounts were approximately $32.5 million, $30.1
million, and $27.1 million in 2003, 2002 and 2001, respectively.
ADVERTISING COSTS--Costs of producing and distributing sales catalogs
and promotional flyers are capitalized and charged to expense over the life of
the related catalog and promotional flyers. Advertising expenses were
approximately $1.3 million, $2.0 million, and $2.1 million in 2003, 2002 and
2001, respectively.
STOCK-BASED COMPENSATION--The Company accounts for stock-based
compensation using the intrinsic method. Accordingly, compensation cost for
stock options issued to employees is measured as the excess, if any, of the
quoted market price of the Company's stock when the Company was publicly traded
and the estimated fair market value of the stock after the Company's common
stock became privately held, at the date of the grant over the amount an
employee must pay to acquire the stock.
39
NET INCOME PER SHARE DATA-- 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. The amounts used in calculating
net income (loss) per share data are as follows:
2003 2002 2001
-------- -------- --------
Net income (loss) $ 7,152 $ 7,146 $ (4,879)
Preferred stock dividends (48,623) (42,470) (37,024)
-------- -------- --------
Net loss applicable to common shareholders $(41,471) $(35,324) $(41,903)
======== ======== ========
Weighted average shares outstanding - basic 5,381 5,385 5,385
Effect of dilutive stock options -- -- --
-------- -------- --------
Weighted average shares outstanding - diluted 5,381 5,385 5,385
======== ======== ========
Options to purchase 187,532, 125,805 and 125,805 shares of common stock
which were outstanding during 2003, 2002 and 2001, 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.
SEGMENT INFORMATION- The Company is in one industry - the distribution
of MRO products. In accordance with SFAS 131, "Disclosure about segments of an
Enterprise and Related Information," the Company has one operating segment. The
Company's sales by product category are approximately as follows:
PRODUCT CATEGORY 2003 2002 2001
- ------------------------------------ -------- -------- --------
Plumbing $ 300,865 $ 306,014 $ 280,304
Electrical 76,817 76,504 73,123
Hardware 44,810 44,627 54,842
Security Hardware 51,211 51,002 48,748
Appliances and Parts 38,408 38,252 36,561
HVAC 38,408 38,252 30,468
Other 89,619 82,879 85,310
--------- --------- ---------
Total $ 640,138 $ 637,530 $ 609,356
========= ========= =========
The Company's revenues and assets outside the United States are not
significant.
INCOME TAXES--Taxes on income are provided using an asset and liability
approach to financial accounting and reporting for income taxes. Deferred income
tax assets and liabilities are computed for differences between the financial
statement and tax bases of assets and liabilities that will result in taxable or
deductible amounts in the future. Such deferred income tax asset and liability
computations are based on enacted tax laws and rates applicable to periods in
which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
DERIVATIVE FINANCIAL INSTRUMENTS--Periodically, the Company enters into
derivative financial instruments, including interest rate exchange agreements
("Swaps") to manage its exposure to fluctuations in interest rates on its debt.
Under existing Swaps, the Company pays a fixed rate on the notional amount to
its banks and the banks pay the Company a variable rate on the notional amount
equal to a base LIBOR rate. The
40
Company's derivative activities, all of which are for purposes other than
trading, are initiated within the guidelines of corporate risk-management
policies. See Note 7 for further description of the Swaps.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS
133, as amended by SFAS 137 "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement 133" and SFAS 138
"Accounting for Certain Derivative Instruments and Certain Hedging Activities".
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. All derivatives, whether designated in
hedging relationships or not, are required to be recorded on the balance sheet
at fair value. The Company adopted SFAS 133, as amended, on January 1, 2001. As
a result, it recorded an accumulated transition adjustment of $5,368 as a
reduction to earnings relating to derivative instruments that do not qualify for
hedge accounting under SFAS 133. The Company recorded an additional loss of
$6,874 and $5,825 in 2001 and 2002, respectively and a gain of $5,272 in 2003,
as a result of the change in market value of the Swaps.
RECENT ACCOUNTING STANDARDS--In December 2003, the Securities and Exchange
Commission ("SEC") issued Staff Accounting Bulletin No. 104 ("SAB 104"). SAB 104
revised and rescinded portions of Staff Accounting Bulletin No. 101 in order to
make the interpretive guidance consistent with the current authoritative
accounting and auditing guidance and SEC rules and regulations.
SFAS 149, "Amendment to Statement 133 on Derivative Instruments and
Hedging Activities" ("SFAS 149"), addresses certain decisions made by the
Financial Accounting Standards Board as part of the Derivatives Implementation
Group process. In general, SFAS 149 is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after June
30, 2003.
SFAS 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity" ("SFAS 150"), addresses how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. The provisions of SFAS 150 are
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise are effective July 1, 2003.
The Company adopted SFAS 149 and SFAS 150 on July 1, 2003 and SAB 104
in December 2003. The adoption of these standards did not have a material impact
on the Company's financial position, results of operations or cash flows.
3. GOODWILL AND OTHER INTANGIBLE ASSETS
A summary of changes to goodwill for the year ended December 26, 2003
follows:
Balance at December 27, 2002 $ 195,669
Acquisitions 6,982
Adjustments to acquisition accrual (424)
---------
Balance at December 26, 2003 $ 202,227
=========
There were no changes to goodwill for the year ended December 27, 2002.
The adjustment to goodwill during 2003 relates primarily to the adjustment of an
acquisition accrual established for the Barnett acquisition that was settled for
less than the amount accrued.
41
The gross carrying amount and accumulated amortization of the Company's
intangible assets other than goodwill as of December 26, 2003 and December 27,
2002 are as follows:
GROSS NET
CARRYING ACCUMULATED BOOK
DECEMBER 26, 2003 AMOUNT AMORTIZATION VALUE
Customer lists $ 49,362 $ 5,403 $ 43,959
Trademarks 36,221 2,912 33,309
Deferred debt issuance costs 13,149 1,079 12,070
Non-compete agreements 2,616 1,322 1,294
--------- -------- --------
Total $ 101,348 $ 10,716 $ 90,632
========= ======== ========
DECEMBER 27, 2002
Customer lists $ 41,732 $ 3,641 $ 38,091
Trademarks 33,821 2,061 31,760
Deferred debt issuance costs 11,169 3,736 7,433
Non-compete agreements 1,371 1,232 139
--------- -------- --------
Total $ 88,093 $ 10,670 $ 77,423
========= ======== ========
The amortization of deferred debt issuance costs, recorded as a
component of interest expense, was $1.8 million, $1.7 million, and $1.7 million
in 2003, 2002 and 2001, respectively. Amortization expense on other intangible
assets was $2.7 million, $2.0 million, and $2.2 million for 2003, 2002 and 2001,
respectively. Expected amortization expense on other intangible assets
(excluding deferred debt issuance costs which will vary depending upon debt
payments) for each of the five succeeding fiscal years is as follows:
FOR FISCAL YEAR:
2004 $ 4,018
2005 4,009
2006 4,007
2007 3,989
2008 3,973
CHANGE IN ESTIMATE- Effective July 1, 2003, the Company changed the
estimated useful life of customer lists acquired in the acquisition of Barnett
and Sexauer during September 2000 and November 1999 respectively, from 40 years
to 17 years. The estimated remaining useful life of 17 years was based upon the
expected life of the customer accounts acquired using the attrition rate
experienced for the twelve-month period ended September 26, 2003, with no
consideration given to new accounts generated during this period. This method is
consistent with the guidance provided in the Statement of Financial Accounting
Standards 142, which suggests that the customer list intangible asset should be
amortized based on management's best estimate of its useful life, following the
pattern in which the expected benefits will be consumed or otherwise used up.
The effect of this change in the estimated remaining useful life is not
considered to be material to the Company's consolidated financial statements.
4. SIGNIFICANT TRANSACTIONS
SPECIAL COSTS AND EXPENSES--Special costs and expenses for 2003, 2002
and 2001 consist of costs associated with distribution center consolidation,
relocation, lease termination, severance related costs and other
42
transaction fees. Such costs and expenses were $0.6 million, $4.9 million and
$3.1 million for fiscal years 2003, 2002 and 2001, respectively.
BARNETT ACQUISITION--In September 2000, the Company completed the
acquisition of Barnett, Inc. (the "Barnett Acquisition") for an aggregate
purchase price of $220.8 million including costs of acquisition of approximately
$7.1 million. The costs of acquisition include a $3.0 million advisory fee paid
to a significant stockholder of the Company. Goodwill recorded in connection
with the Barnett Acquisition totaled approximately $89.3 million. Other
intangible assets recorded in connection with the Barnett Acquisition totaled
approximately $53.1 million. During 2001, the Company finalized its purchase
price of Barnett and as a result recorded an increase in goodwill of
approximately $12.3 million. These additional costs relate to the closure of
duplicate Barnett facilities, severance related to these closures and the
relocation and integration of Barnett employees and administrative functions. As
of December 26, 2003 and December 27, 2002, $4.7 million and $7.4 million was
accrued for such costs.
FLORIDA LIGHTING ACQUISITION - On November 24, 2003, the Company
purchased the net assets of Florida Lighting, Inc. (the "Florida Lighting
Acquisition"), which sells residential lighting and electrical products to
electrical contractors, electrical distributors, lighting, showrooms and mass
merchants primarily through direct mail and outbound telesales.
The aggregate purchase price was $23.1 million including costs of
acquisition of approximately $0.3 million. Goodwill recorded in connection with
the acquisition totaled approximately $7.0 million and is not expected to be
deductible for tax purposes. Other intangible assets recorded in connection with
the Florida Lighting Acquisition totaled approximately $10.7 million consisting
of customer lists of $7.3 million, trademarks of $2.4 million and a non-compete
agreement of $1.0 million. Customer lists and trademarks will be amortized over
13 years and 40 years respectively, using the straight line method. The
non-compete agreement will be amortized over 5 years, the term of the agreement.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition.
At November 24, 2003
Cash $ 481
Accounts receivable 1,046
Inventory 3,872
Prepaid expenses and other current assets 182
Property and equipment 713
Goodwill 6,982
Other intangible assets 10,700
Accounts payable (868)
--------
Total purchase price $ 23,108
========
Additionally, the Company has transferred $1.0 million to an escrow
fund in connection with the Florida Lighting Acquisition. The transfer of the
payment to the seller is contingent upon general representations and warranties
of the seller. The escrow agreement expires on November 25, 2004, at which time
the escrow fund less any claims against the escrow will be paid to the seller.
The Company will record the amount paid from the escrow to the seller as an
addition to the purchase price.
The Company also issued contingent consideration based upon the
acquired business meeting specific operation performance indicators. The
consideration will be paid upon the delivery of the 2004 annual report
43
but no later than April 15, 2005. The Company will record the consideration at
the time the amount is no longer contingent as an addition to the purchase
price.
The above acquisition was accounted for under the purchase method of
accounting, and accordingly, the net assets and results of operations have been
included in the accompanying consolidated financial statements since the date of
acquisition. The following table presents the unaudited results of operations of
the Company for the fiscal year ended December 26, 2003 as if the acquisition
had been consummated as of the beginning of 2003, and includes certain pro forma
adjustments to reflect the amortization of intangible assets and financing
charges on long-term debt:
2003 2002 2001
---- ---- ----
Revenues $ 666,919 $ 666,769 $ 633,883
Net income 8,308 8,370 (4,799)
The unaudited pro forma results of operations are prepared for
comparative purposes only and do not necessarily reflect the results that would
have occurred had the acquisition occurred at the date described above or the
results which may occur in the future.
5. ACCOUNTS RECEIVABLE
The Company's trade receivables are exposed to credit risk. The
majority of the market served by the Company is comprised of numerous individual
accounts, none of which is individually significant. The Company monitors the
creditworthiness of its customers on an ongoing basis and provides a reserve for
estimated bad debt losses.
BALANCE AT BALANCE AT
BEGINNING CHARGED TO END
OF YEAR EXPENSE DEDUCTIONS (1) OF YEAR
---------- ---------- -------------- ----------
Year ended December 28, 2001:
Allowance for doubtful accounts $ 5,045 $ 1,352 $ (1,255) $ 5,142
------- ------- -------- -------
Year ended December 27, 2002:
Allowance for doubtful accounts $ 5,142 $ 1,937 $ (1,757) $ 5,322
------- ------- -------- -------
Year ended December 26, 2003:
Allowance for doubtful accounts $ 5,322 $ 2,240 $ (1,246) $ 6,316
------- ------- -------- -------
(1) Accounts receivable written off as uncollectible, net of recoveries
44
6. PROPERTY AND EQUIPMENT
Major classifications of property and equipment are as follows:
2003 2002
---- ----
Land $ 400 $ 400
Building 9,536 9,060
Machinery and equipment 44,092 40,550
Office furniture and equipment 4,709 4,885
Vehicles 581 554
Leasehold improvements 6,512 6,860
-------- --------
65,830 62,309
Less accumulated depreciation and amortization (35,225) (28,724)
-------- --------
$ 30,605 $ 33,585
======== ========
Depreciation and amortization expense was approximately $8.2 million,
$9.3 million, and $9.1 million for 2003, 2002 and 2001, respectively.
7. DEBT
Long-term debt consists of the following:
2003 2002
---- ----
Term Loan A $ -- $ 70,000
Term Loan B -- 146,625
Term Loan 138,250 --
Note payable 3,275 --
Senior Subordinated Notes - 16% -- 90,899
Senior Subordinated Notes - 11.5% 200,000 --
-------- --------
341,525 307,524
Less current portion (7,000) (22,750)
-------- --------
$334,525 $284,774
======== ========
DEBT-- In May 2003, the Company completed an offering of $200 million
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 the Company's former credit facility, (2) redeem all of the
16% senior subordinated notes, (3) pay accrued interest and related redemption
premiums on the Company's former debt and (4) pay transaction fees and expenses
related to 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 made on
November 15, 2003. Prior to May 15, 2006, the Company may redeem up to 35% of
the notes using proceeds of certain equity offerings and the Company may redeem
all of the notes after May 15, 2007, subject to redemption premiums unless
redeemed after May 15, 2009.
45
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 December 26, 2003 ranged from 4.60% for LIBOR based
borrowings and 6.50% 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 December 26, 2003, the Company had $59.0 million available under
its revolving loan facility. Total letters of credit issued under this facility
as of December 26, 2003 was $6.0 million. There were no borrowings under the
revolving loan facility at December 26, 2003. The 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 $13.1 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 26, 2003 and December
27, 2002, 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
$12.8 million at December 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 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
a maximum debt to cash flow ratio and a minimum interest expense coverage ratio.
The Company was in compliance with all covenants at December 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.
The maturities of long-term debt subsequent to December 26, 2003 are as
follows:
2004 $ 7,000
2005 7,875
2006 11,375
2007 14,000
2008 15,750
Thereafter 285,525
---------
$ 341,525
=========
46
8. SENIOR PREFERRED STOCK
The Company has the authority to issue 27,000,000 shares of senior
preferred stock ("Senior Preferred"), par value $.01 per share. Senior Preferred
is stated at its liquidation value of $10.00 per share plus accrued dividends.
As part of the Company's common stock becoming privately held, 13,306,696 shares
of preferred stock were issued. As part of the Barnett Acquisition (see Note 4),
10,313,192 shares of preferred stock were issued. The Senior Preferred ranks
senior to all other classes of stock of the Company with respect to dividends,
distributions, redemptions and distributions of assets upon liquidation, wind-up
and dissolution of the Company. Holders of the Senior Preferred are entitled to
receive dividends payable on each share at an annual rate of 14%. All dividends
(1) accrue on a daily basis, (2) are cumulative, whether or not earned or
declared, (3) are compounded quarterly from the date of issuance of such shares
and (4) are declared payable when declared by the Board of Directors. All
dividends accrued are payable prior to the payment of any dividend on shares of
any junior stock.
In the event of a voluntary or involuntary liquidation, holders of
Senior Preferred shall be entitled to be paid for each share held, out of funds
legally available for distribution, in an amount equal to the sum of the
liquidation value of $10.00 per share plus an amount of cash equal to all
accumulated and unpaid dividends before any payments to the holders of junior
stock. Certain events that may be considered a "change of control" of the
Company or certain sales of all or substantially all of the Company's assets
would be deemed to be a Liquidation Event under the terms of the Senior
Preferred unless the holders of 80% of the then outstanding shares of Senior
Preferred elect not to treat them as a Liquidation Event. In addition, certain
Senior Preferred shares held by officers of the Company may be required to be
redeemed at the option of the employee upon termination of employment. These put
options terminate upon the consummation of a public offering of stock or a
"change in control" of the Company. If such funds are insufficient to permit
payment in full to the Senior Preferred holders, then the assets available for
distribution will be paid ratably in proportion to the amounts held by the
Senior Preferred holders. At December 26, 2003, December 27, 2002 and December
28, 2001, dividends accrued on Senior Preferred were approximately $143.6
million, $95.0 million and $52.5 million, respectively. No dividends have been
declared or paid. In December 2003, the Company redeemed 19,874 shares of
preferred stock for $0.2 million.
9. STOCKHOLDERS' EQUITY
COMMON STOCK SPLIT--During 2001, the Company declared a three-for-one
split of its common stock. As a result of the stock split, the accompanying
consolidated financial statements retroactively reflects an increase in the
numbers of outstanding shares of common stock.
STOCKHOLDER LOANS--In connection with the Company's common stock
becoming privately held and the Barnett Acquisition, the Company issued
stockholder loans to employees in the amount of $3.1 million to purchase 229,380
(restated for the stock split) shares of common stock and 302,819 shares of
preferred stock. Stockholder loans of $1.2 million were granted in connection
with the Going-Private Transaction. The loans are payable upon termination of
employment, the sale of securities purchased in connection with the loans, or on
May 16, 2005. The notes bear interest at the rate equal to the rate payable by
the Company under its credit facility, as adjusted quarterly, not to exceed
8.0%. As of December 26, 2003 and December 27, 2002, $345 and $240,
respectively, of interest has accrued on the notes and has been included as a
portion of stockholder loans in stockholders' equity. These notes can be prepaid
at any time without penalty. Stockholder loans of $1.9 million were granted in
connection with the Barnett Acquisition. The amount of these notes is equivalent
to deferred compensation agreements granted to the same individuals (see Note
10). Amounts under the deferred compensation plans vest on a monthly basis over
a 24-month period, and vested amounts can be paid out to offset the stockholder
loans. As of December 26, 2003 and December 27, 2002, $1.9 million of these
stockholder loans has been repaid using distributions from the deferred
compensation plans.
47
10. PROFIT SHARING PLAN
The Company has qualified profit sharing plans under Section 401(k) of
the Internal Revenue Code. Contributions to the plans by the Company are made at
the discretion of the Company's Board of Directors. Company contributions to the
plans were approximately $0.7 million, $1.3 million and $1.3 million for 2003,
2002 and 2001, respectively.
11. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS--The Company leases its facilities under operating
leases expiring at various dates through 2008. Minimum future rental payments
under these leases as of December 26, 2003 are as follows:
2004 $ 10,899
2005 9,717
2006 7,577
2007 6,033
2008 4,523
Thereafter 7,688
---------
Total $ 46,437
=========
The Company operates a distribution center, which is leased from an
entity, which is partially owned by a stockholder and director of the Company.
Minimum annual rent payable under this lease is approximately $289, plus all
real estate taxes and assessments, utilities and insurance related to the
premises. Total rent expense for this lease was approximately $289 in 2003, 2002
and 2001. This lease expires on May 31, 2006 and does not contain any renewal
terms. The Company believes that the terms of the lease are no less favorable to
it than could be obtained from an unaffiliated party. The officer sold his
ownership interest in the property in September 2002.
The Company leases an office building from a stockholder and director
of the Company. As amended in March 1995, under the terms of the lease, the
Company is required to pay approximately $137 annually, plus all real estate
taxes and assessments, utilities and insurance related to the premises. Total
rental expense for this lease was $137 for 2003, 2002 and 2001. The lease
expires on April 30, 2004 and does not contain any renewal terms. The Company
believes that the terms of the lease are no less favorable to it than could be
obtained from an unaffiliated party.
Rent expense under all operating leases was approximately $15.7
million, $14.8 million, and $13.9 million for 2003, 2002 and 2001, respectively.
Certain of the leases provide that the Company pays taxes, insurance and other
operating expenses applicable to the leased premises.
EMPLOYMENT AGREEMENT--The Company has employment agreements with
certain officers of various dates through 2005, unless terminated earlier by the
Company, at combined annual base salaries of $1.2 million, subject to
adjustments and plus bonuses.
MANAGEMENT AGREEMENT--In May 2000, the Company entered into an advisory
agreement with a significant stockholder of the Company, which provides for an
annual advisory fee of $250 plus out-of-pocket expenses of up to $25 per year.
The management agreement terminates in September 2005.
CONTINGENT LIABILITIES--At December 26, 2003 and December 27, 2002, the
Company was contingently liable for unused letters of credit aggregating
approximately $6.0 million and $5.9 million, respectively.
48
LEGAL PROCEEDINGS--The Company is involved in various legal proceedings
in the ordinary course of its business that are not anticipated to have a
material adverse effect on the Company's results of operations or financial
position.
DEFERRED COMPENSATION AGREEMENTS--Effective September 29, 2000, the
Company established deferred compensation agreements in the amount of $1.9
million with officers of the Company. Interest is payable on the amounts at the
long-term federal rate, compounded semi-annually, starting on the date of the
initial deferral. The accounts vested ratably over a 24-month period and were
fully vested at September 30, 2002. As of December 26, 2003 and December 27,
2002, $1.9 million of the deferred compensation has vested and has been recorded
as a reduction of stockholder loans (see Note 8).
12. 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 ten years from the date of grant. 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:
WEIGHTED
NUMBER EXERCISE PRICE AVERAGE EXERCISE
OF SHARES PER SHARE PRICE PER SHARE
--------- --------- ---------------
Outstanding at December 28, 2001 125,805 $ 1.67 - $ 20.33 $ 9.00
=======
Outstanding at December 27, 2002 125,805 $ 1.67 - $ 20.33 $ 9.00
=======
2003:
Granted 66,579 $ 0.50 $ 0.50
Cancelled 4,852 $ 0.50 $ 0.50
-------
Outstanding at December 26, 2003 187,532 $ 0.50 - $ 20.33 $ 6.17
=======
The following table summarizes information about the stock options
outstanding under the Company's option plan as of December 26, 2003:
OPTIONS WEIGHTED WEIGHTED OPTIONS WEIGHTED
OUTSTANDING AT AVERAGE AVERAGE EXERCISABLE AT AVERAGE
EXERCISE PRICE DECEMBER 26, 2003 REMAINING LIFE EXERCISE PRICE DECEMBER 26, 2003 EXERCISE PRICE
-------------- ----------------- -------------- -------------- ----------------- --------------
$1.67 41,935 1.5 years $ 1.67 25,161 $ 1.67
5.00 41,935 1.5 years 5.00 25,161 5.00
20.33 41,935 1.5 years 20.33 25,161 20.33
0.50 61,727 4.0 years 0.50 30,691 0.50
------- -------
187,532 106,174
======= =======
49
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 4.02% and expected
life of 5 years.
13. PROVISION FOR INCOME TAXES
The provision (benefit) for income taxes for the years 2003, 2002 and
2001, is as follows:
2003 2002 2001
---- ---- ----
Current:
Federal $ 2,428 $ 2,858 $ 5,852
State 577 547 190
Foreign 518 394 401
------- ------- -------
3,523 3,799 6,443
------- ------- -------
Deferred
Federal 1,167 420 (4,727)
State (143) -- 879
------- ------- -------
1,024 420 (3,848)
------- ------- -------
$ 4,547 $ 4,219 $ 2,595
======= ======= =======
The components of income before income taxes were as follows:
2003 2002 2001
---- ---- ----
United States $10,454 $10,290 $1
Foreign 1,245 1,075 936
------- ------- ----
Total $11,699 $11,365 $937
======= ======= ====
The reconciliation of the provision for income taxes at the federal
statutory tax rate to the provision for income taxes is as follows:
2003 2002 2001
---- ---- ----
Federal statutory tax rate 35 % 35 % 35 %
State income taxes, net of federal benefit 2 % 3 % 74 %
Non-deductible expenses 1 % 1 % 7 %
Foreign income taxes 1 % 1 % 8 %
Goodwill amortization -- % -- % 183 %
Other -- % (3)% (30)%
---- ---- ----
39 % 37 % 277 %
==== ==== ====
50
Deferred income taxes result primarily from temporary differences in
the recognition of certain expenses for financial and income tax reporting
purposes.
The components of the Company's deferred tax assets and liabilities at
December 26, 2003 and December 27, 2002 consists of the following:
2003 2002
---- ----
Deferred tax assets:
Inventory $ 3,578 $ 3,091
Bad debt reserves 2,206 1,857
Interest rate swaps 4,478 6,324
Closing cost accrual 1,659 2,502
Bonus accrual 602 459
Vacation accrual 287 361
Vendor discounts 793 1,149
Other 778 842
-------- --------
Total deferred tax assets 14,381 16,585
-------- --------
Deferred tax liabilities:
Identifiable intangibles (23,494) (23,740)
Depreciation (2,390) (2,454)
State taxes (443) (506)
Other (279) (206)
Total deferred tax liabilities (26,606) (26,906)
-------- --------
Net deferred tax liabilities $(12,225) $(10,321)
======== ========
14. SUBSIDIARY GUARANTORS
The Company completed an offering of $200 million principal amount of
Senior Subordinated Notes in connection with its Refinancing Transactions. The
Company 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 was declared
effective by the SEC and the exchange offer was consummated. 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 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.
51
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 26, 2003
- -------------------------------------------------------------------------------------------------------------------
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ------------ ------------
(in thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,527 $ 85 $ -- $ 1,612
Cash-restricted 1,000 -- -- 1,000
Accounts receivable - trade, net 83,684 -- -- 83,684
Accounts receivable - other 12,932 -- -- 12,932
Inventory 119,301 -- -- 119,301
Prepaid expenses and other current assets 4,255 5 -- 4,260
Deferred income taxes 10,318 -- -- 10,318
Due from Parent -- 43,259 (43,259) --
Investment in subsidiaries 64,330 -- (64,330) --
---------- -------- --------- ---------
Total current assets 297,347 43,349 (107,589) 233,107
PROPERTY AND EQUIPMENT, net 30,605 -- -- 30,605
GOODWILL 202,227 -- -- 202,227
INTANGIBLE ASSETS, net 90,632 -- -- 90,632
OTHER ASSETS 5,412 6,614 (3,315) 8,711
---------- -------- --------- ---------
TOTAL ASSETS $ 626,223 $ 49,963 $(110,904) $ 565,282
========== ======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY)
CURRENT LIABILITIES:
Current portion of long-term debt $ 7,000 $ -- $ -- $ 7,000
Revolving credit facility --
Accounts payable 43,170 10 -- 43,180
Accrued expenses and other current liabilities 19,623 -- -- 19,623
Accrued interest payable 5,803 -- -- 5,803
Accrued merger expenses 4,739 -- -- 4,739
Income taxes payable (2,400) 2,400 -- --
Due to subsidiaries 43,299 -- (43,299) --
---------- -------- --------- ---------
Total current liabilities 121,234 2,410 (43,299) 80,345
LONG-TERM LIABILITIES:
Deferred income taxes 22,543 -- -- 22,543
Interest rate swaps 12,793 -- -- 12,793
Long-term debt, net of current portion 331,250 3,275 -- 334,525
---------- -------- --------- ---------
TOTAL LIABILITIES 487,820 5,685 (43,299) 450,206
---------- -------- --------- ---------
SENIOR PREFERRED STOCK, $0.01 par value, 27,000,000
shares authorized; 23,600,014 shares issued and
outstanding 379,612 -- -- 379,612
STOCKHOLDERS' EQUITY (DEFICIENCY):
Common stock, no par value, 7,500,000 shares
authorized, 5,334,546 shares issued and
outstanding 1,994 -- -- 1,994
Additional paid-in-capital -- 43,285 (43,285) --
Accumulated deficit (265,548) 24,320 (24,320) (265,548)
Shareholder loans (1,545) -- -- (1,545)
Dividends 23,327 (23,327) -- --
Accumulated other comprehensive loss 563 -- -- 563
---------- -------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (241,209) 44,278 (67,605) (264,536)
---------- -------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY) $ 626,223 $ 49,963 $(110,904) $ 565,282
========== ======== ========= =========
52
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Twelve Months Ended December 26, 2003
- -------------------------------------------------------------------------------------------------------------------
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ------------ ------------
(in thousands)
NET SALES $ 640,138 $ -- $ -- $ 640,138
COST OF SALES 395,894 -- -- 395,894
---------- -------- --------- ----------
Gross profit 244,244 -- -- 244,244
OPERATING EXPENSES:
Selling, general and administrative expenses 171,046 45 -- 171,091
Depreciation and amortization 10,949 -- -- 10,949
Special costs and expenses 607 -- -- 607
---------- -------- --------- ----------
Total operating expenses 182,602 45 -- 182,647
---------- -------- --------- ----------
OPERATING INCOME 61,642 (45) -- 61,597
CHANGE IN FAIR VALUE OF INTEREST
RATE SWAPS 5,272 -- -- 5,272
EARLY EXTINGUISHMENT OF DEBT (14,893) -- -- (14,893)
OTHER INCOME 40 40 (40) 40
INTEREST EXPENSE, net (54,522) 14,205 -- (40,317)
EQUITY IN EARNINGS OF SUSIDIARIES 9,260 -- (9,260) --
---------- -------- --------- ----------
Income (loss) before income taxes 6,799 14,200 (9,300) 11,699
PROVISION (BENEFIT) FOR INCOME TAXES (353) 4,900 -- 4,547
---------- -------- --------- ----------
NET INCOME (LOSS) 7,152 9,300 (9,300) 7,152
PREFERRED STOCK DIVIDENDS (48,623) -- -- (48,623)
---------- -------- --------- ----------
NET INCOME (LOSS) APPLICABLE TO
COMMON STOCKHOLDERS $ (41,471) $ 9,300 $ (9,300) $ (41,471)
========== ======== ========= ==========
53
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 26, 2003
- -----------------------------------------------------------------------------------------------------------------
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ------------ ------------
(in thousands)
OPERATING ACTIVITIES:
Net income (loss) $ 7,152 $ 9,300 $ (9,300) $ 7,152
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Equity in earnings of subsidiaries (9,300) -- 9,300 --
Depreciation and amortization 10,949 -- -- 10,949
Amortization of debt issuance costs 8,374 -- -- 8,374
Accretion and write off of discount on 16% senior
subordinated notes 4,410 -- -- 4,410
Redemption premium on 16% senior subordinated notes 3,879 -- -- 3,879
Change in fair value of interest rate swaps (5,272) -- -- (5,272)
Loss on disposal of property and equipment 3 -- -- 3
Interest income on shareholder loans (105) -- -- (105)
Deferred income taxes 1,024 -- -- 1,024
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:
Cash - restricted (671) -- -- (671)
Accounts receivable - trade 449 -- -- 449
Accounts receivable - other 120 -- -- 120
Inventory 9,050 -- -- 9,050
Prepaid expenses and other current assets 1,735 2 - 1,737
Due from parent -- 11,670 (11,670) --
Other (243) (64) -- (307)
Accrued interest payable 1,394 -- -- 1,394
Accounts payable (11,116) 10 -- (11,106)
Accrued expenses and other current liabilities 1,722 (4) -- 1,718
Accrued merger expenses (1,383) -- -- (1,383)
Due to subsidiaries (11,670) -- 11,670 --
Income taxes payable (2,400) 2,400 -- --
------- ---------- -------- ----------
Net cash provided by operating activities 9,775 23,314 -- 33,089
------- ---------- -------- ----------
INVESTING ACTIVITIES:
Purchase of property and equipment (4,556) -- -- (4,556)
Purchase of investment and other assets (575) (3,275) -- (3,850)
Acquisition of businesses, net of cash acquired (18,389) -- -- (18,389)
------- ---------- -------- ----------
Net cash used in investing activities (23,520) (3,275) -- (26,795)
------- ---------- -------- ----------
FINANCING ACTIVITIES:
Increase in revolver and swingline, net (18,500) -- -- (18,500)
Repayment of long-term borrowing (319,236) -- -- (319,236)
Proceeds from refinaqncing transactions 340,000 -- -- 340,000
Payment of debt financing costs (13,011) -- -- (13,011)
Repurchase of Preferred Stock (215) -- -- (215)
Dividends Paid 23,327 (23,327) -- --
Contribution from Parent (3,275) 3,275 -- --
------- ---------- -------- ----------
Net cash provided by (used in)financing
activities 9,090 (20,052) -- (10,962)
------- ---------- -------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 723 -- -- 723
------- ---------- -------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,932) (13) -- (3,945)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,459 98 -- 5,557
------- ---------- -------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,527 $ 85 $ -- $ 1,612
======= ========== ====== ==========
54
CONDENSED CONSOLIDATING BALANCE SHEET
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 10,932 -- -- 10,932
Due from Parent -- 54,929 (54,929) --
Investment in subsidiaries 55,030 -- (55,030) --
--------- ---------- --------- -----------
Total current assets 298,314 55,034 (109,959) 243,389
PROPERTY AND EQUIPMENT, net 33,585 -- -- 33,585
GOODWILL 195,669 -- -- 195,669
INTANGIBLE ASSETS, net 77,423 -- -- 77,423
OTHER ASSETS 1,652 -- -- 1,652
--------- ---------- --------- -----------
TOTAL ASSETS $ 606,643 $ 55,034 $(109,959) $ 551,718
========= ========== ========= ===========
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 7,426 -- -- 7,426
Due to subsidiaries 54,929 -- (54,929) --
--------- ---------- --------- -----------
Total current liabilities 175,030 4 (54,929) 120,105
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 499,124 4 (54,929) 444,199
--------- ---------- --------- -----------
SENIOR PREFERRED STOCK, $0.01 par value, 27,000,000
shares authorized; 23,619,888 shares issued and
outstanding 331,202 -- -- 331,202
--------- ---------- --------- -----------
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)
Shareholder loans (1,440) -- -- (1,440)
Accumulated other comprehensive loss (160) -- -- (160)
--------- ---------- --------- -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (223,683) 55,030 (55,030) (223,683)
--------- ---------- --------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY) $ 606,643 $ 55,034 $(109,959) $ 551,718
========= ========== ========= ===========
55
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Twelve Months Ended December 27, 2002
- -----------------------------------------------------------------------------------------------------------------
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------
(in thousands)
NET SALES $ 637,530 $ -- $ -- $ 637,530
COST OF SALES 401,212 -- -- 401,212
--------- ---------- --------- -----------
Gross profit 236,318 -- -- 236,318
OPERATING EXPENSES:
Selling, general and administrative expenses 164,302 26 -- 164,328
Depreciation and amortization 11,282 -- -- 11,282
Special costs and expenses 4,893 -- -- 4,893
--------- ---------- --------- -----------
Total operating expenses 180,477 26 -- 180,503
--------- ---------- --------- -----------
OPERATING INCOME 55,841 (26) -- 55,815
CHANGE IN FAIR VALUE OF INTEREST
RATE SWAPS (5,825) -- -- (5,825)
INTEREST EXPENSE, net (50,142) 11,517 -- (38,625)
EQUITY IN EARNINGS OF SUSIDIARIES 7,491 -- (7,491) --
--------- ---------- --------- -----------
Income (loss) before income taxes 7,365 11,491 (7,491) 11,365
PROVISION FOR INCOME TAXES 219 4,000 -- 4,219
--------- ---------- --------- -----------
NET INCOME (LOSS) 7,146 7,491 (7,491) 7,146
PREFERRED STOCK DIVIDENDS (42,470) -- -- (42,470)
--------- ---------- --------- -----------
NET (LOSS) INCOME APPLICABLE TO
COMMON STOCKHOLDERS $ (35,324) $ 7,491 $ (7,491) $ (35,324)
========= ========== ========= ===========
56
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 27, 2002
- -----------------------------------------------------------------------------------------------------------------
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------
(in thousands)
OPERATING ACTIVITIES:
Net income (loss) $ 7,146 $ 7,491 $ (7,491) $ 7,146
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Equity in earnings of subsidiaries (7,491) -- 7,491 --
Depreciation and amortization 11,282 -- -- 11,282
Amortization of debt issuance costs 1,669 -- -- 1,669
Accretion of discount on 16% senior subordinated notes 391 -- -- 391
Deferred compensation 765 -- -- 765
Change in fair value of interest rate swaps 5,825 -- -- 5,825
Loss on disposal of property and equipment 438 -- -- 438
Interest income on shareholder loans (76) -- -- (76)
Deferred income taxes 420 -- -- 420
Senior subordinated notes issued for interest due 2,813 -- -- 2,813
Changes in assets and liabilities which provided (used)
cash, net of effects of acquisition:
Accounts receivable - trade 2,074 -- -- 2,074
Accounts receivable - other (4,293) -- -- (4,293)
Inventory (7,329) -- -- (7,329)
Prepaid expenses and other current assets (2,465) 3 -- (2,462)
Due from parent -- (7,506) 7,506 --
Other (6) -- -- (6)
Accrued interest payable (1,187) -- -- (1,187)
Accounts payable (610) -- -- (610)
Accrued expenses and other current liabilities (1,355) 4 -- (1,351)
Accrued merger expenses (3,074) -- -- (3,074)
Due to subsidiaries 7,506 -- (7,506) --
Income taxes payable (2,020) -- -- (2,020)
---------- ---------- --------- -----------
Net cash provided by (used in) operating
activities 10,423 (8) -- 10,415
---------- ---------- --------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment (4,944) -- -- (4,944)
Investment in subsidiaries -- -- -- --
Purchase of investment and other assets -- -- -- --
---------- ---------- --------- -----------
Net cash used in investing activities (4,944) -- -- (4,944)
---------- ---------- --------- -----------
FINANCING ACTIVITIES:
Increase in revolver and swingline, net 14,500 -- -- 14,500
Repayment of long-term borrowing (17,750) -- -- (17,750)
Payment of debt issuance costs (35) -- -- (35)
---------- ---------- --------- -----------
Net cash used in financing activities (3,285) -- -- (3,285)
---------- ---------- --------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 44 -- -- 44
---------- ---------- --------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,238 (8) -- 2,230
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,221 106 -- 3,327
---------- ---------- --------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,459 $ 98 $ -- $ 5,557
========== ========== ========= ===========
57
CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the Year Ended December 28, 2001
- -----------------------------------------------------------------------------------------------------------------
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------
(in thousands)
NET SALES $ 609,356 $ 609,356
COST OF SALES 384,153 384,153
---------- ---------- --------- -----------
Gross profit 225,203 225,203
OPERATING EXPENSES:
Selling, general and administrative expenses 157,781 20 157,801
Depreciation and amortization 16,526 16,526
Special costs and expenses 3,061 3,061
---------- ---------- --------- -----------
Total operating expenses 177,368 20 177,388
---------- ---------- --------- -----------
OPERATING INCOME 47,835 (20) 47,815
CHANGE IN FAIR VALUE OF INTEREST
RATE SWAPS (6,874) (6,874)
INTEREST EXPENSE, net (50,688) 10,684 (40,004)
EQUITY IN EARNINGS OF SUBSIDIARIES 7,064 (7,064)
---------- ---------- --------- -----------
(Loss) income before income taxes (2,663) 10,664 (7,064) 937
(BENEFIT) PROVISION FOR INCOME TAXES (1,005) 3,600 2,595
---------- ---------- --------- -----------
(LOSS) INCOME BEFORE ACCOUNTING CHANGE (1,658) 7,064 (7,064) (1,658)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, net of
income tax benefit of $2,147 (3,221) (3,221)
---------- ---------- --------- -----------
NET (LOSS) INCOME (4,879) 7,064 (7,064) (4,879)
PREFERRED STOCK DIVIDENDS (37,024) (37,024)
---------- ---------- --------- -----------
NET (LOSS) INCOME APPLICABLE TO
COMMON STOCKHOLDERS $ (41,903) $ 7,064 $ (7,064) $ (41,903)
========== ========== ========= ===========
58
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 28, 2001
- -----------------------------------------------------------------------------------------------------------------
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------
(in thousands)
OPERATING ACTIVITIES:
Net (loss) income $ (4,879) $ (7,064) $ 7,064 $ (4,879)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Equity in earnings of subsidiaries 7,064 (7,064)
Depreciation and amortization 16,526 16,526
Loan origination costs amortization 1,705 1,705
Accretion of discount on 16% senior subordinated notes 298 298
Deferred compensation 904 904
Change in fair value of interest rate swaps 12,242 12,242
Loss on disposal of property and equipment (48) (48)
Interest income on shareholder loans (99) (99)
Deferred income taxes (3,848) (3,848)
Senior subordinated notes issued for interest due 2,729 2,729
Changes in assets and liabilities which provided (used)
cash, net of effects of acquisition:
Cash - restricted (3) (3)
Accounts receivable - trade (10,167) (10,167)
Accounts receivable - other (3,492) (3,492)
Inventory (9,931) (9,931)
Prepaid expenses and other current assets 5,186 (7) 5,179
Due from parent 7,059 (7,059)
Other (263) (263)
Accrued interest payable 1,838 1,838
Accounts payable 1,756 1,756
Deferred compensation (514) (514)
Accrued expenses and other current liabilities 3,744 3,744
Due to DHCs (7,059) 7,059
Income taxes payable 2,020 2,020
---------- ---------- --------- -----------
Net cash provided by (used in) operating
activities 15,709 (12) 15,697
---------- ---------- --------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment (8,214) (8,214)
Proceeds from sale of property and equipment 1,803 1,803
Acquisition of businesses, net of cash acquired (1,831) (1,831)
---------- ---------- --------- -----------
Net cash used in investing activities (8,242) (8,242)
---------- ---------- --------- -----------
FINANCING ACTIVITIES:
Increase in revolver and swingline, net 4,000 4,000
(Repayment of) proceeds from long-term borrowing (12,750) (12,750)
Payment of debt financing costs (1,102) (1,102)
---------- ---------- --------- -----------
Net cash used in financing activities (9,852) (9,852)
---------- ---------- --------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (185) (185)
---------- ---------- --------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,570) (12) (2,582)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,791 118 5,909
---------- ---------- --------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,221 $ 106 $ $ 3,327
========== ========== ========= ===========
59
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. 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 December 26, 2003. Based on this evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that, as of December 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 December 26, 2003 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information regarding our directors and
executive officers:
NAME AGE POSITION
- ---- --- --------
Michael J. Grebe................ 46 President, Chief Executive Officer,
Chief Operating Officer and Director
William E. Sanford.............. 44 Executive Vice President, Chief
Financial Officer and Secretary
William R. Pray................. 56 Senior Vice President, Chief
Merchandising Officer and Director
Fred M. Bravo................... 47 Vice President, Field Sales
Pamela L. Maxwell............... 39 Vice President, Marketing
Thomas J. Tossavainen........... 35 Vice President of Finance and Treasurer
William S. Green................ 44 Chairman and Director
Ernest K. Jacquet............... 56 Director
Drew T. Sawyer.................. 36 Director
Christopher C. Behrens.......... 42 Director
Stephen V. McKenna.............. 34 Director
Charles W. Santoro.............. 44 Director
Gideon Argov.................... 47 Director
60
Michael J. Grebe has served as a director of our company since May
2000, our Chief Operating Officer since November 1998, our President since
October 1999 and our Chief Executive Officer since January 2002. Prior to
joining us, Mr. Grebe served as a Group Vice President of Airgas, Inc., or
Airgas, a distributor of industrial gases, from 1997 to 1998. Mr. Grebe joined
Airgas following its acquisition of IPCO Safety, Inc., a national alternate
channel marketer of industrial safety supplies, of which he served as President
from 1991 to 1996.
William E. Sanford has served as our Executive Vice President since
January 2002 and as our Chief Financial Officer and Secretary since April 1999.
Previously he served as our Senior Vice President from April 1999 to January
2002. Prior to joining us, Mr. Sanford served as Vice President, Corporate
Development of MSC Industrial Direct Co., Inc., a distributor of industrial
supplies, from January 1998 to March 1999. Prior to 1998, Mr. Sanford held
various positions at Airgas, serving as Executive Vice President, Vice
President-Sales & Marketing from 1995 to 1998 and as President of its Pacific
Northwest subsidiary from 1988 to 1993.
William R. Pray has served as a director of our company since October
2001, and has served as our Senior Vice President and Chief Merchandising
Officer since March 2002. Prior to joining us, Mr. Pray served as President and
Chief Operating Officer of Waxman Industries, Inc., the former parent of
Barnett, from June 1995 to April 1996, resigning from these positions upon the
consummation of the initial public offering of Barnett, serving as President and
Chief Executive Officer for Barnett until September 2000. From February 1991 to
February 1993, Mr. Pray served as Senior Vice President-President of Waxman
Industries Inc.'s U.S. operations, after serving as President of its Mail
Order/Telesales Group since 1989.
Fred M. Bravo has served as our Vice President, Field Sales since
October 2001. Mr. Bravo previously served as our National Sales Manager,
Director of Sales and Vice President, Sales. Prior to joining us, Mr. Bravo
served as Vice President of Sales of HMA Enterprises, Inc., a Texas-based MRO
parts wholesaler, from 1987 to 1996. Mr. Bravo served as Vice President, Sales
for Cherokee Holdings, Inc., a Houston based MRO wholesaler from 1985 to 1987.
Pamela L. Maxwell has served as our Vice President of Marketing since
January 2001. Prior to joining us, Ms. Maxwell served as President of Airgas
Rutland Tool & Supply Co., Inc., a subsidiary of Airgas and a direct marketing
distributor of metalworking products and MRO supplies, from November 1998 to
December 2000. During her 17-year career at Airgas, Ms. Maxwell held a variety
of positions ranging from customer support and sales management in the gas
distribution division to marketing management in the direct industrial division.
Thomas J. Tossavainen has served as our Vice President and Treasurer
since August 2001. Prior to joining us, Mr. Tossavainen served as the Director
of Strategic Projects-Treasury at Airgas from August 2000 to August 2001. Mr.
Tossavainen joined Airgas in 1996, where he served as the Vice President of
Finance and Controller of Airgas Safety, Inc., a subsidiary of Airgas. Mr.
Tossavainen also served as the assistant controller of Robertson-Ceco Corp. from
March 1995 to August 1996 and as an auditor in the financial services group at
KPMG Peat Marwick LLP from July 1991 through March 1995.
William S. Green has served as Chairman of our Board of Directors and a
director of our company since 1986. Mr. Green founded our predecessor company,
Wilmar Industries, Inc., with his father, Martin Green, in 1977. From 1986 to
October 1999, Mr. Green also served as our President, and from 1986 to December
2001 as our Chief Executive Officer.
Ernest K. Jacquet has served as a director of our company since March
1995. Mr. Jacquet is currently a Co-Chief Executive Officer of Parthenon
Capital, one of our principal shareholders. Prior to founding Parthenon Capital,
Mr. Jacquet was a general partner of Summit Partners from April 1990 through May
1998.
61
Drew T. Sawyer has served as a director of our company since May 2000.
Mr. Sawyer is currently a Managing Director of Parthenon Capital, LLC. He was a
founding member at Parthenon Capital as a Principal from 1998 to 2000. Prior to
joining Parthenon Capital, Mr. Sawyer was a Principal at Parthenon Group from
1997 to 1998. Mr. Sawyer serves on the boards of directors of Atkins
Nutritionals, Inc., Canongate Golf, LLC, Franco Apparel Group, Inc., Official
Starter, LLC and Restaurant Technologies Inc.
Christopher C. Behrens has served as a director of our company since
December 1999. Mr. Behrens is currently a Partner of J.P. Morgan Partners,
LLC, the investment advisor of one of our principal shareholders, and was a
Partner of its predecessor, Chase Capital Partners. Prior to being a Partner, he
was a Principal of Chase Capital Partners from 1992 to 1999. Mr. Behrens serves
on the boards of directors of Berry Plastics Corporation, Brand Services, Inc.,
Carrizo Oil & Gas Inc., as well as a number of private companies.
Stephen V. McKenna has served as a director of our company since
September 2000. Mr. McKenna is currently a Principal of J.P. Morgan Partners,
LLC and was a Principal of its predecessor, Chase Capital Partners. Prior to
joining Chase Capital Partners in 2000, Mr. McKenna worked in the Investment
Banking Group of Morgan Stanley & Co., Incorporated from 1999 to 2000 and in the
Mergers & Acquisitions Group of J.P. Morgan & Co. Incorporated from 1996 to
1999. Mr. McKenna serves on the board of directors of National Waterworks, Inc.
as well as a number of private companies.
Charles W. Santoro has served as a director of our company since May
2000. Mr. Santoro is a co-founder and Managing Partner of Sterling Investment
Partners, L.P., one of our principal shareholders. Before founding Sterling
Investment Partners in December 1999, Mr. Santoro was Vice Chairman, Investment
Banking Division of Paine Webber Group Inc. from 1995 to May 2000. Prior to
joining PaineWebber in 1995, Mr. Santoro was a Managing Director of Smith Barney
Inc. in charge of the firm's Multi-Industry Group and New Business Development
Group. Prior to that, Mr. Santoro was responsible for Smith Barney's
cross-border investment banking activities in New York and London, where he sat
on that firm's International Board of Directors. From May 1984 to April 1991,
Mr. Santoro worked in the Mergers & Acquisitions Department of Morgan Stanley &
Co., Inc., where he last served as Operations Officer of the European Mergers &
Acquisitions Department at Morgan Stanley & Co., Incorporated. Mr. Santoro is
Chairman of the Board of U.S. Maintenance, Inc., and also serves on the board of
directors of Washington Inventory Services, Inc.
Gideon Argov has served as a director of our company since August 2001.
Mr. Argov is currently a Managing Director of Parthenon Capital. His
responsibilities include working with several of Parthenon Capital's portfolio
companies on strategy formulation and implementation, as well as finding and
originating new investments. Prior to joining Parthenon Capital, Mr. Argov
served as Chairman, President and CEO of Kollmorgen Corporation from 1991 to
2000. Mr. Argov serves on the boards of directors of Helix Technologies,
Fundtech and TransTechnology Corporation.
There are currently two vacancies on our board of directors, which the members
of the board of directors expect to fill in the near future.
COMMITTEES
Our board of directors currently has two standing committees: the audit
committee and the compensation committee. The audit committee has the authority
to recommend the appointment of our independent auditors and review the results
and scope of audits, internal accounting controls and tax and other accounting-
related matters. The audit committee consists of Messrs. McKenna and Sawyer.
Because we have no publicly traded equity securities, we have determined not to
have an "audit committee financial expert" as defined in the SEC's rules on our
audit committee. However, we believe that the members of our audit committee
have the requisite financial and accounting experience and knowledge of us and
our affairs to carry out their duties. We intend to appoint a new director to
serve on our audit committee in the near future who will be an "audit committee
62
financial expert". The compensation committee has the authority to approve
salaries and bonuses and other compensation matters for our officers. In
addition, the compensation committee has the authority to approve employee
health and benefit plans. The compensation committee consists of Messrs. Argov,
Santoro and Behrens. Mr. Santoro joined the compensation committee in the fourth
quarter of 2003.
We have adopted a Code of Ethics that applies to our principal
executive officer, principal financial officer and controller or principal
accounting officer, or any person performing similar functions, which is filed
as an exhibit to this report with the SEC.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information relating to the compensation
awarded to, earned by or paid to our President, Chief Executive Officer and
Chief Operating Officer, Michael J. Grebe, and each of our four other most
highly compensated executive officers whose individual compensation exceeded
$100,000 during fiscal 2003 for services rendered to us, to whom we collectively
refer as our "named executive officers."
ANNUAL COMPENSATION
------------------------------------------------------------------
OTHER ANNUAL
NAME YEAR SALARY BONUS (1) COMPENSATION
- ---- ---- ------ --------- ------------
Michael J. Grebe................................. 2003 $364,202 -- $ 12,000
President, Chief Executive Officer, 2002 $342,807 $222,525 $ 60,000 (2)
Chief Operating Officer, and Director
William E. Sanford............................... 2003 $326,920 -- $ 11,940
Chief Financial Officer 2002 $308,923 $199,950 $ 58,000 (2)
William R. Pray.................................. 2003 $493,440 -- $ 18,887
Executive Vice President and Chief Merchant 2002 $472,320 $193,500 $ 18,887
Fred M. Bravo.................................... 2003 $152,016 -- $ 34,400
Vice President, Sales 2002 $139,615 $ 48,375 $ 20,600
Pamela L. Maxwell................................ 2003 $151,616 -- $ 6,000
Vice President, Marketing 2002 $150,096 $ 48,536 $ 4,500
(1) The 2003 bonus, to be calculated based upon targets established by the
compensation committee, has not yet been determined but will be determined
in the near future.
(2) Other annual compensation, including a relocation fee of $50,000 and a
monthly car allowance of $1,000
63
OPTIONS GRANTS DURING FISCAL 2003
We granted the following stock option awards to our named executive
officers in 2003. We have never issued any stock appreciation rights.
PERCENTAGE OF
TOTAL OPTIONS
NUMBER OF SECURITIES GRANTED TO PRESENT VALUE
UNDERLYING OPTIONS EMPLOYEES EXERCISE PRICE EXPIRATION OF GRANT AT
NAME GRANTED (1) IN 2003 (PER SHARE) DATE GRANT DATE ($)(2)
- ---- ----------- ------- ----------- ---- -----------------
Michael J. Grebe -- -- -- -- --
William E. Sanford -- -- -- -- --
William R. Pray -- -- -- -- --
Fred M. Bravo 1,208 1.81% $0.50 1/1/11 $109.00
Pamela L. Maxwell 1,208 1.81% 0.50 1/1/11 109.00
(1) Options to purchase an aggregate of 2,416 shares of Common Stock were
granted to our named executive officers during 2003. These options were
granted at an exercise price equal to the fair market value of the shares
on the date of grant. As such, at the grant date 40% were immediately
vested.
(2) The present value of stock option grants is determined using the
Black-Scholes option-pricing model with the following assumptions:
Expected Life 5 years
Risk-free interest rate 4.02%
Volatility 0.0%
Dividend yield 0.0%
AGGREGATED OPTION EXERCISES IN FISCAL 2003 AND YEAR-END OPTION VALUES
None of our named executive officers exercised any of their options
during fiscal 2003. The following table sets forth exercisable and unexercisable
stock options held by each of our named executive officers as of December 26,
2003, at which time none of these stock options were in the money.
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED OPTIONS AS OF
DECEMBER 26, 2003
-----------------
NAME EXERCISABLE UNEXERCISABLE
- ---- ----------- -------------
Michael J. Grebe........................ 44,730 29,820
William E. Sanford...................... 30,753 20,502
William R. Pray......................... -- --
Pamela L. Maxwell....................... 483 725
Fred M. Bravo........................... 483 725
64
2000 STOCK AWARD PLAN
Under our 2000 Stock Award Plan, or the Stock Award Plan, our
compensation committee may award a total of 525,000 shares of our 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 our directors, officers,
key employees and consultants. Shares subject to any unexercised options granted
under the Stock Award Plan, which have expired or terminated, become available
for issuance again under the Stock Award Plan. During any one-year period during
the term of the Stock Award Plan, no participant may be granted options which in
the aggregate exceed 225,000 shares of common stock authorized for issuance
pursuant to the Stock Award Plan. 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
our 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 our stock may not be less
than 110% of the fair market value of a share of our common stock on the grant
date, and may not be exercisable after the expiration of five years from the
date of grant. SARs may be granted either in tandem with another award or
freestanding and unrelated to another award. A SAR entitles the participant to
receive an amount equal to the excess of the fair market value of a share of our
common stock on the date of exercise of the SAR over the SAR's grant price. Our
compensation committee will determine in its sole discretion whether a SAR is
settled in cash, shares or a combination of cash and shares. Our compensation
committee has full discretion to administer and interpret the Stock Award Plan,
to adopt such rules, regulations and procedures as it deems necessary or
advisable, and to determine the persons eligible to receive awards, the time or
times at which the awards may be exercised, and whether and under what
circumstances an award may be exercised.
EQUITY COMPENSATION PLAN INFORMATION AT DECEMBER 26, 2003
The following table sets forth information as of December 26, 2003
regarding compensation plans under which the Company's equity securities are
authorized for issuance.
- -----------------------------------------------------------------------------------------------------------------
(a) (b) (c)
- -----------------------------------------------------------------------------------------------------------------
Number of securities remaining
available for future issuance
Number of securities to Weighted-average under equity compensation
be issued upon exercise exercise price of plans (excluding securities
Plan Category of outstanding options outstanding options ($) reflected in column (a)
- -----------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security
holders 187,532 6.17 272,278
- -----------------------------------------------------------------------------------------------------------------
Equity compensation plans
not approved by security
holders -- -- --
- -----------------------------------------------------------------------------------------------------------------
Total 187,532 6.17 272,278
- -----------------------------------------------------------------------------------------------------------------
(1) 65,190 shares of restricted common stock have been issued and are
outstanding under the 2000 Stock Award Plan in addition to the
options issued.
65
EMPLOYMENT AGREEMENTS AND OTHER COMPENSATION
MICHAEL J. GREBE. The term of Mr. Grebe's employment agreement is from
May 16, 2000 to December 31, 2003, subject to automatic one-year extensions
unless we or Mr. Grebe give at least 60 days' prior written notice of
non-extension. Such agreement was extended automatically on December 31, 2003 in
accordance with the terms of the agreement. The agreement provides that we will
pay Mr. Grebe a base salary of $240,000, subject to an annual cost of living
increase of at least 5%. He is eligible to receive an annual cash bonus based
upon the achievement of an annual EBITDA target established by our board of
directors, with a target bonus potentially equal to 100% of his base salary.
The agreement may be terminated by us for "cause." Upon termination of
Mr. Grebe's employment for cause, we will pay his accrued and unpaid base salary
and benefits (as defined in his employment agreement) through the date of
termination. If Mr. Grebe's employment terminates due to disability or death, he
or his estate will be entitled to receive (i) any accrued and unpaid base salary
and benefits, (ii) continuation of his base salary for a period of two years
from the date of termination and (iii) a pro rata bonus for the calendar year in
which termination occurs. If his employment is terminated by us without "cause,"
or by Mr. Grebe for either "good reason" or for any reason in the 30-day period
commencing on the first anniversary of a "change in control," he will be
entitled to receive (i) any accrued and unpaid base salary and benefits, (ii)
continuation of his base salary for a period of two years from the date of
termination and (iii) a pro rata bonus. If Mr. Grebe terminates his employment
during the 30-day period commencing on the first anniversary of a change in
control, he may elect to receive, in lieu of the continuation of his base salary
for a period of two years from the date of termination, a single lump sum
payment equal to 90% of the value of this continued base salary, payable within
30 days of the termination of his employment. The termination of Mr. Grebe's
employment at the end of the initial term or any successive one-year renewal
period on account of us giving notice to Mr. Grebe of our desire not to extend
the term of his employment is treated as a termination without cause. Mr. Grebe
is required to provide us 30 days' advance written notice in the event he
terminates his employment other than for good reason.
All severance payments are conditioned upon and subject to Mr. Grebe's
execution of a general waiver and release. Mr. Grebe is subject to a non-compete
agreement during his employment and for the period ending on the later of the
expiration of one year following the termination of his employment and the last
date on which he is entitled to receive a salary continuation payment. Mr. Grebe
is subject to a confidentiality agreement during and after his employment with
us.
As a condition of his employment, Mr. Grebe agreed to buy 115,038
shares of common stock and 56,165 shares of our preferred stock, for an
aggregate purchase price of $599,996, paid by delivery of a promissory note to
us on May 16, 2000. The promissory note is payable on the earlier of (i) 90 days
following a termination of Mr. Grebe's employment by reason of death,
disability, by Mr. Grebe for "good reason," or by us without "cause," (ii)
immediately upon the termination of Mr. Grebe's employment for any other reason,
(iii) upon the sale of the securities purchased in connection with the
promissory note or (iv) May 16, 2005. The promissory note, which is secured by
the securities purchased with the proceeds of such note, bears interest at a
rate equal to the rate payable by us under our former credit facility, as
adjusted quarterly, and not to exceed 8%. The note can be prepaid at any time
without penalty, and remains outstanding to date.
Pursuant to our Shareholders' Agreement, with respect to any shares of
our common or preferred stock held by Mr. Grebe, upon termination of his
employment with us, certain call or put options may be exercised. We may
repurchase (or call) all the shares of common or preferred stock then held by
Mr. Grebe within 30 days of his termination. If Mr. Grebe's employment is
terminated for "cause," or if he terminates his employment without "good
reason," he will receive a call price amount equal to the lesser of the original
per share price paid by Mr. Grebe, or the then fair market value of the shares.
If Mr. Grebe terminates his employment with us for "good reason," then the call
66
price amount will be equal to the greater of the original per share price paid
by him, or the then fair market value of the shares. If Mr. Grebe's employment
with us is terminated for any other reason, the call price amount will be equal
to the then fair market value of the shares. In addition, if Mr. Grebe's
employment is terminated by us without "cause" or as a result of his death or
disability, and we do not exercise our call option within 30 days of his
termination, Mr. Grebe (or his estate) may require us to purchase all the shares
of common or preferred stock then held by him at their then fair market value.
Finally, if Mr. Grebe voluntarily terminates his employment with us for "good
reason," and we do not exercise our call option within 30 days of his
termination, he may require us to purchase all shares of common or preferred
stock then held by him at the greater of the original per share price paid by
Mr. Grebe, or such shares' then fair market value.
Mr. Grebe's employment agreement provides that we shall, subject to our
obligations and the covenants set forth in the terms of our outstanding
indebtedness, including any credit facility, make loans available to him in an
amount not to exceed an additional $599,996 upon his election pursuant to our
Shareholders' Agreement to exercise certain preemptive rights with respect to
new issuances of securities by us. See "Certain Relationships and Related
Transactions-Amended and Restated Shareholders' Agreement" for a discussion of
the terms of our Shareholders' Agreement.
In addition, on May 16, 2000, we granted Mr. Grebe options to purchase
74,550 shares of our common stock under our Stock Award Plan. The options had
exercise prices of $1.67 per share for 24,852 shares, $5 per share for 24,849
shares and $20.33 per share for 24,849 shares. The options become exercisable as
to 20% of the underlying shares on each of May 16, 2001, May 16, 2002, May 16,
2003, May 16, 2004 and May 16, 2005. The options become fully exercisable upon a
"change in control."
WILLIAM E. SANFORD. The term of Mr. Sanford's employment agreement is
from May 16, 2000 to December 31, 2003, subject to automatic one-year
extensions, unless we or Mr. Sanford give at least 60 days' prior written notice
of non-extension. Such agreement was extended automatically on December 31, 2003
in accordance with the terms of the agreement. The agreement provides that we
will pay Mr. Sanford a base salary of $235,000, subject to an annual cost of
living increase of at least 5%. He is eligible to receive an annual cash bonus
based upon the achievement of an annual EBITDA target established by our board
of directors, with a target bonus potential equal to 100% of his base salary.
The agreement may be terminated by us for "cause." Upon termination of
Mr. Sanford's employment for cause, we will pay his accrued and unpaid base
salary and benefits (as defined in his employment agreement) through the date of
termination. If Mr. Sanford's employment terminates due to disability or death,
he or his estate will be entitled to receive (i) any accrued and unpaid base
salary and benefits, (ii) continuation of his base salary for a period of two
years from the date of termination and (iii) a pro rata bonus for the calendar
year in which termination occurs. If his employment is terminated by us without
"cause," or by Mr. Sanford either for "good reason" or for any reason in the
30-day period commencing on the first anniversary of a "change in control," he
will be entitled to receive (i) any accrued and unpaid base salary and benefits,
(ii) continuation of his base salary for a period of two years from the date of
termination and (iii) a pro rata bonus. If Mr. Sanford terminates his employment
during the 30-day period commencing on the first anniversary of a change in
control, he may elect to receive, in lieu of continuation of his base salary for
a period of two years from the date of termination, a single lump sum payment
equal to 90% of the value of this continued base salary, payable within 30 days
of the termination of his employment. The termination of his employment at the
end of the initial term or any successive one-year renewal period on account of
us giving notice to Mr. Sanford of our desire not to extend the term of his
employment is treated as a termination without cause. Mr. Sanford must provide
us 30 days' advance written notice in the event he terminates his employment
other than for good reason.
All severance payments are conditioned upon and subject to Mr.
Sanford's execution of a general waiver and release. Mr. Sanford is subject to a
non-compete agreement during his employment and, for the period ending on the
later of the expiration of one year following the termination of his employment
and the last date on which he is entitled to receive a salary continuation
payment. Mr. Sanford is subject to a confidentiality agreement during and after
his employment with us.
67
As a condition of his employment, Mr. Sanford agreed to buy 81,204
shares of common stock and 57,293 shares of our preferred stock, for an
aggregate purchase price of $599,998, paid by delivery of a promissory note to
us on May 16, 2000. The promissory note is payable on the earlier of (i) 90 days
following a termination of Mr. Sanford's employment by reason of death,
disability, by Mr. Sanford for "good reason," or by us without "cause," (ii)
immediately upon the termination of Mr. Sanford's employment for any other
reason, (iii) upon the sale of the securities purchased in connection with the
promissory note or (iv) May 16, 2005. The promissory note, which is secured by
the securities purchased with the proceeds of such note, bears interest at a
rate equal to the rate payable by us under our former credit facility, as
adjusted quarterly, and not to exceed 8%. The note can be prepaid at any time
without penalty, and remains outstanding to date.
Pursuant to our Shareholders' Agreement, with respect to any shares of
our common or preferred stock held by Mr. Sanford, upon termination of his
employment with us, certain call or put options may be exercised. We may
repurchase (or call) all the shares of common or preferred stock then held by
Mr. Sanford within 30 days of his termination. If Mr. Sanford's employment is
terminated for "cause," or if he terminates his employment with us without "good
reason," he will receive a call price amount equal to the lesser of the original
per share price paid by Mr. Sanford, or the then fair market value of the
shares. If Mr. Sanford terminates his employment with us for "good reason," then
the call price amount will be equal to the greater of the original per share
price paid by him, or the then fair market value of the shares. If Mr. Sanford's
employment with us is terminated for any other reason, the call price amount
will be equal to the then fair market value of the shares. In addition, if Mr.
Sanford's employment is terminated by us without "cause" or as a result of his
death or disability, and we do not exercise our call option within 30 days of
his termination, Mr. Sanford (or his estate) may require us to purchase all the
shares of common or preferred stock then held by him at their then fair market
value. Finally, if Mr. Sanford voluntarily terminates his employment with us for
"good reason," and we do not exercise our call option within 30 days of his
termination, he may require us to purchase all shares of common or preferred
stock then held by him at the greater of the original per share price paid by
Mr. Sanford, or such shares' then fair market value. These call and put options
will terminate when any of the following events first occur: (i) the
consummation of a public offering of our stock, or (ii) the consummation of any
sale of a majority of our stock, a merger, consolidation or reorganization, or a
sale of all or substantially all of our assets, which results in a change of
control.
Mr. Sanford's employment agreement also provides that we shall, subject
to our obligations and the covenants set forth in the terms of our outstanding
indebtedness, including any credit facility, make loans available to him in an
amount not to exceed an additional $599,996, upon his election pursuant to our
Shareholders' Agreement to exercise certain pre-emptive rights over new
issuances of securities by us. See "Certain Relationships and Related
Transactions-Amended and Restated Shareholders' Agreement" for a discussion of
the terms of our Shareholders' Agreement.
In addition, on May 16, 2000, we granted Mr. Sanford options to
purchase 51,255 shares of our common stock under our Stock Award Plan. The
options had exercise prices of $1.67 per share for 17,085 shares, $5 per share
for 17,085 shares and $20.33 per share for 17,085 shares. The options become
exercisable as to 20% of the underlying shares on each of May 16, 2001, May 16,
2002, May 16, 2003, May 16, 2004 and May 16, 2005. The options become fully
exercisable upon a change in control.
68
WILLIAM R. PRAY. The term of Mr. Pray's employment agreement is for
five years from September 29, 2000, subject to automatic one-year extensions,
unless we or Mr. Pray give at least 13 months' prior written notice of
non-extension. The agreement provides that we will pay Mr. Pray a base salary of
$450,000, subject to an annual cost of living increase of at least 4%. He is
eligible to receive an annual cash bonus of up to $300,000 per year, 50% of
which is based upon earning targets established by our board of directors and
50% of which is based upon the discretion of our board of directors.
If the agreement is terminated by us for "cause" or by Mr. Pray for
other than "good reason," he will be paid any accrued and unpaid base salary and
benefits through the date of termination. If Mr. Pray's employment terminates
due to his death, his estate will receive his unpaid base salary through the
month in which his death occurred. If his employment terminates due to his
disability, we will pay Mr. Pray any unpaid base salary through the later of (i)
the month in which the termination occurred or (ii) the date upon which he
commences receiving payments of disability benefits under the disability benefit
programs maintained us and a pro rata bonus. In addition, we will continue to
provide to him, for a year following his termination due to disability, certain
benefits under his employment agreement. If his employment is terminated by us
without "cause," or by Mr. Pray for "good reason," he will receive (i) his base
salary, for a period equal to the greater of the remainder of the term of his
employment or one year and (ii) the product of the average of the bonus
compensation paid to him with respect to the three years preceding the year in
which he terminates his employment for a good reason, whether or not such years
are part of the term of his employment under the employment agreement,
multiplied by the greater of the number of years remaining in the term of the
employment agreement, and one year, all reduced to present value. In addition,
if the receipt of the lump sum pursuant to the foregoing sentence would cause
him to pay federal income tax for the year of receipt at a higher marginal rate
than he would have paid for such year had his employment not been terminated, or
the original marginal rate, he will receive an additional amount such that the
amount retained by him after the payment of federal income taxes on such lump
sum will be the same as if this lump sum had been taxed at the original marginal
rate.
Mr. Pray is subject to a non-compete agreement during his employment
and for a period ending 24 months following the date of his termination. He is
subject to a confidentiality agreement during and after his employment with us.
We have also entered into a deferred compensation agreement with Mr.
Pray, which provides for deferred compensation in an amount equal to $1,707,708,
vesting over a two-year period ending on September 1, 2002 and payable upon a
termination of employment.
Mr. Pray executed and delivered a promissory note in favor of us on
September 29, 2001 in the amount of $1,707,708, which is secured by the
securities purchased in connection with such note. The note becomes due and
payable on the earlier of a termination of employment for any reason, or
September 29, 2010, and bears interest at a rate compounded semi-annually equal
to the Applicable Federal Rate of Interest under the Internal Revenue Code as of
the date the note was issued. The note may be prepaid at any time without
penalty. On September 27, 2002, this note was satisfied through a reduction in
the deferred compensation liability.
On September 29, 2000, Mr. Pray was granted a restricted stock award
consisting of 102,168 shares of our common stock, which became nonforfeitable on
September 29, 2001, except if we terminate Mr. Pray's employment for "cause."
Upon termination of Mr. Pray's employment by us for any reason other than
"cause," or by Mr. Pray for "good reason," we have the right but not the
obligation to call all or a portion of the shares of restricted stock for their
then fair market value (the Call Option) by giving Mr. Pray 30 days' written
notice of our intent to exercise the Call Option. Any shares of restricted stock
not purchased upon exercise of the call option may be called by us at a later
date. We will purchase that number of shares of the restricted stock subject to
the Call Option within 20 days of the date on which their fair market value is
established. If Mr. Pray's employment with us is terminated (i) by us for any
reason other than for "cause" or (ii) by Mr. Pray for "good reason," Mr. Pray
will sell and we will purchase all of his restricted stock at its then fair
market value (the Required Purchase) within
69
30 days of his termination date. We may pay the purchase price in connection
with our exercise of the Call Option or with the Required Purchase in cash, or
if full or partial payment of the purchase price is prohibited by any of our
equity or debt financing instruments, we may either (1) delay full or partial
payment until the prohibitions lapse, provided interest accrues on the purchase
price at the then prevailing prime interest rate as announced by Fleet National
Bank, up to 8% per annum (the Deferred Interest Rate) or (2) pay any unpaid
purchase price in the form of a promissory note bearing interest at the Deferred
Interest Rate. The Call Option and Required Purchase will terminate when any of
the following events first occur: (i) the consummation of a public offering of
our stock or (ii) the consummation of any sale of a majority of our stock, a
merger, consolidation or reorganization, or a sale of all or substantially all
of our assets, which results in a change of control.
PAMELA L. MAXWELL. On January 31, 2003, we granted Ms. Maxwell options
to purchase 1,208 shares of our common stock and a restricted stock award
consisting of 9,024 shares of our common stock, both under the Stock Award Plan.
The options have an exercise price of $0.50 per share. The options are
exercisable as to 40% of the underlying shares as of the date of grant, and 20%
of the remaining shares underlying the option will become exercisable on each of
January 1, 2004, January 1, 2005 and January 1, 2006. The options become fully
exercisable upon a change in control. The restricted stock award is 40% vested
as of the grant date with 20% of the remaining shares of restricted stock
vesting on each of January 1, 2004, January 1, 2005 and January 1, 2006. Prior
to a public offering of our stock, if Ms. Maxwell's employment with us
terminates for any reason, we have the right, but not the obligation, to
purchase any or all vested shares of restricted stock, and/or any shares
acquired upon the exercise of options, then held by Ms. Maxwell at their then
fair market value. If, however, Ms. Maxwell's employment with us is terminated
for "cause," the call price of the stock will be $0.01 per share.
FRED M. BRAVO. On January 31, 2003, we granted Mr. Bravo options to
purchase 1,208 shares of our common stock and a restricted stock award
consisting of 9,024 shares of our common stock, both under the Stock Award Plan.
The options have an exercise price of $0.50 per share. The options are
exercisable as to 40% of the underlying shares as of the date of grant, and 20%
of the remaining shares underlying the option will become exercisable on each of
January 1, 2004, January 1, 2005 and January 1, 2006. The options become fully
exercisable upon a change in control. The restricted stock award is 40% vested
as of the grant date with 20% of the remaining shares of restricted stock
vesting on each of January 1, 2004, January 1, 2005 and January 1, 2006. Prior
to a public offering of our stock, if Mr. Bravo's employment with us terminates
for any reason, we have the right, but not the obligation, to purchase any or
all vested shares of restricted stock then held by Mr. Bravo, and/or any shares
acquired upon the exercise of options, at their then fair market value. If,
however, Mr. Bravo's employment with us is terminated for "cause," the call
price of the stock will be $0.01 per share.
70
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth the number and percentage of our
outstanding shares of common and preferred stock beneficially owned by (1) our
named executive officers and each of our directors individually, (2) all
executive officers and directors as a group and (3) certain principal
shareholders who are known to us to be the beneficial owner of more than five
percent of our common stock as of March 1, 2004:
COMMON STOCK PREFERRED STOCK(2)
------------ ------------------
NAME AND ADDRESS(1) SHARES PERCENTAGE SHARES PERCENTAGE
- ------------------- --------- ---------- --------- ----------
Parthenon Partnerships(3)(4)......... 2,816,481 51.4% 6,118,646 25.9%
J.P. Morgan Partners (23A SBIC),
L.P.(5).......................... 1,156,101 21.4 5,420,474 23.0
JPMorgan Chase Bank, as Trustee for
First Plaza Group Trust(6)......... 781,014 14.5 3,721,805 15.8
Sterling Investment Partners, L.P.(7) 277,668 5.1 1,290,225 5.5
William S. Green..................... 270,570 5.0 290,981 1.2
Michael J. Grebe(8).................. 159,768 2.9 56,165 *
William E. Sanford(9)................ 111,957 2.1 57,293 *
William R. Pray...................... 131,829 2.4 169,487 *
Pamela L. Maxwell(10)................ 6,139 * -- --
Fred Bravo(10)....................... 6,139 * -- --
Ernest K. Jacquet(3)(4).............. 2,816,481 51.4 6,118,646 25.9
John C. Rutherford(3)(4)............. 2,816,481 51.4 6,118,646 25.9
Drew T. Sawyer(3)(11)................ -- -- -- --
Christopher C. Behrens(12)........... 1,156,101 21.4 5,420,474 23.0
Stephen V. McKenna(13)............... -- -- -- --
Charles W. Santoro(14)............... 277,668 5.1 1,290,225 5.5
Gideon Argov(3)(12).................. -- -- -- --
All executive officers and directors
as a group (13 persons)............ 4,942,792 90.2% 13,403,271 56.8%
- ----------------------
* Indicates less than 1% ownership.
(1) Unless otherwise noted, the business address is Interline Brands, Inc., 801
W. Bay Street, Jacksonville, Florida 32204.
(2) Our senior preferred stock is non-convertible and non-voting, accrues
cumulative dividends at an annual rate of 14% and has preferential rights
over all other classes of stock in the event of a liquidation and with
respect to certain distributions.
(3) Parthenon Capital, LLC is the investment advisor to the following Parthenon
partnerships: Parthenon Investors, L.P., PCIP Investors, J&R Founders Fund
and Parthenon Investors II, L.P. Their business address is 200 State
Street, Boston, Massachusetts 02109.
(4) Includes common stock and preferred stock beneficially owned by Parthenon
Investors, L.P., PCIP Investors, J&R Founders Fund and Parthenon Investors
II, L.P. The Co-CEO's of Parthenon Capital, Mr. Jacquet and Mr. Rutherford,
each have beneficial ownership of (i) 1,058,859 shares of common stock and
4,910,622 shares of preferred stock held by Parthenon Investors, L.P.
through their indirect control of Parthenon Investment Advisors, LLC, the
general partner of Parthenon Investors,
71
L.P., (ii) 44,420 shares of common stock and 212,451 shares of preferred
stock held by PCIP Investors, a general partnership of which they have
control as general partners, (iii) 5,351 shares of common stock and 30,456
shares of preferred stock held by J&R Founders Fund, a general partnership
of which they have control as general partners and (iv) 169,652 shares of
common stock and 965,117 shares of preferred stock held by Parthenon
Investors II, L.P., through their indirect control of PCap Partners II LLC,
the general partner of Parthenon Investors II, L.P. Under certain
circumstances, Parthenon Investors, L.P. has shared voting power over an
aggregate of 1,538,599 shares of common stock held by William S. Green,
Michael J. Grebe, William E. Sanford, William R. Pray, JMH Partners Corp.,
BancBoston Capital Inc., Svoboda QP, L.P., Private Equity Portfolio Fund
II, Mellon Ventures II, L.P., Svoboda, L.P., National City Equity Partners
and Great Lakes Capital Investments II, LLC pursuant to the Amended and
Restated Shareholders' Agreement, dated as of September 29, 2000, as
amended, by and among our company and the parties thereto. See "Certain
Relationships and Related Transactions-Amended and Restated Shareholders'
Agreement."
(5) The general partner of JPMP (23A SBIC) is J.P. Morgan Partners (23A SBIC
Manager), Inc., or JPMP (23A SBIC Manager), a wholly owned subsidiary of
J.P. Morgan Chase Bank, or JPM Chase Bank, a wholly-owned subsidiary of
J.P. Morgan Chase & Co., or JPM Chase, a publicly traded company. Each of
JPMP (23A SBIC Manager), JPM Chase Bank and JPM Chase may be deemed
beneficial owners of the shares held by JPMP (23A SBIC), however, the
foregoing shall not be construed as an admission that any of JPMP (23A SBIC
Manager), JPM Chase Bank or JPM Chase is the beneficial owner of the shares
held by JPMP (23A SBIC).
(6) The trust is a pension trust formed pursuant to the laws of the State of
New York for the benefit of certain employee benefit plans of General
Motors Corporation, or GM, its subsidiaries and unrelated employers. These
shares may be deemed to be owned beneficially by General Motors Investment
Management Corporation, or GMIMCo, a wholly-owned subsidiary of GM. GMIMCo
is registered as an investment adviser under the Investment Advisers Act of
1940. GMIMCo's principal business is providing investment advice and
investment management services with respect to the assets of certain
employee benefit plans of GM, its subsidiaries and unrelated employers, and
with respect to the assets of certain direct and indirect subsidiaries of
GM and associated entities. GMIMCo is serving as investment manager with
respect to these shares and in that capacity it has the sole power to
direct the trustee as to the voting and disposition of these shares.
Because of the trustee's limited role, beneficial ownership of the shares
by the trustee is disclaimed. The address of GMIMCo is 767 Fifth Avenue,
New York, New York 10153.
(7) The business address is 276 Post Road West, Westport, Connecticut 06880.
Mr. Santoro is a managing member of Sterling Investment Partners
Management, LLC, the general partner of Sterling Investment Partners, L.P.,
and disclaims beneficial ownership other than his membership interest.
(8) Includes 44,730 shares of common stock issuable pursuant to stock options
exercisable within 60 days of March 1, 2004.
(9) Includes 30,753 shares of common stock issuable pursuant to stock options
exercisable within 60 days of March 1, 2004.
(10) Includes 725 shares of common stock issuable pursuant to stock options
exercisable within 60 days of March 1, 2004.
(11) Mr. Sawyer is a partner of PCIP Investors and a member of PCap Partners II,
LLC, the general partner of Parthenon Investors II, L.P., but has no
beneficial ownership of our shares as a result.
(12) Reflects the shares owned by JPMP (23A SBIC) due to his status as an
executive officer of JPMP (23A SBIC Manager), the managing member of JPMP
(23A SBIC), a wholly owned subsidiary of JPM Chase Bank, a wholly owned
subsidiary of JPM Chase. Mr. Behrens disclaims beneficial ownership and the
foregoing shall not be construed as an admission that Mr. Behrens is the
beneficial owner of the shares held by JPMP (23A SBIC). The address of Mr.
Behrens and JPMP (23A SBIC Manager) is c/o J.P. Morgan Partners, LLC, 1221
Avenue of the Americas, New York, New York 10020.
(13) Mr. McKenna is a Principal at J. P. Morgan Partners, LLC, and a limited
partner of JPMP Master Fund Manager, L.P. ("JPMP MFM"), an entity which has
a carried interest in investments of JPMP (23A SBIC). While Mr. McKenna
does not have beneficial ownership of these shares held by JPMP (23A SBIC)
under Section 13(d) of the Securities Exchange Act of 1934, as amended, and
the rules and regulations of the Securities and Exchange Commission
thereunder because he does not have the ability to control the voting or
investment power of JPMP (23A SBIC Manager), he does have an indirect
pecuniary interest in the shares of the Company held by JPMP (23A SBIC) as
a result of his status as a limited partner of JPMP MFM. Mr. McKenna
disclaims beneficial ownership of these shares. The actual pecuniary
interest which may be attributable to Mr. McKenna is not readily
determinable because it is subject to several variables, including without
limitation, JPMP (23A SBIC)'s internal rate of return and vesting. Mr.
McKenna's address is c/o J. P. Morgan Partners, LLC, 1221 Avenue of the
Americas, New York, New York 10020.
(14) Mr. Argov is a partner of PCIP Investors and a member of PCap Partners II,
LLC, the general partner of Parthenon Investors II, L.P., but has no
beneficial ownership of our shares as a result.
72
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AMENDED AND RESTATED SHAREHOLDERS' AGREEMENT
Pursuant to an Amended and Restated Shareholders' Agreement, dated as
of September 29, 2000, and as amended on March 16, 2004, certain of our
principal shareholders, including affiliates of Parthenon Capital, J.P. Morgan
Partners, L.P., JPMorgan Chase Bank, as trustee for First Plaza Group Trust (a
GM Pension Fund), and Sterling Investment Partners, and certain members of our
management, including Messrs. Grebe, Green, Sanford and Pray, have rights to
nominate members of our board of directors and/or observer rights with respect
to meetings of our board of directors, are subject to certain transfer
restrictions and have certain first offer, tag-along, drag-along, preemptive and
registration rights with respect to their shares of our common stock and
preferred stock. Under the provisions of the Shareholders' Agreement, all of the
shareholder parties agree to elect as members of our board of directors:
o up to three individuals designated by affiliates of Parthenon
Capital, depending on the number of shares of our common stock
held in the aggregate by affiliates of Parthenon Capital and a
few of our smaller shareholders, collectively referred to as
the Parthenon Investors,
o up to two individuals designated by an affiliate of J.P.
Morgan Partners, depending on the number of shares of our
common stock held by such affiliate of J.P. Morgan Partners,
o up to one individual designated by an affiliate of Sterling
Investment Partners, depending on the number of shares of our
common stock held by such affiliate of Sterling Investment
Partners,
o Mr. Grebe, for so long as he serves as one of our executive
officers,
o two additional individuals to be elected by an affirmative
vote of at least a majority of the then-serving members of the
board of directors (currently vacant).
Pursuant to these provisions, Messrs. Jacquet, Sawyer and Argov are
Parthenon Capital designees on our board, Messrs. Behrens and McKenna are J.P.
Morgan Partners designees on our board and Mr. Santoro is the Sterling
Investment Partners designee on our board. In addition, a number of our other
smaller shareholders have observer rights with respect to meetings of our board.
Pursuant to our Shareholders' Agreement, under certain circumstances,
Parthenon Investors, L.P., one of our principal shareholders and an affiliate of
Parthenon Capital, has the right to direct the voting of and a proxy to vote all
shares of our common stock and preferred stock held by a number of our other
shareholders, including the following shareholders and members of our
management: Messrs. Grebe, Green, Sanford and Pray. The shareholders party to
the agreement also agree that board approval of certain extraordinary corporate
transactions and other transactions outside the ordinary course of business
require the prior consent of the holders of at least 60% of our outstanding
shares of common stock. Finally, we and Messrs. Grebe, Sanford and Pray have
certain put and call options over our shares of common and preferred stock held
by such individuals in the event of the termination of their employment with us
under certain circumstances. For more information regarding the put and call
options, see "Management-Employment Agreements and Other Compensation."
73
MANAGEMENT LOANS
In connection with the Going-Private Transaction and the Barnett
Acquisition, we received shareholder promissory notes from each of Messrs.
Grebe, Sanford and Pray. With respect to the promissory notes executed and
delivered to us by Messrs. Grebe and Sanford on May 16, 2002, the aggregate
principal amount of these loans was $1,119,994, the proceeds of which were used
to purchase, in the aggregate, 196,242 shares of common stock and 113,458 shares
of preferred stock. To date, the notes remain outstanding. For information
regarding the interest rate and repayment terms of these notes see our
discussion of Messrs. Grebe and Sanford under "Management-Employment Agreements
and Other Compensation."
On July 15, 2002, each of Mr. Grebe and Mr. Sanford issued a promissory
note in our favor in the principal amount of $150,000, each of which remains
outstanding to date. The cash loaned by us was used by Mr. Grebe and Mr. Sanford
to assist in their relocation. Each note becomes due and payable on July 15,
2005 and bears interest annually at the greater of the LIBOR rate or 5%. Each
note may be prepaid at any time without penalty.
PARTHENON CAPITAL MANAGEMENT AGREEMENT
In May 2000, we entered into an advisory agreement with Parthenon
Capital under which Parthenon Capital provides various advisory services to us
in exchange for an annual advisory fee of $250,000. We have also agreed to
reimburse Parthenon Capital for its out-of-pocket expenses in connection with
these services in an aggregate amount of up to $25,000 per year. The management
agreement, as amended, terminates in September 2005.
LEASES WITH WILLIAM S. GREEN
We entered into a lease agreement and a lease rider agreement with Mr.
Green on March 1, 1994 and March 7, 1995, respectively, under the terms of which
we lease approximately 12,500 square feet of office space at 303 Harper Road,
Moorestown, New Jersey from Mr. Green. The lease, which terminates April 30,
2004. The annual rent from April 1, 1994 to March 31, 1995 was $168,358 and the
annual rent for the period from April 1, 1995 to April 30, 2004 is $137,500.
J.P. MORGAN SECURITIES INC.
An affiliate of J.P. Morgan Securities Inc. beneficially owns
approximately 21.5% of our outstanding shares of common stock. J.P. Morgan
Securities Inc., acted as one of the initial purchasers of our 11.5% notes. This
affiliate of J.P. Morgan Securities Inc., J.P. Morgan Partners (23A SBIC),
L.P., has the right pursuant to our Shareholders' Agreement to designate two
of our directors, and has designated Christopher C. Behrens and Stephen V.
McKenna, respectively, of J.P. Morgan Partners, to hold these positions. In
addition, J.P. Morgan Securities Inc. acts as a joint lead arranger and joint
bookrunner under our credit facility and J.P. Morgan Securities Inc. Chase Bank,
an affiliate of J.P. Morgan Securities Inc., is a lender and agent under our
credit facility and receives customary fees and commissions relating thereto.
74
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following is a summary of the fees billed to us by Deloitte &
Touche LLP for professional services rendered for the fiscal years ended
December 26, 2003 and December 27, 2002:
FEE CATEGORY FISCAL 2003 FEES FISCAL 2002 FEES
------------ ---------------- ----------------
Audit Fees................. $ 589.9 $ 372.7
Audit-Related Fees......... 58.2 22.6
Tax Fees................... 6.9 6.5
---------------- ----------------
Total Fees................. $ 655.0 $ 401.8
================ ================
AUDIT FEES. Consists of fees billed for professional services rendered
for the audit of our consolidated financial statements and review of interim
condensed consolidated financial statements including quarterly reports. Such
fees also include fees associated with comfort letters and consents in
connection with the Refinancing Transactions completed in 2003.
AUDIT-RELATED FEES. Consists of fees billed for assurance and related
services that are reasonably related to the performance of the audit or review
of our condensed consolidated financial statements and are not reported under
"Audit Fees". These services include employee benefit plan audits and accounting
consultations in connection with acquisitions and investments.
TAX FEES. Consists of fees for tax services including tax compliance,
planning and advice.
Our audit committee pre-approves and is responsible for the engagement
of all services provided by our independent auditors.
PART IV
ITEM 15. EXHIBITS AND REPORTS ON FORM 8-K
(a) Documents filed as part of the report.
(1) Consolidated Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity (Deficiency)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) Exhibits
75
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
3.1** Certificate of Incorporation of Interline Brands, Inc.
3.2** Amended and Restated By-Laws of Interline Brands, Inc.
4.1** Indenture, dated as of May 23, 2003, among Interline Brands, Inc., the Subsidiary
Guarantors thereto and The Bank of New York, as Trustee.
4.2** Form of Exchange Security or Private Exchange.
4.3** Registration Rights Agreement, dated as of May 23, 2003, among Interline Brands,
Inc., Credit Suisse First Boston LLC, J.P. Morgan Securities Inc., Wachovia
Securities Inc. and BNY Capital Markets, Inc.
9.1** Amended and Restated Shareholders Agreement, dated as of September 29, 2000, among
the Company and certain of its shareholders.
10.1** Credit Agreement, dated as of May 29, 2003, among Interline Brands, Inc., the Lender
Parties thereto, Credit Suisse First Boston, as Administrative Agent, and JPMorgan
Chase Bank, as Syndication Agent.
10.2* Amendment No. 1, dated as of December 19, 2003, to the Credit Agreement dated as of
May 29, 2003, among Interline Brands, Inc. and the lenders party thereto.
10.3** Guarantee and Collateral Agreement, dated as of May 29, 2003, among Interline Brands,
Inc., the Subsidiaries of Interline Brands, Inc. named therein and Credit Suisse
First Boston.
10.4** Employment Agreement, dated as of May 16, 2000, by and between Wilmar Industries,
Inc. and William E. Sanford.
10.5** Incentive Stock Option Agreement, dated as of May 16, 2000, by and between Wilmar
Industries, Inc. and William E. Sanford.
10.6** Management Subscription Agreement, dated May 16, 2003, between William E. Sanford and
Wilmar Industries, Inc.
10.7** Secured Recourse Promissory Note, dated May 16, 2000, from William E. Sanford to
Wilmar Industries, Inc.
10.8** Pledge Agreement, dated as of May 16, 2000, from William E. Sanford to Wilmar
Industries, Inc.
10.9** Promissory Note, dated as of July 15, 2000, from William E. Sanford to Wilmar
Industries, Inc.
10.10** Employment Agreement, dated as of May 16, 2000, by and between Wilmar Industries,
Inc. and Michael J. Grebe.
76
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
10.11** Incentive Stock Option Agreement of Michael J. Grebe, dated as of May 16, 2000.
10.12** Promissory Note, dated July 15, 2002, from Michael J. Grebe to Interline Brands, Inc.
10.13** Secured Recourse Promissory Note, dated May 16, 2000, from Michael J. Grebe to Wilmar
Industries, Inc.
10.14** Pledge Agreement, dated as of May 16, 2000, from Michael J. Grebe to Wilmar
Industries, Inc.
10.15** Management Subscription Agreement, dated May 16, 2000, between Michael J. Grebe and
Wilmar Industries, Inc.
10.16** Employment Agreement, dated as of September 29, 2000, by and between Wilmar
Industries, Inc. and William R. Pray.
10.17** Restricted Stock Award Agreement under the 2000 Stock Award Plan, dated as of
September 29, 2000, between Wilmar Industries, Inc. and William Green.
10.18** Promissory Note, dated September 29, 2000, by William R. Pray to Wilmar Industries,
Inc.
10.19** Management Subscription Agreement, dated September 29, 2000, between William R. Pray
and Wilmar Industries, Inc.
10.20** Amendment to Stay Pay Agreement, dated as of September 27, 2000, by and between
William R. Pray and Barnett, Inc.
10.21** Deferred Compensation Agreement, dated as of September 29, 2000, by and between
Wilmar Industries, Inc. and William R. Pray.
10.22** Separation Agreement and Release of All Claims, dated December 31, 2001, by and
between Interline Brands, Inc. and William Green.
10.23** Restricted Stock Award Agreement under the 2000 Stock Award Plan, dated as of
September 29, 2000, between William R. Pray and Wilmar Industries, Inc.
10.24** 2000 Stock Award Plan, as amended and restated July, 2000.
12.1* Statement of Computation of Ratios of Earnings and Fixed Charges.
14.1* Code of Ethics.
21.1** List of Subsidiaries of Interline Brands, Inc.
77
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
31.1* Certification of Michael J. Grebe as President and Chief Executive Officer of
Interline Brands, Inc., pursuant to Rule 13a-14(a) under the Securities Exchange Act
of 1934.
31.2* Certification of William E. Sanford as Executive Vice President and Chief Financial
Officer of Interline Brands, Inc., pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934.
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.
- ----------------
* Filed herewith.
** Incorporated by reference to the exhibits filed with the Company's
Registration Statement on Form S-4 and the amendments thereto (File No.
333-106801).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
December 26, 2003.
78
ITEM 16. SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
INTERLINE BRANDS, INC.
/s/ Michael J. Grebe
---------------------------------
Michael J. Grebe
President and Chief Executive
Officer
Date: March 25, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities indicated and
on the 25th day of March, 2004.
/s/ William S. Green /s/ Drew T. Sawyer
- ----------------------------------------------- -------------------------
William S. Green Drew T. Sawyer
Chairman of the Board and Director Director
/s/ Michael J. Grebe /s/ Christopher C. Behrens
- ----------------------------------------------- -------------------------
Michael J. Grebe Christopher C. Behrens
President, Chief Executive Officer and Director Director
(Principal Executive Officer)
/s/ William Sanford /s/ Stephen V. McKenna
- ----------------------------------------------- -------------------------
William Sanford Stephen V. McKenna
Executive Vice President, Chief Financial Officer Director
and Secretary
(Principal Accounting Officer
and Principal Financial Officer)
/s/ William R. Pray /s/ Charles W. Santoro
- ----------------------------------------------- -------------------------
William R. Pray Charles W. Santoro
Director Director
/s/ Ernest K. Jacquet /s/ Gideon Argov
- ----------------------------------------------- -------------------------
Ernest K. Jacquet Gideon Argov
Director Director
S-1
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
3.1** Certificate of Incorporation of Interline Brands, Inc.
3.2** Amended and Restated By-Laws of Interline Brands, Inc.
4.1** Indenture, dated as of May 23, 2003, among Interline Brands, Inc., the Subsidiary
Guarantors thereto and The Bank of New York, as Trustee.
4.2** Form of Exchange Security or Private Exchange.
4.3** Registration Rights Agreement, dated as of May 23, 2003, among Interline Brands,
Inc., Credit Suisse First Boston LLC, J.P. Morgan Securities Inc., Wachovia
Securities Inc. and BNY Capital Markets, Inc.
9.1** Amended and Restated Shareholders Agreement, dated as of September 29, 2000, among
the Company and certain of its shareholders.
10.1** Credit Agreement, dated as of May 29, 2003, among Interline Brands, Inc., the Lender
Parties thereto, Credit Suisse First Boston, as Administrative Agent, and JPMorgan
Chase Bank, as Syndication Agent.
10.2* Amendment No. 1, dated as of December 19, 2003, to the Credit Agreement dated as of
May 29, 2003, among Interline Brands, Inc. and the lenders party thereto.
10.3** Guarantee and Collateral Agreement, dated as of May 29, 2003, among Interline Brands,
Inc., the Subsidiaries of Interline Brands, Inc. named therein and Credit Suisse
First Boston.
10.4** Employment Agreement, dated as of May 16, 2000, by and between Wilmar Industries,
Inc. and William E. Sanford.
10.5** Incentive Stock Option Agreement, dated as of May 16, 2000, by and between Wilmar
Industries, Inc. and William E. Sanford.
10.6** Management Subscription Agreement, dated May 16, 2003, between William E. Sanford and
Wilmar Industries, Inc.
10.7** Secured Recourse Promissory Note, dated May 16, 2000, from William E. Sanford to
Wilmar Industries, Inc.
10.8** Pledge Agreement, dated as of May 16, 2000, from William E. Sanford to Wilmar
Industries, Inc.
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
10.9** Promissory Note, dated as of July 15, 2000, from William E. Sanford to Wilmar
Industries, Inc.
10.10** Employment Agreement, dated as of May 16, 2000, by and between Wilmar Industries,
Inc. and Michael J. Grebe.
10.11** Incentive Stock Option Agreement of Michael J. Grebe, dated as of May 16, 2000.
10.12** Promissory Note, dated July 15, 2002, from Michael J. Grebe to Interline Brands, Inc.
10.13** Secured Recourse Promissory Note, dated May 16, 2000, from Michael J. Grebe to Wilmar
Industries, Inc.
10.14** Pledge Agreement, dated as of May 16, 2000, from Michael J. Grebe to Wilmar
Industries, Inc.
10.15** Management Subscription Agreement, dated May 16, 2000, between Michael J. Grebe and
Wilmar Industries, Inc.
10.16** Employment Agreement, dated as of September 29, 2000, by and between Wilmar
Industries, Inc. and William R. Pray.
10.17** Restricted Stock Award Agreement under the 2000 Stock Award Plan, dated as of
September 29, 2000, between Wilmar Industries, Inc. and William Green.
10.18** Promissory Note, dated September 29, 2000, by William R. Pray to Wilmar Industries,
Inc.
10.19** Management Subscription Agreement, dated September 29, 2000, between William R. Pray
and Wilmar Industries, Inc.
10.20** Amendment to Stay Pay Agreement, dated as of September 27, 2000, by and between
William R. Pray and Barnett, Inc.
10.21** Deferred Compensation Agreement, dated as of September 29, 2000, by and between
Wilmar Industries, Inc. and William R. Pray.
10.22** Separation Agreement and Release of All Claims, dated December 31, 2001, by and
between Interline Brands, Inc. and William Green.
10.23** Restricted Stock Award Agreement under the 2000 Stock Award Plan, dated as of
September 29, 2000, between William R. Pray and Wilmar Industries, Inc.
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
10.24** 2000 Stock Award Plan, as amended and restated July, 2000.
12.1* Statement of Computation of Ratios of Earnings and Fixed Charges.
14.1* Code of Ethics.
21.1** List of Subsidiaries of Interline Brands, Inc.
31.1* Certification of Michael J. Grebe as President and Chief Executive Officer of
Interline Brands, Inc., pursuant to Rule 13a-14(a) under the Securities Exchange Act
of 1934.
31.2* Certification of William E. Sanford as Executive Vice President and Chief Financial
Officer of Interline Brands, Inc., pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934.
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.
- ----------------
* Filed herewith.
** Incorporated by reference to the exhibits filed with the Company's
Registration Statement on Form S-4 and the amendments thereto (File No.
333-106801).