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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
 
 
For the fiscal year ended
December 26, 2014
 
 
 
 
 
 
 
or
 
 
 
 
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
 
 
For the transition period from
 
to
 
 
Commission File Number:
001-32380

INTERLINE BRANDS, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
03-0542659
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
701 San Marco Boulevard
Jacksonville, Florida
 
32207
(Address of principal executive offices)
 
(Zip Code)
(904) 421-1400
(Registrant’s telephone number, including area code)
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to section 12(b) of the Act: NONE
Securities registered pursuant to section 12(g) of the Act: NONE

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý

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 ý No o

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference of Part III of this Form 10-K or any amendment to this Form 10-K.     ý




Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
 
Accelerated filer o
 
 
 
 
 
 
 
Non-accelerated filer ý (Do not check if smaller reporting company)
 
Smaller reporting company o
 

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

Effective September 7, 2012, the Company became privately-held. There is no established public trading of the registrant’s common stock and therefore, an aggregate market value of the registrant's common stock is not determinable.

As of February 20, 2015, there were 1,499,053 shares of the registrant’s common stock issued and outstanding, par value $0.01.



INTERLINE BRANDS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FOR THE FISCAL YEAR ENDED DECEMBER 26, 2014

ITEM
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Unless otherwise indicated, references in this document to "we," "us," "our" and the "Company" refer to Interline Brands, Inc., a Delaware corporation incorporated in 2004, and its consolidated subsidiaries, and "Interline New Jersey" refers to Interline Brands, Inc., a New Jersey corporation incorporated in 1978, through which we conduct our business.

Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) 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, the impact of the Merger, as defined in Part I. Item 1 below, and amounts that may be paid for resolution of legal matters. These statements often include words such as “may,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate” or similar expressions, including, without limitation, certain statements in “Results of Operations” and “Liquidity and Capital Resources” in Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, and Part II. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 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:

our level of indebtedness;
future cash flows;
the highly competitive nature of the maintenance, repair and operations distribution industry;
general market conditions;
the impact of the current rebranding initiative;
the impact of potential future impairment charges;
apartment vacancy rates and effective rents;
governmental and educational budget constraints;
work stoppages or other business interruptions at transportation centers or shipping ports;
health care costs;
our ability to accurately predict market trends;
fluctuations in the cost of commodity-based products and raw materials (such as copper) and fuel prices;
adverse publicity;
labor and benefit costs;
the loss of significant customers;
adverse changes in trends in the home improvement, remodeling and home building markets;
product cost and price fluctuations due to inflation and currency exchange rates;
inability to identify, acquire and successfully integrate acquisition candidates;
our ability to purchase products from suppliers on favorable terms;
the impact of the resolution of current or future legal claims;
our customers' ability to pay us;
inability to realize expected benefits from acquisitions;
consumer spending and debt levels;
interest rate fluctuations;
weather conditions and catastrophic weather events;
material facilities and systems disruptions and shutdowns;
the length of our supply chains;
dependence on key employees;
credit market contractions;
disruptions in information technology systems;



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Forward-Looking Statements (continued)

changes to tariffs between the countries in which we operate;
our ability to protect trademarks;
changes in governmental regulations related to our product offerings; and
changes in consumer preferences.

Any forward-looking statements made by us in this report, or elsewhere, speak only as of the date on which we make them. 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, any forward-looking statements made in this report or elsewhere might not occur.


2


PART I
 
ITEM 1. Business

Our Company

We are a leading national distributor and direct marketer of broad-line maintenance, repair and operations ("MRO") products. We have one operating segment, the distribution of MRO products into the facilities maintenance end-market. We stock approximately 100,000 MRO products in the following categories: janitorial and sanitation ("JanSan"); plumbing; heating, ventilation and air conditioning ("HVAC"); hardware, tools and fixtures; electrical and lighting; appliances and parts; security and safety; and other miscellaneous maintenance products. Our products are primarily used for the repair, maintenance, remodeling, and refurbishment of non-industrial, commercial, multi-family and residential facilities.

Our diverse facilities maintenance customer base includes institutions, such as educational, lodging, health care, and government facilities; multi-family housing, such as apartment complexes; and residential, such as professional contractors, and plumbing and hardware retailers. Our customers range in size from individual contractors and independent hardware stores to apartment management companies and national purchasing groups.

We currently market and sell our products primarily through thirteen distinct and targeted brands, each of which is recognized in the facilities maintenance market they serve for providing quality products at competitive prices with reliable same-day or next-day delivery. The AmSan®, JanPak® , CleanSource®, Sexauer®, and Trayco® brands generally serve our institutional facilities customers;
the Wilmar® and Maintenance USA® brands generally serve our multi-family housing facilities customers; and the Barnett®, Copperfield®, U.S. Lock®, Hardware Express®, LeranSM and AF Lighting® brands generally serve our residential facilities customers. Our multi-brand operating model, which we believe is unique in the industry, allows us to use a single platform to deliver tailored products and services to meet the individual needs of each respective customer group served. During the second quarter of 2014, management made a strategic marketing decision to simplify our brand structure for our institutional customer base during 2015. This rebranding initiative is designed to consolidate our institutional brands under a single national brand name and increase brand awareness as a market leading institutional business.

We reach our markets using a variety of sales channels, including a field sales force of approximately 1,160 associates, which includes sales management and related associates, approximately 470 inside sales and customer service and support associates, a direct marketing program consisting of catalogs and promotional flyers, brand-specific websites, a national accounts sales program, and other supply chain programs, such as vendor managed inventory. We deliver our products through our network of 67 distribution centers and 21 professional contractor showrooms located throughout the United States, Canada, and Puerto Rico, 72 vendor-managed inventory locations at large customer locations and a dedicated fleet of trucks and third party carriers. Our broad distribution network enables us to provide reliable, next-day delivery service to approximately 98% of the United States ("U.S.") population and same-day delivery service to most major metropolitan markets in the U.S.

Our information technology and logistics platforms support our major business functions, allowing us to market and sell our products with same-day or next-day delivery depending on the customer’s service requirements. While we market our products under a variety of brands, generally our brands draw from the same inventory within common distribution centers and share associated employee and transportation costs. In addition, we have centralized marketing, purchasing and catalog production operations to support our brands. We believe that our information technology and logistics platforms also benefit our customers by allowing us to offer a broad product selection at highly competitive prices while maintaining the unique customer appeal, market expertise and service capabilities of each of our targeted brands. Overall, we believe that our common operating platforms have enabled us to improve customer service, maintain lower operating costs, efficiently manage working capital and support our growth initiatives.

Merger Transaction
On September 7, 2012 (the "Merger Date"), pursuant to an Agreement and Plan of Merger (the "Merger Agreement") dated as of May 29, 2012, Isabelle Holding Company Inc., a Delaware corporation (“Parent”), and Isabelle Acquisition Sub Inc., a Delaware corporation and a wholly-owned subsidiary of Parent (“Merger Sub”), merged with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly-owned subsidiary of Parent. Immediately following the effective time of the Merger, Parent was merged with and into the Company with the Company surviving (the "Second Merger"). Under the Merger Agreement, stockholders of the Company received $25.50 in cash for each share of Company common stock. The Merger was unanimously approved by Interline's Board of Directors and a majority of Interline's stockholders holding the outstanding shares of the common stock. Please refer to Note 3. Transactions to our audited consolidated financial statements included in this annual report for further

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information about the Merger Agreement. Prior to the Merger Date, the Company operated as a public company with its common stock traded on the New York Stock Exchange. As a result of the Merger, Interline's common stock became privately-held.

Our primary business activities remain unchanged after the Merger. As a result of the Merger, we applied the acquisition method of accounting and established a new accounting basis on September 8, 2012. Although the Company continued as the same legal entity after the Merger, since the financial statements are not comparable as a result of acquisition accounting, the results of operations and related cash flows are presented for two periods: the period prior to the Merger ("Predecessor") and the period subsequent to the Merger ("Successor").

In connection with the Merger, we incurred significant indebtedness and became more leveraged. In addition, the purchase price paid in connection with the Merger has been allocated to recognize the acquired assets and liabilities at fair value. The purchase accounting adjustments have been recorded to: (i) establish intangible assets for our trademarks and customer relationships, and (ii) revalue the OpCo Notes due 2018 (the "OpCo Notes") to fair value. Subsequent to the Merger, interest expense and non-cash amortization charges have significantly increased. As a result, our Successor financial statements subsequent to the Merger are not comparable to our Predecessor financial statements.

Acquisitions

On December 11, 2012, Interline New Jersey acquired all of the outstanding stock of JanPak, Inc. ("JanPak") for $82.5 million in cash, subject to working capital and other closing adjustments. JanPak, which is headquartered in Davidson, North Carolina, is a large regional distributor of janitorial and sanitation supplies and packaging products, primarily serving property management and building service contractors as well as manufacturing, health care and educational facilities through 16 distribution centers across the Southeast and South Central United States. This acquisition represented an expansion of the Company's offering of JanSan products in the Southeastern, Mid-Atlantic, and South Central United States.

On January 28, 2011, Interline New Jersey acquired substantially all of the assets and a portion of the liabilities of Northern Colorado Paper, Inc. (“NCP”) for $9.5 million in cash and an earn-out of up to $0.3 million in cash over two years. NCP, which is headquartered in Greeley, Colorado, is a regional distributor of JanSan supplies, primarily serving institutional facilities in the health care, education and food service industries. This acquisition represented an expansion of the Company's offering of JanSan products in the western United States.

On October 29, 2010, Interline New Jersey acquired substantially all of the assets and a portion of the liabilities of CleanSource, Inc. (“CleanSource”) for $54.6 million in cash and an earn-out of up to $5.5 million in cash over two years. CleanSource, which is headquartered in San Jose, California, is a large regional distributor of JanSan supplies. CleanSource primarily serves health care and educational facilities, as well as building services contractors. This acquisition represented a geographical expansion of the Company's offering of JanSan products to the western United States.

Financing Transactions

Fiscal Year 2014

On March 17, 2014, Interline New Jersey completed the following financing transactions:

entered into a first lien term loan under which Interline New Jersey incurred a term loan in an aggregate principal amount of $350.0 million (the "Term Loan Facility"); and
amended the asset-based senior secured revolving credit facility, dated as of September 7, 2012 (the “ABL Facility”), by entering into the First Amendment to Credit Agreement to permit the incurrence of the Term Loan Facility and make other changes in connection with the refinancing (the “First ABL Facility Amendment”).

The proceeds from the Term Loan Facility were used to finance the redemption of Interline New Jersey's $300.0 million OpCo Notes, the repayment of a portion of amounts outstanding under the ABL Facility and the payment of related fees, costs and expenses. In connection with the redemption of the OpCo Notes, the Company recorded a loss on early extinguishment of debt in the amount of $4.3 million during the year ended December 26, 2014. The loss was comprised of $18.6 million in consent solicitation, tender premium, call premium and related transaction costs less a non-cash benefit of $14.3 million associated with the write-off of the unamortized fair value premium of $17.8 million less the write-off of the unamortized deferred debt issuance costs of $3.5 million.
    

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On April 8, 2014, Interline New Jersey further amended the ABL Facility by entering into the Second Amendment to the Credit Agreement to amend certain pricing terms applicable to the ABL Facility and extend the maturity date to April 8, 2019, at which date the principal amount outstanding under the ABL Facility will be due and payable in full (the “Second ABL Facility Amendment”).
    
On December 10, 2014 Interline New Jersey further amended the ABL Facility to increase the aggregate commitments from $275.0 million to $325.0 million (the "Increase Agreement"). Except for this commitment increase, no other material terms were modified by the Increase Agreement.

Subsequent to December 26, 2014, the Company used a combination of cash on hand and borrowings under the recently amended ABL Facility to redeem $80.0 million of the $365.0 million outstanding aggregate principal amount of the HoldCo Notes (as defined below).

Fiscal Year 2012

In connection with the Merger in 2012, the Company entered into the following financing transactions:

the ABL Facility, with an aggregate principal amount of up to $275.0 million;
the issuance of $365.0 million aggregate principal amount of senior notes (the "HoldCo Notes"); and
the modification of the OpCo Notes.

Simultaneously with the closing of the Merger, the following occurred: the funding of the new ABL Facility, the release of the net proceeds of the $365.0 million HoldCo Notes from escrow, the termination of the Company's previous $225.0 million asset-based revolving credit facility, and the modification of the OpCo Notes.

See “Management's Discussion and Analysis of Financial Condition and Results of Operations—Financing Transactions,” “Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources”, and Note 10. Debt to our audited consolidated financial statements included in this annual report for further information regarding our outstanding indebtedness.

Rebranding Initiative
During the second quarter of fiscal year 2014, Company management made a strategic marketing decision to rebrand certain trademark assets under one new national brand name within our institutional customer end-market. We believe the rebranding initiative will provide positive outcomes as it relates to national scope and capabilities, brand recognition and market share. The rebranding is not expected to have a significant impact on operations or the quality of our product offerings.

As a result of the rebranding initiative, the Company recorded non-cash charges of $67.5 million related to the impairment of certain indefinite-lived trademark assets due to a change in the expected useful life of the intangible assets. The impairment charges were determined by comparing the fair value of the trademarks, derived using discounted cash flow analyses, to the current carrying value. Prior to the impairment analysis, the associated trademarks had a carrying value of $71.1 million, and after the impairment charge, the associated trademarks had a remaining carrying value of $3.6 million which was amortized over an estimated definite life of six months.

Strategy

Our objective is to become the leading supplier of MRO products to the facilities maintenance end-market, which is comprised of our institutional, multi-family housing and residential facilities customers. In pursuing this objective, we plan to increase our net sales, earnings and return on invested capital by capitalizing on our size and scale, sales force, supply chain programs, information technology and logistics platforms to successfully execute our organic growth, operating efficiency and strategic acquisition initiatives.

Organic Growth Initiatives. We seek to satisfy and solve key customer supply chain needs, which enables us to further penetrate the markets we serve, and to expand into new product and geographic areas by adding sales professionals, and utilizing and increasing our already successful new product and marketing strategies, including: growing web-based sales capabilities; targeting new customer acquisitions; expanding our national accounts program; increasing customer use of our supply chain management services; continuing to develop proprietary products under our exclusive brands; and selectively adding new products and new categories to our various brand offerings.


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Increased Operating Efficiencies. We will continue to focus on enhancing our operating efficiency, which will increase profitability, improve our cash conversion cycle and increase our return on capital.

Acquisitions. We will continue to maintain a disciplined acquisition strategy of adding new customers and/or product offerings in markets we currently serve and pursuing acquisitions of established brands in new or existing markets in an effort to further leverage our operating infrastructure.

Industry and Market Overview

The MRO distribution industry in the U.S. and Canada is approximately $525 billion in size according to MRO market analyses by Modern Distribution Management ("MDM"), a trade company specializing in wholesale distribution, and Industrial Marketing Information, Inc. ("IMI"), a market research company specializing in quantification of the industrial business-to-business markets. The MRO distribution industry encompasses the supply of a wide range of products, including plumbing and electrical supplies, 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 the repair and overhaul of production equipment and machinery; owners and managers of facilities such as apartment complexes, office buildings, schools, hotels and hospitals that use MRO supplies largely for maintenance, repair and refurbishment; and professional contractors.

Within the MRO distribution industry, we focus on serving customers in the facilities maintenance end-market. Our customers are primarily engaged in the repair, maintenance, remodeling, refurbishment and, to a lesser extent, construction of non-industrial and residential facilities.

Our Brands

We currently market and sell our products primarily through thirteen distinct and targeted brands, each of which is recognized in the facilities maintenance markets they serve for providing quality products at competitive prices with reliable same-day or next-day delivery. The Wilmar®, AmSan®, JanPak® , CleanSource®, Sexauer®, Maintenance USA® and Trayco® brands generally serve our multi-family housing and institutional facilities customers; the Barnett®, Copperfield®, U.S. Lock®, Hardware Express®, LeranSM and AF Lighting® brands generally serve our residential facilities customers. Our brands provide a broad product offering as well as services beyond the product such as developing customer-focused solutions based on each customer’s unique facility, providing better results and total value. We have brands that provide complementary services to our customers including inventory and supply chain management and technical assistance. We believe that our brand-based business model effectively allows us to offer a deep product offering to very targeted customers in our facilities maintenance end-market. We have core competencies in our sales channels, including national accounts sales professionals, field sales representatives, outbound and inside sales and customer service representatives, direct marketing via catalogs and flyers, professional contractor showrooms, vendor-managed inventory locations, and internet-based sales and service capabilities. This allows us to effectively compete for a broad range of customers across our industry by offering our customers the service and delivery platform they prefer and often require.

Institutional, Multi-Family and Residential Facilities Maintenance Brands

We serve our institutional and multi-family housing facilities customers primarily through our Wilmar, AmSan, JanPak, CleanSource, Sexauer, Maintenance USA and Trayco brands. These customers buy our products for the maintenance, repair and remodeling of many types of facilities, and often need to obtain products with minimal delay. In many cases, our institutional and multi-family housing facilities customers also look to us for support services such as inventory management, national accounts, procurement technology, technical advice and assistance, drop ship products and equipment servicing and training. Our residential facilities maintenance customers are comprised of professional contractor customers that are primarily served by our Barnett, Hardware Express, Copperfield, U.S. Lock, Leran, and AF Lighting brands. Residential facilities customers generally purchase our products for specific job assignments and/or to resell the product to end-customers to be used in many types of facilities.

Wilmar. Our Wilmar brand markets and sells maintenance products to our multi-family housing customers. Through its 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 same-day or next-day delivery in local markets on our own trucks served by our distribution centers, and ships by parcel delivery services or other carriers to other areas. The Wilmar brand sells primarily through field sales representatives, as well as through its website, direct marketing and inside sales. We also have a successful national accounts program at Wilmar where national account managers market to senior officers at real estate investment trusts and other property management companies. Through this program, we assist large multi-location customers in reducing total supply chain costs.


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AmSan. Our AmSan brand markets and sells a comprehensive range of facilities maintenance products to institutional facilities, such as schools and universities, health care sites, lodging and government facilities and building services contractors. We sell our products primarily through field sales representatives supported by a full line catalog and a robust e-commerce platform, which includes national brand product offerings as well as our exclusive brand product lines such as Renown and Appeal. AmSan provides same-day or next-day delivery in local markets on our own trucks served by our distribution centers and ships by parcel delivery services or other carriers to other areas. In addition, AmSan provides customers with reliable technical support, equipment repair services, and customized training programs, all of which make AmSan an important supplier to our customers.
    
JanPak. Our JanPak brand markets and sells a comprehensive range of cleaning and packaging solutions to building services contractors, property management, health care, education and manufacturing customers. These solutions are sold through a team of field sales professionals with subject matter and market segment expertise to address the most critical needs facing these customers. In addition, JanPak provides a number of after sales service and support capabilities, like technical training, equipment service and repair, and certification platforms, to meet the unique and on-going needs of our customers. Customers are served through a dedicated customer support team, a robust e-commerce platform, and a fleet of delivery vehicles and local distribution centers which provide same-day or next-day delivery.

CleanSource. Our CleanSource brand markets and sells a comprehensive range of facilities maintenance products to institutional facilities, such as schools, health care sites, lodging and government facilities and building services contractors. CleanSource sells products primarily through field sales representatives supported by a catalog and a robust e-commerce platform, which include national brand product offerings as well as our exclusive brand product lines Renown and Appeal. CleanSource field sales representatives are trained and experienced in developing customer-focused solutions based on a careful analysis of each customer’s unique facility, providing better results and total value.

Sexauer. Our Sexauer brand markets and sells specialty plumbing and facility maintenance products to institutional customers, including education, lodging, health care and other facilities maintenance customers. The Sexauer brand sells primarily through field sales representatives. 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, through its catalog and website, drawing upon our product and supply management expertise.

Maintenance USA. Our Maintenance USA brand markets and sells a broad portfolio of MRO products to facilities, including multi-family housing, lodging and institutional customers. Maintenance USA sells our products primarily through inside sales and direct marketing supplemented by its website, representing a low-cost supply alternative to property managers and customers requiring a reduced level of support services.

Trayco. Our Trayco brand markets and sells an extensive inventory of specialty plumbing items as well as a wide array of other facilities maintenance products. Trayco specializes in hard-to-find items and provides access to hundreds of manufacturers. Trayco sells its products through the use of a catalog and field sales personnel, supplemented by its website.

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, remodeling and maintenance applications. The Barnett brand also sells its products to specialty distributors, which are generally smaller and carry fewer products than Barnett. The brand sells its products through a catalog, supplemented by its website, direct marketing, inside sales and field sales representatives 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 professional contractor showrooms, or Pro Centers, as well as a suite of inventory related solutions such as on-site vendor-managed inventory, pre-positioned inventory and consigned inventory capabilities.

Hardware Express. Our Hardware Express brand markets and sells our full range of products to resellers of all types, primarily retail hardware stores, small distributors and online retailers. Hardware Express sells primarily through a catalog, supplemented by its website, direct marketing, inside sales and national accounts.

Copperfield. Our Copperfield brand markets and sells specialty ventilation and chimney maintenance products to chimney professionals and hearth retailers, through its website, direct marketing, outbound and inside sales and field sales representatives. Copperfield offers brand name and exclusive brand repair and replacement items including chimney replacement and relining products, specialty ventilation components, hearth products, gas and electrical appliances and an assortment of gas and solid fuel burning appliances.
    

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U.S. Lock. Our U.S. Lock brand markets and sells a broad range of security hardware products, from individual lock-sets to computerized master-key systems. U.S. Lock sells a number of brand name products from leading security hardware manufacturers, as well as a number of exclusive brand security hardware products. U.S. Lock sells primarily to locksmiths nationwide through a catalog and a team of highly technical inside sales account managers supplemented by its website.
    
Leran. Our Leran brand markets and sells an extensive line of propane, plumbing, HVAC, electrical and hardware products including copper tubing and brass fittings as well as appliances and water heaters to professional contractors. Leran sells its products through the use of a catalog supplemented by inside sales personnel and its website.

AF Lighting. Our AF Lighting brand markets and sells residential lighting and electrical products to electrical contractors, electrical distributors, lighting showrooms and mass merchants through direct marketing, outbound and inside sales and a network of manufacturer’s representatives, supplemented by its website.

Our Products

Our products are primarily used for the repair, maintenance, remodeling and refurbishment of residential and non-industrial facilities. We stock approximately 100,000 standard and specialty MRO products in a number of categories, including: JanSan; plumbing; hardware, tools and fixtures; HVAC; electrical and lighting; appliances and parts; security and safety; and other miscellaneous products. We offer a broad range of brand name and exclusive brand products. We believe we benefit from stable, non-discretionary and recurring end-market demand, which is largely characterized by products that are either consumable or have regular replacement cycles.

Product Categories

The approximate percentages of our net sales for the fiscal year ended December 26, 2014 by principal product category were as follows:
Product Category
 
Percent of Net Sales
JanSan
 
45
%
Plumbing
 
18
%
Hardware, tools and fixtures
 
9
%
HVAC
 
8
%
Electrical and lighting
 
5
%
Appliances and parts
 
6
%
Security and safety
 
4
%
Other
 
5
%
Total
 
100
%

The following is a discussion of our principal product categories:

Janitorial and Sanitation. Our comprehensive selection of JanSan products includes cleaning chemicals, trash can liners, paper towels, bath tissue, brooms, mops, and other products. We offer a number of products from leading JanSan manufacturers, such as Kimberly-Clark, Georgia-Pacific, 3M, GOJO and Rubbermaid. We also offer exclusive brand JanSan products under our Renown and Appeal brands.

Plumbing. We sell a broad range of plumbing products, from individual faucet parts to complete bathroom renovation kits. In addition, we sell both brand name and exclusive brand products. For example, we sell brand name products from manufacturers including Kohler, Moen and Delta. We also sell exclusive brand plumbing products under various proprietary trademarks, including Premier faucets and water heaters, DuraPro tubular products and ProPlus retail plumbing accessories.

Hardware, Tools and Fixtures. We sell a variety of hardware products, tools and fixtures, including hinges, power tools and mini blinds, and a limited selection of cabinetry, doors and windows. Our brand name products include DeWalt, Channellock, Milwaukee Tool and Sunco. Our exclusive brands of hardware products include Yukon, Legend, Anvil Mark and Designer's Touch.


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Heating, Ventilation and Air Conditioning. We offer a variety of HVAC products, including condensing units, thermostats, fans and motors under both name brand and exclusive brand names. We offer brand name products from leading HVAC manufacturers including Goodman, Trane and Honeywell, as well as exclusive brand products such as Garrison. We also offer specialty ventilation and chimney maintenance products through our Copperfield brand.

Electrical and Lighting. Our comprehensive selection of electrical and lighting products ranges from electrical wire and breakers to light fixtures and light bulbs. We offer brand name products from leading electrical supply manufacturers, including Eaton, Sylvania and Leviton, as well as a number of exclusive brand electrical products, such as Monument and Bala.

Appliances and Parts. Our comprehensive range of appliances and parts includes stoves, washer/dryer components, garbage disposers, refrigerators and range hoods. We sell a number of brand name products of leading appliance manufacturers, including General Electric. We also sell a number of high-quality replacement parts from a number of different suppliers.

Security and Safety. 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 exclusive brand security hardware products, such as U.S. Lock hardware, Legend locks and Rx master keyways. We sell a variety of safety products, ranging from safety detection devices, such as smoke detectors, to personal protection items, including gloves and masks.

Exclusive Brand Products

Our size and reputation have enabled us to develop and market various lines of exclusive brand products, which we believe offer our customers high-quality, low-cost alternatives to the brand name products we sell. Third-party manufacturers, primarily in Asia and the United States, using our proprietary branding and packaging design, manufacture our exclusive brand products. Our sales force, catalogs, brand-specific websites and promotional flyers emphasize the comparative value of our exclusive brand products. Since our exclusive brand 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 while offering lower prices to our customers. In addition, we have found that we develop strong relationships with our exclusive brand customers and generate increased repeat business, as exclusive brand customers generally return to us for future service and replacement parts on previously purchased products.

New Product Offerings

We regularly monitor and evaluate our product offerings, both to assess the sales performance of our existing products and to discontinue products that 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. These categories can either be new to Interline or new to a brand. For example, as we enhance our brand-specific websites, we are able to make available products not yet offered in our catalogs. Through these efforts, we are able to sell more products to existing customers as well as 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. We believe that introducing new products in existing product lines and creating new product lines are both strategies that enable us to increase penetration of existing customer accounts, as well as attract new customers to our brands.

Sales and Marketing

We market our products through a variety of sales channels. The majority of sales to our facilities maintenance customers are made through field sales and inside sales representatives, which are supported by a direct marketing program consisting of catalogs, promotional and instructional mailings. We also serve our customers with brand-specific websites, a national accounts sales program, and other supply chain programs, such as vendor managed inventory.

As MRO customers grow in size, their supply chains often become increasingly complex and difficult to manage. In many cases, customers have a limited view into or control over their product spend, inventory shrinkage, and indirect MRO personnel costs. To meet these needs, we offer a range of sophisticated supply chain management solutions designed to solve the unique problems of each of our customers. By offering customers services beyond fulfillment such as product standardization, vendor consolidation, inventory management, product training, and electronic invoicing, we provide a suite of services that can be utilized either individually or as a group based upon the customer’s size and supply chain complexity. Our customers rely upon us as a supply chain partner rather than a vendor, and in turn realize significant benefits by reducing overall product cost, improving inventory management, and lowering their indirect MRO spend. As supply chain partners, we seek to become our customers’ single source for MRO supplies and knowledge.


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Our marketing strategy involves targeting our marketing channels and efforts to specific customer groups. As a result of our long-standing relationships with customers, we have been able to assemble a database of customer purchasing information, such as 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 acquisitions. We are also able to track the success of a particular marketing effort by analyzing the purchases of the customers targeted by that effort. Our information technology allows 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 technology to develop successful print and website-based sales and marketing strategies.

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, on-site maintenance managers, and owners and managers of professional plumbing, electrical and HVAC contractors. Our direct sales force marketing efforts are designed to establish and solidify customer relationships through frequent contact, while emphasizing our broad product selection, e-commerce capabilities, reliable delivery of our products, high level of customer service and competitive pricing.
    
We maintain one of the largest direct sales forces in our industry, with approximately 1,160 sales force associates 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 products.

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 the majority of our field sales representatives based on a commission program or on a combination of salary and bonus program. 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.

Inside Sales

Our inside sales operation has been designed to make ordering our products as convenient and efficient as possible. We divide our inside sales staff into outbound and inbound groups. Our outbound sales 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 inside sales presentations, notify customers of current promotions and encourage additional purchases. Our inbound sales representatives are trained to process orders quickly 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 inside sales representatives who are familiar with a particular brand’s markets, products and customers. Our call centers are staffed by approximately 470 inside sales, customer service and technical support personnel, who utilize our proprietary, on-line order processing system. This sophisticated software provides the inside sales staff with detailed customer profiles and information about products, pricing, promotions and competition.

Catalogs and Direct Mail Marketing

Our catalogs and direct mail marketing promotional flyers are key marketing tools that allow us to communicate our product offerings to both existing and potential customers. We create catalogs for most of our brands and mail or deliver them generally on an annual or semi-annual basis to our existing customers. We often supplement these catalog mailings by sending our customers 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 sometimes 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 inside sales operations. Once customers begin to place orders with us, we typically 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.


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We produce 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 our larger customers.

E-commerce

Our websites play a significant role in meeting the needs of our customers. Whether the customer shops online, references a catalog, uses a virtual catalog, or prefers to interact directly with a representative, our brand websites are an information resource for our customers. Through our user-friendly search engine, customers can access detailed product information, see customer-specific pricing, view real-time product availability, and see how the product will be shipped to their location. Customers can view their entire order history, regardless if placed on the web or through other channels. We offer an extended product assortment online over and above what is in the published catalog.

We offer our customers a variety of online methods for supply chain spending controls. Customized and shared favorites lists assist our customers for ease of placing orders. Additionally, usage reports are available online. Where budgetary considerations are a concern, customers can control spending through a workflow-enabled budget management and approval tool. The flexible budget management tool tracks our customers' spending and generates invoices to the customers' general ledger codes. We also offer product standardization and customized product assortments. Each method allows the customer the ability to tailor their online shopping experience to their business needs. We handle a variety of customers' unique needs, such as consignment, multi-family and single owner operator requirements, all operating on one single web platform. Our field sales force plays a significant role in educating our customers on how to utilize and leverage our e-commerce platform. Our field sales force can assist our customers with registering on the site, setting up favorites lists, and helping customers place their first orders.

Operations and Logistics

Distribution Network

We have a network strategically located to serve the largest metropolitan areas throughout the United States and Canada comprised of 67 distribution centers and 21 professional contractor showrooms. We also maintain a dedicated fleet of trucks to assist in the local delivery of products. The geographic scope of our distribution network and the efficiency of our information technology enable us to provide reliable, next-day delivery service to approximately 98% of the U.S. population and same-day delivery service to most major metropolitan markets in the U.S.

Our distribution centers are central to our operations and range in size from approximately 6,000 square feet to approximately 384,000 square feet. Our distribution centers are typically maintained under operating leases in commercial or industrial centers, and primarily consist of warehouse and shipping facilities. We have professional contractor showrooms in certain existing distribution centers and in freestanding locations, which allow customers to obtain products from a fixed location without ordering in advance.

Inbound Logistics

Our Regional Replenishment Centers ("RRCs") in Jacksonville, Florida; Philadelphia, Pennsylvania; Nashville, Tennessee; and San Bernardino, California are distribution centers that receive the majority of our supplier shipments, efficiently re-distribute products to our other distribution centers and also deliver directly to customers in their local delivery area. Some over-sized or seasonal products are directly shipped to distribution centers other than the RRCs by our suppliers. Our use of RRCs has significantly reduced distribution center replenishment lead times while simultaneously improving our customer fill rates.

Outbound Logistics

Once an order is entered into our computer system, the order is usually picked and processed in the distribution center nearest to the customer. For customers located within the local delivery radius of a distribution center, our own trucks or third-party carriers will deliver the products directly to the customer the next business day (or same day, if needed). For customers located outside the local delivery radius of a distribution center, we deliver products via parcel delivery companies, such as UPS. Large orders, or orders that cannot be delivered via parcel delivery, are delivered by common carriers. In addition, portions of our sales are delivered direct from the supplier through our drop ship process.



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Suppliers and Purchasing

Our suppliers play an important role in our success. We work closely with our supplier base to ensure product merchandising and costs are managed effectively. Wherever possible, we seek to develop long-standing relationships with our suppliers. We also manage sourcing risk by developing multiple sources of competitive product supply for many key products. Due to our high volume of purchases, we are able to obtain purchase terms we believe to be more favorable than those available to most local suppliers of MRO products.

We buy our products from approximately 2,600 suppliers located in the United States and throughout the world. A majority of our purchases are primarily from domestic supplier partners with the remainder from foreign-based suppliers located primarily throughout Asia and South America. No individual supplier represented more than 6.1% of our total purchases during the fiscal year ended December 26, 2014.

With regard to inventory, our customer-centric strategy balances the need for high fill rates with the aggressive management of inventory levels. Our goals are to continue to increase our inventory efficiency over the long term as we grow, further optimize our distribution network, manage stock keeping unit complexity and leverage our common information technology and logistics platforms. We also balance inventory efficiency with global sourcing opportunities, which have longer supply lead times than domestic relationships.

In addition to our inventory management team, our purchasing process is managed through an inventory management system which forecasts demand based on customer ordering patterns. This system monitors our inventory and alerts our purchasing managers of items approaching low levels of stock. We balance ordering and carrying costs in an effort to minimize total inventory costs. Demand forecasting is automated and is primarily based on historical sales, taking into account seasonally adjusted demand and supply lead times, which in turn are key inputs into setting safety stock levels.

Information Technology

We operate a 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 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 customer information. We have consistently invested in our information technology, and we will continue to do so, as we believe that the efficiency and flexibility of our information technology are critical to the success of our business.

We constantly seek new ways to generate additional efficiencies, such as by utilizing e-commerce. For most of our brands, our customers can browse brand-specific product offerings online and use the internet to send electronic purchase orders to our order entry system. Additionally, we integrate with industry-leading business-to-business portals that allow customers to receive real-time inventory visibility and order product. Our customers can integrate these systems into their own purchase order systems, thereby making the 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 by 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 help our customers realize significant cost savings.

Competition

The MRO product distribution industry is highly competitive. Competition in our industry is primarily based upon product line breadth, product availability, technology, service capabilities and price. We face significant competition from national and regional distributors, such as HD Supply, Grainger, and Ferguson. These competitors market their products through the use of direct sales forces as well as direct marketing, websites and catalogs. In addition, we face competition from traditional channels of distribution such as retail outlets, small wholesalers 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.

    

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We expect that competition in our industry will continue to be strong in the future. The MRO product distribution industry continues to consolidate 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 marketing and/or integrated supply arrangements, which will contribute to competition in our industry.

Environmental and Health and Safety Matters

Some of the products we handle and sell, such as cleaning chemicals, are considered hazardous materials. Accordingly, we are subject to certain federal, state and local environmental laws and regulations, including those governing the transportation, 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. We are also subject to various health and safety requirements, including the Occupational, Safety and Health Act, as well as other federal, state and local laws and regulations. We believe we are in compliance in all material respects with all environmental laws and regulations and health and safety requirements applicable to our facilities and operations.

Trademarks and Other Intellectual Property

We have registered and nonregistered trade names, trademarks and service marks covering the principal brand names and product lines under which our products are marketed, including AF Lighting®, AmSan®, Appeal®, Barnett®, CleanSource®, Copperfield®, Hardware Express®, JanPak®, LeranSM, Maintenance USA®, Premier®, ProPlus®, Renown®, Renovations Plus®, Sexauer®, Trayco®, U.S. Lock®, and Wilmar®. We also own several patents for products manufactured and marketed by us, primarily under our Copperfield® brand. We believe that our trademarks and other intellectual property rights are important to our success and our competitive position. Accordingly, our policy is to pursue and maintain registration of our trade names, trademarks and other intellectual property whenever appropriate and to oppose vigorously any infringement or dilution of our trade names, trademarks or other intellectual property.

Employees

As of December 26, 2014, we had approximately 4,300 employees. We believe that our employee relations are satisfactory.

Available Information

Our internet address is www.interlinebrands.com. The information contained on our website is not incorporated by reference into this annual report on Form 10-K and should not be considered a part of this report. We make available, free of charge, through our internet site, via a hyperlink to the 10KWizard.com web site, our annual reports on Form 10-K; quarterly reports on Form 10-Q; current reports on Form 8-K; and any amendments to those reports filed or furnished pursuant to the Exchange Act, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission ("SEC").


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ITEM 1A. Risk Factors

In addition to other information included in this Annual Report on Form 10-K, the following risk factors should be read carefully in connection with evaluating the Company and its business and this Annual Report on Form 10-K. The realization of events pertaining to any of these risks could have a material adverse effect on our business, financial condition, or results of operations. Furthermore, additional risks not presently known to management or that management currently believes to be immaterial may also adversely affect the business.

Certain statements in “Risk Factors” are forward-looking statements. See “Forward-Looking Statements” described on page 1 of this Annual Report on Form 10-K for additional information.
    
Risks Relating to Our Business

General economic conditions may adversely impact our industry and customers resulting in adverse effects on the Company’s operating results.

Financial markets in the United States, Europe and Asia experienced substantial disruption from prior recessions, including, among other things, extreme volatility in security prices, severely diminished liquidity and credit availability, rating downgrades of certain investments and declining valuations of others. A slow and extended recovery or a downturn, worsening or broadening of adverse conditions in the worldwide and domestic economies could negatively affect purchases of our products, and create or exacerbate credit issues, cash flow issues and other financial issues for us and for our suppliers and customers. Depending upon their severity and duration, these conditions could have a material adverse impact on our business, liquidity, financial condition and results of operations.

Current and future economic conditions and other factors, including consumer confidence, interest rates, unemployment trends, government regulations, and liquidity in capital markets can impact consumer spending and demand for our products. Such economic developments may affect our business in a number of ways. Reduced demand may drive us and our competitors to offer products at promotional prices, which would have a negative impact on our profitability. Also, credit availability may adversely affect the ability of our customers and suppliers to obtain financing for significant purchases and operations which could result in a decrease in, or cancellation of, orders for our products. If demand for our products slows down or decreases, we will not be able to improve our revenues and we may run the risk of failing to satisfy the financial and other restrictive covenants to which we are subject under our existing indebtedness. Reduced revenues as a result of decreased demand may also hinder our ability to improve our performance in connection with our long-term strategy.

We operate in a highly competitive industry, which may have a material adverse effect on our business, financial condition, and results of operations.

The MRO product distribution industry is highly competitive. We face significant competition from national and regional distributors that market their products through the use of direct sales forces as well as direct marketing, websites and catalogs. In addition, we face competition from traditional channels of distribution such as retail outlets, small wholesalers 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.

Competition in our industry is primarily based upon product line breadth, product availability, technology, 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 reducing our profitability.

In addition, the MRO product distribution industry is undergoing changes driven by ongoing industry consolidation and increased customer demands. Traditional MRO product distributors are consolidating operations and acquiring or merging with other MRO product distributors to achieve greater economies of scale capabilities and increase efficiency. This consolidation trend could cause the industry to become more competitive and may adversely affect our operating margins and growth prospects. Furthermore, an inability on our part to successfully compete within our target markets could result in lost customers and a corresponding decline in sales, which may have a material adverse effect on our business, financial condition, and results of operations.


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Adverse changes in industry trends and economic factors specific to the principal markets in which we serve may negatively impact our net sales growth and operating margins.

We currently market and sell our products across certain facilities maintenance end-markets, including institutional facilities, multi-family housing facilities, and residential facilities. The demand for our products and services depends to some degree on the capital spending levels of end-users within these markets. The strength of these markets depends on many factors, generally outside of the Company’s control, including general economic conditions, government spending, credit availability and stability of the housing markets, including new residential construction and home improvement activity levels. The success of our business depends in part on our ability to identify and respond promptly to evolving trends in demographics, consumer preferences, expectations and needs, and unexpected weather conditions. Adverse changes in industry trends as well as weaknesses in the industries in which our customers operate may negatively impact the rate of growth of our net sales and operating margins.

We are exposed to additional risks as a result of our foreign operations and global product sourcing.

Our foreign operations expose us to certain risks associated with global economic conditions, political instability, regulatory changes, cultural and legal differences, and currency exchange rate fluctuations. Risks inherent in international operations also include, among others, potential adverse tax consequences, greater credit risk exposure and risks associated with enhanced logistics complexity. Adverse changes to any of these factors may negatively impact our profitability and results of operations.

Because the functional currency related to most of our foreign operations is the applicable local currency, we are exposed to foreign currency exchange rate risks arising from transactions in the normal course of business. Our primary currency exposure risks are with the Canadian dollar and the Chinese Yuan. Fluctuations in the relative strength of foreign economies and volatility in their related currencies could impact our foreign sales and the ability to procure products overseas.

In addition, China’s turnover tax system consists of value-added tax ("VAT"), consumption tax and business tax. Export sales are exempted under VAT rules and an exporter who incurs input VAT on the manufacture of goods can claim a tax rebate from Chinese tax authorities. Currently, our Chinese suppliers benefit from the tax rebates that China provides them to export their products. If these tax rebates are reduced or eliminated, some of our Chinese-sourced products could become more expensive for us, thereby reducing our profitability.

Fluctuations in the availability or price of raw materials, products, and fuel resources could significantly reduce our revenues and profitability.

As a distributor of manufactured products, our profitability is related to the prices we pay to the suppliers from which we purchase our products and to the cost of transporting the products to us and our customers. The price that our suppliers charge us for our products is dependent in part upon the availability and cost of the raw materials used to produce those products. Such raw materials are often subject to price fluctuations, frequently due to factors beyond our control, including changes in supply and demand, U.S. and global economic conditions, labor costs, competition and government regulations. Increases in the cost of raw materials, such as copper, oil, stainless steel, aluminum, zinc, plastic and polyvinyl chloride ("PVC") and other commodities and raw materials have occurred in the past and adversely impacted our operating results. In addition, transportation prices are significantly dependent on fuel prices, which generally change due to factors beyond our control, such as changes in worldwide demand, disruptions in supply, changes in the political climate in the Middle East and other regions and changes in government regulations, including existing and pending legislation and regulations relating to climate change. For example, efforts to combat climate change through reduction of greenhouse gases may result in higher fuel costs through taxation or other means.

Fluctuations in raw materials and fuel prices may increase our costs and significantly reduce our revenues and profitability. We deliver a significant volume of products to our customers by truck. Our operating margin may be adversely affected if we are unable to obtain the fuel we require or offset the anticipated impact of higher fuel prices through other means. The nature and extent of such an impact is difficult to predict, quantify and measure. To the extent the costs of products increase or decrease, the prices we charge for our products may correspondingly increase or decrease, potentially affecting our revenues and profitability.


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Loss of supplier agreements, delivery sources or product supplies could decrease our revenues and profitability.

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 with limited notice and for any reason. In general, our products are obtainable from various sources and in sufficient quantities; however, the loss of several supplier agreements, or a substantial decrease in the availability of products from our suppliers, could have a short-term material impact on our business.

During the year ended December 26, 2014, we sourced products from approximately 2,600 key suppliers located in various countries around the world. Our two largest suppliers accounted for approximately 6.1% and 5.7% of our total purchases, respectively. No other individual supplier represented more than 5% of our total purchases. Loss of a key supplier could disrupt our supply chain for several months or longer, and loss of key suppliers from an individual country could result in disruptions extending beyond several months. Short and long-term disruptions in our supply chain would result in higher inventory levels as we replace similar products, a higher cost of product and ultimately a decrease in our revenues and profitability. Although we are not substantially dependent on any individual supplier, a disruption in the timely availability of our product by our key suppliers could result in a decrease in our revenues and profitability.

A change in supplier rebates could adversely affect our income and gross margins.

The terms on which we purchase products from many of our suppliers entitle us to receive a rebate based on the volume of our purchases. These rebates effectively reduce our costs for products. If market conditions change, suppliers may adversely change the terms of some or all of these programs. Although these changes would not affect the recorded costs of products already purchased, they may lower our gross margins on products we sell or income we realize in future periods. Further, if we fail to meet specified volume thresholds for certain suppliers, we may not receive the most favorable rebates available, which could increase our expected costs and decrease our gross margins.

In some cases, we are dependent on long supply chains, which may subject us to interruptions in the supply of many of the products that we distribute.

A significant portion of the products that we distribute are imported from foreign countries, including China. Thus, we are dependent on long supply chains for the successful delivery of many of our products. The length and complexity of these supply chains make them vulnerable to numerous risks, many of which are beyond our control, which could cause significant interruptions or delays in delivery of our products, or markedly increase our inventory requirements. Factors such as shortages of raw materials, labor disputes, currency fluctuations, changes in tariff or import policies, natural or man-made disasters, severe weather, security procedures, terrorist attacks or other threats or armed hostilities may disrupt these supply chains. In addition to these factors, loading container cargo in certain ports can be disrupted or delayed by congestion in port terminal facilities, inadequate equipment to load, dock and offload container vessels or energy-related tie-ups. In any such case, our product shipments will be delayed. We expect more of our name brand and exclusive brand products will be imported in the future, which will further increase these risks. A significant interruption in our supply chains caused by any of the above factors could result in increased costs or delivery delays which in turn would result in a decrease in our revenues and profitability.

The nature of our business exposes us to potential product quality and liability claims as well as other legal proceedings, which could have a material adverse effect on our business, financial conditions and operating results.

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-parties, we are exposed to risks related 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 or property damage, subjecting us to potential claims from customers or third parties. We have been subject to such claims in the past, which have been resolved without material financial impact. 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, and could result in settlement payments and adjustments not covered by or in excess of insurance. In addition, we may not be able to obtain insurance on terms acceptable to us or at all. An unsuccessful product liability defense could be very costly and could result in a decline in revenues and profitability. In addition, uncertainties with respect to foreign legal systems may adversely affect us in resolving claims arising from our exclusive brand products manufactured outside of the United States. Finally, 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 which may adversely impact our revenues and profitability.

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We also operate a large fleet of trucks and other vehicles and therefore face the risk of automobile accidents. While we currently maintain insurance coverage to address a portion of these types of liabilities, we cannot make assurances 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.

We are involved from time to time in a number of legal proceedings, including government inquiries and investigations, as well as product liability, employment, tort, intellectual property, commercial, and other litigation. We cannot predict with certainty the outcomes of these legal proceedings and other contingencies. Furthermore, defending against these lawsuits and proceedings may involve significant expense and diversion of management's attention and resources from other matters.

Disruptions in our distribution centers could significantly lower our revenues and profitability.

Our distribution centers are essential to the efficient operation of our national distribution network. Any serious disruption to these distribution centers due to man-made or natural disasters including, among others, fire, earthquake, severe weather, acts of terrorism or any other cause, could damage a significant portion of our inventory and could materially impair our ability to distribute products to our customers. Moreover, we could incur significantly higher costs and longer lead times associated with delivering our products to our customers during the time that it takes for us to reopen or replace these centers. As a result, any such disruptions could significantly lower our revenues and profitability.

Work stoppages and other disruptions at transportation centers or shipping ports may adversely affect our ability to obtain inventory and make deliveries to our customers.

Our ability to rapidly process customer orders is an integral component of our overall business strategy. Interruptions at our company-operated facilities or disruptions at a major transportation center or shipping port, due to events such as severe weather, labor interruptions, natural disasters, security procedures, acts of terrorism or other events, could affect our ability to maintain core products in inventory, deliver products to our customers on a timely basis or adversely affect demand for our products, which may in turn adversely affect our results of operations.

We may not be able to facilitate our growth strategy by identifying or completing transactions with attractive acquisition candidates, which could impede our revenues and profitability.

Our acquisitions have contributed significantly to our growth. An important element of our growth strategy is to continue to seek additional businesses to acquire in order to add new customers and products within our existing markets or expand our product offerings into new or existing markets in an effort to further leverage our operating infrastructure. There can be no assurance that we will be able to identify attractive acquisition candidates or complete the acquisition of any identified candidates at favorable prices and upon advantageous terms and conditions. Furthermore, we believe that our industry is currently undergoing increased consolidation, thereby limiting the number of acquisition candidates, escalating competition for attractive acquisition candidates, and/or increasing the overall costs of making acquisitions. Difficulties we may face in identifying or completing acquisitions may result in the incurrence of debt and contingent liabilities, an increase in general operating expenses and significant charges related to integration costs, the occurrence of which could impede our revenue growth and profitability. In addition, we may not be able to obtain the financing necessary to complete acquisitions on terms favorable to us, or at all.

We may not be able to effectively integrate acquired businesses, which could have an adverse effect on our business, financial condition, results of operations and cash flows.

Acquisitions involve significant risks and uncertainties including, among others:

the assumption of liabilities and exposure to unforeseen liabilities of acquired companies;
uncertainties as to the future performance of the acquired business;
the potential loss of key employees, customers or suppliers;
difficulties integrating acquired personnel and other corporate cultures into our business;
difficulties associated with information technology conversions;
difficulties in achieving targeted synergies; and
the diversion of management attention and resources from existing operations.


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We may not be able to fully integrate the operations of JanPak and CleanSource, or any future acquired businesses with our own in an efficient and cost-effective manner or without significant disruption to our existing or acquired operations. Failure to integrate future acquired businesses effectively or to manage other consequences of our acquisitions, including increased indebtedness, could impede our ability to remain competitive and, ultimately, impact our financial condition, results of operations and cash flows.

An impairment of the carrying value of our goodwill or other intangible assets could adversely affect our financial condition and results of operations.

As of December 26, 2014, goodwill and other intangible assets represented approximately 56.9% of our total assets. The recoverability of goodwill and indefinite-lived intangibles is tested for impairment annually or more frequently if events or circumstances indicate that the carrying value may be impaired. A significant amount of judgment is involved in determining if an indication of impairment exists. Factors may include, among others: a significant decline in our expected future cash flows; a significant adverse change in legal factors or the business climate; unanticipated competition; slower growth rates; or a significant adverse change in the extent or manner in which the asset is being used. Any adverse change in these factors could have a material impact on the recoverability of these assets, which could negatively affect our financial condition and consolidated results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates — Goodwill, Intangibles and Other Long-Lived Assets" for additional information related to the recoverability and impairment tests performed for these assets.

We cannot accurately predict the amount and timing of any impairment of assets or whether indefinite-lived intangibles will convert to definite-lived and corresponding amortization will be recorded. Should the value of goodwill or other intangible assets become impaired, or should we determine that certain intangible assets have definite lives, there could be an adverse effect on our financial condition and consolidated results of operations.

We may be subject to disruptions in our information technology systems including data and security breaches which could adversely impact operations.

Our operations are dependent upon information technology that encompasses all of our major business functions. We rely upon these information technology systems 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. As part of our business, we collect, process and retain sensitive and confidential personal information about our customers, employees and suppliers. Furthermore, information technology plays a key role in our ability to achieve operating and financial efficiencies. Despite the implementation of network security measures that we have in place, our facilities and systems, and those of our third-party service providers with which we do business, may be vulnerable to security breaches, cyber-attacks, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors or other similar events. Any security breach involving the misappropriation, loss or other unauthorized disclosure of our confidential information or confidential information of our customers, employees, or suppliers, whether by us or by our third-party service providers with which we do business, could disrupt our business, expose us to risks of litigation and liability, result in a loss of assets or cause reputational damage. Any substantial disruption of our information technology for a prolonged time period could impair our ability to process orders, maintain proper levels of inventories, manage customer billings and collections, prepare and present accurate financial statements and related information, identify business opportunities and otherwise manage our business.

Information technology systems maintenance, enhancements, and compliance with regulatory requirements require substantial ongoing capital expenditures and could involve execution and operational risk to our business.

Information technology plays an increasingly important role in the distribution industry and is central in maintaining a competitive advantage. We have long recognized the importance of technology and have consistently invested in information technology to differentiate ourselves from our competitors and make us even more relevant to customers. The pace of this investment is expected to continue, and most likely increase, as we continue to improve our business through the deployment of new technology. Future technology enhancements - which may be required to achieve our long-term growth plans - are continually planned in many areas of our business. These enhancements may require substantial capital expenditures, and the implementation of any new technology carries execution and operational risk. Failure to secure and implement sufficient new technologies to deliver business process solutions may adversely impact our business and operations. Furthermore, there can be no assurance that the implementation of such initiatives will provide the intended benefits. In addition, the regulatory environment related to information security, data collection and privacy is increasingly rigorous, with new and constantly changing requirements applicable to our business, and compliance with those requirements could result in additional costs.

18



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 carriers such as UPS and other national shippers as well as various local and regional trucking contractors and logistics consulting and management companies. Outsourcing this activity generates a number of risks, including decreased control over the delivery process and service timeliness and quality. 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, which may result in significantly increased expenses and delivery delays. Furthermore, the need to identify and qualify substitute service providers or increase our internal capacity could result in unforeseen operational problems and additional costs. If demand for our products increases, we may be unable to secure sufficient additional capacity from our current suppliers, or others, on commercially reasonable terms, if at all. An inability to effectively manage our third-party service providers, fulfill customer orders and meet customer demands could result in lost sales and damage to our reputation, which could negatively affect our business and results of operations.

The loss of any of our significant customers could significantly reduce our revenues and profitability.

Our 10 largest customers generated approximately $133.1 million, or approximately 8%, of our sales in the fiscal year ended December 26, 2014, and our largest customer accounted for approximately 1% of our sales during the same period. There can be no assurance that we will maintain or improve our relationships with these customers or that we will continue to supply these customers at historic levels. The loss of one or more of our significant customers or deterioration in our relations with any of them could significantly reduce our revenues and profitability.

Our allowance for doubtful accounts may prove inadequate to cover actual losses.

A significant portion of our net sales are facilitated through the extension of credit; therefore, our business depends on the creditworthiness of our customers. We maintain allowances for doubtful accounts for estimated losses on trade receivables resulting from the inability to collect outstanding amounts due from our customers. We continuously review the adequacy of our allowance for doubtful accounts with consideration given to economic conditions and trends, the financial condition of our customers, and credit quality indicators, including the age of accounts receivable as well as historical collection and charge-off experience.

The current economic environment is dynamic and the creditworthiness of our customers can change significantly within very short periods of time. Our allowance may not keep pace with changes in the creditworthiness of our customers which is generally dependent upon economic and industry trends specific to the markets in which they operate. We cannot be certain that our allowance for doubtful accounts will be adequate over time to cover losses in our accounts receivable because of adverse changes in the economy or events adversely affecting specific customers, industries or markets.

Any significant or unforeseen changes to our credit exposure, including a material decrease in the credit quality of our customers, could adversely affect our financial condition and results of operations.

The departure of existing senior management and key personnel or a decline in our ability to attract and retain skilled employees or qualified sales professionals could hinder our growth and materially affect our financial condition and results of operations.

Our success depends in part on our ability to attract, hire, train and retain qualified managerial, operational, sales, marketing and support personnel. We face significant competition for these types of personnel in our industry. As a result, we may be unsuccessful in attracting and retaining the personnel we require to conduct and expand our operations successfully which could adversely affect our revenues and profitability. In addition, key personnel may leave us and compete against us. 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 or other qualified employees could impair our ability to execute our business plan and growth strategy, cause us to lose customers and reduce our net sales, or lead to employee morale problems and/or the loss of other key employees. In any such event, our financial condition and results of operations could be adversely affected.


19



Our ability to compete effectively may be adversely affected if we are unable to protect our intellectual property rights, particularly trademarks and service marks.

We believe that our trademarks (including both trademarks and service marks) are important to the success of our business and our competitive position within the markets we serve. For instance, we market and sell products primarily through thirteen distinct and targeted brands/service marks: Wilmar®, Barnett®, AmSan®, JanPak®, CleanSource®, Sexauer®, Hardware Express®, Copperfield®, Maintenance USA®, U.S. Lock®, LeranSM, Trayco®, and AF Lighting®. We also sell various private label products under registered tradenames, including Premier™, Pro Plus™, and Renown™.

Accordingly, we devote resources to the establishment and protection of our trademarks and our exclusive brand products. However, the actions we have taken may prove inadequate to prevent imitation and/or infringement of our trademarks by others or to prevent others from claiming violations of their trademarks and proprietary rights by us. Our rights in our trademarks may be subject to change based on the rights of others whose actual or constructive use of such trademark (or a confusingly similar mark) commenced before the date our rights vested. Future actions by third parties may diminish the strength of our trademarks or limit our ability to use our trademarks, thereby undermining our competitive position.

The interests of our equity sponsors may differ from the interests of the Company or other company stakeholders.

As a result of the Merger, the Company’s common stock became privately-held and substantially owned by certain private equity investment funds affiliated with GS Capital Partners VI Fund, L.P. and its related entities (“GS Capital Partners”) and P2 Capital Partners, LLC and its related entities (“P2 Capital Partners”). These private equity investment funds have the power, subject to certain exceptions, to direct the Company’s affairs and policies and to elect a majority of the members of our Board of Directors. Through such representation on our Board of Directors, they are able to substantially influence the appointment of management and entry into extraordinary transactions, including mergers and sales of assets.

The interests of GS Capital Partners and P2 Capital Partners could conflict with the interests of the note holders or our creditors. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of GS Capital Partners and P2 Capital Partners as equity holders might conflict with the interests of the note holders or creditors. GS Capital Partners and P2 Capital Partners may also have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity investments, despite the potential for increased risks for the note holders or creditors. In addition, GS Capital Partners and P2 Capital Partners or their respective affiliates may in the future own businesses that directly or indirectly compete with us, our suppliers, or our customers.

Our costs of doing business could increase as a result of changes in U.S. federal, state or local regulations.
 
Our operations are principally affected by various statutes, regulations and laws in which we operate. We are subject to various laws applicable to businesses generally, including laws affecting products, the environment, health and safety, transportation, labor and employment practices, competition, immigration and other matters Changes in U.S. federal, state or local regulations governing the sale of some of our products could increase our costs of doing business. In addition, changes to U.S. federal, state and local tax regulations could increase our costs of doing business. We cannot provide assurance that we will not incur material costs or liabilities in connection with regulatory requirements.

We cannot predict whether future developments in law and regulations concerning us will affect our business, financial condition and results of operations in a negative manner. Similarly, we cannot assess whether we will be successful in meeting future demands of regulatory agencies in a manner which will not materially adversely affected our business, financial condition or results of operations.

20



Risks Relating to Our Indebtedness

Our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our obligations.
    
As of December 26, 2014, our total indebtedness was $796.9 million comprised of $365.0 million in outstanding HoldCo Notes, a $346.6 million Term Loan Facility, and $74.0 million outstanding on the ABL Facility. Other components of our total indebtedness included outstanding letters of credit in the amount of $11.3 million and capital lease obligations of $0.01 million. As of the same date, cash and cash equivalents were $6.1 million and there was $209.7 million in availability under the ABL Facility. Our substantial indebtedness could have important consequences to our financial health including, but not limited to:

increased vulnerability to general adverse economic and industry conditions or a downturn in our business;
limited flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
a competitive disadvantage compared to our competitors that are not as highly leveraged;
difficulties related to satisfying our obligations with respect to the HoldCo Notes, Term Loan Facility, ABL Facility, and our other indebtedness;
reduced availability of cash flows to fund working capital, capital expenditures and general corporate purposes as a result of debt service requirements;
limited capacity to borrow additional funds, if needed; and
an event of default if we fail to satisfy our obligations under the HoldCo Notes, Term Loan Facility, the ABL Facility, or our other indebtedness or if we fail to comply with the financial other restrictive covenants contained in the indenture and agreements governing the ABL Facility, Term Loan Facility and other debt; such event of default could result in all of our debt becoming immediately due and payable and could permit certain of our lenders to foreclose on assets securing our indebtedness.

If our cash flow and capital resources are insufficient to fund our debt service obligations, including timely payment of principal and interest on our outstanding indebtedness, we may be required to reduce or delay capital expenditures, sell assets, seek to obtain additional capital or refinance all or part of our existing debt. There can be no assurance that we will be able to successfully complete any of these transactions or do so on favorable terms. Any of the above listed factors could have a material adverse effect on our business, financial condition and results of operations.

The agreements and indenture governing our debt include restrictive and financial covenants that may limit our operational flexibility.

The indenture governing the HoldCo Notes and the agreements governing the ABL Facility and Term Loan Facility, each contain covenants that, among other things, restrict our ability to take specific actions, even if we believe them to be in our best interest. These include restrictive covenants that limit, among other things, our ability to:

incur certain liens;
incur any additional indebtedness;
consolidate, merge, or sell assets or enter into other business combination transactions;
make certain restricted payments, such as paying dividends, making distributions on, redeeming or repurchasing stock;
make certain investments, including acquisitions and capital expenditures;
amend the terms of certain subordinated indebtedness;
enter into transactions with affiliates;
enter into sale leaseback transactions;
use proceeds from sale of assets;
limit the payment of dividends by our subsidiaries;
prepay, redeem or repurchase certain indebtedness; and
change our business.

In addition, the ABL Facility requires the Company and its restricted subsidiaries, on a consolidated basis, to maintain a fixed charge coverage ratio (defined as the ratio of EBITDA, as defined in the credit agreement, to the sum of cash interest, principal payments on indebtedness and accrued income taxes, dividends or distributions and repurchases, redemptions or retirement of the equity interest of the Company) of at least 1.00:1.00 when the excess availability is less than or equal to the greater of: (i) 10% of the total commitments under the ABL Facility; and (ii) $25.0 million.



21


See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation - Liquidity and Capital Resources - ABL Credit Facility” “- Term Loan Facility” and “- HoldCo Notes” and Note 10. Debt for additional information related to the Company’s outstanding debt.

Despite our current indebtedness levels, we may incur substantial additional indebtedness.

We may incur substantial additional indebtedness in the future to finance acquisitions, investments, or for other purposes, subject to the restrictions contained in the documents governing our current outstanding indebtedness. For example, based on year-end inventory and trade accounts receivable balances as of December 26, 2014 we were able to incur up to a maximum of $209.7 million in additional indebtedness under the ABL Facility. Although the ABL Facility, the indenture and our other debt agreements contain some limitations on our ability to incur indebtedness, we may still incur substantial indebtedness to refinance existing indebtedness or for other purposes. If new debt is added to our current indebtedness levels, the substantial leverage risks that we now face could intensify.

Major disruptions and volatility in the capital and credit markets may impact our ability to secure sufficient financing on favorable terms.

The availability of financing is dependent on numerous factors, some of which are beyond our control, including, but not limited to, general economic conditions and the volatility of the capital and credit markets. We may not able to obtain additional financing on favorable terms, or at all, which could have a material adverse effect on our business, including the ability to make acquisitions and execute our growth strategies. Furthermore, if our operating results, cash flow or capital resources prove inadequate, or if interest rates increase significantly, we could face substantial liquidity problems, which may impede our ability to seek additional capital in a timely manner or refinance our existing debt on favorable terms. If we are unable to service our debt, we could be forced to reduce or delay planned capital expenditures, sell assets, restructure or refinance our debt or seek additional equity capital. There can be no assurance that any of these actions will be sufficient to allow us to service our debt obligations or that such actions will not result in an adverse impact on our business. In addition, the terms of the ABL Facility, Term Loan Facility and the indenture governing the HoldCo Notes and any future indebtedness may limit our ability to take certain of these actions thereby adversely impacting our results of operations and financial condition.

ITEM 1B. Unresolved Staff Comments

None.


22


ITEM 2. Properties

We operate from 177 locations throughout the United States, Canada and Puerto Rico consisting of 67 distribution centers, 21 free-standing professional contractor showrooms, 72 vendor-managed inventory locations, twelve administrative and support facilities and five cross-dock facilities.

We lease 100 properties. The majority of these leases are for varying term lengths up to twelve years. We own a call center located in Jacksonville, Florida and distribution centers in Long Island, New York, and Bluefield, West Virginia, all of which have attached administrative and support facilities. We also own distribution centers in Bristol, Tennessee, and Piedmont, South Carolina. None of the owned properties are subject to any mortgages; however, our call center in Jacksonville, Florida is subject to a development agreement with the City of Jacksonville. Our 72 vendor-managed inventory locations are customer-specific locations whereby we assist those customers with their MRO inventory management process.

We believe that our properties are in good operating condition and adequately serve our current business operations.

The ranges in size of the locations we operate are as follows (not including vendor-managed inventory locations and cross-dock facilities):
            
 
Size
 
(in square feet)
Distribution centers
6,000


384,000

Professional contractor showrooms
2,600


33,700

Administrative and support facilities
3,200


72,900



23


The following table sets forth the states, territories and provinces in which we operate (not including vendor-managed inventory locations and cross-dock facilities):

Location
 
Distribution Centers
 
Professional Contractor Showrooms
 
Administrative and Support Locations
U.S. State
 
 
 
 
 
 
Alabama
 
2

 

 
1

Arizona
 
1

 

 

California
 
5

 
2

 

Colorado
 
3

 
1

 

Florida
 
5

 
6

 
2

Georgia
 
3

 

 
1

Illinois
 
3

 

 

Indiana
 
1

 

 

Iowa
 

 
1

 
2

Kansas
 
1

 

 

Kentucky
 
1

 

 

Louisiana
 
1

 

 

Massachusetts
 
1

 
1

 

Michigan
 
1

 

 

Minnesota
 
1

 

 

Missouri
 

 
1

 

Montana
 

 
2

 

Nebraska
 
1

 

 
1

Nevada
 
1

 
1

 

New Jersey
 
1

 

 
1

New York
 
1

 

 
1

North Carolina
 
3

 

 
1

Ohio
 
2

 
2

 

Oklahoma
 
2

 

 
1

Oregon
 
1

 
1

 
1

Pennsylvania
 
2

 

 

South Carolina
 
4

 

 

Tennessee
 
2

 
1

 

Texas
 
9

 
1

 

Utah
 

 
1

 

Virginia
 
1

 

 

Washington
 
4

 

 

West Virginia
 
2

 

 

Subtotal
 
65

 
21

 
12

U.S. Territory
 
 
 
 
 
 
Puerto Rico
 
1

 

 

Subtotal
 
1

 

 

Canadian Province
 
 
 
 
 
 
Ontario
 
1

 

 

Subtotal
 
1

 

 

Total
 
67

 
21

 
12


24


ITEM 3. Legal Proceedings

In May 2011, we were named as a defendant in the case of Craftwood Lumber Company v. Interline Brands, Inc. ("Craftwood Matter"), filed before the Nineteenth Judicial Circuit Court of Lake County, Illinois, and subsequently removed to the United States District Court for the Northern District of Illinois ("the Court"). The complaint alleges that we sent unsolicited fax advertisements to businesses nationwide in violation of the Telephone Consumer Protection Act of 1991, as amended by the Junk Fax Prevention Act of 2005 (“Junk Fax Act”). At the time of filing the initial complaint in state court, the plaintiff also filed a motion asking the Court to certify a class of plaintiffs comprised of businesses who allegedly received unsolicited fax advertisements from us during the four-year statute of limitations period. In its amended complaint filed in the United States District Court, the plaintiff seeks preliminary and permanent injunctive relief enjoining the Company from violating the Junk Fax Act, as well as statutory damages for each fax transmission found to be in violation of the Junk Fax Act. On November 17, 2014, we filed a joint notice of settlement with the
Court advising them of the settlement of the Craftwood Matter. Under the terms of the settlement agreement we agreed to total settlement consideration of $40.0 million, representing an after tax payment of $24.3 million. The settlement has been preliminarily approved by the Court and is awaiting final approval.

As part of this matter, a pre-tax charge of $20.5 million was recorded in the third quarter of 2013 and an additional $19.5 million pre-tax charge was recorded in the fourth quarter of 2014 and is included in selling, general and administrative expenses in the statements of operations for the fiscal years ended December 27, 2013 and December 26, 2014, respectively. Please refer to Note 15. Commitments and Contingencies to our audited consolidated financial statements included in Item 8 of this annual report for additional information.

We are involved in various other legal proceedings that have arisen in the ordinary course of our business and have not been fully adjudicated. These actions, when ultimately concluded and determined, will not, in the opinion of management, have a material effect upon our consolidated financial statements.

Because the outcome of litigation is inherently uncertain, we may not prevail in these proceedings and we cannot estimate our ultimate exposure in such proceedings if we do not prevail. Accordingly, any rulings against us in the above proceedings could have a material adverse effect on our financial performance and liquidity.

ITEM 4. Mine Safety Disclosures

None.



PART II

ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

From December 16, 2004 through September 7, 2012, our common stock was publicly traded on the New York Stock Exchange (“NYSE”) under the symbol “IBI”. Subsequent to the Merger transaction, our outstanding common stock became privately-held, and therefore there is no established public trading market.

Holders

As of February 20, 2015, there were approximately 102 holders of record of our outstanding common stock.

Dividends

We have never declared dividends on our common stock. Our ability to declare and pay dividends on our common stock is subject to the requirements of Delaware law. In addition, we are a parent company with no business operations of our own. Accordingly, our sources of cash are dividends and distributions with respect to our ownership interest in Interline New Jersey that are derived from the earnings and cash flow generated by our businesses. Our ability to pay dividends to stockholders and the ability of Interline New Jersey to pay dividends to us is restricted under the ABL Facility, the HoldCo Notes, and the Term Loan Facility. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources" for a more detailed description of our debt instruments.

Unregistered Sales of Equity Securities

During the period from September 28, 2014 through December 26, 2014, the Company sold 20,095 shares of unregistered equity securities. The sale of the Company's common stock was not subject to any underwriting discount or commission. The common stock was privately offered and sold to employees of the Company, pursuant to Rule 506 of Regulation D, and the sales were exempt from registration under the Securities Act of 1933. The transactions did not involve any public offering and were sold to a limited group of persons. Each recipient either received adequate information about the Company or had access, through employment or other relationships, to such information, and the Company determined that each recipient had such knowledge and experience in financial and business matters that they were able to evaluate the merits and risks of an investment in the Company. For more information see “Item 8. Financial Statements and Supplementary Data - Consolidated Statements of Stockholders’ Equity” and “- Note 12. Stockholder’s Equity” and “-Note 13. Share-Based Compensation.”  

Purchases of Equity Securities by the Issuer

During the period from September 28, 2014 through December 26, 2014, the Company repurchased 1,861 shares representing shares tendered in satisfaction of the exercise price and tax withholding obligations related to the non-cash exercise of stock options during the period. For more information see “Item 8. Financial Statements and Supplementary Data - Consolidated Statements of Stockholders’ Equity” and “- Note 12. Stockholder’s Equity”. 


26


ITEM 6. Selected Financial Data

The table below presents our selected historical consolidated financial data (in thousands) for fiscal periods 2014, 2013, 2012, 2011 and 2010. The information presented below should be read in conjunction with Item 7. “Management's Discussion and Analysis of Financial Conditions and Results of Operations” and the consolidated financial statements included elsewhere in this report.

 
Successor
 
 
Predecessor
 
Fiscal Year Ended
 
For the period September 8, 2012 through December 28, 2012 (1)(3)
 
 
For the period December 31, 2011 through September 7, 2012 (2)(3)
 
Fiscal Year Ended
 
December 26, 2014
 
December 27, 2013
 
 
 
 
December 30, 2011 (3)
 
December 31, 2010 (3)(4)
Income Statement Data:
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
$
1,676,221

 
$
1,598,055

 
$
404,593

 
 
$
917,752

 
$
1,249,484

 
$
1,086,989

Cost of sales
1,094,578

 
1,045,084

 
256,349

 
 
584,033

 
787,017

 
672,745

Gross profit
581,643

 
552,971

 
148,244

 
 
333,719

 
462,467

 
414,244

Operating expenses(5)
529,729

 
508,651

 
168,011

 
 
292,165

 
378,493

 
339,060

Operating income (loss)
51,914

 
44,320

 
(19,767
)
 
 
41,554

 
83,974

 
75,184

Impairment of other intangible assets
(67,500
)
 

 

 
 

 

 

Loss on extinguishment
   of debt, net
(4,257
)
 

 

 
 
(2,214
)
 

 
(11,486
)
Interest and other expense, net
(58,195
)
 
(61,507
)
 
(19,180
)
 
 
(15,132
)
 
(22,463
)
 
(16,948
)
(Loss) income before income
  taxes
(78,038
)
 
(17,187
)
 
(38,947
)
 
 
24,208

 
61,511

 
46,750

Income tax (benefit) provision
(30,966
)
 
(10,847
)
 
(10,503
)
 
 
11,384

 
23,837

 
18,829

Net (loss) income
$
(47,072
)
 
$
(6,340
)
 
$
(28,444
)
 
 
$
12,824

 
$
37,674

 
$
27,921

 
 
 
 
 
 
 
 
 
 
 
 
 
Cash Flow Data:
 
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in):
 
 
 
 
 
 
 
 
 
 
 
 
Operating activities
$
33,940

 
$
20,931

 
$
3,908

 
 
$
25,118

 
$
72,417

 
$
60,760

Investing activities
(17,437
)
 
(18,738
)
 
(913,965
)
 
 
(15,244
)
 
(28,966
)
 
(71,131
)
Financing activities
(16,213
)
 
(11,612
)
 
819,583

 
 
660

 
(33,715
)
 
(2,016
)
Capital expenditures
17,437

 
18,738

 
5,748

 
 
11,966

 
19,371

 
17,729

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Data (as of end of period):
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
6,064

 
$
6,102

 
$
15,801

 
 
N/A

 
$
95,673

 
$
86,981

Total assets
1,460,622

 
1,517,733

 
1,523,233

 
 
N/A

 
1,036,458

 
1,007,609

Total debt(6)
785,609

 
798,588

 
814,741

 
 
N/A

 
301,395

 
314,871

Stockholders' equity
316,517

 
356,853

 
357,470

 
 
N/A

 
514,445

 
496,232

 
 
 
 
 
 
 
 
 
 
 
 
 
Other Data:
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
$
53,814

 
$
50,038

 
$
12,837

 
 
$
17,707

 
$
23,739

 
$
20,612

Adjusted EBITDA(7)
141,802

 
134,144

 
37,610

 
 
84,132

 
117,158

 
107,094

____________________
(1)
As a result of the Merger, we applied the acquisition method of accounting, which established a new accounting basis as of September 8, 2012. The financial results for the period September 8, 2012 through December 28, 2012 represent the 16-week Successor Period subsequent to the Merger.    

27


(2)
As a result of the Merger, we applied the acquisition method of accounting, which established a new accounting basis as of September 8, 2012. The financial results for the period December 31, 2011 through September 7, 2012 represent the 36-week Predecessor Period prior to the Merger.    

(3)
We acquired JanPak in December 2012, NCP in January 2011, and CleanSource in October 2010. Their results have been included in the financial statements since each respective acquisition date.

(4)
Fiscal year ended December 31, 2010 was a 53-week year. All other years presented were 52-week years, with the exception of 2012, which is presented as Successor and Predecessor Periods.

(5)
Included in operating expenses were Merger related costs of $0.1 million for the fiscal year ended December 26, 2014, $1.4 million for the fiscal year ended December 27, 2013, $39.6 million for the period September 8, 2012 through December 28, 2012 (Successor Period), and $19.0 million for the period December 31, 2011 through September 7, 2012 (Predecessor Period). There were no Merger related costs in 2011, nor 2010.

(6)
Total debt represents the amount of our short-term debt and long-term debt and short and long-term capital leases.

(7)
We present EBITDA, as shown below, and Adjusted EBITDA herein because we believe it to be relevant and useful information to our investors since it is consistently used by our management to evaluate the operating performance of our business and to compare our operating performance with that of our competitors. Management also uses EBITDA and Adjusted EBITDA for planning purposes, including the preparation of annual operating budgets, and to determine appropriate levels of operating and capital investments. We utilize EBITDA and Adjusted EBITDA as a useful alternative to net (loss) income as an indicator of our operating performance compared to the Company's plan. However, EBITDA and Adjusted EBITDA are not measures of financial performance under accounting principles generally accepted in the United States of America (“US GAAP”). Accordingly, EBITDA and Adjusted EBITDA should not be used in isolation or as substitutes for other measures of financial performance reported in accordance with US GAAP, such as gross margin, operating income, net income, cash flows from operating, investing and financing activities or other income or cash flow statement data prepared in accordance with US GAAP.

EBITDA is defined as net (loss) income adjusted to:
exclude interest expense, net of interest income;
exclude (benefit) provision for income taxes; and
exclude depreciation and amortization.

Adjusted EBITDA is defined as EBITDA adjusted to:
exclude Merger related expenses associated with the acquisition of the Company by affiliates of GS Capital Partners and P2 Capital Partners;
exclude share-based compensation, which is comprised of non-cash compensation expense arising from the grant of equity incentive awards;
exclude impairment of other intangible assets, which is comprised of excess carrying value over fair value for certain trademark assets determined to have a definite life during 2014;
exclude loss on extinguishment of debt, net, which is comprised of net losses associated with specific significant financing transactions, such as writing off the deferred financing costs associated with refinancing previous credit facilities and indentures as well as tender premiums and transaction costs associated with refinancing previous indentures;
exclude distribution center consolidations and restructuring costs, which are comprised of facility closing costs, such as lease termination charges, property and equipment write-offs and headcount reductions, incurred as part of the rationalization of our distribution network, as well as employee separation costs, such as severance charges, incurred as part of a restructuring;
exclude acquisition-related costs, which includes our direct acquisition-related expenses, including legal, accounting and other professional fees and expenses arising from acquisitions, as well as severance charges and stay bonuses, offset by the fair market value adjustments to earn-outs;
exclude litigation related costs associated with the class action lawsuit filed by Craftwood Lumber Company in 2011 and other nonrecurring litigation related costs; and
exclude the non-cash impact on rent expense associated with the effect of straight-line rent expense on leases.

We believe EBITDA and Adjusted EBITDA allow management and investors to evaluate our operating performance without regard to the adjustments described above which can vary from company to company depending upon the acquisition history, capital intensity, financing options and the method by which its assets were acquired. While adjusting for these items limits the usefulness of these non-GAAP measures as performance measures because they do not reflect all the related expenses we incurred, we believe adjusting for these items and monitoring our performance with and without them helps management and investors more meaningfully evaluate and compare the results of our operations from period to period and to those of other

28


companies. Actual results could differ materially from those presented. We believe these items for which we are adjusting are not indicative of our core operating results. These items impacted net income over the periods presented, which makes direct comparisons between years less meaningful and more difficult without adjusting for them. While we believe that some of the items excluded in the calculation of EBITDA and Adjusted EBITDA are not indicative of our core operating results, these items did impact our income statement during the relevant periods, and management therefore utilizes EBITDA and Adjusted EBITDA as operating performance measures in conjunction with other measures of financial performance under US GAAP such as net income.
    
The reconciliation of EBITDA and Adjusted EBITDA to the most directly comparable US GAAP financial measure, which is net (loss) income, is as follows (in thousands):

 
Successor
 
 
Predecessor
 
Fiscal Year Ended
 
For the period September 8, 2012 through December 28, 2012
 
 
For the period December 31, 2011 through September 7, 2012
 
Fiscal Year Ended
 
December 26, 2014
 
December 27, 2013
 
 
 
 
December 30, 2011
 
December 31, 2010
EBITDA
 
 
 
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(47,072
)
 
$
(6,340
)
 
$
(28,444
)
 
 
$
12,824

 
$
37,674

 
$
27,921

Interest expense, net
59,099

 
63,042

 
19,758

 
 
16,613

 
24,327

 
18,572

(Benefit) provision for income taxes
(30,966
)
 
(10,847
)
 
(10,503
)
 
 
11,384

 
23,837

 
18,829

Depreciation and amortization
53,814

 
50,038

 
12,837

 
 
17,707

 
23,739

 
20,612

EBITDA
34,875

 
95,893

 
(6,352
)
 
 
58,528

 
109,577

 
85,934

 
 
 
 
 
 
 
 
 
 
 
 
 
EBITDA Adjustments
 
 
 
 
 
 
 
 
 
 
 
 
Impairment of other intangible assets
67,500

 

 

 
 

 

 

Loss on extinguishment of debt, net
4,257

 

 

 
 
2,214

 

 
11,486

Merger related expenses
102

 
1,377

 
39,641

 
 
19,049

 

 

Share-based compensation
3,720

 
5,330

 
2,945

 
 
3,922

 
5,935

 
4,533

Distribution center consolidations and restructuring costs
7,459

 
8,307

 
484

 
 
323

 
1,354

 
4,676

Acquisition-related costs, net
1,496

 
372

 
610

 
 
96

 
292

 
465

Litigation-related costs
21,604

 
21,841

 

 
 

 

 

Impact of straight-line rent expense
789

 
1,024

 
282

 
 

 

 

Adjusted EBITDA
$
141,802

 
$
134,144

 
$
37,610

 
 
$
84,132

 
$
117,158

 
$
107,094




29


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” described on page 1 of this annual report. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including the risks described elsewhere in this report under Item 1A. Risk Factors.

Overview

We are a leading national distributor and direct marketer of broad-line maintenance, repair and operations (“MRO”) products. We have one operating segment, the distribution of MRO products into the facilities maintenance end-market. We stock approximately 100,000 MRO products in the following categories: janitorial and sanitation (“JanSan”); plumbing; hardware, tools and fixtures; heating, ventilation and air conditioning (“HVAC”); electrical and lighting; appliances and parts; security and safety; and other miscellaneous maintenance products. Our products are primarily used for the repair, maintenance, remodeling, and refurbishment of non-industrial and residential facilities.

Our diverse facilities maintenance customer base includes institutions, such as educational, lodging, health care, and government facilities; multi-family housing, such as apartment complexes; and residential, such as professional contractors, and plumbing and hardware retailers. Our customers range in size from individual contractors and independent hardware stores to apartment management companies and national purchasing groups.

We currently market and sell our products primarily through thirteen distinct and targeted brands, each of which is recognized in the facilities maintenance market they serve for providing quality products at competitive prices with reliable same-day or next-day delivery. The AmSan®, JanPak® , CleanSource®, Sexauer®, and Trayco® brands generally serve our institutional facilities customers;
the Wilmar® and Maintenance USA® brands generally serve our multi-family housing facilities customers; and the Barnett®, Copperfield®, U.S. Lock®, Hardware Express®, LeranSM and AF Lighting® brands generally serve our residential facilities customers. Our multi-brand operating model, which we believe is unique in the industry, allows us to use a single platform to deliver tailored products and services to meet the individual needs of each respective customer group served. During the second quarter of 2014, management made a strategic marketing decision to simplify our brand structure for our institutional customer base during 2015. This rebranding initiative is designed to consolidate our institutional brands under a single national brand name and increase brand awareness as a market leading institutional platform.

We reach our markets using a variety of sales channels, including a field sales force of approximately 1,160 associates, which includes sales management and related associates, approximately 470 inside sales and customer service and support associates, a direct marketing program consisting of catalogs and promotional flyers, brand-specific websites, a national accounts sales program, and other supply chain programs, such as vendor managed inventory. We deliver our products through our network of 67 distribution centers and 21 professional contractor showrooms located throughout the United States, Canada, and Puerto Rico, 72 vendor-managed inventory locations at large customer locations and a dedicated fleet of trucks and third party carriers. Our broad distribution network enables us to provide reliable, next-day delivery service to approximately 98% of the U.S. population and same-day delivery service to most major metropolitan markets in the U.S.

Our information technology and logistics platforms support our major business functions, allowing us to market and sell our products at varying price points depending on the customer’s service requirements. While we market our products under a variety of brands, generally our brands draw from the same inventory within common distribution centers and share associated employee and transportation costs. In addition, we have centralized marketing, purchasing and catalog production operations to support our brands. We believe that our information technology and logistics platforms also benefit our customers by allowing us to offer a broad product selection at highly competitive prices while maintaining the unique customer appeal of each of our targeted brands. Overall, we believe that our common operating platforms have enabled us to improve customer service, maintain lower operating costs, efficiently manage working capital and support our growth initiatives.

Merger Transaction
    
On September 7, 2012, pursuant to an Agreement and Plan of Merger dated as of May 29, 2012, Isabelle Holding Company Inc., a Delaware corporation, and Isabelle Acquisition Sub Inc., a Delaware corporation and a wholly-owned subsidiary of Parent, merged with and into the Company, with the Company surviving the Merger as a wholly-owned subsidiary of Parent. Immediately following the effective time of the Merger, Parent was merged with and into the Company with the Company surviving. Under the

30


Merger Agreement, stockholders of the Company received $25.50 in cash for each share of Company common stock. Please refer to Note 3. Transactions to our audited consolidated financial statements included in this annual report for further information about the Merger Agreement. Prior to the Merger Date, the Company operated as a public company with its common stock traded on the New York Stock Exchange. As a result of the Merger, Interline's common stock became privately-held.

Our primary business activities remain unchanged after the Merger. As a result of the Merger, we applied the acquisition method of accounting and established a new accounting basis on September 8, 2012. Although the Company continued as the same legal entity after the Merger, since the financial statements are not comparable as a result of acquisition accounting, the results of operations and related cash flows are presented for two periods: the period prior to the Merger and the period subsequent to the Merger.

In connection with the Merger, we incurred significant indebtedness and became more leveraged. In addition, the purchase price paid in connection with the Merger has been allocated to recognize the acquired assets and liabilities at fair value. The purchase accounting adjustments have been recorded to: (i) establish intangible assets for our trademarks and customer relationships, and (ii) revalue our OpCo Notes due 2018 (the "OpCo Notes") to fair value. Subsequent to the Merger, interest expense and non-cash amortization charges have significantly increased. As a result, our Successor financial statements subsequent to the Merger are not comparable to our Predecessor financial statements.

Acquisitions

On December 11, 2012, Interline New Jersey acquired all of the outstanding stock of JanPak for $82.5 million in cash, subject to working capital and other closing adjustments. JanPak, which is headquartered in Davidson, North Carolina, is a large regional distributor of janitorial and sanitation supplies and packaging products, primarily serving property management and building service contractors as well as manufacturing, health care and educational facilities through 16 distribution centers across the Southeast and South Central United States. This acquisition represents an expansion of the Company's offering of JanSan products in the Southeastern, Mid-Atlantic, and South Central United States.

Financing Transactions

On March 17, 2014, Interline New Jersey completed the following financing transactions:

entered into a first lien term loan under which Interline New Jersey incurred a term loan in an aggregate principal amount of $350.0 million (the "Term Loan Facility"); and
amended the asset-based senior secured revolving credit facility, dated as of September 7, 2012 (the “ABL Facility”), by entering into the First Amendment to Credit Agreement to permit the incurrence of the Term Loan Facility and make other changes in connection with the refinancing (the “First ABL Facility Amendment”).

The proceeds from the Term Loan Facility were used to finance the redemption of Interline New Jersey's $300.0 million OpCo Notes, the repayment of a portion of amounts outstanding under the ABL Facility and the payment of related fees, costs and expenses. In connection with the redemption of the OpCo Notes, the Company recorded a loss on early extinguishment of debt in the amount of $4.3 million during the year ended December 26, 2014. The loss was comprised of $18.6 million in consent solicitation, tender premium, call premium and related transaction costs less a non-cash benefit of $14.3 million associated with the write-off of the unamortized fair value premium of $17.8 million less the write-off of the unamortized deferred debt issuance costs of $3.5 million.

    On April 8, 2014, Interline New Jersey further amended the ABL Facility by entering into the Second Amendment to the Credit Agreement to amend certain pricing terms applicable to the ABL Facility and extend the maturity date to April 8, 2019, at which date the principal amount outstanding under the ABL Facility will be due and payable in full (the “Second ABL Facility Amendment”).
    
On December 10, 2014 Interline New Jersey further amended the ABL Facility to increase the aggregate commitments from $275.0 million to $325.0 million (the "Increase Agreement"). Except for this commitment increase, no other material terms were modified by the Increase Agreement.

Subsequent to December 26, 2014, the Company used a combination of cash on hand and borrowings under the recently amended ABL Facility to redeem $80.0 million of the $365.0 million outstanding aggregate principal amount of the HoldCo Notes.


31


Fiscal Year 2012

In connection with the Merger in 2012, the Company entered into the following financing transactions:

the ABL Facility, with an aggregate principal amount of up to $275.0 million;
the issuance of $365.0 million aggregate principal amount of senior notes (the "HoldCo Notes"); and
the modification of the OpCo Notes.

Simultaneously with the closing of the Merger, the following occurred: the funding of the new ABL Facility, the release of the net proceeds of the $365.0 million HoldCo Notes from escrow, the termination of the Company's previous $225.0 million asset-based revolving credit facility, and the modification of the OpCo Notes. See “Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources”, and Note 10. Debt included in Part II. Item 8 of this annual report for further information regarding our outstanding indebtedness.

As a result of the Merger, acquisitions and refinancing transactions described above, our historical financial results or results of operations may not be indicative of our financial results or results of operations in the future.

Purchases of Equity Securities by the Issuer

On August 15, 2011, the Company announced that its Board of Directors had authorized the repurchase of up to an aggregate amount of $25.0 million of the Company's common stock. As of December 30, 2011, the Company had repurchased 1,783,822 shares of common stock pursuant to the Authorization at an aggregate cost of $25.0 million, or an average cost of $14.01 per share, through open market transactions, thereby completing the amount of shares that may be purchased under the Authorization.

In connection with the Merger transaction, each share of common stock of Interline was canceled on September 7, 2012, and converted automatically into a right to receive $25.50 in cash, without interest.

During the fiscal year ended December 26, 2014 the Company repurchased 2,276 shares representing shares tendered in satisfaction of the exercise price and tax withholding obligations related to the non-cash exercise of stock options during the period.


32


Results of Operations

Comparison of the operating results for the fiscal year ended December 26, 2014 to the fiscal year ended December 27, 2013

The following table presents information derived from the consolidated statements of operations for the fiscal years ended December 26, 2014 and December 27, 2013 expressed as a percentage of net sales.
 
 
% of Net Sales
 
 
For the fiscal year ended
 
 
 
 
December 26, 2014
 
December 27, 2013
 
% Increase (Decrease) (1)
Net sales
 
100.0
 %
 
100.0
 %
 
4.9
 %
Cost of sales
 
65.3

 
65.4

 
4.7

Gross profit
 
34.7

 
34.6

 
5.2

 
 
 
 
 
 
 
Operating Expenses:
 
 
 
 
 
 
Selling, general and administrative expenses
 
28.4

 
28.6

 
4.1

Depreciation and amortization
 
3.2

 
3.1

 
7.5

Merger related expenses
 

 
0.1

 
(92.6
)
Total operating expenses
 
31.6

 
31.8

 
4.1

Operating income
 
3.1

 
2.8

 
17.1

 
 
 
 
 
 
 
Impairment of other intangible assets
 
(4.0
)
 

 
100.0

Loss on extinguishment of debt, net
 
(0.3
)
 

 
100.0

Interest expense
 
(3.5
)
 
(3.9
)
 
(6.2
)
Interest and other income
 
0.1

 
0.1

 
(37.8
)
Income before income taxes
 
(4.7
)
 
(1.1
)
 
354.1

Income tax benefit
 
(1.8
)
 
(0.7
)
 
185.5

Net loss
 
(2.8
)%
 
(0.4
)%
 
642.5
 %
____________________
(1)
Percent increase (decrease) represents the actual change as a percentage of the prior year’s result.

The following discussion refers to the term average daily sales and average organic daily sales. Average daily sales are defined as sales for a period of time divided by the number of shipping days in that period of time. Average organic daily sales are defined as sales for a period of time excluding any sales from acquisitions made subsequent to the beginning of the prior year period divided by the number of shipping days in that period. For a reconciliation of average organic daily sales growth to US GAAP-based financial measures, see “Reconciliation of Average Organic Daily Sales to Net Sales” table below.

Net Sales and Gross Profit
 
 
 
Fiscal Year Ended
(in thousands)
 
December 26, 2014

 
December 27, 2013

 
 
 
 
 
 
Net sales
 
$
1,676,221

 
$
1,598,055

Cost of sales
 
1,094,578

 
1,045,084

 
Gross profit
 
$
581,643

 
$
552,971


Net Sales. Net sales increased by $78.2 million, or 4.9%, for the fiscal year ended December 26, 2014 compared to the fiscal year ended December 27, 2013. The increase in sales was primarily attributable to sales of $44.0 million from net increases in sales to our institutional facilities customers, plus $30.5 million from net increases in sales to our multi-family housing facilities customers, and $6.2 million from net increases in sales to our residential facilities customers.

During the fiscal year ended December 26, 2014, our sales increased 4.9% on an average daily sales basis, primarily reflecting the impact of continued economic improvements across our facilities maintenance end-market, combined with our continued investments in our sales forces and our information technology. Sales to our institutional facilities customers, which

33


comprised 50% of our total sales, increased 5.6%. Sales to our multi-family housing facilities customers, which comprised 30% of our total sales, increased 6.4%. Sales to our residential facilities customers, which comprised 19.9% of our total sales, increased 1.9%. We believe we are starting to more fully realize the benefits of our efforts to strengthen our business, improve our competitive position, and enhance our market capabilities. We expect these trends to continue into 2015 as we continue our investments in our sales force and other key areas of our business.

Gross Profit. Gross profit increased by $28.7 million, or 5.2%, in the fiscal year ended December 26, 2014 compared to the fiscal year ended December 27, 2013. Our gross profit margin increased 10 basis points to 34.7% for the fiscal year ended December 26, 2014 compared to 34.6% for the fiscal year ended December 27, 2013. The increase in gross profit margin was primarily related to our investment in sales force development, including selling tools which provide for a greater level of visibility throughout the selling process, as well as a continued focus on controlling our product costs.
    
Operating Expenses
 
 
 
Fiscal Year Ended
(in thousands)
 
December 26, 2014

 
December 27, 2013

 
 
 
 
 
 
Selling, general and administrative expenses
 
$
475,813

 
$
457,236

Depreciation and amortization
 
53,814

 
50,038

Merger related expenses
 
102

 
1,377

 
Total operating expenses
 
$
529,729

 
$
508,651


Selling, General and Administrative Expenses. Selling, general and administrative ("SG&A") expenses increased by $18.6 million, or 4.1%, in the fiscal year ended December 26, 2014 compared to fiscal year ended December 27, 2013. As a percentage of net sales, SG&A decreased 20 basis points to 28.4% for the fiscal year ended December 26, 2014 compared to 28.6% for the fiscal year ended December 27, 2013. The decrease in SG&A expenses as a percentage of sales was primarily due to reduced legal expense and settlement costs as well as reduced stock compensation expense in fiscal year 2014 compared to fiscal year 2013.

Depreciation and Amortization. Depreciation and amortization expense increased by $3.8 million, or 7.5%, in the fiscal year ended December 26, 2014 compared to the fiscal year ended December 27, 2013. The increase was primarily driven by the additional amortization of trademark assets that were determined to have a definite life during the second quarter of 2014. As a percentage of net sales, depreciation and amortization expense was 3.2% and 3.1% for the fiscal year ended December 26, 2014 and fiscal year ended December 27, 2013, respectively.

Merger related expenses. Merger related expenses incurred during the fiscal year ended December 26, 2014 of $0.1 million are comprised transaction related compensation incurred as a result of the Merger. Merger related expenses incurred in the fiscal year ended December 27, 2013 of $1.4 million are comprised of professional fees of $0.4 million, transaction related compensation of $0.8 million, and other costs of $0.2 million, all incurred as a direct result of the Merger.

Operating Income

 
 
 
Fiscal Year Ended
(in thousands)
 
December 26, 2014
 
December 27, 2013
 
 
 
 
 
 
Operating income
 
$
51,914

 
$
44,320

    
Operating income. As a result of the foregoing, operating income increased by $7.6 million, or 17.1%, in the fiscal year ended December 26, 2014 as compared to the fiscal year ended December 27, 2013.

Operating income as a percentage of net sales was 3.1% in the fiscal year ended 2014 compared to 2.8% in the comparable prior year period. The increase in operating income as a percentage of sales is primarily a result of higher gross margins, lower Merger related expenses, and lower SG&A expenses as a percentage of sales.



34


Other Income (Expense)
 
 
 
Fiscal Year Ended
(in thousands)
 
December 26, 2014
 
December 27, 2013
 
 
 
 
 
 
Impairment of other intangible assets
 
$
(67,500
)
 
$

Loss on extinguishment of debt, net
 
(4,257
)
 

Interest expense
 
(59,178
)
 
(63,087
)
Interest and other income
 
983

 
1,580

 
(Loss) income before income taxes
 
$
(78,038
)
 
$
(17,187
)

Impairment of other intangible assets. During the fiscal year ended December 26, 2014, the Company recorded non-cash charges of $67.5 million related to the impairment of certain indefinite-lived trademark assets. These impairments were primarily due to a strategic marketing decision to phase out certain brand names which resulted in a change in the expected useful life of the intangible assets. The impairment charges were determined by comparing the fair value of the trademarks, derived using discounted cash flow analyses, to the current carrying value. There was no impairment charge that occurred during the prior fiscal year.

Loss on extinguishment of debt. In connection with the redemption of the OpCo Notes and the related financing transactions, we recorded a loss on extinguishment of debt, net of $4.3 million which consisted of $18.6 million in consent solicitation, tender premium, call premium and related transaction costs less a non-cash benefit of $14.3 million associated with the write-off of the unamortized fair value premium of $17.8 million and the write-off of the unamortized deferred debt financing costs of $3.5 million. There was no extinguishment of debt that occurred during the prior fiscal year.

Interest Expense. Interest expense decreased $3.9 million, or 6.2%, in the fiscal year ended December 26, 2014 compared to fiscal year ended December 27, 2013. The decrease in interest expense is directly attributable interest expense savings realized as a result of the financing transactions that occurred in the first quarter of 2014. Refer to the "Liquidity and Capital Resources" section below for additional discussion regarding the current year refinancing transactions.


Income Tax Benefit and Net Loss
 
 
 
Fiscal Year Ended
(in thousands)
 
December 26, 2014
 
December 27, 2013
 
 
 
 
 
 
Income tax benefit
 
$
(30,966
)
 
$
(10,847
)
 
Net loss
 
$
(47,072
)
 
$
(6,340
)

Income tax benefit. Income taxes changed by $20.1 million, to a benefit of $31.0 million in the fiscal year ended December 26, 2014 as compared to a benefit of $10.8 million in fiscal year ended December 27, 2013. The increase in income tax benefit is related to the increase in current year book loss, primarily related to the impairment charges.

The effective tax rate for the fiscal years ended December 26, 2014, and December 27, 2013, was 39.7%, and 63.1%, respectively. The change in the effective tax rate is primarily caused by the true-up of state apportionment rates to the returns for each legal entity in 2013.
    
Net loss. As a result of the foregoing, net loss increased by $40.7 million in the fiscal year ended December 26, 2014 as compared to the fiscal year ended December 27, 2013. As a percentage of net sales, net loss was 2.8% for the fiscal year ended December 26, 2014 compared to 0.4% for the same period in the prior year.

35


Comparison of the operating results for the fiscal year ended December 27, 2013 to the combined results of fiscal year ended December 28, 2012

The following table presents information derived from the consolidated statements of operations expressed as a percentage of net sales in accordance with US GAAP. US GAAP requires that we separately present our results for the period from September 8, 2012 through December 28, 2012 ("Successor Period") and for the December 31, 2011 through September 7, 2012 ("Predecessor Period"). Management believes reviewing our operating results for the fiscal years ended December 27, 2013 and December 28, 2012 by combining the results of the Predecessor and Successor periods is more useful in identifying trends in, or reaching conclusions regarding, our overall operating performance and performs reviews at that level. Accordingly, the table below presents the non-GAAP combined results for the fiscal year December 28, 2012, which we also use to compute the percentage change as compared to the prior year, as we believe this presentation provides a more meaningful basis for comparison of our results. The combined operating results may not reflect the actual results we would have achieved had the Merger closed prior to September 7, 2012, and may not be predictive of our future results of operations.

 
% of Net Sales
 
Successor
 
 
Predecessor
 
Combined
 
 % Increase (Decrease)
2013 vs. Combined 2012
(1)
 
For the fiscal year ended December 27, 2013
 
For the period September 8, 2012 through December 28, 2012
 
 
For the period December 31, 2011 through September 7, 2012
 
For the combined fiscal year ended December 28, 2012
 
Net sales
100.0
 %
 
100.0
 %
 
 
100.0
 %
 
100.0
 %
 
 %
Cost of sales
65.4

 
63.4

 
 
63.6

 
63.6

 
1.8

Gross profit
34.6

 
36.6

 
 
36.4

 
36.4

 
(1.8
)
 
 
 
 
 
 
 
 
 
 
 
Operating Expenses:
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
28.6

 
28.6

 
 
27.8

 
28.1

 
0.5

Depreciation and amortization
3.1

 
3.2

 
 
1.9

 
2.3

 
0.8

Merger related expenses
0.1

 
9.8

 
 
2.1

 
4.4

 
(4.3
)
 Total operating expenses
31.8

 
41.5

 
 
31.8

 
34.8

 
(3.0
)
Operating (loss) income
2.8

 
(4.9
)
 
 
4.5

 
1.6

 
1.2

 
 
 
 
 
 
 
 
 
 
 
Loss on extinguishment of debt, net

 

 
 
(0.2
)
 
(0.2
)
 
0.2

Interest expense
(3.9
)
 
(4.9
)
 
 
(1.8
)
 
(2.8
)
 
(1.1
)
Interest and other income
0.1

 
0.1

 
 
0.2

 
0.2

 
(0.1
)
(Loss) income before income taxes
(1.1
)
 
(9.6
)
 
 
2.6

 
(1.1
)
 

Income tax (benefit) provision
(0.7
)
 
(2.6
)
 
 
1.2

 
0.1

 
(0.8
)
Net (loss) income
(0.4
)%
 
(7.0
)%
 
 
1.4
 %
 
(1.2
)%
 
0.8
 %
____________________
(1)
Percent increase (decrease) represents the actual change as a percentage of the prior year’s result.




36


Net Sales and Gross Profit
 
 
 
Successor
 
 
Predecessor
 
Combined
(in thousands)
 
For the fiscal year ended December 27, 2013
 
For the period September 8, 2012 through December 28, 2012
 
 
For the period December 31, 2011 through September 7, 2012
 
For the fiscal year ended December 28, 2012
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
1,598,055

 
$
404,593

 
 
$
917,752

 
$
1,322,345

Cost of sales
 
1,045,084

 
256,349

 
 
584,033

 
840,382

 
Gross profit
 
$
552,971

 
$
148,244

 
 
$
333,719

 
$
481,963

 
Net Sales. Net sales increased by $275.7 million, or 20.9%, in the fiscal year ended December 27, 2013 compared to the combined fiscal year ended December 28, 2012. The increase in sales was primarily attributable to sales of $252.5 million from net increases in sales to our institutional facilities customers, including $234.1 million from acquisitions, plus $20.7 million from net increases in sales to our multi-family housing facilities customers, and $5.3 million from net increases in sales to our residential facilities customers. On an organic basis, our sales increased 3.1%, and on an average organic daily sales basis, our sales increased 3.5%. On an uncombined basis, net sales increased by $1,193.5 million and $680.3 million for fiscal year ended December 27, 2013 as compared to the periods from September 8, 2012 through December 28, 2012 and December 31, 2011 through September 7, 2012, respectively. These increases were directly attributable to the comparison of 252 selling days in the current year Successor Period to 76 and 177 selling days in the prior year Successor and Predecessor Periods, respectively.

Gross Profit. Gross profit increased by $71.0 million, or 14.7%, to $553.0 million in the fiscal year ended December 27, 2013 from $482.0 million in the combined fiscal year ended December 28, 2012. Our gross profit margin decreased 180 basis points to 34.6% for the fiscal year ended December 27, 2013 compared to 36.4% for the combined fiscal year ended December 28, 2012. This decrease in gross profit margin was related to our acquisitions, which accounted for the majority of the decrease in gross profit margins. On an uncombined basis, gross profit increased by $404.7 million and $219.3 million for fiscal year ended December 27, 2013 as compared to the periods from September 8, 2012 through December 28, 2012 and December 31, 2011 through September 7, 2012, respectively. These increases are directly attributable to the comparison of 252 selling days in the current year Successor Period to 76 and 177 selling days in the prior year Successor and Predecessor Periods, respectively.

Operating Expenses
 
 
 
Successor
 
 
Predecessor
 
Combined
(in thousands)
 
For the fiscal year ended December 27, 2013
 
For the period September 8, 2012 through December 28, 2012
 
 
For the period December 31, 2011 through September 7, 2012
 
For the fiscal year ended December 28, 2012
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 
$
457,236

 
$
115,533

 
 
$
255,409

 
$
370,942

Depreciation and amortization
 
50,038

 
12,837

 
 
17,707

 
30,544

Merger related expenses
 
1,377

 
39,641

 
 
19,049

 
58,690

 
Total operating expenses
 
$
508,651

 
$
168,011

 
 
$
292,165

 
$
460,176


Selling, General and Administrative Expenses. SG&A expenses increased by $86.3 million, or 23.3%, to $457.2 million in the fiscal year ended December 27, 2013 from $370.9 million in the combined fiscal year ended December 28, 2012. As a percentage of net sales, SG&A increased 50 basis points to 28.6% for the fiscal year ended December 27, 2013 compared to 28.1% for the combined fiscal year ended December 28, 2012. The increase in SG&A expenses as a percentage of sales was primarily due to higher litigation related costs, higher distribution center consolidation costs, and higher wages and fringe benefit costs, offset in part by the favorable impact from acquisitions. On an uncombined basis, SG&A increased by $341.7 million and $201.8 million for fiscal year ended December 27, 2013 as compared to the periods from September 8, 2012 through December 28, 2012 and December 31, 2011 through September 7, 2012, respectively. These increases are directly attributable to the comparison of 260 expense days in the current year Successor Period to 80 and 180 expense days in the prior year Successor and Predecessor Periods, respectively.

37


Depreciation and Amortization. Depreciation and amortization expense increased by $19.5 million, or 63.8%, to $50.0 million in fiscal year ended December 27, 2013 from $30.5 million in the combined fiscal year ended December 28, 2012. As a percentage of net sales, depreciation and amortization were 3.1% and 2.3% for the fiscal year ended December 27, 2013 and combined fiscal year ended December 28, 2012, respectively. The increase in depreciation expense was due to higher capital spending associated with our information technology infrastructure and distribution center consolidation and integration efforts that occurred during the last four years, combined with the impact of depreciation expense on the acquired JanPak assets. The increase in amortization expense is primarily driven by the incremental amortization of the fair value adjustments for the definite-lived intangible asset values recorded as a result of the Merger as well as the JanPak acquisition. On an uncombined basis, depreciation and amortization increased by $37.2 million and $32.3 million for fiscal year ended December 27, 2013 as compared to the periods from September 8, 2012 through December 28, 2012 and December 31, 2011 through September 7, 2012, respectively. These increases are directly attributable to the comparison of 260 expense days in the current year Successor Period to 80 and 180 expense days in the prior year Successor and Predecessor Periods, respectively, combined with the increase in amortization on the definite-lived intangibles identified in connection with the Merger transaction, as well as the depreciation and amortization expense associated with the definite-lived tangible and intangible assets acquired with the JanPak acquisition.

Merger related expenses. Merger related expenses incurred in the fiscal year ended December 27, 2013 of $1.4 million are comprised of professional fees of $0.4 million, transaction related compensation of $0.8 million, and other costs of $0.2 million, all incurred as a direct result of the Merger. Merger related expenses incurred in the combined fiscal year ended December 28, 2012 of $58.7 million are comprised of professional fees of $22.4 million, share-based compensation of $18.3 million, fees paid to our sponsors of $10.0 million, transaction related compensation of $6.8 million, and other costs of $1.2 million, all incurred as a direct result of the Merger.

Operating Income

 
 
 
Successor
 
 
Predecessor
 
Combined
(in thousands)
 
For the fiscal year ended December 27, 2013
 
For the period September 8, 2012 through December 28, 2012
 
 
For the period December 31, 2011 through September 7, 2012
 
For the fiscal year ended December 28, 2012
 
 
 
 
 
 
 
 
 
 
 
Operating income (loss)
 
$
44,320

 
$
(19,767
)
 
 
$
41,554

 
$
21,787


Operating income. As a result of the foregoing, operating income increased by $22.5 million, or 103.4%, to $44.3 million in fiscal year ended December 27, 2013 from $21.8 million in the combined fiscal year ended December 28, 2012. Operating income as a percentage of net sales was 2.8% in the fiscal year ended 2013 compared to 1.6% in the comparable combined prior year period. Excluding expenses associated with the litigation related charge and the Merger, operating income was 4.2% of sales in the fiscal year ended 2013. The increase in operating income as a percentage of sales is primarily a result of lower Merger related expenses, lower selling, general and administrative ("SG&A") expenses as a percentage of sales, net of litigation related costs, offset in part by lower gross profit margins related to changes in customer and product mix, and to a lesser extent, some product cost pressure as compared to the prior year, and higher depreciation and amortization expense, which was predominately driven by the Merger.

38


Other Income (Expense)
 
 
 
Successor
 
 
Predecessor
 
Combined
(in thousands)
 
For the fiscal year ended December 27, 2013
 
For the period September 8, 2012 through December 28, 2012
 
 
For the period December 31, 2011 through September 7, 2012
 
For the fiscal year ended December 28, 2012
 
 
 
 
 
 
 
 
 
 
 
Loss on extinguishment of debt, net
 
$

 
$

 
 
$
(2,214
)
 
$
(2,214
)
Interest expense
 
(63,087
)
 
(19,773
)
 
 
(16,631
)
 
(36,404
)
Interest and other income
 
1,580

 
593

 
 
1,499

 
2,092

 
(Loss) income before income taxes
 
$
(17,187
)
 
$
(38,947
)
 
 
$
24,208

 
$
(14,739
)

Loss on extinguishment of debt. In connection with the termination of the previous asset-based revolving facility, $2.2 million of unamortized deferred debt financing costs were written off during the third quarter of 2012, in the Predecessor Period. There was no extinguishment of debt that occurred during the fiscal year ended December 27, 2013 .

Interest Expense. Interest expense increased $26.7 million, or 73.3%, to $63.1 million in fiscal year ended December 27, 2013 from $36.4 million in the combined fiscal year ended December 28, 2012. The increase in interest expense is directly attributable to the borrowings made under the ABL Facility and the issuance of the HoldCo Notes to finance the Merger transactions, and the incremental interest associated with the modification of the OpCo Notes as more fully discussed in "Liquidity and Capital Resources" below. On an uncombined basis, interest expense increased by $43.3 million and $46.5 million for fiscal year ended December 27, 2013 as compared to the periods from September 8, 2012 through December 28, 2012 and December 31, 2011 through September 7, 2012, respectively. These increases are directly attributable to the comparison of 260 expense days in the current year Successor Period to 80 and 180 expense days in the prior year Successor and Predecessor Periods, respectively, combined with the increase in interest expense as a result of the financing transactions discussed above.

Income Tax (Benefit) Provision and Net (Loss) Income
 
 
 
Successor
 
 
Predecessor
 
Combined
(in thousands)
 
For the fiscal year ended December 27, 2013
 
For the period September 8, 2012 through December 28, 2012
 
 
For the period December 31, 2011 through September 7, 2012
 
For the fiscal year ended December 28, 2012
 
 
 
 
 
 
 
 
 
 
 
(Benefit) provision for income taxes
 
$
(10,847
)
 
$
(10,503
)
 
 
$
11,384

 
$
881

 
Net (loss) income
 
$
(6,340
)
 
$
(28,444
)
 
 
$
12,824

 
$
(15,620
)

Income tax (benefit) provision. Income taxes changed by $11.7 million, to a benefit of $10.8 million in the fiscal year ended December 27, 2013 as compared to a provision of $0.9 million in the combined fiscal year ended December 28, 2012. The effective tax rate for the fiscal year ended December 27, 2013, and for the periods from September 8, 2012 through December 28, 2012 and December 31, 2011 through September 7, 2012, was 63.1%, 27.0%, and 47.0%, respectively. The change in the effective tax rate is primarily caused by the non-deductibility of certain Merger related expenses incurred in 2012 and true-up of state apportionment rates to the returns for each legal entity.


39


Reconciliation of Average Organic Daily Sales to Net Sales

Average organic daily sales are defined as sales for a period of time divided by the number of shipping days in that period of time excluding any sales from acquisitions made subsequent to the beginning of the prior year period. The computation of average organic daily sales for each fiscal year shown below is as follows (dollar amounts in thousands):

 
 
Successor
 
 
 
Successor
 
Combined (1)
 
 
 
 
December 26, 2014
 
December 27, 2013
 
% Variance
 
December 27, 2013
 
December 28, 2012
 
% Variance
Net sales
 
$
1,676,221

 
$
1,598,055

 
4.9
%
 
$
1,598,055

 
$
1,322,345

 
20.9
%
Less acquisitions
 

 

 
 
 
(234,118
)
 

 
 
Organic sales
 
$
1,676,221

 
$
1,598,055

 
4.9
%
 
$
1,363,937

 
$
1,322,345

 
3.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Daily sales:
 
 
 
 
 
 
 
 
 
 
 
 
  Ship days
 
252

 
252

 
 
 
252
 
253
 
 
  Average daily sales(2)
 
$
6,652

 
$
6,341

 
4.9
%
 
$
6,341

 
$
5,227

 
21.3
%
  Average organic daily sales(3)
 
$
6,652

 
$
6,341

 
4.9
%
 
$
5,412

 
$
5,227

 
3.5
%
____________________
(1)
The computation of average daily sales is performed using combined Predecessor and Successor net sales, as we believe that there was no impact to net sales as a result of the Merger and we also believe that it is more useful in identifying trends in, or reaching conclusions regarding, our overall operating performance.

(2)
Average daily sales are defined as sales for a period of time divided by the number of shipping days in that period of time.

(3)
Average organic daily sales are defined as sales for a period of time excluding any sales from acquisitions made subsequent to the beginning of the prior year period divided by the number of shipping days in that period.

Average daily sales and average organic daily sales are presented herein because we believe it to be relevant and useful information to our investors since it is used by our management to evaluate the operating performance of our business, as adjusted to exclude the impact of acquisitions, and compare our organic operating performance with that of our competitors. However, average daily sales and average organic daily sales are not measures of financial performance under U.S. GAAP and it should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with U.S. GAAP, such as net sales. Management utilizes average daily sales and average organic daily sales as an operating performance measure in conjunction with U.S. GAAP measures such as net sales.

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. Typically, November, December and January sales are 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. Our Copperfield brand customarily experiences approximately two-thirds of its sales between July and December. As such, our first quarter sales and earnings typically tend to be lower than the remaining three quarters of the year. In addition, our working capital requirements in the second half of the year tend to be lower.


40


Liquidity and Capital Resources

Overview

We are a holding company whose only asset is the stock of Interline New Jersey. We conduct virtually all of our business operations through Interline New Jersey. Accordingly, our only material sources of cash are dividends and distributions with respect to our ownership interests in Interline New Jersey that are derived from the earnings and cash flow generated by Interline New Jersey.

On March 17, 2014, Interline New Jersey completed the following refinancing transactions:

entered into a first lien term loan agreement under which Interline New Jersey incurred a term loan in an aggregate principal amount of $350.0 million (the “Term Loan Facility”); and
amended the asset-based senior secured revolving credit facility, dated as of September 7, 2012 (the “ABL Facility”), by entering into the First Amendment to Credit Agreement to permit the incurrence of the Term Loan Facility and make other changes in connection with the refinancing (the “First ABL Facility Amendment”).

The proceeds from the Term Loan Facility were used to finance the redemption of Interline New Jersey's $300.0 million OpCo Notes, the repayment of a portion of amounts outstanding under the ABL Facility and the payment of related fees, costs and expenses. In connection with the redemption of the OpCo Notes, the Company recorded a loss on early extinguishment of debt in the amount of $4.3 million during the year ended December 26, 2014. The loss was comprised of $18.6 million in consent solicitation, tender premium, call premium and related transaction costs less a non-cash benefit of $14.3 million associated with the write-off of the unamortized fair value premium of $17.8 million less the write-off of the unamortized deferred debt issuance costs of $3.5 million.

In addition to making changes that were required in order to permit the incurrence of the Term Loan Facility and the redemption of the OpCo Notes, the First ABL Facility Amendment also made various changes to the ABL Facility that were intended to conform certain covenant baskets and related terms with those contained in the Term Loan Facility (the terms of which are disclosed below under "—Term Loan Facility”). The First ABL Facility Amendment also released the security interest previously granted by the Company to secure the ABL Facility, subject to a requirement that the Company re-pledge its assets to secure the ABL Facility in the event that the Company’s 10.00% / 10.75% Senior Notes due 2018 (the “HoldCo Notes”) are no longer outstanding. Accordingly, while the Company will guaranty both the Term Loan Facility and the ABL Facility, its assets will not be pledged to secure either such facility so long as the HoldCo Notes remain outstanding.

On April 8, 2014, Interline New Jersey further amended the ABL Facility by entering into the Second Amendment to Credit Agreement to amend certain pricing terms applicable to the ABL Facility and extend the maturity date of the ABL Facility to April 8, 2019 (the “Second ABL Facility Amendment”).

On December 10, 2014 Interline New Jersey further amended the ABL Facility to increase the aggregate commitments from $275.0 million to $325.0 million. Except for this commitment increase, no other material terms were modified by the Increase Agreement.

Subsequent to December 26, 2014, the Company used a combination of cash on hand and borrowings under the recently amended ABL Facility to redeem $80.0 million of the $365.0 million outstanding aggregate principal amount of the HoldCo Notes.

The debt instruments of Interline New Jersey, primarily the ABL Facility and the Term Loan, contain significant restrictions on the payment of dividends and distributions to the Company by Interline New Jersey. See “—ABL Facility” and “—Term Loan Facility” for more information on the ABL Facility and the Term Loan Facility, respectively.
        
Interline New Jersey and the Company were in compliance with all covenants contained in the ABL Facility, the Term Loan Facility, and HoldCo Notes as of December 26, 2014.

The debt instruments of Interline New Jersey, primarily the ABL Facility and the indenture governing the terms of the OpCo Notes, contain significant restrictions on the payment of dividends and distributions to the Company by Interline New Jersey.


41


Liquidity

Historically, our capital requirements have been for debt service obligations, working capital requirements, including inventories, accounts receivable and accounts payable, acquisitions, the expansion and maintenance of our distribution network and upgrades of our information systems. We expect this to continue in the foreseeable future. Historically, we have funded these requirements through cash flow generated from operating activities and funds borrowed under our credit facility. We expect our cash on hand, cash flow from operations and availability under our ABL Facility to be our primary source of funds in the future.

As of December 26, 2014, we had cash and cash equivalents of $6.1 million. A portion of our cash and cash equivalents are denominated in various foreign currencies and held by our foreign subsidiaries. These balances are associated with our permanent reinvestment strategy and are subject to fluctuations in currency exchange rates. We do not believe that the indefinite reinvestment of these funds offshore impairs our ability to meet our domestic working capital needs.

From time to time, based on market conditions and other factors, we may repay or refinance all or any of our existing indebtedness, including repurchasing or redeeming our bonds, or incur additional indebtedness. Letters of credit, which are issued under our ABL Facility, are used to support payment obligations incurred for our general corporate purposes.

As of December 26, 2014, we had $209.7 million of availability under our ABL Facility, net of $11.3 million in letters of credit. We believe that cash and cash equivalents on hand, cash flow from operations and available borrowing capacity under our ABL Facility will be adequate to finance our ongoing operational cash flow needs and debt service obligations in the foreseeable future.

Financial Condition

Working capital decreased by $63.2 million to $240.5 million as of December 26, 2014 from $303.7 million as of December 27, 2013. The decrease in working capital was primarily attributable to an increase in the current portion of long term debt of $83.5 million related to the Term Loan Facility entered into during fiscal year 2014 and the partial redemption of the HoldCo Notes announced during fiscal year 2014, and an increase in accrued expenses of $19.5 million related to the Craftwood Matter. These increases in current liabilities were partially offset by increases in accounts receivable—trade due to increases in net sales and increases in inventory levels to keep up with increasing customer demands of next day shipping.

We regularly review our liquidity needs, the adequacy of cash flow from operations, and other expected liquidity sources to meet these needs. We may seek, from time to time, depending on market conditions, to refinance our existing indebtedness, extend the maturity of our indebtedness or lower the interest margin on our indebtedness. Any such transaction would be subject to market conditions, compliance with our credit agreements, reaching agreement with lenders, completion of a successful syndication and various other factors. There is no assurance that we will seek to refinance our indebtedness, and there can be no assurance that we would be able to refinance our indebtedness on favorable terms or at all. 

Cash Flow

Operating Activities
    
Net cash provided by operating activities was $33.9 million for the fiscal year ended December 26, 2014, $20.9 million for the fiscal year ended December 27, 2013, $3.9 million for the period from September 8, 2012 through December 28, 2012, and $25.1 million for the period from December 31, 2011 through September 7, 2012.

Successor. Net cash provided by operating activities of $33.9 million for the fiscal year ended December 26, 2014 primarily consisted of net loss of $47.1 million, adjustments for non-cash items of $90.2 million and net cash used by working capital items of $8.9 million. Adjustments for non-cash items primarily consisted of an impairment of other intangible assets of $67.5 million, $53.8 million in depreciation and amortization of property and equipment and intangible assets, $4.2 million of amortization of debt financing costs, $3.7 million in share-based compensation, $2.7 million in provisions for doubtful accounts, and loss on early extinguishment of debt in the amount of $4.3 million, which consisted of $18.6 million in consent solicitation, tender premium, call premium and related transaction costs less a non-cash benefit of $14.3 million associated with the write-off of the unamortized fair value premium of $17.8 million less the write-off of the unamortized deferred debt financing costs of $3.5 million. These amounts were partially offset by $44.3 million in deferred income taxes, $0.8 million of amortization of deferred lease incentive obligations, and $0.4 million in net amortization of debt discount/premiums on the OpCo Notes and Term Loan Facility. The cash used by working capital items primarily consisted of $26.6 million from increased inventory levels due to expected sales growth combined with opportunistic year-end purchases, $15.3 million from increased trade receivables, net of changes in provision for doubtful accounts, resulting from increased sales in the current year as compared to the prior year, and $1.8 million in increased prepaid expenses and

42


other current assets primarily as a result of timing of collections of rebates from our vendors, and a $2.5 million decrease in accrued interest due to due to the early redemption of the OpCo Notes. The cash used by working capital items was partially offset by $25.6 million from an increase in accrued expenses and other current liabilities as a result of the accrual for litigation related costs, combined with higher payroll and incentive compensation accruals as compared to prior year-end due to increased headcount, and timing of promotional spending, offset in part by timing of other miscellaneous accrual and payment activity, $9.8 million from changes in income taxes, and $1.8 million from increased trade payables balances as a result of the timing of purchases and related payments.

Net cash provided by operating activities of $20.9 million for fiscal year ended December 27, 2013 primarily consisted of net loss of $6.3 million, adjustments for non-cash items of $37.4 million and cash used by working capital items of $9.8 million. Adjustments for non-cash items primarily consisted of $50.0 million in depreciation and amortization of property and equipment and intangible assets, $5.3 million in share-based compensation, $3.8 million of amortization of debt financing costs, and $2.0 million in provisions for doubtful accounts. These amounts were partially offset by $19.4 million in deferred income taxes, $3.1 million in amortization of the fair value adjustment recorded to the OpCo Notes in connection with the Merger, $0.8 million of amortization of deferred lease incentive obligations, and $0.4 million of other items. The cash used by working capital items primarily consisted of $27.0 million from increased inventory levels primarily related to increased demand for our products combined with opportunistic year-end purchases, $8.3 million from increased trade receivables, net of changes in provision for doubtful accounts, resulting from increased sales during the fiscal year compared to the prior year, and timing of sales and collections, and $7.8 million in increased prepaid expenses and other current assets primarily as a result of timing of collections of rebates from our vendors. The cash used by working capital items was partially offset by $18.9 million from an increase in accrued expenses and other current liabilities as a result of the accrual for litigation related costs, combined with higher payroll and incentive compensation accruals as compared to prior year-end due to increased headcount, and timing of promotional spending, offset in part by timing of other miscellaneous accrual and payment activity, $11.2 million from increased trade payables balances as a result of the timing of purchases and related payments, $1.7 million from changes in income taxes, and an $1.5 million increase in accrued interest due to normal timing of accrual and payment activity.

Net cash provided by operating activities of $3.9 million for the period from September 8, 2012 through December 28, 2012 primarily consisted of net loss of $28.4 million, adjustments for non-cash items of $25.0 million and cash provided by working capital items of $7.3 million. Adjustments for non-cash items primarily consisted of $12.8 million in depreciation and amortization of property and equipment and intangible assets, which includes increased amortization on the incremental step-up in customer relationships recorded in connection with purchase accounting for the Merger, $10.0 million in share-based compensation associated with the modification of the rolled over options as a result of the Merger transactions as well as share-based compensation associated with options issued during the period, $2.0 million in deferred income taxes, $1.2 million of amortization of debt financing costs, and $0.5 million in provisions for doubtful accounts. These amounts were partially offset by $1.0 million in amortization of the fair value adjustment recorded to the OpCo Notes in connection with the Merger, and $0.3 million of amortization of financing costs. The cash provided by working capital items primarily consisted of $24.0 million from decreased trade receivables, net of changes in provision for doubtful accounts, resulting from timing of sales and collections, $10.7 million from increased trade payables balances as a result of the timing of purchases and related payments, and an $8.3 million increase in accrued interest due in part to interest on the ABL Facility and HoldCo Notes that were incurred in connection with the Merger, combined with the increase in the interest rate on the OpCo notes, as well as normal timing of accrual and payment activity on the OpCo Notes. The cash provided by working capital items was partially offset by $16.4 million from increased inventory levels primarily related to increased demand combined with opportunistic year-end purchases, $9.6 million from a decrease in accrued expenses and other current liabilities as a result of payment of costs associated with the Merger, timing of sales tax payments, and timing of other miscellaneous accrual and payment activity, $6.4 million from changes in income taxes, and $3.1 million in increased prepaid expenses and other current assets primarily as a result of timing of collections of rebates from our vendors.

Predecessor. Net cash provided by operating activities of $25.0 million for the period from December 31, 2011 through September 7, 2012 primarily consisted of net income of $12.8 million, adjustments for non-cash items of $39.3 million and cash used by working capital items of $27.0 million. Adjustments for non-cash items primarily consisted of $17.7 million in depreciation and amortization of property, equipment and intangible assets, $15.2 million in share-based compensation, which includes $11.2 million that was a result of the acceleration of share-based compensation in connection with the Merger transactions, $7.7 million in deferred income taxes, $2.2 million in loss on the extinguishment of debt recorded as a result of the extinguishment of the prior asset-based revolving credit facility, $1.3 million in provision for doubtful accounts, and $1.0 million in amortization of debt financing costs. These amounts were partially offset by $4.6 million in excess tax benefits from share-based compensation and $1.2 million of other items. The cash used by working capital items primarily consisted of $29.8 million from increased trade receivables, net of changes in provision for doubtful accounts, resulting from increased sales in the current year as compared to the prior year, $12.4 million from decreased trade payables balances as a result of the timing of purchases and related payments, and $4.0 million from changes in income taxes. The use of cash was partially offset by $8.8 million from increased accrued expenses and other current liabilities as a result of costs associated with the Merger, timing of sales tax payments, offset in part by lower payroll and incentive compensation

43


accruals as compared to prior year-end due to timing of payments, $5.6 million from decreased inventory levels due to the normal sales activity and timing of purchases, and $3.9 million in accrued interest due to normal accrual and payment activity.
    
Investing Activities

Net cash used in investing activities was $17.4 million for fiscal year ended December 26, 2014, $18.7 million for fiscal year ended December 27, 2013, $914.0 million for the period from September 8, 2012 through December 28, 2012, and $15.2 million for the period from December 31, 2011 through September 7, 2012.

Successor. Net cash used in investing activities for the fiscal years ended December 26, 2014 and December 27, 2013 of $17.4 million and $18.7 million, respectively, was attributable to capital expenditures made in the ordinary course of business.

Net cash used in investing activities for the period from September 8, 2012 through December 28, 2012 was attributable to $825.7 million in cash paid to acquire the Company in connection with the Merger, $82.5 million for the acquisition of JanPak, and $5.7 million of capital expenditures made in the ordinary course of business.

Predecessor. Net cash used in investing activities for the period from December 31, 2011 through September 7, 2012 was attributable to $12.0 million of capital expenditures made in the ordinary course of business and $3.3 million related to the purchase of a business.
    
Financing Activities

Net cash used in financing activities totaled $16.2 million for fiscal year ended December 26, 2014, and $11.6 million for the fiscal year ended December 27, 2013, compared to net cash provided by financing activities of $819.6 million for the period from September 8, 2012 through December 28, 2012, and net cash used in financing activities of $0.7 million for the period from December 31, 2011 through September 7, 2012.

Successor. Net cash used in financing activities for the fiscal year ended December 26, 2014 was primarily attributable to $300.0 million used to finance the redemption of the OpCo Notes, $41.0 million in net payments on the ABL Facility, payments of tender premiums and expenses related to redemption of the OpCo Notes of $18.6 million, $8.1 million of payments for debt issuance costs, and payments made on Term Loan Facility of $2.6 million. The cash outflows were partially offset by proceeds from the issuance of the Term Loan Facility totaling $349.1 million, proceeds of $2.6 million from stock options exercised, and $1.2 million net increase in purchase card payables.

Net cash used in financing activities for the fiscal year ended December 27, 2013 was attributable to $12.5 million in net payments on the ABL Facility, $0.5 million of payments on capital lease obligations, and $0.2 million of payments for debt financing costs, offset in part by a $0.8 million net increase in purchase card payable, and $0.8 million of proceeds from the issuance of common stock.
Net cash provided by financing activities for the period from September 8, 2012 through December 28, 2012 was attributable to $365.0 million in proceeds from the issuance of the HoldCo Notes in connection with the Merger, $350.9 million of equity proceeds in connection with the Merger, $217.5 million in proceeds from the ABL Facility, $1.5 million of proceeds from the issuance of common stock, and a $1.3 million net increase in purchase card payable, offset in part by $90.0 million in repayments on the ABL Facility, and $26.4 million in debt financing costs on the ABL Facility, OpCo Notes, and HoldCo Notes, which were incurred or modified in connection with the Merger.

Predecessor. Net cash provided by financing activities for the period from December 31, 2011 through September 7, 2012 was attributable to $6.8 million of proceeds from stock options exercised and excess tax benefits from share-based compensation, partially offset by a $3.8 million net decrease in purchase card payable, $1.5 million in treasury stock acquired to satisfy minimum statutory tax withholding requirements resulting from the vesting or exercising of equity awards, and $0.5 million of payments on capital lease obligations.

Capital Expenditures

Capital expenditures were $17.4 million for the fiscal year ended December 26, 2014, $18.7 million for the fiscal year ended December 27, 2013, $5.7 million for the period from September 8, 2012 through December 28, 2012, and $12.0 million for the period from December 31, 2011 through September 7, 2012.


44


Capital expenditures as a percentage of net sales were 1.0% for the fiscal year ended December 26, 2014, 1.2% for the fiscal year ended December 27, 2013, 1.4% for the period from September 8, 2012 through December 28, 2012, and 1.3% for the period from December 31, 2011 through September 7, 2012.
    
Capital expenditures during 2014, 2013, and 2012 were driven primarily by the continued consolidation of our distribution center network including investments in larger more efficient distribution centers and enhancements to our information technology systems. We expect our capital expenditures for 2015 to be comparable with our historical capital expenditures as a percentage of sales.

ABL Facility

The ABL Facility permits revolving borrowings in an aggregate principal amount of up to $325.0 million. In addition, the ABL Facility provides for a sub-limit of borrowings on same-day notice referred to as swingline loans up to $30.0 million and a sub-limit for the issuance of letters of credit up to $45.0 million. Subject to certain conditions, the principal amount of the ABL Facility may be increased from time to time up to an amount which, in the aggregate for all such increases, does not exceed $100.0 million, in $25.0 million increments.

Advances under the ABL Facility are limited to the lesser of (a) the aggregate commitments under the ABL Facility and (b) the sum of the following:

85% of the book value of eligible accounts receivable; plus
the lesser of (i) 70% of the lower of cost (net of rebates and discounts) or market value of eligible inventory; and (ii) 85% of the appraised net orderly liquidation value of eligible inventory;
minus certain reserves as may be established under the ABL Facility.

Future borrowings under the ABL Facility are subject to the Company's representation and warranty that no event, change or condition has occurred that has had, or could reasonably be expected to have, a material adverse effect on the Company (as defined in the ABL Facility).

Obligations under the ABL Facility are guaranteed by the Company and each of the wholly-owned material subsidiaries of the co-borrowers under the ABL Facility. These obligations will be primarily secured, subject to certain exceptions, by a security interest in substantially all of the assets of Interline New Jersey and each of its wholly-owned material U.S. subsidiaries. This security interest will be comprised of a first-priority lien on generally all of the current assets (including accounts receivable and inventory) of Interline New Jersey and the other grantors, which assets secure the Term Loan on a second-priority basis, and a second-priority lien on generally all of the fixed assets of Interline New Jersey and the other grantors, which assets secure the Term Loan on a first-priority basis.

From the date of the Second ABL Facility Amendment through the end of Interline New Jersey’s first fiscal quarter after the closing date thereof, borrowings were subject to an interest rate equal to LIBOR plus 1.5% in the case of Eurodollar revolving loans, and an applicable base rate plus 0.5% in the case of Alternate Base Rate (“ABR”) loans.

As of the end of the first fiscal quarter following the closing of the Second ABL Facility Amendment, the interest rates applicable to obligations under the ABL Facility will be determined as of the end of each fiscal quarter in accordance with applicable rates set forth in the table below, which are generally 0.25% lower than the rates in effect prior to the Second ABL Facility Amendment:
Availability
 
Revolver ABR Spread
 
Revolver Eurodollar Spread
Category 1
 
 
 
 
Greater than $177.3 million
 
0.25%
 
1.25%
Category 2
 
 
 
 
Greater than $88.6 million but less than or equal to $177.3 million
 
0.50%
 
1.50%
Category 3
 
 
 
 
Less than or equal to $88.6 million
 
0.75%
 
1.75%


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The applicable rates for Category 1 will be available starting in the second fiscal quarter of 2015. The applicable rates for Category 2 and Category 3 are subject to a 0.25% step-down from the spread described above if the fixed charge coverage ratio for the
period of four consecutive fiscal quarters ending on the last day of the fiscal quarter most recently ended is greater than 1.75:1.00. This step-down is currently available for Category 3 borrowings and will be available for Category 2 borrowings during the second fiscal quarter of 2015. As of December 26, 2014, the interest rate in effect with respect to the ABL Facility was 1.69% for the Eurodollar revolving loans and 3.75% for the ABR revolving loans.

In addition to paying interest on outstanding principal under the ABL Facility, Interline New Jersey is required to pay a commitment fee in respect of unutilized commitments, which is equal to 0.375% per annum for the ABL Facility if utilization is less than 25% of the aggregate commitments and 0.25% per annum if the utilization of the ABL Facility exceeds 25% of the aggregate commitments. The principal balance outstanding may be voluntarily prepaid in advance, without penalty or premium, at any time in whole or in part, subject to certain breakage costs.

The ABL Facility requires the Company and its restricted subsidiaries, on a consolidated basis, to maintain a fixed charge coverage ratio (defined as the ratio of EBITDA, as defined in the credit agreement, to the sum of cash interest, principal payments on indebtedness and accrued income taxes, dividends or distributions and repurchases, redemptions or retirement of the equity interest of the Company) of at least 1.00:1.00 when the excess availability is less than or equal to the greater of: (i) 10% of the total commitments under the ABL Facility; and (ii) $25.0 million.

In addition to making changes that were required in order to permit the incurrence of the Term Loan Facility and the redemption of the OpCo Notes, the First ABL Facility Amendment also made various changes to the ABL Facility that were intended to conform certain covenant baskets and related terms with those contained in the Term Loan Facility (the terms of which are disclosed below under "—Term Loan Facility").

As amended by the First ABL Facility Amendment, Interline New Jersey and its restricted subsidiaries will be permitted under the ABL Facility to incur secured or unsecured indebtedness so long as (i) in the event that the proceeds thereof are used to redeem HoldCo Notes, the pro forma interest coverage ratio of Interline New Jersey and its restricted subsidiaries is at least 2.00:1.00 or (ii) in the event the proceeds thereof are used for another purpose, (A) if such indebtedness is secured on a second-lien or other junior basis or is unsecured, the pro forma total leverage ratio of Interline New Jersey and its restricted subsidiaries is less than or equal to 6.50:1.00, or (B) if such indebtedness is secured on a first-lien basis, the pro forma ratio of (x) consolidated first lien indebtedness of Interline New Jersey and its restricted subsidiaries and (y) consolidated EBITDA of Interline New Jersey and its restricted subsidiaries (such ratio, the “First Lien Leverage Ratio”) is less than or equal to 3.75:1.00.

The First ABL Facility Amendment also released the security interest previously granted by the Company to secure the ABL Facility, subject to a requirement that the Company re-pledge its assets to secure the ABL Facility in the event that the HoldCo Notes are no longer outstanding. Accordingly, while the Company will guaranty both the Term Loan Facility and the ABL Facility, its assets will not be pledged to secure either such facility so long as the HoldCo Notes remain outstanding.    

The ABL Facility also contains restrictive covenants (in each case, subject to exclusions) that limit, among other things, the ability of Interline New Jersey and its restricted subsidiaries to:

create, incur, assume or suffer to exist, any liens;
create, incur, assume or permit to exist, directly or indirectly, any additional indebtedness;
consolidate, merge, amalgamate, liquidate, wind up or dissolve themselves;
convey, sell, lease, license, assign, transfer or otherwise dispose of their assets;
make certain restricted payments;
make certain investments;
amend or otherwise alter the terms of documents related to certain subordinated indebtedness;
enter into transactions with affiliates; and
prepay certain indebtedness.

The ABL Facility contains certain customary representations and warranties, affirmative and other covenants and events of default, including, among other things, payment defaults, breach of representations and warranties, covenant defaults, cross-defaults to certain indebtedness bankruptcy, certain events under the Employee Retirement Income Security Act ("ERISA"), judgment defaults, actual or asserted failure of any material guaranty or security document supporting the ABL Facility to be in force and effect and change of control. If such an event of default occurs the agent under the ABL Facility is entitled to take various actions, including the acceleration of amounts due under the ABL Facility, the termination of all revolver commitments and all other actions that a secured creditor is permitted to take following a default.

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Term Loan Facility

The initial aggregate principal amount of the Term Loan Facility is equal to $350.0 million. The Term Loan Facility allows for incremental increases in an aggregate principal amount of up to (i) $100.0 million plus (ii) the amount as of the date of incurrence that would not cause the First Lien Leverage Ratio to exceed 3.75:1.00. The Term Loan Facility will mature on the earlier of (A) March 17, 2021 and (B) the date which is 91 days prior to the maturity date of the HoldCo Notes.
    
Obligations under the Term Loan Facility are guaranteed by the Company and each of the wholly-owned material U.S. subsidiaries of Interline New Jersey. These obligations are primarily secured, subject to certain exceptions, by a security interest in substantially all of the assets of Interline New Jersey and each of its wholly-owned material U.S. subsidiaries. This security interest is comprised of a first-priority lien on generally all of the fixed assets of Interline New Jersey and the other grantors, which assets secure the ABL Facility on a second-priority basis, and a second-priority lien on generally all of the current assets (including accounts receivable and inventory) of Interline New Jersey and the other grantors, which assets secure the ABL Facility on a first-priority basis. The assets held directly by the Company will not secure the Term Loan Facility, except that the Company will be required to grant a security interest in these assets in the event that the HoldCo Notes are no longer outstanding.

The Term Loan Facility will bear interest, at the borrower’s option, at (i) LIBOR subject to a minimum floor of 1.00%, plus 300 basis points ("LIBO Rate") or (ii) an ABR subject to a minimum floor of 2.0%, plus 200 basis points. In addition, at the closing of the Term Loan Facility, Interline New Jersey paid (in addition to customary fees) an upfront fee equal to 0.25% of the principal amount thereof. As of December 26, 2014, the interest rate in effect with respect to the Term Loan Facility was 4.00% for LIBO Rate borrowings and 5.25% for ABR borrowings.

Under the Term Loan Facility, Interline New Jersey may voluntarily prepay principal at any time and from time to time without penalty or premium, other than a 1.00% premium during the first six months following the closing date for re-pricing transactions only. The Term Loan Facility is due and payable in quarterly installments equal to 0.25% of the original principal amount, with the balance payable in one final installment at the maturity date. Additional provisions include the requirement to repay the Term Loan Facility with certain asset sale and insurance proceeds, certain debt proceeds and 50% of excess cash flow (reducing to 25% if the First Lien Leverage Ratio is no more than 3.00:1.00 and 0% if the First Lien Leverage Ratio is no more than 2.75:1.00).

The Term Loan Facility does not include any financial covenants; however, it does contain certain restrictive covenants (in each case, subject to exclusions) that limit, among other things, the ability of Interline and the restricted subsidiaries to:

create, incur, assume or suffer to exist, any liens;
create, incur, assume or permit to exist, directly or indirectly, any additional indebtedness;
consolidate, merge, amalgamate, liquidate, wind up or dissolve themselves;
convey, sell, lease, license, assign, transfer or otherwise dispose of their assets;
make certain restricted payments;
make certain investments;
amend or otherwise alter the terms of documents related to certain subordinated indebtedness;
enter into transactions with affiliates; and
prepay certain indebtedness.

The covenants are subject to various baskets and materiality thresholds, with certain of the baskets to the restrictions on the repayment of subordinated indebtedness, restricted payments and investments being available only when the pro forma interest coverage ratio of Interline New Jersey and its restricted subsidiaries is at least 2.00:1.00.

The Term Loan Facility provides that Interline New Jersey and its restricted subsidiaries may incur secured or unsecured indebtedness so long as (i) (A) in the event that the proceeds thereof are used to redeem HoldCo Notes, the pro forma interest coverage ratio of Interline New Jersey and its restricted subsidiaries is at least 2.00:1.00 or (B) in the event the proceeds thereof are used for another purpose, the pro forma total leverage ratio of Interline New Jersey and its restricted subsidiaries is less than or equal to 6.50:1.00 and (ii) in the event any of such indebtedness is secured on a first-lien basis, the First Lien Leverage Ratio is less than or equal to 3.75:1.00.

The Term Loan Facility contains certain customary representations and warranties, affirmative covenants and events of default, including, among other things, payment defaults, breach of representations and warranties, covenant defaults, cross-defaults to certain indebtedness (subject to certain restrictions on cross-defaults to the financial covenant contained in the ABL Facility), certain events of bankruptcy, certain events under ERISA, judgment defaults, actual or asserted failure of any material guaranty or security documents supporting the Term Loan Facility to be in full force and effect and change of control. If such an event of default occurs,

47


the Agent under the Term Loan Facility is entitled to take various actions, including the acceleration of amounts due and all other actions that a secured creditor is permitted to take following a default.

HoldCo Notes

In connection with the Merger, as discussed in Note 3. Transactions to the audited consolidated financial statements, included in Item 8 of this annual report, Interline Delaware issued $365.0 million in aggregate principal amount of 10.00%/10.75% senior notes (the "HoldCo Notes") due November 15, 2018. Debt financing costs capitalized in connection with the HoldCo Notes were $16.7 million.
 
The HoldCo Notes are the Company's general senior unsecured obligations; rank pari passu in right of payment with all existing and future indebtedness of the Company, other than subordinated obligations; are senior in right of payment to any future subordinated obligations of the Company; are not guaranteed by any subsidiary of the Company; are effectively subordinated to any existing or future obligations of the Company that are secured by liens on assets of the Company (including the Company's guarantee of the ABL Facility which is secured by a pledge of the stock of Interline New Jersey) to the extent of the value of such assets unless the HoldCo Notes are equally and ratably secured by such assets; are structurally subordinated to all existing and future indebtedness (including the OpCo Notes and indebtedness under the ABL Facility) of, and other claims and obligations (including preferred stock) of, the subsidiaries of the Company, except to the extent a subsidiary of the Company executes a guaranty agreement in the future. The HoldCo Notes are not guaranteed by any of the Company's subsidiaries.
    
The HoldCo Notes bear interest at a rate of 10.00% per annum with respect to cash interest and 10.75% per annum with respect to any paid-in-kind ("PIK") interest, payable semi-annually on January 15 and July 15. The Company is required to pay interest on the HoldCo Notes in cash, unless its subsidiaries are restricted from dividending money to it (or have limited ability to do so), subject to certain circumstances.

The Company has the option to redeem the HoldCo Notes prior to November 15, 2014 at a redemption price equal to 100% of the principal amount plus a make-whole premium and accrued and unpaid interest to the date of redemption. At any time on or after November 15, 2014, the Company may redeem some or all of the HoldCo Notes at certain fixed redemption prices expressed as percentages of the principal amount, plus accrued and unpaid interest. At any time prior to November 15, 2014, the Company may, from time to time, redeem up to 35% of the aggregate principal amount of the HoldCo Notes with any funds up to an aggregate amount equal to the net cash proceeds received by the Company from certain equity offerings at a price equal to 110.00% of the principal amount of the HoldCo Notes redeemed, plus accrued and unpaid interest and additional interest, if any, to the redemption date, provided that the redemption occurs within 90 days of the closing date of such equity offering, and at least 65% of the aggregate principal amount of the HoldCo Notes remain outstanding immediately thereafter.
    
The Indenture governing the HoldCo Notes contains covenants limiting, among other things, the ability of the Company and its restricted subsidiaries to incur additional indebtedness, issue preferred stock, create or incur certain liens on assets, pay dividends and make other restricted payments, create restriction on dividend and other payments to the Company from certain of its subsidiaries, sell assets and subsidiary stock, engage in transactions with affiliates, consolidate, merge or transfer all or substantially all of the Company's assets and the assets of its subsidiaries and create unrestricted subsidiaries. These covenants are subject to a number of important exceptions and qualifications.

The holders of the HoldCo Notes have the right to require us to repurchase their notes upon certain change of control events.

Purchases of Equity Securities by the Issuer

Purchases of equity securities by the Company during fiscal year ended December 26, 2014 represent shares tendered in satisfaction of the exercise price and tax withholding obligations related to the non-cash exercise of stock options during the period. There were no share repurchases during fiscal years 2013 or 2012.



48


Contractual Obligations and Off-Balance Sheet Arrangements

The following table sets forth our contractual obligations as of December 26, 2014 (in thousands):
 
Total
 
Less than 1 year
 
2 - 3 years
 
4 - 5 years
 
After 5 years
ABL Facility
$
74,000

 
$

 
$

 
$
74,000

 
$

Term Loan Facility
347,375

 
3,500

 
7,000

 
7,000

 
329,875

HoldCo Notes
365,000

 
80,000

 

 
285,000

 

Interest(1)
205,417

 
47,921

 
86,763

 
54,327

 
16,406

Operating leases
116,612

 
33,755

 
50,128

 
21,350

 
11,379

Legal Settlement(2)
39,900

 
39,900

 

 

 

Purchase Obligations (3)
7,096

 
7,096

 

 

 

Employment agreements
5,988

 
5,738

 
250

 

 

Call Premium(4)
4,000

 
4,000

 

 

 

Other(5)
2,620

 
1,124

 
730

 
566

 
200

Total contractual cash obligations(6)(7)
$
1,168,008

 
$
223,034

 
$
144,871

 
$
442,243

 
$
357,860

____________________
(1)
Average interest of 1.69% on the ABL Facility is based on the 30-day LIBOR rate, plus the applicable revolver Eurodollar spread. Average interest of 4% on the Term Loan Facility is based on a minimum LIBOR floor of 1.00%, plus 300 basis points per the credit facility agreement. Actual interest could vary with changes in LIBOR.
(2)
Legal Settlement represents the Craftwood legal settlement of $40 million, less $0.1 million paid during fiscal year 2014. Refer to Note 15. Commitments and Contingencies to our audited consolidated financial statements included in Item 8 of this annual report for additional information regarding the Craftwood Matter.
(3)
Purchase obligations primarily represent contractual obligations related to inventory purchases.
(4)
Call premium represents the premium payment related to the partial redemption of the HoldCo Notes. Refer to Note 19. Subsequent Events to our audited consolidated financial statements included in Item 8 of this annual report for additional disclosure regarding partial redemption of HoldCo Notes.
(5)
Other includes deferred compensation and retirement plans, unused commitment fees on our ABL Facility, administrative fees related to the ABL and Term Loan Facilities, legal claims, and capital leases.
(6)
Trade accounts payable of $126.1 million are excluded from the table but are generally payable within 30 to 60 days. Refer to Item 8. "Financial Statements and Supplementary Data" and the accompanying audited consolidated financial statements.
(7)
As more fully disclosed in Note 17. Income Taxes to our audited consolidated financial statements included in this report, as of December 26, 2014, we are unable to make a reasonably reliable estimate of the timing of payments in individual years beyond 12 months due to uncertainties in the timing of tax audit outcomes totaling $0.4 million as of that date. As a result, this amount is not included in the table above.
    
As of December 26, 2014, except for operating leases and letters of credit, we had no material off-balance sheet arrangements.


49


Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make judgments, assumptions and estimates that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented, including the accompanying notes. Our estimates and assumptions are based on historical experience, current trends and various other factors that we believe are reasonable at the time of evaluation. We periodically evaluate the accounting policies and estimates used to prepare the consolidated financial statements. The Audit Committee of the Board of Directors has reviewed the selection, application and disclosure of our critical accounting policies and estimates. Actual results may differ from these estimates under different circumstances or conditions.

Our significant accounting policies are discussed in Note 2. Summary of Significant Accounting Policies to our audited consolidated financial statements included within this Annual Report on Form 10-K. We believe that the following accounting policies are the most critical in order to fully understand and evaluate our financial position and results of operations. These estimates and assumptions are material due to the inherent levels of subjectivity and judgment necessary to account for conditions that are highly uncertain and susceptible to change.

Revenue Recognition

While our recognition of revenue is predominantly derived from routine transactions and does not involve significant judgment, revenue recognition represents an important accounting policy for us. We recognize revenue when persuasive evidence of an arrangement exists, the product has been shipped and risk of loss has passed to the customer, the sales price is fixed and determinable and collectability is reasonably assured. Sales are recorded net of estimated discounts, rebates and returns. The provision for discounts, rebates and returns is estimated based on sales volumes and historical experience. Actual results have not varied materially from amounts historically reserved; however, our sales could be impacted if these estimates vary significantly from actual results.

Vendor Rebates

Many of our arrangements with our vendors provide for us to receive a rebate of a specified amount payable to us when we achieve certain targeted measures, generally related to the volume of purchases from them. We account for these rebates as a reduction of the prices of the related vendors' products, which reduces inventory until the period in which we sell the product, at which time the reduced costs are included in cost of sales in our statement of operations. Throughout the year, we estimate the amount of rebates receivable based upon the expected level of purchases. We continually revise these estimates to reflect actual rebates earned based on actual purchase levels. If we determine we will not achieve a measure which is required to obtain a vendor rebate, we will record a charge in the period that we determine the criteria or measure for the vendor rebate will not be met to the extent the vendor rebate was estimated and included as a reduction of cost of sales. Historically, our estimates and assumptions have been materially accurate in regards to the actual rebates earned and received.

Vendors may change the terms of some or all of these programs in response to changes in general market conditions; thus there can be no assurance that vendors will continue to provide comparable amounts of vendor rebates in the future. Although these changes would not affect the amounts which we have recorded related to products already purchased, it may impact our gross margin on revenues earned in future periods.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability to collect outstanding amounts due from our customers. We evaluate the collectability of trade accounts receivable throughout the year based on a combination of factors including current economic conditions and trends, historical collection and charge-off experience, creditworthiness of customers, changes in customer payment terms, and aging of accounts receivables. On a monthly basis, we estimate an allowance for doubtful accounts as a percentage of net sales based on our historical bad debt trends. We then evaluate the aging of our accounts receivable and adjust the allowance based on historical collection rates. In addition, we periodically adjust the allowance when we become aware of a specific customer’s inability to meet its financial obligations (e.g., bankruptcy filing). Based on our analysis of historical write-offs of uncollectible accounts receivable, our estimates and assumptions have been materially accurate in regards to the valuation of our allowance for doubtful accounts.



50


As of December 26, 2014, our allowance for doubtful accounts was $4.2 million. To the extent historical credit experience is not indicative of future performance or other assumptions used by management do not prevail, the allowance for doubtful accounts could differ significantly, resulting in either higher or lower future provisions for doubtful accounts.

Valuation of Excess and Obsolete Inventory

Inventories consist primarily of finished goods and are valued at the lower of cost or market. We determine inventory cost using the weighted-average cost method and market value based on net realizable value. The majority of the products we carry in inventory have long shelf lives and are not subject to technical obsolescence. On a quarterly basis we evaluate our inventory balance for excess and obsolete inventory and for the difference by which the cost of the inventory may exceed the estimated market value. This evaluation includes a review of inventory quantities on hand, slow movement reports and sales history reports. Management estimates the required adjustment based on estimated demand for products and general market conditions. To the extent historical inventory reserves are not indicative of future results and if future events impact, either favorably or unfavorably, the saleability of our products or our relationship with certain key vendors, our inventory reserves could differ significantly, resulting in either higher or lower future inventory provisions. As of December 26, 2014, the carrying value of inventory was $302.7 million.

Goodwill, Intangibles and Other Long-Lived Assets

Management assesses the recoverability and performs impairment tests of goodwill, intangible and other long-lived assets in accordance with U.S. GAAP. Under Accounting Standards Codification ("ASC") 350, Intangibles - Goodwill and Other, goodwill and indefinite-lived intangible assets are tested for impairment annually, or more frequently if events or circumstances indicate that an asset may be impaired. For certain other long-lived assets, recoverability and/or impairment tests are required only when conditions exist that indicate the carrying value may not be recoverable. The following factors, among others, may trigger an impairment review: (1) significant under performance relative to previously projected or projected future operating results; (2) a significant adverse change in the extent or manner in which an assets is being used; (3) significant negative industry or economic trends; (4) a significant increase in competition; or (5) recurring or forecasted operating or cash flow losses. If any of the aforementioned or similar factors are present, an impairment analysis is performed by comparing the estimated fair value, calculated in accordance with ASC 820, Fair Value Measurements and Disclosures, to the asset’s carrying value.

The recoverability of goodwill and indefinite-lived intangible assets is evaluated annually during the fourth quarter of the fiscal year or when events or changes in circumstances indicate the carrying amount may not be recoverable. As of December 26, 2014, the Company had one reporting unit that was subject to goodwill impairment testing. Impairment of goodwill exists when the carrying value exceeds its fair value, which is determined using a two-step approach. The first step compares the reporting unit’s estimated fair value to its carrying value. If the carrying value exceeds the estimated fair value, a second step is performed to measure the amount of impairment loss, if any. The identification and measurement of goodwill impairment requires significant management judgment to estimate the fair value of the reporting unit based on a weighting of both the present value of future projected cash flows and the use of comparative market multiples. Factors that management must estimate include revenue growth rates, profit margins, future capital expenditures, working capital needs, discount rates and perpetual growth rates. In conducting the impairment analysis of indefinite-lived intangible assets, management is required to make certain assumptions regarding estimated future cash flows, revenue growth rates, discount rates, assumed royalty rates, and perpetual growth rates to determine the fair value of the respective assets.

During the second quarter of fiscal year 2014, the Company recorded non-cash charges of $67.5 million related to the impairment of certain indefinite-lived trademark assets. These impairments were primarily due to a strategic marketing decision to phase out certain brand names which resulted in a change in the expected useful life of the intangible assets. The charges were determined using a discounted cash flow analysis based on the income approach, relief from royalty method, which requires assumptions related to projected revenues from annual forecasted plans, assumed royalty rates that could be payable if we did not own the trademarks, and an estimated discount rate. Prior to the impairment analysis the associated trademarks had a carrying value of $71.1 million, and after the impairment charge the associated trademarks had a remaining carrying value of $3.6 million which was amortized over an estimated definite life of six months. Management has evaluated whether other triggering events have occurred, noting no events that would cause impairment of the other trademark assets or any other long-lived assets including goodwill. Based on the fiscal year 2014 annual impairment tests of goodwill and indefinite-lived intangible assets, no additional impairment charges were recorded.

The estimation of fair value for goodwill, indefinite-lived intangibles and other long-lived assets is based on the best information available at the date of the assessment. The variability of these factors depends on a number of conditions, including uncertainty about future events and future cash flows which can be affected by changes in the industry or declines in the general economic and market conditions, among others. As a result, our accounting estimates may change from period to period and may result in future impairment charges. The Company records impairment charges in the statements of operations, and any impairment charge would result in

51


reduced carrying amounts of the related assets on the balance sheet. As of December 26, 2014, the carrying amount of goodwill and other intangible assets was $486.4 million and $345.3 million, respectively.

Share-Based Compensation
 
The Company accounts for its share-based compensation using the fair value method of accounting in accordance with U.S. GAAP. Under ASC 718, Compensation - Stock Compensation, share-based compensation cost is measured at the grant date based on the fair value of the award. For awards containing only time based service conditions, we recognize share-based compensation cost on a straight-line basis over the expected vesting period or to the retirement eligibility date, if less than the vesting period. For awards with performance conditions, we recognize share-based compensation cost on a straight-line basis for each performance criteria tranche over the implied service period when we believe it is probable that the performance targets, as defined in the agreements, will be achieved. We use the Black-Scholes option pricing model to determine the fair value of stock options. The Black-Scholes option pricing model requires assumptions regarding various complex and subjective variables, including expected stock price volatility over the expected term of the awards, risk-free interest rates, estimated forfeitures, equity share value at date of grant, and expected dividends. The fair value of restricted stock awards is based on the fair value of the underlying shares as of the grant dates.

We estimate the expected term of options granted by calculating the average term from our historical stock option exercise experience. Prior to the Merger, we estimated the volatility of our common stock based on the historical performance of our common stock. Subsequent to the Merger, we estimate the volatility of our common stock based on the historical volatilities of comparable companies over a historical period that matches the expected life of the options as of the grant date. We base the risk-free interest rate on zero-coupon yields implied from U.S. Treasury issues with remaining terms similar to the expected term on the options. Historically, we have not declared or paid cash dividends, and therefore we use an expected dividend yield of zero in the option pricing model. We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeiture rates differ from those estimates. Historical data is used to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest. To the extent our actual forfeiture rate is different from our estimate; stock-based compensation expense is adjusted accordingly. For additional information, see Note 13. Share-Based Compensation to our audited consolidated financial statements included in this report.
    
Share-based compensation expense was $3.7 million, $5.3 million and $25.1 million for fiscal years 2014, 2013 and 2012, respectively. If any of the assumptions used in the Black-Scholes model changes significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period.

Income Taxes

Significant judgment is required in determining our provision for income taxes, current tax assets and liabilities, deferred tax assets and liabilities and our future taxable income for purposes of assessing our ability to realize future benefit from our deferred tax assets. Deferred tax assets and liabilities are recognized for the future tax benefit or expenses created by temporary differences between the financial statement and tax reporting basis of assets and liabilities to the extent they are realizable. A valuation allowance is established to reduce our deferred tax assets to the amount that is considered more likely than not to be realized through the generation of future taxable income and other tax planning opportunities. Management considers the reversal of temporary differences, availability of carrybacks, and projected future taxable income in making this determination. To the extent that a determination is made to establish or adjust a valuation allowance, the expense or benefit is recorded in the period in which the determination is made.

Our accounting for income taxes requires us to exercise judgment for known issues under discussion with tax authorities and transactions yet to be settled. The final outcome of these tax uncertainties is dependent upon various matters including tax examinations, legal proceedings, changes in regulatory tax laws, or interpretation of those tax laws, or expiration of statutes of limitation. However, based on the number of jurisdictions, the uncertainties associated with litigation and the status of examinations, including the protocols of finalizing audits by the relevant tax authorities, which could include formal legal proceedings; there is a high degree of uncertainty regarding the future cash outflows associated with these tax uncertainties. Refer to Note 17. Income Taxes to our audited consolidated financial statements included in this report for additional information.
Future rulings by tax authorities and future changes in tax laws and their interpretation, changes in projected levels of taxable income and future tax planning strategies could impact our actual effective tax rate and our recorded tax balances. If actual results differ from estimates we have used, or if we adjust these estimates in future periods, our operating results and financial position could be materially affected.


52


Legal Contingencies

We are party to various legal proceedings and claims arising in the normal course of business. In accordance with U.S. GAAP, if it is probable that, as a result of a pending legal claim, an asset has been impaired or a liability has been incurred as of 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 selling, 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.
 
During fiscal years 2014 and 2013, we recorded legal contingencies totaling $20.5 million and $19.5 million, respectively, related to resolution of the Craftwood Matter. For additional information, see Note 15. Commitments and Contingencies to our audited consolidated financial statements included in Item 8 of this annual report. Management does not believe that currently pending proceedings will have a material adverse effect on the consolidated financial statements. However, it is possible that future results of operations for any particular period could be materially affected by changes in our assumptions related to these proceedings.

Recently Issued Accounting Guidance
    
In March 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity ("ASU 2013-05"). The amendments contained within this guidance clarify the applicable guidance for the release of the cumulative translation adjustment under current U.S. GAAP when an entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity. The amendments in ASU 2013-05 are effective prospectively for the first annual period beginning after December 15, 2014, and interim and annual periods thereafter, with early adoption permitted. The amendments should be applied prospectively to derecognition events occurring after the effective date, and prior periods should not be adjusted. This ASU is not expected to have a material impact on the Company's consolidated financial statements.
In May 2014, FASB issued ASU No. 2014-09, Revenue From Contracts With Customers, that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The ASU is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. The amendments in this update are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The company is currently assessing the impact that this standard will have on its consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period ("ASU 2014-12"). The amendments in ASU 2014-12 require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Accounting Standards Codification Topic No. 718, “Compensation — Stock Compensation,” as it relates to awards with performance conditions that affect vesting to account for such awards. The amendments in this update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted. Entities may apply the amendments in ASU 2014-12 either: (a) prospectively to all awards granted or modified after the effective date; or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. This ASU is not expected to have a material impact on the Company's consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40)-Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 provides guidance to U.S. GAAP about management’s responsibility to evaluate whether there is a substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Specifically, ASU 2014-15 (1) defines the term substantial doubt, (2) requires an evaluation of every reporting period including interim periods, (3) provides principles for considering the mitigating effect of management’s plan, (4) requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) requires an express statement and other disclosures when substantial doubt is not alleviated, and (6) requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this update are

53


effective for annual periods beginning after December 15, 2016 and interim periods within those reporting periods. Earlier adoption is permitted. This ASU is not expected to have a material impact on the Company's consolidated financial statements.

Other accounting standards that have been recently issued by the FASB are not expected to have a material impact on the Company’s consolidated financial statements.

Recently Adopted Accounting Guidance

In February 2013, the FASB issued ASU No. 2013-04, Liabilities (Topic 405) - Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date ("ASU 2013-04"). The objective of the amendments in this update is to provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, except for obligations addressed within existing US GAAP. Examples of obligations within the scope of this ASU include debt arrangements, other contractual obligations, and settled litigation and judicial rulings. This guidance requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope is fixed at the reporting date, as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement amount its co-obligors, plus any additional amount the entity expects to pay on behalf of its co-obligors. The guidance also requires an entity to disclose the nature and amount of the obligations as well as other information about those obligations. Effective December 28, 2013 the Company adopted ASU 2013-04, which did not have a material impact on the Company's consolidated financial statements.

In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists ("ASU 2013-11"). The objective of this ASU is to eliminate the diversity in practice on how entities present unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. ASU 2013-11 requires entities to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset (with certain exceptions) for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. Effective December 28, 2013, the Company adopted ASU 2013-11, which did not have a material impact on the Company's consolidated financial statements.


54


ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

Commodity Price Risk

We are aware of the potentially unfavorable effects inflationary pressures may create through higher product and material costs, higher asset replacement costs and related depreciation, and higher interest rates. In addition, our operating performance is affected by price fluctuations in copper, oil, stainless steel, aluminum, zinc, plastic and PVC, and other commodities and raw materials. 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. However, 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.

Interest Rate Risk

Our variable rate term debt is sensitive to changes in the general level of interest rates. As of December 26, 2014, the interest rate in effect with respect to the outstanding balance of $74.0 million variable rate debt was 1.69% for the Eurodollar revolving loans and 3.75% for the ABR revolving loans. While our variable rate term debt obligations exposes us to the risk of rising interest rates, we do not believe that the potential exposure is material to our overall financial performance or results of operations. Based on the outstanding variable rate debt as of December 26, 2014, a 1.0% annual increase or decrease in current market interest rates would have the effect of causing a $0.7 million pre-tax change to our statement of operations.

The fair market value of our ABL Facility, OpCo Notes, and HoldCo Notes is subject to interest rate risk. As of December 26, 2014, the estimated fair market value of our debt was as shown below (in thousands):

 
Fair Market Value
 
Percent of Par
Term Loan Facility
$
333,480

 
96.00%
ABL Facility
$
74,370

 
100.50%
HoldCo Notes
$
379,600

 
104.00%

Foreign Currency Exchange Risk

The majority of our purchases from foreign-based suppliers are from China and other countries in Asia and are transacted in U.S. dollars. Accordingly, our risk to foreign currency exchange rates was not material as of December 26, 2014.

    Most of our foreign suppliers incur costs of production in non-U.S. currencies. Accordingly, depreciation of the U.S. dollar against foreign currencies could increase the price we pay for these products. A substantial portion of our products is sourced from suppliers in China and the value of the Chinese Yuan has increased relative to the U.S. dollar since July 2005, when it was allowed to fluctuate against a basket of foreign currencies. Most experts believe that the value of the Yuan will continue to increase relative to the U.S. dollar over the next few years absent a policy change in how China regulates its currency. The continued increase in the value of the Chinese Yuan relative to the U.S. dollar would most likely result in an increase in the cost of products that are sourced from suppliers in China.


55


ITEM 8. Financial Statements and Supplementary Data



56


    


Report of Independent Registered Certified Public Accounting Firm

To the Board of Directors and Stockholders of Interline Brands, Inc.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive loss, stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Interline Brands, Inc. and its subsidiaries at December 26, 2014 and December 27, 2013 and the results of their operations and their cash flows for each of the periods from December 28, 2013 through December 26, 2014 and from December 29, 2012 through December 27, 2013 and September 8, 2012 through December 28, 2012, in conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.


/s/ PricewaterhouseCoopers LLP

Jacksonville, FL
February 25, 2015

57



Report of Independent Registered Certified Public Accounting Firm

To the Board of Directors and Stockholders of Interline Brands, Inc.:

In our opinion, the accompanying consolidated statements of operations, comprehensive income, stockholders' equity and cash flows for the period from December 31, 2011 through September 7, 2012 of Interline Brands, Inc. and its subsidiaries (Predecessor) present fairly, in all material respects, the results of their operations and their cash flows for the period from December 31, 2011 through September 7, 2012 in conformity with accounting principles generally accepted in the United States of America. 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 audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.



/s/ PricewaterhouseCoopers LLP

Jacksonville, FL
March 12, 2013


58


INTERLINE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
Successor
 
December 26,
2014
 
December 27,
2013
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
6,064

 
$
6,102

Accounts receivable - trade (net of allowance for doubtful accounts of $4,190 and $3,595)
177,878

 
165,420

Inventories
302,743

 
276,341

Prepaid expenses and other current assets
42,596

 
40,936

Income taxes receivable
4,139

 
13,563

Deferred income taxes
30,290

 
15,179

Total current assets
563,710

 
517,541

Property and equipment, net
54,844

 
58,665

Goodwill
486,439

 
486,439

Other intangible assets, net
345,314

 
445,046

Other assets
10,315

 
10,042

Total assets
$
1,460,622

 
$
1,517,733

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
126,116

 
$
123,915

Accrued expenses and other current liabilities
96,272

 
69,939

Accrued interest
17,305

 
19,755

Current portion of long-term debt
83,500

 

Current portion of capital leases
10

 
231

Total current liabilities
323,203

 
213,840

Long-Term Liabilities:
 
 
 
Deferred income taxes
116,358

 
145,584

Long-term debt, net of current portion
702,099

 
798,347

Capital leases, net of current portion

 
10

Other liabilities
2,445

 
3,099

Total liabilities
1,144,105

 
1,160,880

Commitments and contingencies (Note 15)


 


Stockholders' Equity:
 
 
 
Common stock; $0.01 par value, 2,500,000 authorized; 1,501,418 shares issued and 1,499,142 shares outstanding as of December 26, 2014 and 1,478,151 issued and outstanding as of December 27, 2013
15

 
15

Additional paid-in capital
400,231

 
392,201

Accumulated deficit
(81,856
)
 
(34,784
)
Accumulated other comprehensive loss
(1,165
)
 
(579
)
Treasury stock, at cost, 2,276 shares held as of December 26, 2014 and none as of December 27, 2013
(708
)
 

Total stockholders' equity
316,517

 
356,853

Total liabilities and stockholders' equity
$
1,460,622

 
$
1,517,733

 
 
 
 
See accompanying notes to consolidated financial statements.

59


INTERLINE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
 
 
Successor
 
 
Predecessor
 
For the fiscal year ended
 
For the period September 8, 2012 through December 28, 2012
 
 
For the period December 31, 2011 through September 7, 2012
 
December 26,
2014
 
December 27,
2013
 
 
 
Net sales
$
1,676,221

 
$
1,598,055

 
$
404,593

 
 
$
917,752

Cost of sales
1,094,578

 
1,045,084

 
256,349

 
 
584,033

Gross profit
581,643

 
552,971

 
148,244

 
 
333,719

 
 
 
 
 
 
 
 
 
Operating Expenses:
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
475,813

 
457,236

 
115,533

 
 
255,409

Depreciation and amortization
53,814

 
50,038

 
12,837

 
 
17,707

Merger related expenses
102

 
1,377

 
39,641

 
 
19,049

Total operating expenses
529,729

 
508,651

 
168,011

 
 
292,165

Operating income (loss)
51,914

 
44,320

 
(19,767
)
 
 
41,554

 
 
 
 
 
 
 
 
 
Impairment of other intangible assets
(67,500
)
 

 

 
 

Loss on extinguishment of debt, net
(4,257
)
 

 

 
 
(2,214
)
Interest expense
(59,178
)
 
(63,087
)
 
(19,773
)
 
 
(16,631
)
Interest and other income
983

 
1,580

 
593

 
 
1,499

(Loss) income before income taxes
(78,038
)
 
(17,187
)
 
(38,947
)
 
 
24,208

(Benefit) provision for income taxes
(30,966
)
 
(10,847
)
 
(10,503
)
 
 
11,384

Net (loss) income
$
(47,072
)
 
$
(6,340
)
 
$
(28,444
)
 
 
$
12,824

 
 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.


60




INTERLINE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands)

 
Successor
 
 
Predecessor
 
For the fiscal year ended
 
For the period September 8, 2012 through December 28, 2012
 
 
For the period December 31, 2011 through September 7, 2012
 
December 26,
2014
 
December 27,
2013
 
 
 
Net (loss) income
$
(47,072
)
 
$
(6,340
)
 
$
(28,444
)
 
 
$
12,824

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
(586
)
 
(546
)
 
(33
)
 
 
303

Other comprehensive (loss) income
(586
)
 
(546
)
 
(33
)
 
 
303

Comprehensive (loss) income
$
(47,658
)
 
$
(6,886
)
 
$
(28,477
)
 
 
$
13,127

 
 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.


61

INTERLINE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)

 
Common Stock
 
Treasury Stock
 
Additional Paid-In Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders' Equity
 
Shares
Amount
 
Shares
Amount
 
 
 
 
 
Predecessor
Predecessor balances as of December 30, 2011
33,558,842

$
335

 
1,962,227

$
(28,351
)
 
$
599,923

 
$
(59,150
)
 
$
1,688

 
$
514,445

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income


 


 

 
12,824

 

 
12,824

Foreign currency translation


 


 

 

 
303

 
303

Total comprehensive income
 
 
 
 
 
 
 
 
12,824

 
303

 
13,127

Share-based compensation


 


 
15,169

 

 

 
15,169

Issuance of common stock from exercise of stock options
156,297

2

 


 
2,186

 

 

 
2,188

Issuance of common stock from vesting of restricted share units
253,839

3

 


 
(2
)
 

 

 
1

Excess tax benefits on stock options exercised and other vested share-based payments


 


 
4,292

 

 

 
4,292

Repurchases of common stock


 
75,025

(1,450
)
 

 

 

 
(1,450
)
Predecessor balances prior to Merger on September 7, 2012
33,968,978

$
340


2,037,252

$
(29,801
)
 
$
621,568

 
$
(46,326
)
 
$
1,991

 
$
547,772

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Successor
Successor opening balances subsequent to Merger on September 8, 2012

$

 

$

 
$

 
$

 
$

 
$

Comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss


 


 

 
(28,444
)
 

 
(28,444
)
Foreign currency translation


 


 

 

 
(33
)
 
(33
)
Total comprehensive loss
 
 
 
 
 
 
 
 
(28,444
)
 
(33
)
 
(28,477
)
Capital contribution, net
1,468,763

14

 


 
374,520

 

 

 
374,534

Share-based compensation


 


 
9,958

 

 

 
9,958

Issuance of common stock
5,702

1

 


 
1,454

 

 

 
1,455

Successor balances as of December 28, 2012
1,474,465

$
15



$

 
$
385,932

 
$
(28,444
)
 
$
(33
)
 
$
357,470

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

62

INTERLINE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
(in thousands, except share data)

 
Common Stock
 
Treasury Stock
 
Additional Paid-In Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders' Equity
 
Shares
Amount
 
Shares
Amount
 
 
 
 
 
Successor
Successor balances as of December 28, 2012
1,474,465

$
15

 

$

 
$
385,932

 
$
(28,444
)
 
$
(33
)
 
$
357,470

Comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss


 


 

 
(6,340
)
 

 
(6,340
)
Foreign currency translation


 


 

 

 
(546
)
 
(546
)
Total comprehensive loss
 
 
 
 
 
 
 
 
(6,340
)
 
(546
)
 
(6,886
)
Share-based compensation


 


 
5,330

 

 

 
5,330

Issuance of common stock
3,686


 


 
939

 

 

 
939

Successor balances as of December 27, 2013
1,478,151

$
15



$

 
$
392,201

 
$
(34,784
)
 
$
(579
)
 
$
356,853

Comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss


 


 

 
(47,072
)
 

 
(47,072
)
Foreign currency translation


 


 

 

 
(586
)
 
(586
)
Total comprehensive loss
 
 
 
 
 
 
 
 
(47,072
)
 
(586
)
 
(47,658
)
Share-based compensation


 


 
3,720

 

 

 
3,720

Issuance of common stock
2,334


 


 
726

 

 

 
726

Excess tax benefits on stock options exercised


 


 
419

 

 

 
419

Issuance of common stock from exercise of stock option
20,818


 


 
3,165

 

 

 
3,165

Issuance of restricted stock
115


 


 

 

 

 

Repurchase of common stock


 
2,276

(708
)
 

 

 

 
(708
)
Successor balances as of December 26, 2014
1,501,418

$
15


2,276

$
(708
)
 
$
400,231

 
$
(81,856
)
 
$
(1,165
)
 
$
316,517

 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.

63

INTERLINE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

 
 
 
 
 
 
 
 
Successor
 
 
Predecessor
 
For the fiscal year ended
 
For the period September 8, 2012 through December 28, 2012
 
 
For the period December 31, 2011 through September 7, 2012
 
December 26,
2014
 
December 27,
2013
 
 
 
Cash Flows from Operating Activities:
 
 
 
 
 
 
 
 
Net (loss) income
$
(47,072
)
 
$
(6,340
)
 
$
(28,444
)
 
 
$
12,824

Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
 
 
 
 
 
 
 
 
Depreciation and amortization
53,814

 
50,038

 
12,837

 
 
17,707

Impairment of other intangible assets
67,500

 

 

 
 

Amortization of deferred lease incentive obligation
(811
)
 
(844
)
 
(256
)
 
 
(561
)
Amortization of deferred debt financing costs
4,224

 
3,812

 
1,165

 
 
985

Amortization of debt premium, net
(445
)
 
(3,147
)
 
(1,006
)
 
 

Tender premiums and expenses on OpCo Notes
18,595

 

 

 
 

Write-off of unamortized OpCo Notes fair value adjustment
(17,803
)
 

 

 
 

Write-off of deferred debt issuance costs
3,465

 

 

 
 
2,214

Share-based compensation
3,720

 
5,330

 
9,958

 
 
15,169

Excess tax benefits from share-based compensation
(419
)
 

 

 
 
(4,573
)
Deferred income taxes
(44,337
)
 
(19,379
)
 
1,995

 
 
7,675

Provision for doubtful accounts
2,743

 
1,981

 
530

 
 
1,285

Loss (gain) on disposal of property and equipment
33

 
8

 
(83
)
 
 
(125
)
Other
(65
)
 
(375
)
 
(138
)
 
 
(494
)
Changes in assets and liabilities, net of businesses acquired:
 
 
 
 
 
 
 
 
Accounts receivable - trade
(15,305
)
 
(8,317
)
 
23,969

 
 
(29,822
)
Inventories
(26,595
)
 
(26,985
)
 
(16,437
)
 
 
5,631

Prepaid expenses and other current assets
(1,805
)
 
(7,814
)
 
(3,126
)
 
 
964

Other assets
(359
)
 
(81
)
 
44

 
 
38

Accounts payable
1,778

 
11,168

 
10,669

 
 
(12,415
)
Accrued expenses and other current liabilities
25,596

 
18,888

 
(9,643
)
 
 
8,797

Accrued interest
(2,451
)
 
1,525

 
8,280

 
 
3,879

Income taxes
9,837

 
1,686

 
(6,372
)
 
 
(4,048
)
Other liabilities
102

 
(223
)
 
(34
)
 
 
(12
)
Net cash provided by operating activities
33,940

 
20,931

 
3,908

 
 
25,118

 
 
 
 
 
 
 
 
 
Cash Flows from Investing Activities:
 
 
 
 
 
 
 
 
Acquisition of Interline Brands, Inc.

 

 
(825,717
)
 
 

Purchases of property and equipment, net
(17,437
)
 
(18,738
)
 
(5,748
)
 
 
(11,966
)
Purchase of businesses, net of cash acquired

 

 
(82,500
)
 
 
(3,278
)
Net cash used in investing activities
(17,437
)
 
(18,738
)
 
(913,965
)
 
 
(15,244
)

64

INTERLINE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(in thousands)

 
 
 
 
 
 
 
Successor
 
 
Predecessor
 
For the fiscal year ended
 
For the period September 8, 2012 through December 28, 2012
 
 
For the period December 31, 2011 through September 7, 2012
 
December 26,
2014
 
December 27,
2013
 
 
 
Cash Flows from Financing Activities:
 
 
 
 
 
 
 
 
Proceeds from equity contributions, net

 

 
350,886

 
 

Proceeds from issuance of Term Loan Facility, net
349,125

 

 

 
 

Repayment of OpCo Notes
(300,000
)
 

 

 
 

Proceeds from issuance of HoldCo Notes

 

 
365,000

 
 

Proceeds from ABL Facility
110,000

 
124,000

 
217,500

 
 

Payments on ABL Facility
(151,000
)
 
(136,500
)
 
(90,000
)
 
 

Payment of tender premium and expenses on OpCo Notes
(18,595
)
 

 

 
 

Payments on Term Loan Facility
(2,625
)
 

 

 
 

Payment of deferred debt financing costs
(8,074
)
 
(228
)
 
(26,353
)
 
 
(355
)
Proceeds from stock options exercised
2,597

 

 

 
 
2,188

Excess tax benefits from share-based compensation
419

 

 

 
 
4,573

Increase (decrease) in purchase card payable, net
1,233

 
822

 
1,289

 
 
(3,840
)
Payments on capital lease obligations
(159
)
 
(506
)
 
(193
)
 
 
(456
)
Proceeds from issuance of common stock
866

 
800

 
1,454

 
 

Purchases of treasury stock

 

 

 
 
(1,450
)
Net cash (used in) provided by financing activities
(16,213
)
 
(11,612
)
 
819,583

 
 
660

Effect of exchange rate changes on cash and cash equivalents
(328
)
 
(280
)
 
(65
)
 
 
133

Net (decrease) increase in cash and cash equivalents
(38
)
 
(9,699
)
 
(90,539
)
 
 
10,667

Cash and cash equivalents at beginning of period
6,102

 
15,801

 
106,340

 
 
95,673

Cash and cash equivalents at end of period
$
6,064

 
$
6,102

 
$
15,801

 
 
$
106,340

 
 
 
 
 
 
 
 
 
Supplemental Disclosure of Cash Flow Information:
 
 
 
 
 
 
 
 
Cash paid (received) during the period for:
 
 
 
 
 
 
 
 
Interest
$
57,718

 
$
60,680

 
$
10,783

 
 
$
11,663

Income taxes, net of refunds
$
3,403

 
$
7,313

 
$
(5,853
)
 
 
$
7,714

 
 
 
 
 
 
 
 
 
Schedule of Non-Cash Investing and Financing Activities:
 
 
 
 
 
 
 
 
Non-cash equity contributions from shareholders
$

 
$
140

 
$
23,648

 
 
$

Property acquired through lease incentives
$

 
$

 
$
93

 
 
$

Contingent consideration associated with acquisitions
$

 
$

 
$

 
 
$
300

Capital expenditures incurred but not yet paid
$
2,167

 
$
2,117

 
$
2,143

 
 
$
1,654

 
 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.

65

INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 26, 2014 and December 27, 2013 (Successor) and the periods September 8, 2012 to December 28, 2012 (Successor) and December 31, 2011 to September 7, 2012 (Predecessor)



1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business

Interline Brands, Inc., a Delaware corporation, and its subsidiaries (“Interline” or the “Company”) is a leading national distributor and direct marketer of broad-line maintenance, repair and operations (“MRO”) products into the facilities maintenance end-market. The Company sells janitorial and sanitation (“JanSan”) supplies, plumbing, heating, ventilation and air conditioning (“HVAC”), hardware, electrical, appliances, security, and other MRO products. Interline’s diverse customer base of over 100,000 customers consists of institutions, such as educational, lodging, health care, and government facilities; multi-family housing, such as apartment complexes; and residential, including professional contractors, and plumbing and hardware retailers. Interline's customers range in size from individual contractors and independent hardware stores to apartment management companies and national purchasing groups.

The Company currently markets and sells its products primarily through thirteen targeted brands, each of which is recognized in the facilities maintenance end-market for providing quality products at competitive prices with reliable same-day or next-day delivery. During the second quarter of 2014, the Company made a strategic marketing decision to simplify its brand structure for the institutional customer base, which will result in the consolidation of certain brands serving these customers during 2015. The Company utilizes a variety of sales channels, including a direct field sales force, inside sales representatives, a direct marketing program, brand-specific websites, a national account sales program and various supply chain programs. The Company delivers its products through its network of distribution centers and professional contractor showrooms located throughout the United States, Canada, and Puerto Rico, as well as vendor managed inventory locations at large professional contractor and institutional customer locations, and its dedicated fleet of trucks and third-party carriers. Through its broad distribution network, the Company is able to provide next-day delivery service to approximately 98% of the United States ("U.S.") population and same-day delivery service to most major metropolitan markets in the U.S.

Interline Brands, Inc. is the holding company of the Interline group of businesses, including its principal operating subsidiary, Interline Brands, Inc., a New Jersey corporation (“Interline New Jersey”).

Basis of Presentation

On September 7, 2012 (the "Merger Date"), pursuant to an Agreement and Plan of Merger (the "Merger Agreement") dated as of May 29, 2012, Isabelle Holding Company Inc., a Delaware corporation (“Parent” or "Interline Delaware"), and Isabelle Acquisition Sub Inc., a Delaware corporation and a wholly-owned subsidiary of Parent (“Merger Sub”, and together with Parent, the "Acquiring Parties"), merged with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly-owned subsidiary of Parent. Immediately following the effective time of the Merger, Parent was merged with and into the Company, with the Company surviving (the "Second Merger"). Under the Merger Agreement, stockholders of the Company received $25.50 in cash for each share of Company common stock. The Merger was unanimously approved by Interline's Board of Directors and a majority of Interline's stockholders holding the outstanding shares of the common stock. Please refer to Note 3. Transactions for further information about the Merger Agreement. Prior to the Merger Date, the Company operated as a public company with its common stock traded on the New York Stock Exchange. As a result of the Merger, Interline's common stock became privately-held.

The Merger has been accounted for in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for business combinations and accordingly, the Company's assets and liabilities were recorded using their fair values as of September 7, 2012.

Although the Company continued as the same legal entity after the Merger, since the financial statements are not comparable as a result of acquisition accounting, the accompanying consolidated financial statements are presented for two periods: the period prior to the Merger ("Predecessor") and the period subsequent to the Merger ("Successor").


66

INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 26, 2014 and December 27, 2013 (Successor) and the periods September 8, 2012 to December 28, 2012 (Successor) and December 31, 2011 to September 7, 2012 (Predecessor)


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of Interline Brands, Inc. and all of its wholly-owned subsidiaries. These statements have been prepared in accordance with U.S. GAAP. All 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. The fiscal years ended December 26, 2014 and December 27, 2013 both included 52 weeks each year. As a result of the Merger that occurred on September 7, 2012, the 2012 fiscal year is comprised of two periods, the 16-week Successor period from September 8, 2012 through December 28, 2012, and the 36 week Predecessor period from December 31, 2011 through September 7, 2012. References herein to 2014, 2013 and 2012 are for the fiscal years ended December 26, 2014, December 27, 2013, and the 2012 Successor and Predecessor periods, respectively.

Reclassifications

The Company has reclassified certain items previously reported in the financial statements in order to conform to current year presentation. The reclassifications were made within current assets and had no impact on working capital.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the fiscal period. Actual results may differ from those estimates and assumptions.

Foreign Currency Translation

The consolidated financial statements are presented in United States dollars ("USD"), which is the functional and presentation currency of the Company. Assets and liabilities of the Company's foreign subsidiaries, where the functional currency is the local currency, are translated into USD at exchange rates effective as of the balance sheet date. Revenues and expenses are translated using average exchange rates in effect for the periods presented.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and highly liquid investments that can be readily converted into cash or that have an original maturity of three months or less.

Concentrations of Credit Risk

Financial instruments, which potentially subject the Company to concentration of credit risk, consist primarily of trade accounts receivable. The Company's trade accounts receivable are principally from facilities maintenance, professional contractor and specialty distributor customers in the United States and Canada. Concentration of credit risk with respect to accounts receivable is limited due to the large number of customers comprising the Company's customer base. The Company performs credit evaluations of its customers; however, the Company's policy is not to require collateral. As of December 26, 2014 and December 27, 2013, the Company had no significant concentrations of credit risk.


67

INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 26, 2014 and December 27, 2013 (Successor) and the periods September 8, 2012 to December 28, 2012 (Successor) and December 31, 2011 to September 7, 2012 (Predecessor)


Allowance for Doubtful Accounts

 
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make payments. The allowance for doubtful accounts is estimated using factors such as general economic conditions and trends, historical collection and charge-off experience, creditworthiness of customers and aging of accounts receivable. Receivables are charged against the allowance for doubtful accounts when it is probable that the receivable will not be recovered.

Inventories

Inventories, consisting substantially of finished goods, are valued at the lower of cost or market. Inventory cost is determined using the weighted-average cost method. The Company adjusts inventory balances 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 adjustment for excess and obsolete inventory, management reviews inventory quantities on hand, slow movement reports and sales history reports. In addition, management estimates required cost adjustments based on estimated demand for products and market conditions.

Property and Equipment

Property and equipment purchased in the normal course of business are stated at cost, net of accumulated depreciation. Expenditures for additions, renewals and improvements are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. Property and equipment acquired in connection with acquisitions are recorded at amounts which approximate fair market value as of the date of the acquisition. 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. Lease incentive obligations accrued as a result of leasehold improvements are amortized as a decrease in rent expense over the life of the related leasehold improvements.

Depreciation and amortization, including assets under capital leases, is computed using the straight-line method based upon estimated useful lives of the assets as follows (in years):
Buildings
 
39
-
40
Machinery and equipment
 
2
-
7
Office furniture and equipment
 
3
-
7
Vehicles
 
2
-
5
Leasehold improvements
 
1
-
10
        

68

INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 26, 2014 and December 27, 2013 (Successor) and the periods September 8, 2012 to December 28, 2012 (Successor) and December 31, 2011 to September 7, 2012 (Predecessor)


Costs of Computer Software Developed or Obtained for Internal Use

The Company capitalizes development costs, including design, coding, installation and testing costs, associated with computer software developed or obtained for internal use. These costs consist of both internal labor costs, the cost of upgrades or modifications that result in additional functionality, as well as third party contract costs directly associated with the software development. The Company capitalizes costs related to internally developed software and amortizes those costs over five years. As of December 26, 2014 and December 27, 2013, there was $12.0 million and $9.6 million of unamortized capitalized software costs, respectively. Capitalized software costs and associated amortization expense during 2014, 2013 and 2012 were as follows (in thousands):
 
Successor
 
 
Predecessor
 
For the fiscal year ended
 
For the period September 8, 2012 through December 28, 2012
 
 
For the period December 31, 2011 through September 7, 2012
 
December 26, 2014
 
December 27, 2013
 
 
 
Capitalized software costs
$
6,119

 
$
4,843

 
$
376

 
 
$
3,107

Amortization expense of capitalized software costs
$
3,780

 
$
3,001

 
$
218

 
 
$
2,387


Impairment of Long-Lived Assets

The Company evaluates its long-lived assets for impairment on an annual basis or when an event occurs or circumstances change that would indicate that the fair value of the long-lived asset has fallen below its carrying amount. Such evaluations include 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 are used to measure impairment losses. The determination of whether long-lived assets have become impaired involves a significant level of judgment in the assumptions underlying the approach used to determine the value of the long-lived asset. Changes in the Company's strategy or assumptions, environmental or other regulations, and/or market conditions could significantly impact these judgments. The Company monitors market conditions and other factors to determine if interim impairment tests are necessary. The Company has not identified any impairment losses with respect to long-lived assets for any period presented.

Goodwill

Goodwill represents the excess purchase price of acquired companies over the fair value of their net assets. The Company performs a goodwill impairment analysis, using the two-step method, on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company has elected to perform its annual goodwill impairment test as of the last day of each fiscal year. The recoverability of goodwill is measured at the reporting unit level, which the Company has determined to be consistent with its operating segment, by comparing the reporting unit's carrying amount, including goodwill, to its fair value. The Company determines the fair value of its reporting unit based on a weighting of both the present value of future projected cash flows and the use of comparative market multiples. The determination of whether goodwill has become impaired involves a significant level of judgment in the assumptions underlying the methods used to determine the value of the Company's reporting unit, including assumptions related to revenue growth rates, profit margins, future capital expenditures, working capital needs, discount rates and perpetual growth rates, among other considerations. Changes in the Company's strategy or assumptions, environmental or other regulations, and/or operating, economic or market conditions could significantly impact these judgments. The Company monitors these conditions and other factors to determine if interim impairment tests are necessary. The Company has not identified any impairment losses with respect to goodwill for any period presented.


69

INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 26, 2014 and December 27, 2013 (Successor) and the periods September 8, 2012 to December 28, 2012 (Successor) and December 31, 2011 to September 7, 2012 (Predecessor)


Other Intangible Assets
    
Other intangible assets include amounts assigned to trademarks, customer lists and relationships, and deferred debt issuance costs. Customer lists and relationships are amortized over their useful lives of 7 to 19 years on either a straight-line or accelerated basis, depending on the characteristics of the asset at the beginning of its life. Deferred debt issuance costs are amortized as a component of interest expense over the term of the related debt using the effective interest method or a method that approximates the effective interest method. The Company has historically determined that its trademarks have indefinite lives and has elected to perform its annual impairment test on indefinite-lived assets as of the last day of each year.

During the second quarter of 2014, the Company recorded non-cash charges of $67.5 million related to the impairment of certain indefinite-lived trademark assets.  These impairments were primarily due to a strategic marketing decision to phase out certain brand names through the remainder of the fiscal year and market the related products under a new consolidated brand name which resulted in a change in the expected useful life of the intangible assets. The impairment charges were determined by comparing the fair value of the trademarks, derived using discounted cash flow analyses, to the current carrying value. The Company has evaluated whether other trademark assets not associated with the rebranding still remain indefinite-lived, noting no other events have occurred that would cause an impairment of these assets or any other intangible or long-lived assets, including goodwill. Refer to Note 8. Goodwill and Other Intangible Assets for additional disclosure regarding the impairment charges. The Company has not identified any impairment losses with respect to other intangible assets for any prior periods presented.

Risk Insurance

The Company has a $0.4 million self-insured retention per occurrence in connection with its workers' compensation and auto insurance policies (collectively “Risk Insurance”). The Company accrues its estimated cost in connection with its portion of its Risk Insurance losses using an actuarial methodology based on claims filed, historical development factors and an estimate of claims incurred but not yet reported. The Company does not discount its workers compensation reserve. Claims paid are charged against the reserve.

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Disclosure about how fair value is determined for assets and liabilities is based on a hierarchy established from the significant levels of inputs as follows:

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

The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
 
The fair value of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate the carrying amount because of the short maturities of these items. As previously discussed, the Company recorded nonrecurring charges of $67.5 million related to the impairment of certain indefinite-lived trademark assets during the second quarter of 2014. In conjunction with the Company's impairment analysis, these trademark assets were remeasured at their fair value of $3.6 million using Level 3, significant unobservable inputs. Key assumptions include projected revenue attributable to the products and/or services that utilize the trademark assets, their expected economic life, a discount rate of 13% and a royalty rate range of 0.6% to 1.5%. Refer to Note 8. Goodwill and Other Intangible Assets for additional disclosures regarding the impairment charges.


70

INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 26, 2014 and December 27, 2013 (Successor) and the periods September 8, 2012 to December 28, 2012 (Successor) and December 31, 2011 to September 7, 2012 (Predecessor)


The fair value of the Company’s Term Loan Facility, ABL Facility, OpCo Notes, and HoldCo Notes (as defined in Note 10. Debt) is determined by quoted market prices and other inputs that are observable for these liabilities, which are Level 2 inputs. The carrying amount and fair value of the financial instruments as of December 26, 2014 and December 27, 2013 were as follows (in thousands):
 
 
Successor
 
 
December 26, 2014
 
December 27, 2013
Description
 
Carrying Amount
 
Fair
Value
 
Carrying Amount
 
Fair
Value
Term Loan Facility (1) (2)
 
$
346,599

 
$
333,480

 
$

 
$

ABL Facility
 
74,000

 
74,370

 
115,000

 
115,098

OpCo Notes (1) (3)
 

 

 
318,347

 
317,625

HoldCo Notes
 
365,000

 
379,600

 
365,000

 
398,763

____________________
(1)
In March of 2014, Interline New Jersey entered into the Term Loan Facility and used a portion of the proceeds to finance the redemption of the OpCo Notes and discharged its remaining obligations thereunder.
(2)
As of December 26, 2014, the carrying amount of the Term Loan Facility included an unamortized original issue discount of $0.8 million.
(3)
As of December 27, 2013, the OpCo notes included an unamortized fair value premium of $18.3 million recorded as a result of the Merger.

Revenue Recognition

The following four basic criteria must be met before the Company recognizes revenue:

persuasive evidence of an arrangement exists;
delivery has occurred or services have been rendered;
the price to the buyer is fixed or determinable; and
collectability is reasonably assured.
    
The Company recognizes a sale when the risk of loss has passed to the customer. For goods shipped by third party carriers, the Company recognizes revenue upon shipment since the terms are generally FOB shipping point. For goods delivered on the Company's dedicated fleet of trucks, the Company recognizes revenue upon delivery to the customer. The Company bills some shipping and handling costs to its customers and has included this amount in revenue. Sales are recorded net of estimated discounts, rebates and returns. The provision for discounts, rebates and returns is estimated based on sales volumes and historical experience.

Taxes Collected and Remitted

The Company records non-income taxes collected from customers and remitted to governmental agencies on a net basis.

Cost of Sales

Cost of sales includes merchandise costs less vendor rebates, freight-in and a portion of operating costs related to the activities of some of our regional replenishment centers.

Vendor Rebates

Many of the Company's arrangements with its vendors provide for the Company to receive a rebate of a specified amount of consideration, payable to the Company when the Company achieves certain targeted measures, generally related to the volume level of purchases from its vendors. The Company accounts for such rebates as a reduction of the prices of the vendor's products, which reduces inventory until the period in which the product is sold, at which time the reduced costs are included in cost of sales in the Company's statement of operations. Throughout the year, the Company estimates the amount of rebates earned based upon the

71

INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 26, 2014 and December 27, 2013 (Successor) and the periods September 8, 2012 to December 28, 2012 (Successor) and December 31, 2011 to September 7, 2012 (Predecessor)


expected level of purchases relative to the purchase levels that mark the Company's progress toward earning the rebates. The Company continually revises these estimates to reflect actual rebates earned based on actual purchase levels.

Shipping and Handling Costs

Shipping and handling costs to customers have been included in selling, general and administrative expenses on the consolidated statements of operations. Shipping and handling costs were as follows (in thousands):

 
Successor
 
 
Predecessor
 
For the fiscal year ended
 
For the period September 8, 2012 through December 28, 2012
 
 
For the period December 31, 2011 through September 7, 2012
 
December 26, 2014
 
December 27, 2013
 
 
 
Shipping and handling costs
$
76,739

 
$
72,238

 
$
18,800

 
 
$
41,241


Advertising Costs

Costs of producing and distributing sales catalogs and promotional flyers are capitalized and charged to expense ratably over the life of the related catalog and promotional flyers. Advertising expense, net of co-op advertising, and co-op advertising was as follows (in thousands):
 
Successor
 
 
Predecessor
 
For the fiscal year ended
 
For the period September 8, 2012 through December 28, 2012
 
 
For the period December 31, 2011 through September 7, 2012
 
December 26, 2014
 
December 27, 2013
 
 
 
Advertising expense, net of co-op advertising
$
1,723

 
$
1,786

 
$
381

 
 
$
867

Co-op advertising expense
$
2,566

 
$
2,570

 
$
651

 
 
$
1,796


Share-Based Compensation

The Company accounts for its share-based compensation using the fair value method of accounting in accordance with U.S. GAAP. Under Accounting Standards Codification ("ASC") 718, Compensation - Stock Compensation, share-based compensation cost is measured at the grant date based on the fair value of the award. For awards containing only service conditions, the Company recognizes share-based compensation cost on a straight-line basis over the expected vesting period or to the retirement eligibility date, if less than the vesting period. For awards with performance conditions, the Company recognizes share-based compensation cost on a straight-line basis for each performance criteria tranche over the implied service period when the Company believes it is probable that the performance targets, as defined in the agreements, will be achieved. The measurement of fair value of the share-based compensation awards requires judgment in the assumptions underlying the methods used to determine the fair value, including stock price volatility, risk-free interest rates, and estimated forfeitures. Refer to Note 13. Share-Based Compensation for additional disclosure regarding share-based compensation costs.

Income Taxes

The Company accounts for income taxes under the provisions of ASC 740, Income Taxes, using the liability method. Deferred tax assets and liabilities are computed for differences between the financial statement carrying values and the tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. Such deferred 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.


72

INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 26, 2014 and December 27, 2013 (Successor) and the periods September 8, 2012 to December 28, 2012 (Successor) and December 31, 2011 to September 7, 2012 (Predecessor)


Accounting for income taxes requires the Company to exercise judgment in evaluating uncertain tax positions taken by the Company. The Company accounts for uncertainty in income taxes in accordance with U.S. GAAP. The final outcome of these tax uncertainties is dependent upon various matters including tax examinations, legal proceedings, changes in regulatory tax laws, or interpretation of those tax laws, or expiration of statutes of limitation. The Company recognizes potential penalties and interest related to unrecognized tax benefits within its statements of operations as selling, general and administrative expenses and interest expense, respectively. To the extent penalties and interest are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of selling, general and administrative expenses and interest expense, respectively. Refer to Note 17. Income Taxes for more information.

Segment Information

The Company has one operating segment and, therefore, one reportable segment, the distribution of MRO products into the facilities maintenance end-market. The Company’s revenues and assets outside the United States are not significant. The Company’s net sales by product category were as follows (in thousands):

 
 
Successor
 
 
Predecessor
 
 
For the fiscal year ended
 
For the period September 8, 2012 through December 28, 2012
 
 
For the period December 31, 2011 through September 7, 2012
Product Category(1)
 
December 26, 2014
 
December 27, 2013
 
 
 
JanSan
 
$
757,338

 
$
722,368

 
$
170,158

 
 
$
378,944

Plumbing
 
296,833

 
285,004

 
77,593

 
 
178,207

Hardware, tools and fixtures
 
148,817

 
133,736

 
33,918

 
 
76,855

HVAC
 
130,664

 
127,403

 
32,593

 
 
81,330

Electrical and lighting
 
88,632

 
84,605

 
22,853

 
 
51,676

Appliances and parts
 
92,667

 
81,875

 
20,856

 
 
48,762

Security and safety
 
72,154

 
68,320

 
18,901

 
 
41,341

Other
 
89,116

 
94,744

 
27,721

 
 
60,637

Total
 
$
1,676,221

 
$
1,598,055

 
$
404,593

 
 
$
917,752

____________________
(1)
The Company continually refines its product classification groupings and, as a result, stock keeping units are     periodically realigned within product categories. Therefore, the prior periods in this table have been recast to be consistent with current presentation.

Recently Issued Accounting Guidance

In March 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity ("ASU 2013-05"). The amendments contained within this guidance clarify the applicable guidance for the release of the cumulative translation adjustment under current U.S. GAAP when an entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity. The amendments in ASU 2013-05 are effective prospectively for the first annual period beginning after December 15, 2014, and interim and annual periods thereafter, with early adoption permitted. The amendments should be applied prospectively to derecognition events occurring after the effective date, and prior periods should not be adjusted. This ASU is not expected to have a material impact on the Company's consolidated financial statements.
In May 2014, FASB issued ASU No. 2014-09, Revenue From Contracts With Customers ("ASU 2014-09"), that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The ASU is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature,

73

INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 26, 2014 and December 27, 2013 (Successor) and the periods September 8, 2012 to December 28, 2012 (Successor) and December 31, 2011 to September 7, 2012 (Predecessor)


amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. The amendments in this update are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The company is currently evaluating the transition method that will be elected and assessing the impact that this standard will have on its consolidated financial statements.
    
In June 2014, the FASB issued ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The amendments in ASU 2014-12 require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Accounting Standards Codification Topic No. 718, “Compensation — Stock Compensation,” as it relates to awards with performance conditions that affect vesting to account for such awards. The amendments in this update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted. Entities may apply the amendments in ASU 2014-12 either: (a) prospectively to all awards granted or modified after the effective date; or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. This ASU is not expected to have a material impact on the Company's consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40)-Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 provides guidance to U.S. GAAP about management’s responsibility to evaluate whether there is a substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Specifically, ASU 2014-15 (1) defines the term substantial doubt, (2) requires an evaluation of every reporting period including interim periods, (3) provides principles for considering the mitigating effect of management’s plan, (4) requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) requires an express statement and other disclosures when substantial doubt is not alleviated, and (6) requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this update are effective for annual periods beginning after December 15, 2016 and interim periods within those reporting periods. Earlier adoption is permitted. This ASU is not expected to have a material impact on the Company's consolidated financial statements.

Other accounting standards that have been recently issued by the FASB are not expected to have a material impact on the Company’s consolidated financial statements.

Recently Adopted Accounting Guidance

In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2013-04, Liabilities (Topic 405) - Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date ("ASU 2013-04"). The objective of the amendments in this update is to provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, except for obligations addressed within existing U.S. GAAP. Examples of obligations within the scope of this ASU include debt arrangements, other contractual obligations, and settled litigation and judicial rulings. This guidance requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope is fixed at the reporting date, as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement amount its co-obligors, plus any additional amount the entity expects to pay on behalf of its co-obligors. The guidance also requires an entity to disclose the nature and amount of the obligations as well as other information about those obligations. Effective December 28, 2013 the Company adopted ASU 2013-04, which did not have a material impact on the Company's consolidated financial statements.

In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists ("ASU 2013-11"). The objective of this ASU is to eliminate the diversity in practice on how entities present unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. ASU 2013-11 will require entities to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset (with certain exceptions) for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. Effective December 28, 2013, the Company adopted ASU 2013-11, which did not have a material impact on the Company's consolidated financial statements.

74

INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 26, 2014 and December 27, 2013 (Successor) and the periods September 8, 2012 to December 28, 2012 (Successor) and December 31, 2011 to September 7, 2012 (Predecessor)


3. TRANSACTIONS

The Merger and Merger Agreement

Pursuant to the Merger Agreement, Merger Sub merged with and into the Company, with the Company surviving as a wholly-owned subsidiary of Parent. Parent is an affiliate of GS Capital Partners VI L.P. and, at the closing of the transaction, certain interests of Parent became owned by investment funds managed by P2 Capital Partners, LLC and certain members of Company management.  

As of the effective time of the Second Merger, the issued and outstanding common stock of the Company was owned as follows: (i) approximately 84% by GS Capital Partners VI Fund, L.P., GS Capital Partners VI Offshore Fund, L.P., GS Capital Partners VI GmbH & Co. KG, GS Capital Partners VI Parallel, L.P., MBD 2011 Holdings, L.P., Bridge Street 2012 Holdings, L.P. (collectively, the “GSCP Parties”), (ii) approximately 14% by P2 Capital Master Fund I, L.P. and P2 Capital Master Fund VII, L.P. (collectively, the “P2 Parties”), and (iii) approximately 2% by certain members of the Company's management.
    
At the effective time of the Merger, each share of common stock of Interline (other than shares owned by Interline, Parent, Merger Sub, any stockholders who were entitled to and who properly exercised appraisal rights under Delaware law (collectively, the "Excluded Stockholders"), and a portion of shares owned by P2 Capital Partners), was canceled and converted automatically into a
right to receive $25.50 in cash (the "Merger Consideration"), without interest. In connection with the closing of the Merger, P2 Capital Partners rolled 927,386 shares into the Company. In addition, at the effective time of the Merger, each outstanding option to purchase
shares of common stock of Interline were accelerated and fully vested, if not previously vested, and canceled (unless otherwise agreed to by the holder thereof and Parent) and converted into the right to receive cash consideration in an amount equal to the product of the total number of shares previously subject to the option and the excess, if any, of the Merger Consideration over the exercise price per share of the option. All outstanding Restricted Share Units were also accelerated, fully vested and then canceled and converted into the right to receive cash consideration in an amount equal to the Merger Consideration in respect of each share underlying the canceled Restricted Share Unit. In connection with the closing of the Merger, certain members of the Company's senior management reinvested a portion of their after-tax proceeds from the Merger attributable to each component of their existing equity, on terms agreed upon between management and Parent. A portion of this reinvestment was satisfied through an exchange of options based on the intrinsic value of the options on the date of closing of the Merger for shares and/or options in Parent. The options that were exchanged were done so on a 10:1 ratio, with a fair value of $255.00 per share.

The authorization to issue the preferred stock of the Company was canceled at the time of the Merger.

The Related Financing Transactions

In connection with the Merger, the Company entered into the following financing transactions:

a new senior secured asset-based revolving credit facility totaling $275.0 million (the "ABL Facility"); and
the issuance of $365.0 million aggregate principal amount of senior notes (the "HoldCo Notes").

Simultaneously with the closing of the Merger, the following occurred: the funding of the new senior secured asset-based revolving credit facility, the release of the net proceeds of the $365.0 million aggregate principal amount of senior notes from escrow, and the termination of the Company's previous $225.0 million asset-based revolving credit facility. Please refer to Note 10. Debt for further information regarding the financing transactions.

The Consent Solicitation

In connection with the Merger, on June 21, 2012, Interline New Jersey commenced the Consent Solicitation regarding certain amendments to the indenture governing the OpCo Notes (the "Bond Amendments"). The Bond Amendments permitted the Merger to occur without triggering a "Change of Control" under the indenture governing the OpCo Notes. As consideration for that amendment, and in addition to an aggregate consent payment of $1.5 million paid by Parent, Interline New Jersey agreed to certain additional amendments that apply from and including the closing date of the Merger. These additional amendments included, among other items, increasing the interest rate on the OpCo Notes from 7.00% to 7.50% per annum, increasing the redemption price of the OpCo Notes for certain periods, making the OpCo Notes rank equal in right of payment to all future incurrences of senior indebtedness (including

75

INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 26, 2014 and December 27, 2013 (Successor) and the periods September 8, 2012 to December 28, 2012 (Successor) and December 31, 2011 to September 7, 2012 (Predecessor)


the ABL Facility) and replacing the restriction on the incurrence of secured indebtedness contained in the anti-layering covenant with a covenant restricting Interline New Jersey and its restricted subsidiaries from incurring liens, other than permitted liens, without equally and ratably securing the OpCo Notes.
    
On June 27, 2012, Interline New Jersey received the requisite consents to the Bond Amendments and, as a result, a supplemental indenture reflecting the Bond Amendments was executed and became effective. Interline New Jersey received consents to the Bond Amendments from holders of $296.3 million aggregate principal amount of the OpCo Notes (representing 98.8% of the principal amount outstanding) as of the expiration date of the Consent Solicitation.

Sources and Uses

The sources and uses of funds in connection with the Merger transactions are summarized below (in thousands):
Sources:
 
 
Debt:
 
 
Proceeds from ABL Facility
 
$
80,000

Proceeds from HoldCo Notes
 
365,000

Rollover of OpCo Notes
 
300,000

Rollover of capital lease obligations
 
940

Total debt
 
745,940

Proceeds from equity contributions
 
350,886

Gross cash used to fund transactions
 
107,602

Total sources
 
$
1,204,428

 
 
 
Uses:
 
 
Equity purchase price:
 
 
Payments to common stockholders
 
$
790,611

Payments for outstanding equity awards
 
35,106

Total equity purchase price
 
825,717

Assumption of indebtedness:
 
 
OpCo Notes
 
300,000

Capital lease obligations
 
940

Total assumption of indebtedness
 
300,940

Merger related costs and financing fees
 
60,707

Cash remaining on balance sheet
 
17,064

Total uses
 
$
1,204,428


Purchase Accounting

The Merger resulted in a significant change in ownership and was accounted for using the acquisition method under Accounting Standards Codification Topic 805, Business Combinations ("ASC 805"). Under the acquisition method, the purchase price was allocated to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair values, with the remainder allocated to goodwill. Goodwill recorded in connection with the Merger transaction represents intangible assets that do not qualify for separate recognition, such as assembled workforce. None of the goodwill recorded in connection with the Merger is deductible for income tax purposes. The purchase price paid and related costs and transaction fees incurred have been accounted for in the Company's consolidated financial statements.


76

INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 26, 2014 and December 27, 2013 (Successor) and the periods September 8, 2012 to December 28, 2012 (Successor) and December 31, 2011 to September 7, 2012 (Predecessor)


The final purchase price allocation is summarized in the following table (in thousands):

Total sources
$
1,204,428

 
 
Plus:
 
Rollover of equity and stock options
30,661

Accelerated share-based compensation
13,533

 
44,194

Less:
 
Rollover of OpCo Notes and capital lease obligations
(300,940
)
Merger related costs and financing fees
(60,707
)
Net cash used to fund transaction
(90,538
)
 
(452,185
)
Equals purchase price consideration to be allocated
$
796,437

 
 
Fair value of tangible assets and liabilities acquired:
 
Cash and cash equivalents
$
17,064

Accounts receivable - trade
157,690

Inventories
212,712

Prepaid expenses and other current assets
50,301

Property and equipment
57,289

Other long-term assets
35,863

Deferred income tax assets
15,094

Accounts payable
(97,095
)
Other short-term liabilities
(61,225
)
OpCo Notes
(322,500
)
Other long-term liabilities
(4,437
)
Deferred tax liabilities
(157,104
)
Total net tangible assets and liabilities
(96,348
)
 
 
Fair value of identifiable intangible assets acquired:
 
Customer relationships
253,500

Trademarks
171,900

Goodwill
467,385

Total intangible assets acquired
892,785

Total purchase price
$
796,437


In accordance with ASC 805, changes to the purchase price allocation and corrections of errors are adjusted retrospectively to the consolidated financial results. The values above includes revisions to correctly present deferred taxes as of the Merger Date totaling $24.7 million. This adjustment reduced deferred tax liabilities as well as goodwill. The impact of this change has been deemed immaterial to the consolidated financial position, results of operations, and cash flows. The December 28, 2012 balances included in the consolidated balance sheets have been revised to include the effect of the adjustment.

77

INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 26, 2014 and December 27, 2013 (Successor) and the periods September 8, 2012 to December 28, 2012 (Successor) and December 31, 2011 to September 7, 2012 (Predecessor)


Merger Costs

The following table summarizes the Merger costs for the period December 31, 2011 through December 28, 2012, including professional fees and other related costs (in thousands):

 
For the fiscal year ended December 28, 2012
Merger costs:
 
Professional fees
$
22,371

Share-based compensation
18,260

Sponsors' fees
10,000

Transaction related compensation
6,833

Other fees
1,226

 
$
58,690

 
 
Deferred financing costs:
 
ABL Facility
$
5,627

OpCo Notes
4,380

HoldCo Notes
16,701

 
$
26,708


Professional fees, share-based compensation, sponsors' fees, transaction related compensation, and other fees are included in merger related expenses line item in the statement of operations. Financing fees associated with the ABL Facility, OpCo Notes, and HoldCo Notes were capitalized in other intangible assets, and are amortized using the straight-line method for the ABL Facility and the effective interest method for the OpCo Notes and HoldCo Notes over the respective terms of the agreements. Approximately $10.9 million of the financing costs were paid to Goldman, Sachs & Co., a related party to the Company.

Pro Forma Financial Information

The following pro forma results of operations gives effect to the Merger transactions as if they had occurred on the first day of the first quarter of fiscal 2012 (December 31, 2011). The pro forma results of operations reflect adjustments (i) to record amortization resulting from purchase accounting, (ii) to record incremental interest expense associated with the ABL Facility and HoldCo Notes as well as the modified OpCo Notes, (iii) to eliminate costs incurred in connection with the Merger including acquisition-related share-based compensation, transaction costs, and loss on extinguishment of debt, and (iv) to record incremental straight-line rent expense. This pro forma financial information should not be relied upon as necessarily being indicative of the historical results that would have been obtained if the Merger transactions had actually occurred on that date, nor the results of operations in the future.

 
 
For the fiscal year ended December 28, 2012
(in thousands)
 
As Reported
 
Pro Forma
Net sales
 
$
1,322,345

 
$
1,322,345

Net (loss) income
 
$
(15,620
)
 
$
3,064


78

INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 26, 2014 and December 27, 2013 (Successor) and the periods September 8, 2012 to December 28, 2012 (Successor) and December 31, 2011 to September 7, 2012 (Predecessor)


4. ACQUISITIONS

Acquisition of JanPak

On December 11, 2012, Interline New Jersey acquired all of the outstanding stock of JanPak, Inc. ("JanPak") for $82.5 million in cash, subject to working capital and other closing adjustments. Direct acquisition costs of $0.5 million were incurred in connection with the JanPak acquisition. JanPak, which is headquartered in Davidson, North Carolina, is a large regional distributor of janitorial and sanitation supplies and packaging products, primarily serving property management and building service contractors as well as manufacturing, health care and educational facilities through 16 distribution centers across the Southeast and South Central United States. This acquisition represented an expansion of the Company's offering of JanSan products in the Southeastern, Mid-Atlantic, and South Central United States.

In accordance with the purchase method of accounting, the acquired net assets were recorded at fair value at the date of acquisition. The purchase price was based primarily on the estimated future operating results of JanPak. As the estimates and assumptions used to determine the fair values involved a complex series of judgments about future events and uncertainties. None of the goodwill recorded in connection with the JanPak acquisition is deductible for income tax purposes. The results of operations of JanPak are included in the consolidated results of operations of the Company from the date of acquisition.

The following table summarizes the final fair values of the assets acquired and liabilities assumed in the JanPak acquisition at the date of acquisition (in thousands):

 
 
Successor
Accounts receivable
 
$
24,765

Inventories
 
20,460

Other current assets
 
4,716

Property and equipment
 
4,822

Goodwill
 
19,054

Intangible assets
 
32,600

Other assets
 
37

Total assets acquired
 
106,454

Current liabilities
 
9,554

Other liabilities
 
14,400

Total liabilities assumed
 
23,954

Net assets acquired
 
$
82,500


Of the $32.6 million of acquired intangible assets, $13.7 million was assigned to registered trademarks that are not subject to amortization as the Company believes these intangible assets have indefinite lives. The remaining $18.9 million of acquired intangible assets consists of customer relationships and have a weighted-average useful life of approximately 19 years. The goodwill for the JanPak acquisition represents the value associated with the assembled workforce, anticipated growth from new customer relationships as well as the geographic expansion attained in connection with the acquisition.

Net sales and net income for the year ended December 28, 2012 of $10.3 million and $0.1 million are included in the Consolidated Statement of Operations relating to JanPak for the period from December 12, 2012 through December 28, 2012.


79

INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 26, 2014 and December 27, 2013 (Successor) and the periods September 8, 2012 to December 28, 2012 (Successor) and December 31, 2011 to September 7, 2012 (Predecessor)


Pro Forma Financial Information

The following table sets forth the unaudited pro forma net sales and net (loss) income of the Company, which give effect to the JanPak acquisition as if it had occurred on January 1, 2011. The unaudited pro forma net sales and net (loss) income do not purport to present what the Company's results would actually have been if the aforementioned transactions had in fact occurred on such dates or at the beginning of the periods indicated, nor do they project the Company's financial position or results at any future date for any future period.
 
Successor
 
 
Predecessor
(in thousands)
For the period September 8, 2012 through December 28, 2012
 
 
For the period December 31, 2011 through September 7, 2012
Net sales
$
467,066

 
 
$
1,079,640

Net (loss) income
$
(27,924
)
 
 
$
13,909


5. ACCOUNTS RECEIVABLE

The Company's trade accounts receivable consist primarily of individual accounts, none of which is individually significant. Trade receivables are inherently exposed to credit risk, and thus the Company monitors the creditworthiness of its customers on an ongoing basis and provides a reserve for estimated uncollectible accounts. If the financial condition of the Company’s customers were to deteriorate, increases in its allowance for doubtful accounts may be needed.

The activity in the allowance for doubtful accounts consisted of the following (in thousands):
 
Successor
 
 
Predecessor
 
For the fiscal year ended
 
For the period September 8, 2012 through December 28, 2012
 
 
For the period December 31, 2011 through September 7, 2012
 
December 26, 2014
 
December 27, 2013
 
 
 
Beginning balance
$
3,595

 
$
528

 
$

 
 
$
6,457

Charged to expense
2,743

 
1,981

 
530

 
 
1,285

Deductions(1)
(2,148
)
 
1,086

 
(2
)
 
 
(2,967
)
Ending balance
$
4,190

 
$
3,595

 
$
528

 
 
$
4,775

____________________
(1)    Accounts receivable previously charged to expense, written-off as uncollectible, net of recoveries.



80

INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 26, 2014 and December 27, 2013 (Successor) and the periods September 8, 2012 to December 28, 2012 (Successor) and December 31, 2011 to September 7, 2012 (Predecessor)


6. PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consisted of the following as of December 26, 2014 and December 27, 2013 (in thousands):
 
Successor
 
December 26, 2014
 
December 27, 2013
Vendor rebates receivable
$
29,351

 
$
25,657

Prepaid insurance
2,561

 
3,214

Prepaid maintenance agreements
2,425

 
1,892

Prepaid rent
2,326

 
2,218

Other (1)
5,933

 
7,955

Prepaid expenses and other current assets
$
42,596

 
$
40,936

    ____________________
(1)
Amounts within the "Other" category of prepaid expenses and other current assets were not considered individually significant as of December 26, 2014 and December 27, 2013.

7. PROPERTY AND EQUIPMENT

Major classifications of property and equipment as of December 26, 2014 and December 27, 2013 were as follows (in thousands):

 
Successor
 
December 26, 2014
 
December 27, 2013
 
Owned
 
Capital Leases
 
Total
 
Owned
 
Capital Leases
 
Total
Land
$
696

 
$

 
$
696

 
$
696

 
$

 
$
696

Building
5,859

 

 
5,859

 
5,859

 

 
5,859

Machinery and equipment
72,460

 
243

 
72,703

 
56,639

 
770

 
57,409

Office furniture and equipment
3,649

 
139

 
3,788

 
3,460

 
139

 
3,599

Vehicles
4,717

 
1,258

 
5,975

 
4,069

 
1,258

 
5,327

Leasehold improvements
14,061

 

 
14,061

 
13,378

 

 
13,378

Construction in progress
107

 

 
107

 
165

 

 
165

Property and equipment, gross
101,549

 
1,640

 
103,189

 
84,266

 
2,167

 
86,433

Less: Accumulated depreciation and amortization
(46,715
)
 
(1,630
)
 
(48,345
)
 
(25,840
)
 
(1,928
)
 
(27,768
)
Property and equipment, net
$
54,834

 
$
10

 
$
54,844

 
$
58,426

 
$
239

 
$
58,665


During 2014, 2013 and 2012, depreciation and amortization expense, which includes amortization of capital leases, was as follows (in thousands):
 
Successor
 
 
Predecessor
 
For the fiscal year ended
 
For the period September 8, 2012 through December 28, 2012
 
 
For the period December 31, 2011 through September 7, 2012
 
December 26, 2014
 
December 27, 2013
 
 
 
Depreciation and amortization expense
$
21,197

 
$
21,780

 
$
6,117

 
 
$
13,135



81

INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 26, 2014 and December 27, 2013 (Successor) and the periods September 8, 2012 to December 28, 2012 (Successor) and December 31, 2011 to September 7, 2012 (Predecessor)


8. GOODWILL AND OTHER INTANGIBLE ASSETS

Changes to goodwill during 2014, 2013 and 2012 were as follows (in thousands):

 
Successor
 
 
Predecessor
 
For the fiscal year ended
 
For the period September 8, 2012 through December 28, 2012
 
 
For the period December 31, 2011 through September 7, 2012
 
December 26, 2014
 
December 27, 2013
 
 
 
Balance at beginning of period
$
486,439

 
$
486,439

 
$

 
 
$
344,478

Acquisition of Interline Brands, Inc.

 

 
467,385

 
 

Acquired goodwill

 

 
19,054

 
 
1,547

Balance at end of period
$
486,439

 
$
486,439

 
$
486,439

 
 
$
346,025

    
In connection with the Merger transactions as discussed in Note 3. Transactions, the Company recorded $467.4 million of goodwill as a part of purchase accounting. The acquired goodwill during the period September 8, 2012 through December 28, 2012 primarily relates to the Company's acquisition of JanPak in December of 2012.

As of December 26, 2014 and December 27, 2013, the gross carrying amount and accumulated amortization of the Company's intangible assets other than goodwill as of were as follows (in thousands):
Successor
 
 
December 26, 2014
 
December 27, 2013
Indefinite-lived
 
 
 
 
Trademarks
 
$
114,500

 
$
185,600

Definite-lived
 
 
 
 
Trademarks (1)
 
3,600

 

Customer relationships
 
272,400

 
272,400

Deferred financing costs
 
30,631

 
26,935

Other intangible assets, gross
 
421,131

 
484,935

Less: Accumulated amortization
 
(75,817
)
 
(39,889
)
Other intangible assets, net
 
$
345,314

 
$
445,046

 
 
 
 
 
____________________
(1) Definite-lived trademark assets were fully amortized as of December 26, 2014.

As discussed in Note 3. Transactions, in connection with the Merger transaction, the Company recognized intangible assets related to trademarks and customer relationships. Customer relationships were determined to have an economic useful life of between 7 and 19 years and will be amortized over those periods using an accelerated amortization method. At the time of the Merger, trademarks were determined to have indefinite lives.

During the second quarter of fiscal year 2014, the Company recorded non-cash charges of $67.5 million related to the impairment of certain indefinite-lived trademark assets. These impairments were primarily due to a strategic marketing decision to phase out certain brand names and market the related products under a new consolidated brand name. This decision resulted in a change in the expected useful life of the trademark assets. The impairment charges were determined by comparing the fair value of the trademarks, derived using a discounted cash flow analysis based on the income approach, relief from royalty method, to the current carrying value. Prior to the impairment analysis, the associated trademarks had a carrying value of $71.1 million, and after the

82

INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 26, 2014 and December 27, 2013 (Successor) and the periods September 8, 2012 to December 28, 2012 (Successor) and December 31, 2011 to September 7, 2012 (Predecessor)


impairment charge, the associated trademarks had a remaining carrying value of $3.6 million which was amortized over an estimated definite life of six months.

During 2014, 2013 and 2012, amortization of other intangible assets and amortization of debt financing costs (recorded as a component of interest expense), were as follows (in thousands):
 
Successor
 
 
Predecessor
 
For the fiscal year ended December 26, 2014
 
For the fiscal year ended December 27, 2013
 
For the period September 8, 2012 through December 28, 2012
 
 
For the period December 31, 2011 through September 7, 2012
Amortization of other intangible assets
$
32,617

 
$
28,258

 
$
6,720

 
 
$
4,572

Amortization of debt financing costs
$
4,224

 
$
3,812

 
$
1,165

 
 
$
985

    
Expected amortization expense on other intangible assets (excluding deferred financing costs, which will vary depending upon debt payments) for each of the five succeeding fiscal years is expected to be as follows (in thousands):

Fiscal Year
 
Future Estimated Amortization
2015
 
$
31,467

2016
 
30,900

2017
 
25,896

2018
 
21,723

2019
 
18,014

Thereafter
 
80,471

Total
 
$
208,471


9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consisted of the following as of December 26, 2014 and December 27, 2013 (in thousands):
 
Successor
 
December 26, 2014
 
December 27, 2013
Accrued compensation and benefits
$
23,142

 
$
21,435

Litigation-related accrual (1)
39,900

 
20,500

Purchase card payable
7,262

 
6,029

Accrued sales tax
6,096

 
4,691

Accrued insurance liabilities
5,866

 
5,783

Other (2)
14,006

 
11,501

Accrued expenses and other current liabilities
$
96,272

 
$
69,939

____________________
(1)
Represents amounts recorded in conjunction with the Craftwood Matter, as defined in Note 15. Commitments and Contingencies.
(2)
Amounts within the "Other" category of accrued expenses and other current liabilities were not considered individually significant as of December 26, 2014 and December 27, 2013.

83

INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 26, 2014 and December 27, 2013 (Successor) and the periods September 8, 2012 to December 28, 2012 (Successor) and December 31, 2011 to September 7, 2012 (Predecessor)


10. DEBT

The Company's outstanding debt consisted of the following as of December 26, 2014 and December 27, 2013 (in thousands):

 
Successor
 
December 26, 2014
 
December 27, 2013
Term Loan Facility(1) 
$
346,599

 
$

ABL Facility
74,000

 
115,000

OpCo Notes(2)

 
318,347

HoldCo Notes
365,000

 
365,000

Total debt
785,599

 
798,347

Less: Current portion
83,500

 

Total long-term debt
$
702,099

 
$
798,347

____________________
(1)
As of December 26, 2014, the Term Loan Facility included an unamortized original issue discount of $0.8 million.
(2)
As of December 27, 2013, the OpCo notes included an unamortized fair value premium of $18.3 million recorded as a result of the Merger. On March 26, 2014, Interline New Jersey discharged its remaining obligations under the OpCo Notes.

In November 2010, Interline New Jersey completed a series of refinancing transactions: (1) offered $300.0 million of 7.00% senior subordinated notes due 2018 (the "OpCo Notes") and (2) entered into the predecessor $225.0 million asset-based revolving credit facility. The proceeds from the OpCo Notes were used to redeem the previously held 8 1/8% senior subordinated notes due 2012 and to repay the indebtedness under the prior credit facility. Debt financing costs capitalized in connection with the OpCo Notes were $6.9 million.

As previously discussed in Note 3. Transactions, Interline New Jersey completed the Bond Amendments on June 21, 2012 which increased the interest rate on the OpCo Notes from 7.00% to 7.50% per annum, among other amendments.
    
On September 7, 2012, in connection with the Merger (discussed in Note 3. Transactions) Interline Delaware issued $365.0 million in aggregate principal amount of 10.00%/10.75% senior notes (the "HoldCo Notes") due November 15, 2018 and capitalized deferred debt financing costs in the amount of $16.7 million. Concurrently with the closing of the Merger, Interline New Jersey and certain of its material wholly-owned domestic subsidiaries, as co-borrowers, entered into a new asset-based senior secured revolving credit facility, dated as of September 7, 2012 (the “ABL Facility”) with a syndicate of lenders that permits revolving borrowings in an aggregate principal amount of up to $275.0 million. Debt financing costs capitalized in connection with the ABL Facility were $5.6 million. Additionally, the Company recorded a loss on the extinguishment of the previous asset-based revolving facility in the amount of $2.2 million, comprised of the write-off of unamortized deferred debt issuance costs.

On March 17, 2014, Interline New Jersey completed the following financing transactions: (1) entered into a first lien term loan under which Interline New Jersey incurred a term loan in an aggregate principal amount of $350.0 million (the "Term Loan Facility") and (2) amended the asset-based senior secured revolving credit facility, by entering into the First Amendment to Credit Agreement to permit the incurrence of the Term Loan Facility and make other changes in connection with the refinancing (the “First ABL Facility Amendment”).

Proceeds from the Term Loan Facility were used to finance the redemption of the OpCo Notes, the repayment of a portion of amounts outstanding under the ABL Facility and the payment of related fees, costs and expenses. In connection with the redemption of the OpCo Notes, the Company recorded a loss on early extinguishment of debt in the amount of $4.3 million during the year ended December 26, 2014. The loss was comprised of $18.6 million in consent solicitation, tender premium, call premium and related transaction costs less a non-cash benefit of $14.3 million associated with the write-off of the unamortized fair value premium of $17.8 million less the write-off of the unamortized deferred debt issuance costs of $3.5 million.


84

INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 26, 2014 and December 27, 2013 (Successor) and the periods September 8, 2012 to December 28, 2012 (Successor) and December 31, 2011 to September 7, 2012 (Predecessor)


    On April 8, 2014, Interline New Jersey further amended the ABL Facility by entering into the Second Amendment to Credit Agreement to amend certain pricing terms applicable to the ABL Facility and extend the maturity date to April 8, 2019, at which date the principal amount outstanding under the ABL Facility will be due and payable in full (the “Second ABL Facility Amendment”).

Debt financing costs capitalized in connection with the Term Loan Facility, the First ABL Facility Amendment and the Second ABL Facility Amendment totaled approximately $8.0 million.

On December 10, 2014, Interline New Jersey further amended the ABL Facility to increase the aggregate commitments from $275.0 million to $325.0 million. Except for this commitment increase, no other material terms were modified by the Increase Agreement.

As of December 26, 2014 and December 27, 2013, respectively, Interline New Jersey had $209.7 million and $113.5 million available under the ABL Facility (as defined below). There were $74.0 million and $115.0 million borrowings under the revolving credit facilities as of December 26, 2014 and December 27, 2013, respectively, and total letters of credit issued under the revolving credit facilities were $11.3 million and $10.5 million as of the same dates.

Interline New Jersey and the Company were in compliance with all covenants contained in the ABL Facility, Term Loan Facility and HoldCo Notes as of December 26, 2014.

Subsequent to December 26, 2014, the Company used a combination of cash on hand and borrowings under the recently amended ABL Facility to redeem $80.0 million of the $365.0 million outstanding aggregate principal amount of the HoldCo Notes. Please refer to Note 19. Subsequent Events for additional information.

ABL Facility

The ABL Facility permits revolving borrowings in an aggregate principal amount of up to $325.0 million. In addition, the ABL Facility provides for a sub-limit of borrowings on same-day notice referred to as swingline loans up to $30.0 million and a sub-limit for the issuance of letters of credit up to $45.0 million. Subject to certain conditions, the principal amount of the ABL Facility may be increased from time to time up to an amount which, in the aggregate for all such increases, does not exceed $100.0 million, in $25.0 million increments.

Advances under the ABL Facility are limited to the lesser of (a) the aggregate commitments under the ABL Facility and (b) the sum of the following:

85% of the book value of eligible accounts receivable; plus
the lesser of (i) 70% of the lower of cost (net of rebates and discounts) or market value of eligible inventory; and (ii) 85% of the appraised net orderly liquidation value of eligible inventory;
minus certain reserves as may be established under the ABL Facility.

Future borrowings under the ABL Facility are subject to the Company's representation and warranty that no event, change or condition has occurred that has had, or could reasonably be expected to have, a material adverse effect on the Company (as defined in the ABL Facility).

Obligations under the ABL Facility are guaranteed by the Company and each of the wholly-owned material subsidiaries of the co-borrowers under the ABL Facility. These obligations will be primarily secured, subject to certain exceptions, by a security interest in substantially all of the assets of Interline New Jersey and each of its wholly-owned material U.S. subsidiaries. This security interest will be comprised of a first-priority lien on generally all of the current assets (including accounts receivable and inventory) of Interline New Jersey and the other grantors, which assets secure the Term Loan on a second-priority basis, and a second-priority lien on generally all of the fixed assets of Interline New Jersey and the other grantors, which assets secure the Term Loan on a first-priority basis.

From the date of the Second ABL Facility Amendment through the end of Interline New Jersey’s first fiscal quarter after the closing date thereof, borrowings were subject to an interest rate equal to LIBOR plus 1.5% in the case of Eurodollar revolving loans, and an applicable base rate plus 0.5% in the case of Alternate Base Rate (“ABR”) loans.

85

INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 26, 2014 and December 27, 2013 (Successor) and the periods September 8, 2012 to December 28, 2012 (Successor) and December 31, 2011 to September 7, 2012 (Predecessor)


As of the end of the first fiscal quarter following the closing of the Second ABL Facility Amendment, the interest rates applicable to obligations under the ABL Facility will be determined as of the end of each fiscal quarter in accordance with applicable rates set forth in the table below, which are generally 0.25% lower than the rates in effect prior to the Second ABL Facility Amendment:
Availability
 
Revolver ABR Spread
 
Revolver Eurodollar Spread
Category 1
 
 
 
 
Greater than $177.3 million
 
0.25%
 
1.25%
Category 2
 
 
 
 
Greater than $88.6 million but less than or equal to $177.3 million
 
0.50%
 
1.50%
Category 3
 
 
 
 
Less than or equal to $88.6 million
 
0.75%
 
1.75%

The applicable rates for Category 1 will be available starting in the second fiscal quarter of 2015. The applicable rates for Category 2 and Category 3 are subject to a 0.25% step-down from the spread described above if the fixed charge coverage ratio for the
period of four consecutive fiscal quarters ending on the last day of the fiscal quarter most recently ended is greater than 1.75:1.00. This step-down is currently available for Category 3 borrowings and will be available for Category 2 borrowings during the second fiscal quarter of 2015. As of December 26, 2014, the interest rate in effect with respect to the ABL Facility was 1.69% for the Eurodollar revolving loans and 3.75% for the ABR revolving loans.

In addition to paying interest on outstanding principal under the ABL facility, Interline New Jersey is required to pay a commitment fee in respect of unutilized commitments, which is equal to 0.375% per annum for the ABL Facility if utilization is less than 25% of the aggregate commitments and 0.25% per annum if the utilization of the ABL Facility exceeds 25% of the aggregate commitments. The principal balance outstanding may be voluntarily prepaid in advance, without penalty or premium, at any time in whole or in part, subject to certain breakage costs.

The ABL Facility requires the Company and its restricted subsidiaries, on a consolidated basis, to maintain a fixed charge coverage ratio (defined as the ratio of EBITDA, as defined in the credit agreement, to the sum of cash interest, principal payments on indebtedness and accrued income taxes, dividends or distributions and repurchases, redemptions or retirement of the equity interest of the Company) of at least 1.00:1.00 when the excess availability is less than or equal to the greater of: (i) 10% of the total commitments under the ABL Facility; and (ii) $25.0 million.

In addition to making changes that were required in order to permit the incurrence of the Term Loan Facility and the redemption of the OpCo Notes, the First ABL Facility Amendment also made various changes to the ABL Facility that were intended to conform certain covenant baskets and related terms with those contained in the Term Loan Facility (the terms of which are disclosed below under "—Term Loan Facility").

As amended by the First ABL Facility Amendment, Interline New Jersey and its restricted subsidiaries will be permitted under the ABL Facility to incur secured or unsecured indebtedness so long as (i) in the event that the proceeds thereof are used to redeem HoldCo Notes, the pro forma interest coverage ratio of Interline New Jersey and its restricted subsidiaries is at least 2.00:1.00 or (ii) in the event the proceeds thereof are used for another purpose, (A) if such indebtedness is secured on a second-lien or other junior basis or is unsecured, the pro forma total leverage ratio of Interline New Jersey and its restricted subsidiaries is less than or equal to 6.50:1.00, or (B) if such indebtedness is secured on a first-lien basis, the pro forma ratio of (x) consolidated first lien indebtedness of Interline New Jersey and its restricted subsidiaries and (y) consolidated EBITDA of Interline New Jersey and its restricted subsidiaries (such ratio, the “First Lien Leverage Ratio”) is less than or equal to 3.75:1.00.

The First ABL Facility Amendment also released the security interest previously granted by the Company to secure the ABL Facility, subject to a requirement that the Company re-pledge its assets to secure the ABL Facility in the event that the HoldCo Notes are no longer outstanding. Accordingly, while the Company will guaranty both the Term Loan Facility and the ABL Facility, its assets will not be pledged to secure either such facility so long as the HoldCo Notes remain outstanding.    
    

86

INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 26, 2014 and December 27, 2013 (Successor) and the periods September 8, 2012 to December 28, 2012 (Successor) and December 31, 2011 to September 7, 2012 (Predecessor)


The ABL Facility also contains restrictive covenants (in each case, subject to exclusions) that limit, among other things, the ability of Interline New Jersey and its restricted subsidiaries to:

create, incur, assume or suffer to exist, any liens;
create, incur, assume or permit to exist, directly or indirectly, any additional indebtedness;
consolidate, merge, amalgamate, liquidate, wind up or dissolve themselves;
convey, sell, lease, license, assign, transfer or otherwise dispose of their assets;
make certain restricted payments;
make certain investments;
amend or otherwise alter the terms of documents related to certain subordinated indebtedness;
enter into transactions with affiliates; and
prepay certain indebtedness.

The ABL Facility contains certain customary representations and warranties, affirmative and other covenants and events of default, including, among other things, payment defaults, breach of representations and warranties, covenant defaults, cross-defaults to certain indebtedness bankruptcy, certain events under the Employee Retirement Income Security Act ("ERISA"), judgment defaults, actual or asserted failure of any material guaranty or security document supporting the ABL Facility to be in force and effect and change of control. If such an event of default occurs the agent under the ABL Facility is entitled to take various actions, including the acceleration of amounts due under the ABL Facility, the termination of all revolver commitments and all other actions that a secured creditor is permitted to take following a default.

Term Loan Facility

The initial aggregate principal amount of the Term Loan Facility is equal to $350.0 million. The Term Loan Facility allows for incremental increases in an aggregate principal amount of up to (i) $100.0 million plus (ii) the amount as of the date of incurrence that would not cause the First Lien Leverage Ratio to exceed 3.75:1.00. The Term Loan Facility will mature on the earlier of (A) March 17, 2021 and (B) the date which is 91 days prior to the maturity date of the HoldCo Notes.
    
Obligations under the Term Loan Facility are guaranteed by the Company and each of the wholly-owned material U.S. subsidiaries of Interline New Jersey. These obligations are primarily secured, subject to certain exceptions, by a security interest in substantially all of the assets of Interline New Jersey and each of its wholly-owned material U.S. subsidiaries. This security interest is comprised of a first-priority lien on generally all of the fixed assets of Interline New Jersey and the other grantors, which assets secure the ABL Facility on a second-priority basis, and a second-priority lien on generally all of the current assets (including accounts receivable and inventory) of Interline New Jersey and the other grantors, which assets secure the ABL Facility on a first-priority basis. The assets held directly by the Company will not secure the Term Loan Facility, except that the Company will be required to grant a security interest in these assets in the event that the HoldCo Notes are no longer outstanding.

The Term Loan Facility will bear interest, at the borrower’s option, at (i) LIBOR subject to a minimum floor of 1.00%, plus 300 basis points ("LIBO Rate") or (ii) an ABR subject to a minimum floor of 2.0%, plus 200 basis points. In addition, at the closing of the Term Loan Facility, Interline New Jersey paid (in addition to customary fees) an upfront fee equal to 0.25% of the principal amount thereof. As of December 26, 2014, the interest rate in effect with respect to the Term Loan Facility was 4.00% for LIBO Rate borrowings and 5.25% for ABR borrowings.

Under the Term Loan Facility, Interline New Jersey may voluntarily prepay principal at any time and from time to time without penalty or premium, other than a 1.00% premium during the first six months following the closing date for re-pricing transactions only. The Term Loan Facility is due and payable in quarterly installments equal to 0.25% of the original principal amount, with the balance payable in one final installment at the maturity date. Additional provisions include the requirement to repay the Term Loan Facility with certain asset sale and insurance proceeds, certain debt proceeds and 50% of excess cash flow (reducing to 25% if the First Lien Leverage Ratio is no more than 3.00:1.00 and 0% if the First Lien Leverage Ratio is no more than 2.75:1.00).


87

INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 26, 2014 and December 27, 2013 (Successor) and the periods September 8, 2012 to December 28, 2012 (Successor) and December 31, 2011 to September 7, 2012 (Predecessor)


The Term Loan Facility does not include any financial covenants; however, it does contain certain restrictive covenants (in each case, subject to exclusions) that limit, among other things, the ability of Interline and the restricted subsidiaries to:

create, incur, assume or suffer to exist, any liens;
create, incur, assume or permit to exist, directly or indirectly, any additional indebtedness;
consolidate, merge, amalgamate, liquidate, wind up or dissolve themselves;
convey, sell, lease, license, assign, transfer or otherwise dispose of their assets;
make certain restricted payments;
make certain investments;
amend or otherwise alter the terms of documents related to certain subordinated indebtedness;
enter into transactions with affiliates; and
prepay certain indebtedness.

The covenants are subject to various baskets and materiality thresholds, with certain of the baskets to the restrictions on the repayment of subordinated indebtedness, restricted payments and investments being available only when the pro forma interest coverage ratio of Interline New Jersey and its restricted subsidiaries is at least 2.00:1.00.

The Term Loan Facility provides that Interline New Jersey and its restricted subsidiaries may incur secured or unsecured indebtedness so long as (i) (A) in the event that the proceeds thereof are used to redeem HoldCo Notes, the pro forma interest coverage ratio of Interline New Jersey and its restricted subsidiaries is at least 2.00:1.00 or (B) in the event the proceeds thereof are used for another purpose, the pro forma total leverage ratio of Interline New Jersey and its restricted subsidiaries is less than or equal to 6.50:1.00 and (ii) in the event any of such indebtedness is secured on a first-lien basis, the First Lien Leverage Ratio is less than or equal to 3.75:1.00.

The Term Loan Facility contains certain customary representations and warranties, affirmative covenants and events of default, including, among other things, payment defaults, breach of representations and warranties, covenant defaults, cross-defaults to certain indebtedness (subject to certain restrictions on cross-defaults to the financial covenant contained in the ABL Facility), certain events of bankruptcy, certain events under ERISA, judgment defaults, actual or asserted failure of any material guaranty or security documents supporting the Term Loan Facility to be in full force and effect and change of control. If such an event of default occurs, the Agent under the Term Loan Facility is entitled to take various actions, including the acceleration of amounts due and all other actions that a secured creditor is permitted to take following a default.

HoldCo Notes

In connection with the Merger, as discussed in Note 3. Transactions, Interline Delaware issued $365.0 million in aggregate principal amount of 10.00%/10.75% senior notes (the "HoldCo Notes") due November 15, 2018. Debt financing costs capitalized in connection with the HoldCo Notes were $16.7 million.
 
The HoldCo Notes are the Company's general senior unsecured obligations; rank pari passu in right of payment with all existing and future indebtedness of the Company, other than subordinated obligations; are senior in right of payment to any future subordinated obligations of the Company; are not guaranteed by any subsidiary of the Company; are effectively subordinated to any existing or future obligations of the Company that are secured by liens on assets of the Company (including the Company's guarantee of the ABL Facility which is secured by a pledge of the stock of Interline New Jersey) to the extent of the value of such assets unless the HoldCo Notes are equally and ratably secured by such assets; are structurally subordinated to all existing and future indebtedness (including the OpCo Notes and indebtedness under the ABL Facility) of, and other claims and obligations (including preferred stock) of, the subsidiaries of the Company, except to the extent a subsidiary of the Company executes a guaranty agreement in the future. The HoldCo Notes are not guaranteed by any of the Company's subsidiaries.
    
The HoldCo Notes bear interest at a rate of 10.00% per annum with respect to cash interest and 10.75% per annum with respect to any paid-in-kind ("PIK") interest, payable semi-annually on January 15 and July 15. The Company is required to pay interest on the HoldCo Notes in cash, unless its subsidiaries are restricted from dividending money to it (or have limited ability to do so), subject to certain circumstances.


88

INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 26, 2014 and December 27, 2013 (Successor) and the periods September 8, 2012 to December 28, 2012 (Successor) and December 31, 2011 to September 7, 2012 (Predecessor)


The Company has the option to redeem the HoldCo Notes prior to November 15, 2014 at a redemption price equal to 100% of the principal amount plus a make-whole premium and accrued and unpaid interest to the date of redemption. At any time on or after November 15, 2014, the Company may redeem some or all of the HoldCo Notes at certain fixed redemption prices expressed as percentages of the principal amount, plus accrued and unpaid interest. At any time prior to November 15, 2014, the Company may, from time to time, redeem up to 35% of the aggregate principal amount of the HoldCo Notes with any funds up to an aggregate amount equal to the net cash proceeds received by the Company from certain equity offerings at a price equal to 110.00% of the principal amount of the HoldCo Notes redeemed, plus accrued and unpaid interest and additional interest, if any, to the redemption date, provided that the redemption occurs within 90 days of the closing date of such equity offering, and at least 65% of the aggregate principal amount of the HoldCo Notes remain outstanding immediately thereafter.
    
The Indenture governing the HoldCo Notes contains covenants limiting, among other things, the ability of the Company and its restricted subsidiaries to incur additional indebtedness, issue preferred stock, create or incur certain liens on assets, pay dividends and make other restricted payments, create restriction on dividend and other payments to the Company from certain of its subsidiaries, sell assets and subsidiary stock, engage in transactions with affiliates, consolidate, merge or transfer all or substantially all of the Company's assets and the assets of its subsidiaries and create unrestricted subsidiaries. These covenants are subject to a number of important exceptions and qualifications.

The holders of the HoldCo Notes have the right to require us to repurchase their notes upon certain change of control events.

OpCo Notes
    
As previously disclosed, Interline New Jersey discharged its remaining obligations under the OpCo Notes on March 26, 2014. Prior to their redemption, the OpCo Notes were unconditionally guaranteed, jointly and severally, by the Company and Interline New Jersey's existing and future domestic subsidiaries that guarantee the ABL Facility (collectively the ''Guarantors''). The OpCo Notes were not guaranteed by any of Interline New Jersey's foreign subsidiaries. While outstanding, interest on the OpCo Notes was payable on May 15 and November 15 of each year.

In connection with the Merger transactions, the OpCo Notes were amended to modify the definition of “Change of Control” and add a definition of “Permitted Holders” in the related indenture, which permitted the Merger to occur without triggering a “Change of Control” under the indenture governing the OpCo Notes. As consideration for these amendments, and in addition to a consent payment of $1.5 million, Interline New Jersey agreed to certain additional amendments that applied from and including the Merger date. These additional amendments included, among other items, increasing the interest rate on the OpCo Notes from 7.00% to 7.50% per annum, increasing the redemption price of the OpCo Notes for certain periods, making the OpCo Notes and the related guarantees rank equal in right of payment to all future incurrences of senior indebtedness (including the ABL Facility) and replacing the restriction on the incurrence of secured indebtedness contained in the anti-layering covenant with a covenant restricting Interline New Jersey and its restricted subsidiaries from incurring liens, other than permitted liens, without equally and ratably securing the OpCo Notes. Additionally, the OpCo Notes were remeasured to the fair value on the date of the Merger, which resulted in a premium of $22.5 million that was amortized through interest expense using the effective interest method over the term of the OpCo Notes. Debt financing costs capitalized in connection with the modification of the OpCo Notes were $4.4 million, and the unamortized balance of the originally capitalized debt financing costs of $5.7 million were allocated to goodwill in connection with purchase accounting.

11. RELATED PARTY TRANSACTIONS

Transactions with Principal Owners

Subsequent to the Merger, all of the Company's outstanding stock became privately held by certain affiliates of Goldman, Sachs & Co., including GS Capital Partners VI Fund, L.P. and its related entities, and P2 Capital Partners, LLC and its related entities (collectively, the "Sponsors"), and certain members of Company management. In conjunction with the financing transactions, the Company paid approximately $2.6 million to Goldman, Sachs & Co. for underwriting services rendered in connection with the Term Loan Facility and tender fees incurred as the lead agent on the OpCo Notes redemption. Please refer to Note 10. Debt for additional information related to the financing transactions and the related redemption of the OpCo Notes.


89

INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 26, 2014 and December 27, 2013 (Successor) and the periods September 8, 2012 to December 28, 2012 (Successor) and December 31, 2011 to September 7, 2012 (Predecessor)


12. STOCKHOLDER'S EQUITY

Common Stock

In connection with the Merger (as defined in Note 3. Transactions), each share of common stock of Interline was canceled on September 7, 2012, and converted automatically into a right to receive $25.50 in cash, without interest. As a result of the Merger, Interline's common stock became privately-held.

Employee Stock Purchase Plan

On September 7, 2012, the Company's Board of Directors (the "Board") adopted the Interline Brands, Inc. Employee Stock Purchase Plan (the "ESPP Plan"), pursuant to which certain employees of the Company, including the Company’s named executive officers, were given the opportunity to acquire shares of common stock of the Company at the closing of the Merger at the same price as paid by the GSCP and P2 Parties in the Merger. Up to 50,000 shares of common stock were available under the ESPP Plan. The Plan terminated on December 31, 2012. During the period from September 8, 2012 through December 28, 2012, employees purchased 31,819 shares under this plan at a price of $255.00 per share.

Purchases of Equity Securities by the Issuer

Purchases of equity securities by the Company during fiscal year ended December 26, 2014 represent shares tendered in satisfaction of the exercise price and tax withholding obligations related to the non-cash exercise of stock options during the period. There were no share repurchases during fiscal years 2013 or 2012.

Other Comprehensive Income

Comprehensive income refers to net income plus revenues, expenses, gains and losses that are recorded directly as an adjustment to stockholders' equity, net of tax, including changes in employee benefit plan obligations and foreign currency translation.

Accumulated other comprehensive income is comprised entirely of foreign currency translation adjustments as of December 26, 2014 and December 27, 2013.

13. SHARE-BASED COMPENSATION

Total compensation cost and income tax benefits recognized in the consolidated statements of operations during 2014, 2013, and 2012 for the Company's share-based awards were as follows (in thousands):
 
Successor
 
 
Predecessor
 
For the fiscal year ended
 
For the period September 8, 2012 through December 28, 2012
 
 
 
For the period December 31, 2011 through September 7, 2012
 
December 26, 2014
 
December 27, 2013
 
 
 
 
Share-based compensation expense
$
3,720

 
$
5,330

 
$
9,958

(1) 
 
 
$
15,169

Income tax benefits
$
1,463

 
$
2,095

 
$
3,892

 
 
 
$
5,955

____________________
(1) In connection with the Merger, all of the outstanding share-based compensation awards were accelerated and fully vested, if not previously vested, and converted to the right to receive cash consideration. Total share-based compensation of $18.3 million was recognized and included in Merger related expenses in the consolidated statements of operations, $11.2 million of which was recorded in the Predecessor Period, and $7.0 million was recorded in the Successor Period.

As of December 26, 2014, there was $8.6 million of total unrecognized share-based compensation expense related to unvested share-based payment awards. The expense is expected to be recognized over a weighted-average period of 1.23 years.


90

INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 26, 2014 and December 27, 2013 (Successor) and the periods September 8, 2012 to December 28, 2012 (Successor) and December 31, 2011 to September 7, 2012 (Predecessor)


Current Equity Compensation Plan

On September 7, 2012 the Board adopted the Interline Brands, Inc. 2012 Option Plan, as amended (the “2012 Plan”), for the benefit of certain employees and directors of the Company. The 2012 Plan is administered by the Compensation Committee of the Board (the "Compensation Committee"), pursuant to which grants may be made in the form of stock options, restricted stock and restricted stock units. Subject to adjustment as provided in the plan, 172,766 shares of the Company's common stock are reserved and available for issuance pursuant to equity awards granted under the 2012 Plan as of December 26, 2014. Stock options available under the 2012 Plan include time-vested and performance-vested awards.

The 2012 Plan will terminate on September 7, 2022. However, the Board may suspend, amend, alter, discontinue or terminate the 2012 Plan prior to the termination date, except as provided in the 2012 Plan. Awards granted prior to the termination of the 2012 Plan may extend beyond the date of such termination. During fiscal years 2014 and 2013, 9,363 and 12,584 time-based option awards and 9,363 and 8,663 performance-based stock options were granted, respectively. During the period from September 7, 2012 through December 28, 2012, 73,954 time-based option awards and 73,954 performance-based stock options were granted. As of December 26, 2014, 1,603 shares of common stock were available for future grant.

Time-Vested Option Award Agreements

Subject to an optionee’s continued employment (except as described below), options granted under these agreements vest incrementally at twenty percent (20.0%) of the time-vested options over a period of five years upon each anniversary of the grant date, with accelerated vesting upon a change in control of the Company. Upon the optionee’s termination for cause, any unexercised portion of the option, whether or not vested, will terminate. The optionee is subject to covenants restricting competition with the Company and solicitation of employees and customers of the Company during the optionee’s term of employment and for a period of time thereafter.

Performance-Vested Option Award Agreements

Performance-vested options become vested and exercisable with respect to twenty percent (20.0%) of the shares subject to the option based upon the Company’s achievement of specified EBITDA targets for the Company’s annual performance periods; subject (except as described below) to the optionee remaining employed through the date on which audited financial statements for the applicable annual performance period are presented to the Board. Upon a change in control of the Company (i) prior to the first anniversary of the date of grant, the option will become fully vested and (ii) prior to the end of any of the other annual performance periods, a number of options will vest equal to the number of unvested options multiplied by a fraction, the numerator of which is the number of performance periods in which the targets have been achieved and the denominator of which is the number of periods that have elapsed since the date of grant. Upon the optionee’s termination for cause, any unexercised portion of the option, whether or not vested, will terminate. The optionee is subject to covenants restricting competition with the Company and solicitation of employees and customers of the Company during the optionee’s term of employment and for a period of time thereafter.

Rollover Option Award Agreements

In connection with the Merger, certain members of management were provided the opportunity to roll over options held under the 2004 Plan, as defined below, into the 2012 Plan. In total, 508,449 options under the 2004 Plan were rolled into the new Company at a 10:1 ratio resulting in 50,845 options with a weighted-average exercise price of $117.07.
        
The fair values of stock options granted under the 2012 Plan were estimated using the Black-Scholes option-pricing model. The stock price is estimated based on an annual valuation of the company. Expected volatility was based on the historical volatilities of comparable companies over a historical period that matches the expected life of the options on the date of grant. The Company also considers historical data to estimate the timing and amount of stock option exercises and forfeitures. The expected life represents the period of time that stock options are expected to remain outstanding and is based on the contractual term of the stock options and expected exercise behavior. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected option life assumed at the date of grant.
    

91

INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 26, 2014 and December 27, 2013 (Successor) and the periods September 8, 2012 to December 28, 2012 (Successor) and December 31, 2011 to September 7, 2012 (Predecessor)


The Black-Scholes weighted-average assumptions for the 2012 Plan were as follows:
 
Successor
 
For the fiscal year ended
 
For the period September 8, 2012 through December 28, 2012
 
December 26, 2014
 
December 27, 2013
 
 
Time-Based Awards
 
Performance-Based Awards
 
Time-Based Awards
 
Performance-Based Awards
 
Time and Performance-Based Awards
Exercise price
$
311.00

 
$
311.00

 
$
255.00

 
$
255.00

 
$
255.00

Expected volatility
48.3
%
 
48.2
%
 
48.6
%
 
49.1
%
 
49.2
%
Expected dividends
0.0
%
 
0.0
%
 
0.0
%
 
0.0
%
 
0.0
%
Risk-free interest rate
2.2
%
 
2.1
%
 
1.4
%
 
1.4
%
 
0.9
%
Expected life (in years)
6.5

 
6.3

 
6.5

 
6.2

 
6.3


The weighted-average fair value per option of stock options granted during fiscal years ended December 26, 2014 and December 27, 2013 was $113.78 and $124.42 for time-based options and $111.66 and $122.79 for performance-based options, respectively. The weighted-average fair value per option of stock options granted during the period from September 8, 2012 through December 28, 2012 for both time and performance-based options was $122.07.

A summary of stock options activity under the 2012 Plan from December 28, 2012 through December 26, 2014 is presented below:
 
Successor
 
Shares
 
Weighted- Average Exercise Price
 
Weighted- Average Remaining Contractual Term
 
Aggregate Intrinsic Value (1)
 
 
 
 
 
(in years)
 
(in thousands)
Outstanding at December 28, 2012
198,753

 
$
219.72

 
8.0
 
$
7,013

Granted
21,247

 
255.00

 
 
 
 
Exercised

 

 
 
 
 
Forfeited
4,571

 
255.00

 
 
 
 
Outstanding at December 27, 2013
215,429

 
$
222.45

 
7.2
 
$
7,013

Granted
18,726

 
311.00

 
 
 
 
Exercised
20,818

 
152.01

 
 
 
 
Forfeited
12,146

 
255.00

 
 
 
 
Outstanding at December 26, 2014
201,191

 
$
236.01

 
7.0
 
$
15,087

Vested or expected to vest at December 26, 2014
200,385

 
$
228.17

 
6.4
 
$
18,448

Exercisable at December 26, 2014
105,539

 
$
209.86

 
5.9
 
$
10,674

____________________
(1)
The aggregate intrinsic value represents the amount by which the fair value of the underlying stock at period end exceeds the stock option exercise price.

Proceeds from stock options exercised during the fiscal year ended December 26, 2014 were $2.6 million. There were no stock options exercised during the fiscal year ended December 27, 2013.


92

INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 26, 2014 and December 27, 2013 (Successor) and the periods September 8, 2012 to December 28, 2012 (Successor) and December 31, 2011 to September 7, 2012 (Predecessor)


Restricted Stock And Restricted Stock Units

Restricted stock awards and restricted stock units vest based on time and performance conditions that are determined by the Compensation Committee and set forth in the applicable awards agreement at the time of issuance. The Company measures the fair value of restricted stock and restricted stock units on the date of grant with the related compensation expenses recognized on a straight-line basis over the vesting period, net of estimated forfeitures. For immediate vesting terms, the aggregate compensation expense is recognized on the date of grant.

During the fiscal year ended December 26, 2014, the Company issued 115 shares of common stock as a result of fully-vested restricted stock awards granted during the period. Share-based compensation expense was determined based on a share price of $311.00, the estimated fair value of the Company's common stock as of the grant dates. The total fair value of restricted stock vested during the fiscal year ended December 26, 2014 was less than $0.1 million.

Prior Equity Compensation Plans

Effective as of the closing of the Merger, outstanding awards under the 2000 and 2004 stock incentive plans, as described below, vested in full and were converted into either immediate cash payments or fully vested new options to purchase common stock of the Parent. No additional shares are available to be granted under these plans.

During 2000, Interline New Jersey established a Stock Award Plan (the “2000 Plan”), under which Interline New Jersey could award a total of 6,395 shares of common stock in the form of incentive stock options (which could be awarded to key employees only), nonqualified stock options, stock appreciation rights (“SARs”) and restricted stock awards, all of which could be awarded to directors, officers, key employees and consultants. The Company's compensation committee determined in its sole discretion whether a SAR is settled in cash, shares or a combination of cash and shares. In connection with the Company's initial public offering in December 2004, options to purchase shares of the common stock of Interline New Jersey were converted into options to purchase shares of the Company's common stock. Effective December 25, 2009 no further awards were granted under the 2000 Plan.

During 2004, the Company adopted the 2004 Equity Incentive Plan, (the “2004 Plan”), as amended in May of 2006 and 2008, under which the Company could award 3,800,000 shares in the form of incentive stock options, nonqualified stock options, stock appreciation rights, or SARs, restricted stock, restricted share units (“RSUs”), deferred stock units (“DSUs”) and stock bonus awards, all of which could be awarded to any employee, director, officer or consultant of the Company. In May 2006, the stockholders of the Company approved an amendment to the 2004 Plan to further restrict the repricing of awards granted under the 2004 Plan without first obtaining approval by the Company's stockholders. In May 2008, the stockholders of the Company approved amendments to the 2004 Plan to change the method by which shares subject to full value awards granted thereunder are counted against the 2004 Plan's share limit. Effective January 1, 2008, shares subject to grants of full value awards, or awards other than options or SARs, counted against the applicable share limits under the 2004 Plan as 1.8 shares for every 1 share granted, while shares subject to stock options or SARs counted against the applicable share limits as 1 share for every 1 share granted.

These plans allowed the Company to fulfill its incentive stock option, nonqualified stock option, SAR, restricted stock, RSU, DSU and stock bonus award obligations using unissued or treasury shares.

Stock Options
    
Under the terms of the 2000 Plan, the exercise price per share for an incentive stock option could 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 could not be less than 110% of the fair market value of a share of common stock on the grant date. These incentive stock options vested in 25% increments over four years and could not be exercisable after the expiration of ten years from the date of grant.

Under the terms of the 2004 Plan, the exercise price of the options could not be less than the fair market value of the common stock at the date of grant, generally vested in 25% increments over four years and could not be exercisable after the expiration of seven or ten years from the date of grant.    


93

INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 26, 2014 and December 27, 2013 (Successor) and the periods September 8, 2012 to December 28, 2012 (Successor) and December 31, 2011 to September 7, 2012 (Predecessor)


The fair values of stock options were estimated using the Black-Scholes option-pricing model. Expected volatility was based on historical performance of the Company's stock. The Company also considered historical data to estimate the timing and amount of stock option exercises and forfeitures. The expected life represented the period of time that stock options were expected to remain outstanding and was based on the contractual term of the stock options and expected exercise behavior. The risk-free interest rate was based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected option life assumed at the date of grant. The Black-Scholes weighted-average assumptions were as follows:
 
 
Predecessor
 
 
For the period December 31, 2011 through September 7, 2012
Expected volatility
 
43.5
%
Expected dividends
 
0.0
%
Risk-free interest rate
 
0.8
%
Expected life (in years)
 
5.0


The weighted-average fair value per option of stock options granted during the period December 31, 2011 through September 7, 2012 was $7.84.
    
During the period from December 31, 2011 through September 7, 2012, there were 156,297 stock options exercised with an intrinsic value of $1.4 million. Total intrinsic value represents the difference between the exercise price and the market price on the date of exercise. Proceeds from stock options exercised during the period from December 31, 2011 through September 7, 2012 were $2.2 million.

In connection with the Merger, 2,560,744 options were exercised, with an aggregate intrinsic value of $16.9 million, and 171,881 options were canceled. Subsequent to the Merger, 508,449 options were outstanding with a weighted-average exercise price of $11.71, a weighted-average contractual term of 3.12 years and an aggregate intrinsic value of $7.0 million. In connection with the Merger, these 508,449 options were rolled into the new Company at a 10:1 ratio resulting in 50,845 options with a weighted-average exercise price of $117.07.
    
Restricted Stock, Restricted Share Units and Deferred Stock Units
    
The share-based compensation expense associated with the restricted stock was based on the quoted market price of the Company's shares of common stock on the date of grant. One-half of the restricted stock awards granted to employees vested evenly over three years and one-half vested evenly over five years.

RSUs granted under the 2004 Plan to management did not have an exercise price. The share-based compensation expense associated with the RSUs was based on the quoted market price of the Company's shares of common stock on the date of grant. Depending on the grant, (1) one-half of the RSUs vested on the second grant date anniversary provided that certain pre-established annual percentage increases in specific Company-wide metrics, such as EBITDA, was attained and one-half vested evenly over three years; or (2) one-half of the RSUs vested evenly over two years and one-half vested evenly over three years; or (3) one-third of the RSUs vested evenly over each of the first three years following the date of grant; or (4) one-half of the RSUs vested evenly over three years and one-half vested evenly over five years; or (5) on the earlier of: (A) the fourth grant date anniversary, provided that the average daily closing price of a share of the Company's common stock during any 20-consecutive-trading-day period (“Average Closing Price”) commencing on or after the grant date equaled or exceeded a specified amount prior to the fourth grant date anniversary; or (B) the date that is the later of: (x) the date on which the Average Closing Price equaled or exceeded a higher specified amount and (y) the fifth grant date anniversary of the Transaction Date, provided that it occurred no later than the seventh grant date anniversary. Under all vesting schedules, the RSUs only vested provided the grantee's service to the Company had not terminated prior to the vesting date.


94

INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 26, 2014 and December 27, 2013 (Successor) and the periods September 8, 2012 to December 28, 2012 (Successor) and December 31, 2011 to September 7, 2012 (Predecessor)


DSUs granted under the 2004 Plan to non-employee directors did not have an exercise price. The share-based compensation expense associated with the DSUs was based on the quoted market price of the Company's shares of common stock on the date of grant. DSUs vested on the grant date or evenly over the non-employee directors' current service terms, depending on the grant. All DSUs were to be settled in shares of the Company's common stock upon termination of the non-employee directors' service or one year after termination of the non-employee directors' service, depending on the grant.
        
The total fair value of restricted stock vested during the period December 31, 2011 through September 7, 2012 was less than $0.1 million. The total fair value of RSUs vested during the period December 31, 2011 through September 7, 2012 was $4.7 million. The total fair value of deferred stock units vested during the period from December 31, 2011 through September 7, 2012 was $0.2 million.

In connection with the Merger, all outstanding restricted share units and deferred stock units vested with a fair value of $14.7 million and $3.5 million, respectively. Subsequent to the Merger, there were no restricted stock, restricted shares units or deferred stock units outstanding.

14. EMPLOYEE BENEFIT PLAN
    
The Company has a qualified profit sharing plan under Section 401(k) of the Internal Revenue Code. Pursuant to the 401(k) plan, the Company matches employee contributions at a rate of 25% of the first 5% contributed by the employees, up to a maximum of $3,250 per employee. Company contributions to the 401(k) plan were as follows (in thousands):
 
Successor
 
 
Predecessor
 
For the fiscal year ended
 
For the period September 8, 2012 through December 28, 2012
 
 
For the period December 31, 2011 through September 7, 2012
 
December 26, 2014
 
December 27, 2013
 
 
 
Company contributions
$
1,457

 
$
1,384

 
$
371

 
 
$
819



95

INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 26, 2014 and December 27, 2013 (Successor) and the periods September 8, 2012 to December 28, 2012 (Successor) and December 31, 2011 to September 7, 2012 (Predecessor)


15. COMMITMENTS AND CONTINGENCIES

Lease Commitments

The Company leases its facilities, vehicles, and other equipment under operating and capital leases expiring at various dates through 2024. Minimum future rental payments under these operating and capital leases as of December 26, 2014 are as follows (in thousands):
 
 
Successor
Fiscal Year
 
Operating
 
Capital
2015
 
$
33,755

 
$
10

2016
 
28,583

 

2017
 
21,545

 

2018
 
14,653

 

2019
 
6,697

 

Thereafter
 
11,379

 

Total payments
 
$
116,612

 
10

Less: Amount representing interest
 
 
 

Present value of minimum lease payments
 
 
 
10

Less: Current portion
 
 
 
(10
)
Long term portion
 
 
 
$


Certain of the leases provide that the Company pays taxes, insurance and other operating expenses applicable to the leased premises. Rent expense under all operating leases was as follows (in thousands):
 
Successor
 
 
Predecessor
 
For the fiscal year ended
 
For the period September 8, 2012 through December 28, 2012
 
 
For the period December 31, 2011 through September 7, 2012
 
December 26, 2014
 
December 27, 2013
 
 
 
Rent expense
$
46,628

 
$
44,890

 
$
11,655

 
 
$
25,541


Employment Agreements
    
The Company has employment agreements with certain officers and employees totaling combined salaries of $6.0 million, plus bonuses and subject to adjustments.

Contingent Liabilities

As of December 26, 2014 and December 27, 2013, the Company was contingently liable for outstanding letters of credit aggregating to $11.3 million and $10.5 million, respectively.

Legal Proceedings

In May 2011, the Company was named as a defendant in the case of Craftwood Lumber Company v. Interline Brands, Inc. ("Craftwood Matter"), filed before the Nineteenth Judicial Circuit Court of Lake County, Illinois, and subsequently removed to the United States District Court for the Northern District of Illinois. The complaint alleges that the Company sent unsolicited fax advertisements to businesses nationwide in violation of the Telephone Consumer Protection Act of 1991, as amended by the Junk Fax Prevention Act of 2005 (“Junk Fax Act”). At the time of filing the initial complaint in state court, the plaintiff also filed a motion

96

INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 26, 2014 and December 27, 2013 (Successor) and the periods September 8, 2012 to December 28, 2012 (Successor) and December 31, 2011 to September 7, 2012 (Predecessor)


asking the Court to certify a class of plaintiffs comprised of businesses who allegedly received unsolicited fax advertisements from the Company during the four-year statute of limitations period. In its amended complaint filed in the United States District Court, the plaintiff seeks preliminary and permanent injunctive relief enjoining the Company from violating the Junk Fax Act, as well as statutory damages for each fax transmission found to be in violation of the Junk Fax Act. In light of the Company's assessment of potential legal risks associated with the Craftwood Matter, the Company recorded a pre-tax charge in the amount of $20.5 million in the third quarter of 2013. In the fourth quarter of 2014, the Company filed a joint notice of settlement with the Court for aggregate consideration in the amount of $40.0 million. The settlement has been preliminarily approved by the Court and is awaiting final approval.

As a result of the executed settlement agreement, the Company recorded an additional pre-tax charge in the amount of $19.5 million during the fiscal year ended December 26, 2014. Estimated charges recorded in conjunction with the Craftwood Matter were included in selling, general and administrative expenses in the statements of operations during the respective fiscal years. The litigation-related accrual of $39.9 million and $20.5 million were included in accrued expenses and other current liabilities in the consolidated balance sheets as of December 26, 2014 and December 27, 2013.

The Company is involved in various other legal proceedings in the ordinary course of its business and have not been fully adjudicated. These actions, when ultimately concluded and determined, will not, in the opinion of management, have a material effect upon the Company’s consolidated financial statements.

Because the outcome of litigation is inherently uncertain, the Company may not prevail in these proceedings and the ultimate exposure cannot be estimated if the Company were not to prevail. Accordingly, any rulings against the Company could have a material adverse effect on the consolidated financial statements.

16. INTEREST AND OTHER INCOME

Interest and other income consisted of the following during 2014, 2013 and 2012 (in thousands):
 
Successor
 
 
Predecessor
 
For the fiscal year ended December 26, 2014
 
For the fiscal year ended December 27, 2013
 
For the period September 8, 2012 through December 28, 2012
 
 
For the period December 31, 2011 through September 7, 2012
Interest income
$
79

 
$
45

 
$
15

 
 
$
18

Other income
904

 
1,535

 
578

 
 
1,481

Interest and other income
$
983

 
$
1,580

 
$
593

 
 
$
1,499



97

INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 26, 2014 and December 27, 2013 (Successor) and the periods September 8, 2012 to December 28, 2012 (Successor) and December 31, 2011 to September 7, 2012 (Predecessor)


17. INCOME TAXES

The Company files numerous consolidated and separate income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal income tax examinations for years before 2013 and is no longer subject to state and local, or foreign income tax examinations by tax authorities for years before 2011.

The (benefit) provision for income taxes for 2014, 2013 and 2012, is as follows (in thousands):

 
Successor
 
 
Predecessor
 
For the fiscal year ended
 
For the period September 8, 2012 through December 28, 2012
 
 
For the period December 31, 2011 through September 7, 2012
 
December 26, 2014
 
December 27, 2013
 
 
 
Current:
 
 
 
 
 
 
 
 
Federal
$
12,012

 
$
7,973

 
$
(15,232
)
 
 
$
3,150

State
1,381

 
507

 
2,656

 
 
383

Foreign
(22
)
 
52

 
78

 
 
176

 
13,371

 
8,532

 
(12,498
)
 
 
3,709

Deferred:
 
 
 
 
 
 
 
 
Federal
(39,694
)
 
(14,243
)
 
4,744

 
 
6,842

State
(4,634
)
 
(5,287
)
 
(2,749
)
 
 
833

Foreign
(9
)
 
151

 

 
 

 
(44,337
)
 
(19,379
)
 
1,995

 
 
7,675

 
$
(30,966
)
 
$
(10,847
)
 
$
(10,503
)
 
 
$
11,384


As of December 26, 2014, the approximate amount of earnings of foreign subsidiaries that the Company considers permanently reinvested and for which deferred taxes have not been provided was $14.4 million. Because of the availability of U.S. foreign tax credits, it is not practicable to determine the U.S. federal income tax impact if such earnings were not permanently reinvested.

The Company no longer has foreign tax credits that may be used to offset future foreign source income taxable in the U.S.

The components of (loss) income before income taxes for 2014, 2013 and 2012 were as follows (in thousands):

 
Successor
 
 
Predecessor
 
For the fiscal year ended
 
For the period September 8, 2012 through December 28, 2012
 
 
For the period December 31, 2011 through September 7, 2012
 
December 26, 2014
 
December 27, 2013
 
 
 
United States
$
(77,759
)
 
$
(17,312
)
 
$
(39,202
)
 
 
$
23,581

Foreign
(279
)
 
125

 
255

 
 
627

Total
$
(78,038
)
 
$
(17,187
)
 
$
(38,947
)
 
 
$
24,208



98

INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 26, 2014 and December 27, 2013 (Successor) and the periods September 8, 2012 to December 28, 2012 (Successor) and December 31, 2011 to September 7, 2012 (Predecessor)


The reconciliation of the provision for income taxes at the federal statutory tax rate to the provision for income taxes for 2014, 2013 and 2012 is as follows:
 
Successor
 
 
Predecessor
 
For the fiscal year ended
 
For the period September 8, 2012 through December 28, 2012
 
 
For the period December 31, 2011 through September 7, 2012
 
December 26, 2014
 
December 27, 2013
 
 
 
Federal statutory tax rate
35.00
 %
 
35.00
 %
 
35.00
 %
 
 
35.00
 %
Provision to return true ups
1.72

 
29.33

 
3.19

 
 
0.93

State and local income taxes, net of Federal benefit
3.46

 
0.65

 
(0.56
)
 
 
4.92

Foreign income taxes
(0.07
)
 
(0.04
)
 
0.03

 
 
(0.18
)
Merger related expenses

 
(0.14
)
 
(10.38
)
 
 
5.73

Nondeductible expenses and other
(0.43
)
 
(1.69
)
 
(0.31
)
 
 
0.63

 
39.68
 %
 
63.11
 %
 
26.97
 %
 
 
47.03
 %
    
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 as of December 26, 2014 and December 27, 2013 consist of the following (in thousands):
 
 
Successor
 
 
December 26, 2014
 
December 27, 2013
Deferred tax assets:
 
 
 
 
Litigation related accrual
 
$
15,973

 
$
8,057

Inventories
 
6,743

 
7,515

Share-based compensation
 
7,064

 
6,482

Net operating loss and tax credit
   carryforwards
 
2,333

 
2,361

Accrued workers compensation
 
2,307

 
2,273

Accrued bonus
 
2,062

 
1,615

Accrued vacation
 
1,465

 
1,407

Allowance for doubtful accounts
 
1,462

 
1,338

Lease incentive obligation
 
890

 
1,208

Deferred rent
 
784

 
554

Other
 
616

 
605

Total deferred tax assets
 
41,699

 
33,415

Deferred tax liabilities:
 
 
 
 
Intangibles
 
(114,610
)
 
(149,114
)
Depreciation
 
(8,955
)
 
(10,263
)
Other
 
(4,202
)
 
(4,443
)
Total deferred tax liabilities
 
(127,767
)
 
(163,820
)
Net deferred tax liabilities
 
$
(86,068
)
 
$
(130,405
)

At December 26, 2014, the Company had $1.9 million of state operating loss carryforwards related primarily to the Merger transaction that will expire at various dates through 2033.

99

INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 26, 2014 and December 27, 2013 (Successor) and the periods September 8, 2012 to December 28, 2012 (Successor) and December 31, 2011 to September 7, 2012 (Predecessor)


Unrecognized Tax Benefits

In accordance with U.S. GAAP, the Company will recognize the impact of a tax position if a position is "more likely than not" to prevail.

A reconciliation of the beginning and ending unrecognized tax benefits for the fiscal years ended December 26, 2014 and December 27, 2013 and for the period from September 8, 2012 through December 28, 2012 is as follows (in thousands):
 
Successor
 
For the fiscal year ended
 
For the period September 8, 2012 through December 28, 2012
 
December 26, 2014
 
December 27, 2013
 
Balance at beginning of period
$
249

 
$
1,535

 
$
152

Increases related to prior year tax positions
8

 
45

 
817

Increases related to current year tax positions
153

 
52

 
566

Decreases related to prior year tax positions

 
(1,383
)
 

Balance at end of period
$
410

 
$
249

 
$
1,535


There were no material uncertain tax positions as of September 7, 2012.

The unrecognized tax benefit, if recognized, would not have a material effect on the effective tax rate at December 26, 2014.

The Company recognizes potential penalties and interest related to unrecognized tax benefits within its statements of operations as selling, general and administrative expenses and interest expense, respectively. To the extent penalties and interest are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of selling, general and administrative expenses and interest expense, respectively. Interest expense for the year ended December 26, 2014 was not material.
The unrecognized tax benefit with respect to certain of the Company's tax positions may increase or decrease over the next twelve months; however, management does not expect the change, if any, to have a material effect on the Company's financial position or results of operations within the next twelve months.
During 2014, the IRS concluded the examination of the Company's federal income tax return for the fiscal year 2012. The exam resulted in additional refunds received for carryback of credits. During 2013, the IRS concluded the examination of the Company's federal income tax return for the fiscal years 2009-2010. The exam resulted in an immaterial adjustment, which is reflected in the above deferred balances.


100

INTERLINE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 26, 2014 and December 27, 2013 (Successor) and the periods September 8, 2012 to December 28, 2012 (Successor) and December 31, 2011 to September 7, 2012 (Predecessor)


18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of the Company's quarterly results of operations for 2014 and 2013 (in thousands):
 
Successor
 
First Quarter
 
Second Quarter
 
Third Quarter
 
Fourth Quarter
 
Total Fiscal Year
Fiscal year 2014
 
 
 
 
 
 
 
 
 
Net sales
$
392,469

 
$
425,542

 
$
442,445

 
$
415,765

 
$
1,676,221

Gross profit
135,790

 
145,570

 
154,399

 
145,884

 
581,643

Net (loss) income
(6,094
)
(1 
) 
(38,577
)
(2 
) 
7,198

 
(9,599
)
 
(47,072
)
Fiscal year 2013
 
 
 
 
 
 
 
 
 
Net sales
380,753

 
405,706

 
421,541

 
390,055

 
1,598,055

Gross profit
131,696

 
138,333

 
146,978

 
135,964

 
552,971

Net (loss) income
$
(1,480
)
 
$
1,172

 
$
(7,206
)
 
$
1,174

 
$
(6,340
)
____________________
(1) Net loss for the first quarter of 2014 includes a loss on extinguishment of debt of $4.2 million recorded in connection with the redemption of the OpCo Notes and the related financing transactions. Refer to the Note 10. Debt for additional information.
(2) Net loss for the second quarter of 2014 includes non-cash charges of $67.5 million related to the impairment of certain indefinite-lived trademark assets. These impairments were primarily due to a strategic marketing decision to phase out certain brand names which resulted in a change in the expected useful life of the intangible assets. Refer to the Note 8. Goodwill and Other Intangible Assets for additional information related to the impairment charges.

19. Subsequent Events

On December 30, 2014, the Company used a combination of cash on hand and borrowings under the recently amended ABL Facility to redeem $80.0 million of the $365.0 million outstanding aggregate principal amount of the HoldCo Notes at a redemption price of 105% of the outstanding aggregate principal amount to be redeemed, plus accrued and unpaid interest through the redemption date. In connection with the redemption of the HoldCo Notes, the Company recorded a loss on early extinguishment of debt in the amount of $6.6 million which will be included in the statement of operations for the three months ended March 27, 2015. The loss was comprised of $4.0 million in tender premium and related transactions costs and the write-off of the unamortized deferred debt issuance costs of $2.6 million. Please refer to Note 10. Debt for additional information related to the Company's outstanding debt obligations.


101


ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A. Controls and Procedures

Evaluation of Disclosure 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, 2014. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 26, 2014, our disclosure controls and procedures were effective to ensure that: (1) material information disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure and (2) 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.

Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation, under the Internal Control-Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 26, 2014.

Changes in Internal Control over Financial Reporting

In May 2013, the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) issued an updated version of its Internal Control - Integrated Framework (the “2013 framework”).  Originally issued in 1992, the framework helps organizations design, implement and evaluate the effectiveness of internal control concepts and simplify their use and application. 
During the fourth quarter of fiscal year 2014, the Company transitioned to the 2013 framework. No other changes in our internal control over financial reporting occurred during the quarter ended December 26, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of a control system are met. Further, any control system reflects limitations on resources, and the benefits of a control system must be considered relative to its costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. The design of a control system is also based upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected. Our disclosure controls are designed to provide reasonable assurance of achieving their objectives. Based on our evaluation of the effectiveness of our internal control over financial reporting, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that, as of December 26, 2014, our disclosure controls and procedures were effective at the reasonable assurance level.

ITEM 9B. Other Information

None.


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PART III

ITEM 10. Directors, Executive Officers and Corporate Governance

Our Board of Directors

Our current Board of Directors consists of ten members. Members of the Board of Directors are elected in accordance with the provisions of the Third Amended and Restated Certificate of Incorporation, the Sixth Amended and Restated Bylaws and the Stockholders Agreement dated September 7, 2012 (the “Stockholders Agreement”). The Stockholders Agreement was entered into by and among GS Capital Partners and its affiliates, P2 Capital Partners and its affiliates, and certain stockholders of the Company. Pursuant to the Stockholders Agreement, GS Capital Partners (which owns a majority of the Company's shares) has the right to designate five members of our Board of Directors and P2 Capital Partners has the right to designate two members of our Board of Directors, unless otherwise agreed by GS Capital Partners and P2 Capital Partners. In addition, the Stockholders Agreement provides that the Chief Executive Officer and the President of the Company shall be members of our Board of Directors, with the Chief Executive Officer also serving as Chairman of the Board. Because of these requirements and because our equity is privately-held, we do not currently have a policy or procedures with respect to shareholder recommendations for nominees to our Board of Directors.

As a result of the Stockholders Agreement, Messrs. Mehra, Gross and Crampton, and Ms. Berry were designated as members of our Board of Directors by GS Capital Partners, and Messrs. Moller and Paulson were designated by P2 Capital Partners. In addition, the Board of Directors appointed two independent directors to our Board of Directors: Dennis J. Letham, who also serves as Chair of our Audit Committee; and Jozef Opdeweegh, who also serves as a member of our Compensation Committee. Pursuant to the Stockholders' Agreement, Mr. Opdeweegh was designated as a member of our Board of Directors by GS Capital Partners. In addition, GS Capital Partners and P2 Capital Partners agreed to increase the size of our Board of Directors to ten members in connection with Mr. Letham's appointment in March 2013 and that Mr. Letham would be designated as a member of our Board of Directors by GS Capital Partners pursuant to the terms of the Stockholders' Agreement. Each of our directors, other than Messrs. Letham and Opdeweegh, are employed by us or our principal stockholders.

The names of our current directors, along with their present positions and qualifications, their principal occupations and directorships held with public corporations during the past five years and their ages as of February 25, 2015 are set forth below:
Name
 
Age
 
Position
Michael J. Grebe
 
57
 
Chairman of the Board and Chief Executive Officer
Kenneth D. Sweder
 
45
 
Director, President and Chief Operating Officer
Ann Berry
 
33
 
Director
Christopher Crampton
 
36
 
Director
Bradley Gross
 
42
 
Director
Dennis J. Letham
 
63
 
Director
Sanjeev Mehra
 
56
 
Director
Claus J. Moller
 
51
 
Director
Jozef Opdeweegh
 
48
 
Director
Joshua D. Paulson
 
37
 
Director

Director Backgrounds and Qualifications

Unless otherwise indicated, the business experience of our directors described below represents their experience over at least the last five years.

Michael J. Grebe has served as Chairman of the Board of Directors of Interline since January 2007; as a director of Interline since June 2004; as Chairman of the Board of Directors of Interline New Jersey since January 2007; as a director of Interline New Jersey since May 2000; and as Chief Executive Officer of Interline and Interline New Jersey since June 2004. Mr. Grebe has also previously served as President of Interline and Interline New Jersey and as Chief Operating Officer of Interline New Jersey. Prior to joining Interline, Mr. Grebe served as a Group Vice President of Airgas, Inc. (“Airgas”) a distributor of industrial gases, from 1997 to 1998. Mr. Grebe joined Airgas following its acquisition of IPCO Safety, Inc., a national distributor of industrial safety supplies, where he served as President from 1991 to 1996. Mr. Grebe also serves on the Boards of Directors of SRS Distribution, Inc. and Baptist Health System, Inc. Mr. Grebe's qualifications to serve on our Board of Directors include his more than 20 years of experience serving

103


in senior-level leadership positions in distribution companies, and his more than 10 years of experience serving as CEO, President and/or COO of Interline and Interline New Jersey.

Kenneth D. Sweder has served as a director of Interline since September 2012, as President of Interline and Interline New Jersey since February 2011, and as Chief Operating Officer of Interline and Interline New Jersey since October 2008. Mr. Sweder also previously served as Chief Merchandising Officer of Interline and Interline New Jersey from April 2007 to August 2013. Prior to joining Interline, Mr. Sweder was the First Vice President of Property Operations Strategy at Equity Residential Properties from June 2004 to April 2007, a management consultant at Bain & Company from June 2000 to May 2004, and in various positions within the National Corporate Banking division of PNC Bank from July 1991 to May 2000, most recently as Vice President. Mr. Sweder's qualifications to serve on our Board of Directors include his extensive knowledge of our business, industry and operations; high level of financial and capital markets literacy; deep acquisition and integration expertise; and significant experience with our sales, marketing and technology platforms.

Ann Berry has served as a director of Interline since September 2012. Ms. Berry is a Vice President in the Principal Investment Area of the Merchant Banking Division of Goldman, Sachs & Co., which she joined in 2008. She also serves as a director of U.S. Security Associates. Ms. Berry's qualifications to serve on our Board of Directors are described below.

Christopher Crampton has served as a director of Interline and Interline New Jersey since September 2012. Mr. Crampton is a Managing Director in the Principal Investment Area of the Merchant Banking Division of Goldman, Sachs & Co., which he joined in 2003. He also serves as a director of ProQuest Holdings, LLC, Pipeline Supply and Service, LLC, Americold Realty Trust, Andrews International, and U.S. Security Associates. Within the past five years, he has served as a director of MRC Global, Inc. Mr. Crampton's qualifications to serve on our Board of Directors are described below.

Bradley Gross has served as a director of Interline and Interline New Jersey since September 2012. Mr. Gross is a Managing Director of Goldman, Sachs & Co. Mr. Gross joined Goldman, Sachs & Co. in the Real Estate Principal Investment Area in 1995 and joined the Principal Investment Area in 2000. Mr. Gross currently serves as a director of Americold Realty Trust, Griffon Corporation, ProQuest Holdings, LLC and PSAV Holdings LLC. Within the past five years, he has served as a director of Aeroflex Holding Corp., First Aviation Services, Inc., Flynn Restaurant Group LLC, Capmark Financial Group, and Cequel Communications, LLC. Mr. Gross' qualifications to serve on our Board of Directors are described below.

Dennis J. Letham has served as a director of Interline since March 2013. From 1995 until his retirement in 2011, Mr. Letham served as Executive Vice President, Finance and Chief Financial Officer of Anixter International, Inc. During 1993 to 1995, Mr. Letham served as Executive Vice President and Chief Financial Officer of Anixter, Inc., the principal operating subsidiary of Anixter International, Inc. Prior to joining Anixter, Mr. Letham served in various leadership positions during his 10-year career with National Intergroup, Inc. Mr. Letham began his career with Arthur Andersen & Co. where he held progressive responsibilities in the Audit Department. Mr. Letham also serves on the Board of Directors of Tenneco, Inc. and chairs its Audit Committee. Mr. Letham's qualifications to serve on our Board of Directors include his prior experience as a Chief Financial Officer of a large public distribution company, and his extensive experience in complex financial, accounting and operational issues.

Sanjeev Mehra has served as a director of Interline since September 2012. Mr. Mehra serves as Vice Chairman of Goldman, Sachs's private equity business and has been a partner of Goldman, Sachs & Co. since 1998 and a Managing Director of its Merchant Banking Division since 1996. He also serves as a director of ARAMARK Corporation, SunGard Data Systems, Inc., Sigma Electric, Max India Limited and TVS Logistics Services Limited, and in the past five years has served as a director of KAR Auction Services, Inc., Hawker Beechcraft, Inc., First Aviation Services, Inc., Adam Aircraft Industries, Inc. and Burger King Holdings, Inc. Mr. Mehra's qualifications to serve on our Board of Directors are described below.

Claus J. Moller has served as a director of Interline since September 2012. Mr. Moller is the Founder and Managing Partner of P2 Capital Partners, a private equity firm. Mr. Moller's qualifications to serve on our Board of Directors are described below.

Jozef Opdeweegh has served as a director of Interline since February 2013. Mr. Opdeweegh is currently the Chief Executive Officer of Neovia Logistics Services, LLC (f/k/a Caterpillar Logistics Services, Inc.). Mr. Opdeweegh previously served as the Chief Executive Officer of Americold Realty Trust from March 2009 to February 2012, as interim Chief Executive Officer of Americold Realty Trust from September 2008 through March 2009 and as a Trustee of Americold Realty Trust since March 2008. From 2000 through the end of 2007, Mr. Opdeweegh served as the Chief Executive Officer and President of Syncreon, Inc. (f/k/a TDS Logistics & Walsh Western), a supply chain services company focused on the automotive and technology industry. Mr. Opdeweegh's qualifications to serve on our Board of Directors include his extensive knowledge of complex supply chain solutions, warehouse operations and distribution.


104


Joshua D. Paulson has served as a director of Interline and Interline New Jersey since September 2012. Mr. Paulson is a Partner with P2 Capital Partners, a private equity firm. Mr. Paulson also serves on the Board of Directors of UTi Worldwide Inc. Mr. Paulson's qualifications to serve on our Board of Directors are described below.

We believe that each of our directors nominated by our private equity sponsors have the experience and qualifications that will allow them to make substantial contributions to the Board of Directors. Messrs. Crampton, Gross, Mehra, Moller and Paulson, and Ms. Berry, have expertise in distribution, operations, logistics and marketing as a result of their experience working on investments in other distribution companies. These directors hold positions with national and global private equity firms and possess experience in owning and managing enterprises like the Company and are familiar with corporate finance, strategic business planning activities and issues involving stakeholders more generally. In addition, these directors have experience in corporate governance through their experience serving as directors of other public and private companies.

Our Executive Officers
The following table sets forth the name, age and positions, as of February 25, 2015, of individuals who are currently executive officers of the Company. To our knowledge, there are no family relationships between any director or executive officer and any other director or executive officer of the Company.
Name
 
Age
 
Position
Michael J. Grebe
 
57
 
Chairman of the Board and Chief Executive Officer
Kenneth D. Sweder
 
45
 
Director, President and Chief Operating Officer
Michael Agliata
 
41
 
Vice President, General Counsel and Secretary
Jonathan S. Bennett
 
46
 
Chief Merchandising Officer
Lucretia D. Doblado
 
51
 
Chief Information Officer
Kevin O'Meara
 
52
 
Senior Vice President, Operations
Federico L. Pensotti
 
47
 
Chief Financial Officer
David C. Serrano
 
51
 
Chief Accounting Officer and Corporate Controller

Michael Agliata has served as Vice President, General Counsel and Secretary of Interline and Interline New Jersey since March 2009. Mr. Agliata previously served as Corporate Counsel for Interline and Interline New Jersey from July 2007 to March 2009 and as Assistant Secretary from March 2008 to March 2009. Prior to joining Interline, Mr. Agliata was a practicing attorney in the Jacksonville, Florida office of Holland & Knight LLP from April 2004 to April 2007 and in the Miami and Fort Lauderdale offices of Fowler White Burnett, P.A. from July 1999 through April 2004.

Jonathan S. Bennett has served as Chief Merchandising Officer of Interline and Interline New Jersey since August 2013. Prior to joining Interline, Mr. Bennett served in various leadership positions with The Home Depot from 2002 to January 2013, most recently as Vice President, Pricing and Analytics. Mr. Bennett also worked as Project Leader for the Boston Consulting Group from 1999 through 2003, and as an attorney with the law firm of Davis, Polk and Wardwell from 1994 to 1999.

Lucretia D. Doblado has served as Chief Information Officer of Interline and Interline New Jersey since October 2006. Prior to joining Interline, Ms. Doblado served as the Senior Vice President and Chief Information Officer of The Bombay Company, Inc. from October 2003 to September 2006 and a Partner at Accenture, a premier consulting and business integration firm, from 1986 to 2002, where she assisted clients for 17 years building information technology solutions for Fortune 500 and international companies.

Kevin O'Meara has served as Senior Vice President, Operations of Interline and Interline New Jersey since January 2014. Prior to joining Interline, Mr. O'Meara served as Senior Vice President, Supply Chain Effectiveness for Breakthrough Fuel, LLC from 2012 to January 2014. Mr. O’Meara also held several leadership positions with Whirlpool Corporation between 2005 and 2012, most recently as the Senior Director, Supply Chain Operations. Prior to joining Whirlpool, Mr. O’Meara worked in several leadership positions with Schneider National, Inc. from 1993 to 2005, most recently as Vice President, Customer Relationship Management. Mr. O’Meara was also an officer in the U.S. Army, where he served from 1984 to 1993.

Federico L. Pensotti has served as Chief Financial Officer of Interline and Interline New Jersey since May 2014. Prior to joining Interline, Mr. Pensotti served as the Senior Vice President, Finance and Corporate Controller at Sabre Corporation, a leading technology provider to the global travel and tourism industry from 2009 to 2014. During his time at Sabre Corporation, from 1999 to 2014, he held various positions including Vice President and Treasurer, Chief Financial Officer over several of Sabre's business segments, including Sabre Travel Network, Sabre Airline Solutions, and Travelocity. From 2004 2009, Mr. Pensotti held various positions of progressive responsibility at American Airlines in the areas of Airline Profitability Analysis, Financial and Capital

105


Planning, and Corporate Finance/Treasury. Mr. Pensotti started his career in 1989 as a securities and investment portfolio analyst at Eagle Management and Trust Company.

David C. Serrano has served as Chief Accounting Officer of Interline and Interline New Jersey since May 2010 and as Corporate Controller of Interline and Interline New Jersey since August 2001. Mr. Serrano also served as Interim Chief Financial Officer of Interline and Interline New Jersey from March 19, 2013 through June 10, 2013. Mr. Serrano previously served as Vice President of Finance of Interline and Interline New Jersey from September 2005 to May 2010, and as Divisional Controller of Interline New Jersey from September 2000 to August 2001. Prior to joining Interline, Mr. Serrano served as Corporate Controller of Barnett, Inc., one of our corporate predecessors, from 1990 to 2000, and as Assistant Controller of U.S. Lock Corporation, another one of our predecessor companies, from 1988 to 1990.

Committees

Our Board of Directors currently has two standing committees: the Audit Committee and the Compensation Committee.

The primary purposes of the Audit Committee are to assist the Board of Directors in monitoring the integrity of our financial statements, the qualifications and independence of our independent registered certified public accounting firm, the performance of our audit function and independent registered certified public accounting firm, and our compliance with legal and regulatory requirements. The Audit Committee also assists the Board of Directors in monitoring various controls implemented by the Company to address and reduce financial and legal risks. Messrs. Crampton, Letham and Paulson and Ms. Berry are currently serving on the Audit Committee. Mr. Letham serves as Chairman of the Audit Committee and also qualifies as an independent “audit committee financial expert,” as such term has been defined by the SEC in Item 407(d)(5)(ii) of Regulation S-K.

The Compensation Committee has the authority to approve salaries and bonuses and other compensation matters for our executive officers. In addition, the Compensation Committee has the authority to approve employee benefit plans as well as administer the 2012 Stock Option Plan. The Compensation Committee currently consists of Messrs. Crampton, Gross, Opdeweegh, and Paulson. Mr. Gross serves as Chairman of the Compensation Committee.

Code of Conduct and Ethics

Our Board of Directors and management have a strong commitment to ethical conduct and business practices. The Company has adopted a Code of Conduct and Ethics (the “Code”), which applies to all of the Company's directors, officers (including its Chief Executive Officer, Chief Financial Officer, Controller and any person(s) performing similar functions) and employees. The Code is periodically reviewed and updated to remain current with applicable legal requirements and best practices. The Code is posted on our website at www.interlinebrands.com and is available in print to any shareholder who requests it.

Section 16(A) Beneficial Ownership Reporting Compliance

In light of our status as a privately held company, Section 16(a) of the Securities Exchange Act of 1934, as amended, does not apply to our directors, executive officers and significant stockholders.

ITEM 11. Executive Compensation

Compensation Committee Interlocks and Insider Participation

None of our executive officers serves as a member of the Board of Directors or Compensation Committee of any entity that has one or more executive officers who serve on our Board of Directors or Compensation Committee.

DIRECTOR COMPENSATION

The Sponsors appointed Ann Berry, Christopher Crampton, Bradley Gross, Sanjeev Mehra, Claus J. Moller, and Joshua D. Paulson (together, the “Sponsor Appointees”) to serve on the Board with Michael J. Grebe and Kenneth D. Sweder. None of the Sponsor Appointees, Mr. Grebe or Mr. Sweder is individually compensated by the Company for service on the Board.

Jozef Opdeweegh and Dennis J. Letham joined the Board as independent directors in 2013. Mr. Opdeweegh and Mr. Letham each receive an annual retainer of $40,000. Mr. Letham also receives an annual fee of $20,000 for serving as the Chair of the Audit Committee, and Mr. Opdeweegh receives an annual fee of $7,500 for serving as a member of the Compensation Committee. All fees are payable in equal installments on a quarterly basis. Upon joining our Board in 2013, Messrs. Letham and Opdeweegh were also

106


each granted 1,961 time-based stock options with an exercise price of $255.00 per share. These options vest in equal increments of 20% of the total stock option grant on each of the first, second, third, fourth and fifth anniversaries of the date of grant, subject to continued service on our Board. No stock options or other stock awards were granted to our directors in 2014.

No additional fees are paid to directors for attendance at Board or committee meetings. For the independent directors, all director compensation is contingent upon a director attending a minimum of 75% of our regular meetings (in person or telephonically) each year.

The following table summarizes the fees and other compensation that our non-employee directors earned for services as members of the Board of Directors and any committee of the Board of Directors for the fiscal year ended December 26, 2014.

Name
 
Fees Earned or Paid in Cash
 
Option Awards
 
Total
Ann Berry(1)
 
$

 
$

 
$

Christopher Crampton(1)
 
$

 
$

 
$

Bradley Gross(1)
 
$

 
$

 
$

Dennis J. Letham
 
$
60,000

 
$

(2) 
$
60,000

Sanjeev Mehra(1)
 
$

 
$

 
$

Claus J. Moller(1)
 
$

 
$

 
$

Jozef Opdeweegh
 
$
47,500

 
$

(2) 
$
47,500

Joshua D. Paulson(1)
 
$

 
$

 
$

____________________

(1)
Each of these directors was appointed by the Sponsors to serve on the Board effective as of September 7, 2012. These directors were not compensated for their service on the Board in 2014.
(2)
As of December 26, 2014, Messrs. Letham and Opdeweegh each held options to purchase 1,961 shares of common stock, 392 of which are vested. No other directors held any outstanding option or stock awards as of that date.

COMPENSATION COMMITTEE REPORT

The following report of the Compensation Committee does not constitute soliciting material and shall not be deemed filed or incorporated by reference into any other filing by Interline under the Securities Act of 1933 or the Securities Exchange Act of 1934.

The Compensation Committee of the Board of Directors reviewed and discussed the Compensation Discussion and Analysis with management. Based on such review and discussions, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company's Form 10-K for the year ended December 26, 2014, as filed with the SEC.

 
COMPENSATION COMMITTEE
 
Mr. Bradley Gross, Chairman
 
Mr. Christopher Crampton
 
Mr. Jozef Opdeweegh
 
Mr. Joshua D. Paulson


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COMPENSATION DISCUSSION AND ANALYSIS

The following discussion describes our executive compensation philosophy and compensation programs, and how they are applied to our CEO, to both of the executives who served as our CFO in 2014 and to our other executive officers whose compensation is listed in the Summary Compensation Table and discussed below (our “named executive officers”).

General Compensation Philosophy

Our compensation program is designed to:

(i)
attract, retain, motivate and reward highly qualified executive management who drive the execution of our long-term business strategy and, in turn, generate shareholder value;
(ii) 
create appropriate incentives for executive management without encouraging unnecessary risk-taking;
(iii)
maintain a simple, consistent, equitable and transparent framework that permits flexibility and room for judgment; and
(iv)
use compensation judiciously to achieve business objectives without undue transfer of value to employees.
Our compensation program is also designed to align management's incentives with the long-term interests of our shareholders. We believe we can best increase our shareholders' value over the long-term by attaining earnings growth through increased sales, improved gross margins and lower operating costs. Accordingly, our annual non-equity incentive compensation program for our named executive officers is designed to reward achievement of earnings growth-based performance targets as well as achievement by each individual of his personal performance objectives.

Oversight

Our executive compensation objectives, policies and programs are established by the Compensation Committee. The Compensation Committee is responsible for the following:

reviewing and approving annually the goals and objectives relevant to compensation of all executive officers;

reviewing and approving the individual elements of all executive officers' annual compensation;

reviewing and approving all employment agreements, severance agreements, retirement arrangements, and change in control agreements/provisions for the Company's executive officers;

administering the Company's 2012 Stock Option Plan (the "2012 Plan");

periodically reviewing the compensation paid to non-employee and independent Directors and recommending changes to the full Board, as appropriate;

planning for executive development and succession; and

assisting the Board in its oversight of the development, effectiveness and implementation of our compensation policies and strategies.

Compensation Program

The primary elements of compensation for our named executive officers are base salary, annual non-equity incentive compensation (also referred to herein as annual cash bonuses) and equity compensation. We do not maintain any post-retirement benefit plans solely for our named executive officers and we provide limited perquisites to our named executive officers. There are no benefit plans that are available to our named executive officers that are not also available on the same terms to our other employees.
Our CEO recommended to the Compensation Committee annual compensation levels for executive officers other than himself, as well as any new employment contracts or changes to existing contracts.


108


Base Salaries

Base salaries are intended to establish a level of compensation which, together with the other components of the compensation program, will help us attract and retain the talent needed to meet the challenges of the competitive industry in which we operate while maintaining an acceptable level of fixed costs.

The Company generally determines base salaries and other cash compensation for the Company's named executive officers based upon consideration of the following material factors: (1) the Company's evaluation of the named executive officer's performance in the preceding fiscal year; (2) the anticipated contribution by the named executive officer in the upcoming fiscal year, taking into account the role, responsibility and scope of each position; (3) any extraordinary changes that have occurred (such as a significant change in responsibilities or a promotion); (4) any specific requirements set forth in a named executive officer's employment agreement; (5) the named executive officer's length of service and his performance over an extended period of time; (6) general economic conditions; and (7) the value and potential value to the executive of the other elements of the Company's compensation program. All of the above considerations are addressed collectively in the determination of the named executive officer's base salary level.

For 2014, the base salaries for our named executive officers were increased, or otherwise remained unchanged, as set forth below and were implemented in the normal course in 2014:

Named Executive Officer and Principal Position
 
2014 Base Salary
 
2013 Base Salary
Michael J. Grebe (1)
 
$
695,000

 
$
695,000

Chairman and Chief Executive Officer
 
 
 
 
Federico L. Pensotti (2)
 
$
375,000

 
$

Chief Financial Officer
 
 
 
 
John K. Bakewell (3)
 
$
375,000

 
$
375,000

Former Chief Financial Officer
 
 
 
 
Kenneth D. Sweder
 
$
500,000

 
$
466,796

President and Chief Operating Officer
 
 
 
 
Kevin O'Meara (4)
 
$
260,000

 
$

Senior Vice President, Operations
 
 
 
 
Jonathan S. Bennett
 
$
307,500

 
$
292,500

Chief Merchandising Officer
 
 
 
 
____________________
(1)
Mr. Grebe did not accept a merit increase for himself in 2014.
(2)
Mr. Pensotti joined the Company effective May 19, 2014.
(3)
Mr. Bakewell resigned from the Company effective May 16, 2014.
(4)
Mr. O'Meara joined the Company effective January 28, 2014.

We believe our base salary structure provides a framework for an equitable compensation ratio between executives, with higher salaries for jobs having greater duties and responsibilities. The amount of base salary is taken into account and affects the amount of annual bonuses for our named executive officers, because the target annual bonus for each of our named executive officers is expressed as a specified percentage of his base salary.

Annual Non-Equity Incentive Compensation (Annual Bonus)

Our annual non-equity incentive compensation awarded under the Executive Cash Incentive Plan (the “ECIP”) is intended to motivate and reward performance by providing cash bonus payments based upon meeting or exceeding performance goals. Upon achievement of the established performance goals, individual awards are determined as variable percentages of the executives' base salaries, depending on the extent to which performance goals are attained. The Compensation Committee determines achievement of performance under the ECIP based on achievement of (i) Company performance targets and (ii) individual performance goals. For 2014, the ECIP Company performance targets were based on achievement of fiscal 2014 Further Adjusted EBITDA of $144.0 million, with a sliding scale applying to over or under-achievement.


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The Compensation Committee confirms achievement of performance goals before payment of any bonus amounts, and any such bonus payments are typically made on or before March 15 of the year following the year in which the bonuses are earned. The Compensation Committee approves the performance goals for the then-current fiscal year typically on or around the same time that the Compensation Committee confirms the achievement of the prior year's performance goals.

As a result of the Company’s performance during fiscal 2014, our named executive officers were determined to have achieved 80% of the Further Adjusted EBITDA component of their annual bonuses for 2014.

After determining the extent to which the individual performance goals under the ECIP's discretionary component were met, the Compensation Committee determined to pay annual bonus amounts as set forth in the Summary Compensation Table below. The threshold, target and maximum amounts of the 2014 annual bonus that were possible to be earned during 2014 are set forth in the Grants of Plan-Based Awards Table, and the actual amounts earned are set forth in the Summary Compensation Table.

For the 2014 fiscal year, the threshold, target and maximum bonuses (as a percentage of base salary) that could have been earned by our named executive officers were as follows:
Name
 
Threshold
 
Target
 
Maximum
Michael J. Grebe
 
37.50%
 
100%
 
200%
Federico L. Pensotti (1)
 
18.75%
 
50%
 
200%
John K. Bakewell (2)
 
18.75%
 
50%
 
200%
Kenneth D. Sweder (3)
 
37.50%
 
100%
 
200%
Kevin O'Meara (4)
 
3.75%
 
40%
 
200%
Jonathan S. Bennett
 
3.75%
 
45%
 
200%
____________________
(1)
Mr. Pensotti joined the Company effective May 19, 2014.
(2)
Mr. Bakewell resigned from the Company effective May 16, 2014.
(3)
Mr. Sweder's annual bonus is payable 75% in the form of cash and 25% in the form of restricted stock.
(4)
Mr. O'Meara joined the Company effective January 28, 2014.

The maximum percentages above superseded the maximum bonus that is provided for in the employment agreements for our named executive officers (which are described under “Employee Agreements” following the Grants of Plan-Based Awards Table). The Compensation Committee sets threshold, target and maximum annual bonus amounts, as a percentage of base salary, for each of our named executive officers, based on recommendations by the CEO. Our annual competitive compensation assessment was used to confirm the appropriateness of the target bonus percentages. The different target bonus percentages among the named executive officers reflect their relative duties and responsibilities as well as the Compensation Committee's consideration of the factors described above in “Compensation Program - Base Salaries.”

The discretionary component comprises 25% of each named executive officer’s annual bonus, with the exceptions of Messrs. Bennett and O'Meara, whose annual bonuses have the following components: (i) achievement of specific business objectives (75%) and (ii) achievement of the annual Further Adjusted EBITDA target (25%). For each of our named executive officers, the discretionary component was based on the achievement of individual objectives, which objectives were agreed upon with the CEO (other than the CEO's own objectives, which were set by the Compensation Committee). Individual performance objectives generally focused on:

completion of various long-term strategic operational, information technology, and financial improvements to enhance long-term shareholder profitability;

increased sales and profitability in certain brands and business areas;

specific cost-savings measures; and

operational improvements in the areas of sales, distribution, customer service, product quality and sourcing, and information technology infrastructure.

The Compensation Committee determined that no discretionary bonuses were earned under the annual bonus plan for 2014. A summary of the annual bonuses paid to our named executive officers, as approved by the Compensation Committee, is set forth in the Summary Compensation Table below. The threshold, target and maximum amounts of the 2014 annual bonus that were possible to be

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earned are set forth in the Grants of Plan-Based Awards Table, and the actual amounts earned are set forth in the Summary Compensation Table.

New Hire Bonus

In connection with the commencing employment with the Company, Mr. Pensotti received a lump sum equal to $100,000, which was given to help make Mr. Pensotti whole for lost equity and to entice him to join the Company.

Equity Compensation

We believe that superior results can be achieved through an ownership culture that encourages long-term performance by our executive officers through the use of equity-based awards.

Following the closing of the Merger, equity compensation continues to be a primary element of our overall compensation program for our named executive officers. In connection with the closing of the Merger, the Compensation Committee adopted the 2012 Plan pursuant to which it granted time-based and performance-based stock options to our named executive officers and other members of the Company's management. The time-based stock options vest in equal increments of 20% on each of the first, second, third, fourth and fifth anniversaries of the date of grant, subject to continued employment. The performance-based stock options vest 20% annually based upon certification of achievement of 95% of the Company's annual Further Adjusted EBITDA targets for the Company's 2012, 2013, 2014, 2015 and 2016 fiscal years (or such other 5-year period as may commence with the date of grant) (in each case, an “Annual Performance Period”). A description of the effect of a change of control or a termination of employment on these time-based and performance-based stock options is below under the heading “Potential Payments Upon Termination or Change in Control.” The number of shares subject to the time-based stock options and performance-based stock options are intended to provide a significant long-term incentive opportunity. The Compensation Committee does not expect to make grants on an annual basis; however, the Compensation Committee may, either directly or through limited authority granted to the CEO, approve special equity grants from time to time for key new hires, superlative performance of existing employees, and such other reasons as the Compensation Committee may determine to be in the best interests of the Company.

In addition, and as described above, a portion of Mr. Sweder's earned annual bonus is granted in share of restricted stock, which vests upon the earlier to occur of (i) a liquidity event (a change in control or a qualified initial public offering) and (ii) the fifth anniversary of the date of grant, subject to continued employment.

Other than the grants to Mr. Sweder described above and the grants to Messrs. Pensotti and O'Meara described in the summary of their respective employement agreements under the heading "Employee Agreements" below, no grants of equity compensation were made to our named executive officers in 2014.

Other Compensation

Executive officers also participate in our benefit plans on the same terms as other employees. These plans, which include medical, dental and life insurance, participation in a 401(k) plan and discounts on our products, are designed to enable us to attract and retain our workforce in a competitive marketplace.

Medical, dental and life insurance benefits help ensure that we have a productive and focused workforce through reliable and competitive health and other welfare benefit coverage. Participation in a 401(k) plan helps employees save and prepare financially for retirement. Discounts on our products help employees save on purchases of home improvement, maintenance and repair goods.

Except as noted below, the only perquisite we provide to our executive officers as part of our competitive compensation package is a monthly automotive allowance. The cost of this benefit constitutes only a small percentage of each executive officer's total compensation. We furnish this benefit because our executive officers are required to travel extensively as part of their responsibilities and providing the automotive allowance enables us to remain competitive in the general marketplace for executive talent. The actual amounts provided to each named executive officer are set forth in the "All Other Compensation" column of the Summary Compensation Table.

In addition to the benefits described above, we provided additional benefits to Messrs. Bennett, Pensotti and O'Meara in 2014 pursuant to the terms of their respective employment agreements: (i) a monthly allowance of $3,500 for Mr. Bennett (not to exceed ten months) and a monthly allowance of $3,000 to Mr. O'Meara (not to exceed six months), in each case for lodging in Jacksonville, Florida and (ii) the reimbursement of relocation expenses for Mr. Bennett (not to exceed $90,000), Mr. O'Meara (not to exceed $62,000) and Mr. Pensotti (not to exceed $100,000).

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Severance and Change-in-Control Provisions and Agreements

We believe that companies should provide reasonable severance benefits to their executive officers due to the greater level of difficulty they face in finding comparable employment within a short period of time. We also believe that executive officers have a greater risk of job loss or modification, as a result of a change-in-control transaction, than other employees. For these reasons, we have entered into employment agreements and change-in-control agreements with our named executive officers.

The principal reason for providing our executive officers severance upon a termination by us without cause or a resignation by the executive for good reason following a change in control is to offer our executive officers appropriate incentive to remain with us before, during and after any change-in-control transaction by providing them with adequate security in the event that their employment is terminated. By reducing the risk of job loss or reduction in job responsibilities of the executive officer, these change-in-control provisions help ensure that the executive officers support any potential change-in-control transactions that may be in the best interests of our shareholders, even though the transaction may create uncertainty in the executive officer's personal employment situation. We believe that the severance and change-in-control provisions within our executive officers' employment agreements or change-in-control agreements are consistent with our objective of motivating and retaining talented employees.

The severance provisions contained in each named executive officers' employment agreement (other than those contained in Mr. Grebe's employment agreement which was amended in connection with the Merger) were in effect as of the Company's IPO in December 2004 or as of such executive's start date with the Company. We believe these severance protections are appropriate, because we believe that it is in both the best interests of us and our shareholders to have: (i) severance provisions within our executive officers' employment agreements, under which the executive officers will receive certain benefits and compensation if their employment is terminated by us without cause or by the executive officer for good reason; and (ii) either change-in-control provisions within our executive officers' employment agreements or separate change-in-control agreements, under which the executive officers will receive certain benefits and compensation if their employment is terminated by us without cause or by the executive officer for good reason following a change in control. See “Potential Payments Upon Termination Or Change in Control” for a detailed discussion of the terms of these agreements.

Under our agreements with our named executive officers, in order for amounts to become payable, the change-in-control provisions contained in our employment agreements and change-in-control agreements are generally "double trigger", requiring that (i) a change in control occurs and (ii) the executive officer's employment is terminated by us other than for cause or by the executive officer for good reason.


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SUMMARY COMPENSATION TABLE

The following table summarizes the total compensation earned by each of our named executive officers during the fiscal years ended December 26, 2014, December 27, 2013 and December 28, 2012.
Name
 
Year
 
Salary
 
Stock Awards(1)
 
Option Awards(1)
 
Non-Equity Incentive Plan Compensation(2)
 
All Other Compensation
 
Total
Michael J. Grebe
   Chief Executive
   Officer
 
2014
 
$
695,000

 
$

 
$

 
$
417,000

 
$
18,250

(3)

$
1,130,250

 
2013
 
$
695,000

 
$

 
$

 
$
203,288

 
$
18,188

 
$
916,476

 
2012
 
$
647,500

 
$
557,998

 
$
6,224,306

 
$
622,199

 
$
3,187,899

 
$
11,239,902

Federico L. Pensotti Chief Financial Officer
 
2014
 
$
216,346

 
$

 
$
1,048,973

 
$
69,231

 
$
140,476

(4)
$
1,475,026

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
John K. Bakewell (5)
   Former Chief Financial Officer
 
2014
 
$
183,173

 
$

 
$

 
$

 
$
22,500


$
205,673

 
2013
 
$
194,712

 
$

 
$
1,035,908

 
$
30,586

 
$
39,750

 
$
1,300,956

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Kenneth D. Sweder
   President and
   Chief Operating
   Officer
 
2014
 
$
498,723

 
$
75,000

 
$

 
$
225,000

(6)

$
206,916

(7)

$
1,005,639

 
2013
 
$
466,273

 
$
34,135

 
$

 
$
102,403

 
$
302,688

 
$
905,499

 
2012
 
$
452,692

 
$
299,995

 
$
4,420,915

 
$
321,715

 
$
335,959

 
$
5,831,276

Kevin O'Meara
   Senior Vice
   President,
   Operations
 
2014
 
$
230,000

 
$

 
$
469,329

 
$
45,045

 
$
86,153

(8)
$
830,527

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Jonathan S. Bennett
   Chief
   Merchandising
   Officer
 
2014
 
$
297,693

 
$

 
$

 
$
114,159

 
$
88,132

(9)
$
499,984

 
2013
 
$
101,250

 
$

 
$
465,773

 
$
32,426

 
$
20,188

 
$
619,637

 
 
 
 
 
 
 
 
 
 
 
 
 
 
____________________
(1)
Represents the aggregate amount of grant date fair value (computed in accordance with FASB ASC Topic 718, Compensation-Stock Compensation). For a complete description of the valuation assumptions, please refer to Note 13. Share-Based Compensation to our audited consolidated financial statements included in this annual report.
(2)
Represents bonuses earned under our ECIP, which is a performance-based plan.
(3)
Consists of (i) annual automobile allowance of $15,000 and (ii) matching contributions to 401(k) plan of $3,250.
(4)
Consists of (i) annual automobile allowance of $12,000 prorated from his employment effective date of May 19, 2014 and (ii) new hire bonus of $100,000 and (iii) reimbursement of relocation expenses $33,476.
(5)
Mr. Bakewell resigned from the Company effective May 16, 2014.
(6)
Mr. Sweder’s non-equity incentive plan compensation (or annual bonus) is paid in cash and in restricted stock. The cash component represents 75% of his earned annual bonus and the non-cash component represents 25% of his earned annual bonus.
(7)
Consists of (i) annual automobile allowance of $12,000, (ii) matching contributions to 401(k) plan of $3,250 and (iii) the final installment of Mr. Sweder's retention bonus payment of $191,666.
(8)
Consists of (i) annual automobile allowance of $6,000, prorated from Mr. O'Meara's employment effective date of January 28, 2014, (ii) temporary housing allowance of $18,000 and (iii) reimbursement of relocation expenses of $62,653.
(9)
Consists of (i) annual automobile allowance of $9,000, (ii) temporary housing allowance of $30,000 and (iii) reimbursement of relocation expenses of $48,364.


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GRANTS OF PLAN-BASED AWARDS

The following table summarizes the awards granted to each of our named executive officers during the fiscal year ended December 26, 2014.
Name
 
Grant Date
 
Estimated Future Payouts Under Non-Equity Incentive Plan Awards(1)
 
All Other Stock Awards: Number of Shares of Stock or Units
 
All Other Option Awards: Number of Securities Underlying Options
 
Exercise or Base Price of Option Awards ($/Sh)
 
Grant Date Fair Value of Stock and Option Awards
 
 
Threshold
 
Target
 
Maximum
 
 
 
 
Michael J. Grebe
 
3/7/2014
 
$
260,625

 
$
695,000

 
$
1,390,000

 
 
 
 
 
 
 
 
Federico L. Pensotti (2)
 
5/19/2014
 
$
70,313

 
$
187,500

 
$
750,000

 
 
 
4,685

(3) 
$
311.00

 
$
516,190

 
5/19/2014
 
 
 
 
 
 
 
 
 
4,685

(4) 
$
311.00

 
$
532,783

John K. Bakewell (5)
 
3/7/2014
 
$
70,313

 
$
187,500

 
$
750,000

 
 
 
 
 
 
 
 
Kenneth D. Sweder
 
3/7/2014
 
$
187,500

 
$
500,000

 
$
1,000,000

 
 
 
 
 
 
 
 
Kevin O'Meara
 
3/7/2014
 
$
9,750

 
$
104,000

 
$
520,000

 
 
 
 
 
 
 
 
 
 
1/28/2014
 
 
 
 
 
 
 
 
 
2,059

(3) 
$
311.00

 
$
233,206

 
 
1/28/2014
 
 
 
 
 
 
 
 
 
2,059

(4) 
$
311.00

 
$
236,122

Jonathan S. Bennett
 
3/7/2014
 
$
11,531

 
$
138,375

 
$
615,000

 
 
 
 
 
 
 
 
____________________
(1)
Represents bonus awards that were granted under the ECIP, which is a performance-based plan.
(2)
Prorated to reflect the period of time during which the executive served in each position.
(3)
Represents option awards that were granted under the 2012 Plan. These stock options vest 20% annually based upon achievement of certain performance targets for the Company's 2014, 2015, 2016, 2017 and 2018 fiscal years.
(4)
Represents option awards that were granted under the 2012 Plan. These stock options vest in equal increments of 20% on each of the first, second, third, fourth and fifth anniversaries of the date of grant, subject to continued employment.
(5)
Mr. Bakewell resigned from the Company effective May 16, 2014.

Employee Agreements

The following paragraphs summarize the principal provisions of the employment agreements and certain other agreements entered into in connection with the closing of the Merger with our named executive officers.

Michael J. Grebe        

We have entered into an employment agreement with Mr. Grebe, which became effective August 13, 2004, and was amended effective as of December 2, 2004, December 31, 2008, March 31, 2011, and September 7, 2012. The term of the employment agreement is subject to automatic one-year extensions at the beginning of each calendar year unless we or Mr. Grebe give at least 90 days' written notice of non-extension. Mr. Grebe is entitled to a base salary, and he is eligible for an annual cash bonus based upon the achievement of annual performance targets established by our Compensation Committee. Effective on the closing of the Merger, Mr. Grebe's base salary was increased to $695,000, subject to additional increases at the discretion of our Compensation Committee. Mr. Grebe’s annual base salary is currently $715,850. Mr. Grebe is also eligible to participate in the benefits plans and arrangements generally available to our senior executives, which includes a monthly automotive allowance. His employment agreement also provides for severance upon certain terminations of employment, as described under "Potential Payments upon Termination or Change in Control".

Pursuant to the September 7, 2012 amendment to his employment agreement, Mr. Grebe agreed to certain changes to the definition of “good reason” and terms of the severance to which he would become entitled under certain termination events, as described under “Potential Payments upon Termination or a Change in Control.”

On September 7, 2012, Mr. Grebe was awarded time-vesting and performance-vesting options under the 2012 Plan. Generally, the terms of the time-vesting option award agreement provide that subject to Mr. Grebe's continued employment, the options vest in equal installments of 20% on each of the first, second, third fourth, and fifth anniversaries of the grant date. The terms of Mr. Grebe's performance-vesting option award agreement provide that options will generally vest and become exercisable with

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respect to 20% of the shares subject to the option based upon the Company's achievement of specified EBITDA targets for the Company's 2012, 2013, 2014, 2015 and 2016 fiscal years (each, an “Annual Performance Period”), subject to Mr. Grebe's remaining employed through the date on which the audited financial statements for the applicable Annual Performance Period are presented to the board of directors. The treatment of Mr. Grebe's time-vesting and performance-vesting option awards upon a termination of employment or a change in control of the Company is described below in the section entitled “Potential Payments upon Termination or a Change in Control.”

Federico L. Pensotti

We have entered into an employment agreement with Mr. Pensotti dated May 19, 2014. The initial term of his employment agreement is one year and subject to automatic one-year extensions unless we or Mr. Pensotti give at least 60 days' prior written notice of non-extension. Mr. Pensotti's annual base salary is currently $375,000, subject to increase at the discretion of our CEO. Mr. Pensotti is eligible to receive an annual cash bonus based upon the achievement of annual performance targets established by our Compensation Committee. Mr. Pensotti also received a one-time new hire bonus of $100,000 in connection with entering into the employment agreement. Mr. Pensotti is also eligible to participate in the benefits plans and arrangements generally available to our senior executives, which include a monthly automotive allowance. In addition, the employment agreement provides that we will reimburse Mr. Pensotti for actual costs incurred in conjunction with his relocation, provided that the reimbursement will not exceed $100,000. His employment agreement also provides for severance upon certain terminations of employment, as described under "Potential Payments upon Termination or Change in Control."

Additionally, on May 19, 2014, Mr. Pensotti was awarded time-vesting and performance-vesting options under the 2012 Plan. Generally, the terms of the time-vesting option award agreement provide that, subject to Mr. Pensotti's continued employment, the options vest in equal installments of 20% on each of the first, second, third fourth, and fifth anniversaries of the grant date. The terms of Mr. Pensotti's performance-vesting option award agreement provide that options will generally vest and become exercisable with respect to 20% of the shares subject to the option based upon the Company's achievement of specified EBITDA targets for the Company's 2014, 2015, 2016, 2017, and 2018 Annual Performance Periods, subject to Mr. Pensotti's remaining employed through the date on which the audited financial statements for the applicable Annual Performance Period are presented to the board of directors. The treatment of Mr. Pensotti's time-vesting and performance-vesting option awards upon a termination of employment or a change in control of the Company is described below in the section entitled “Potential Payments upon Termination or a Change in Control.”

Kenneth D. Sweder
           
We entered into an employment agreement with Mr. Sweder dated April 30, 2007, as amended on October 20, 2008, December 31, 2008 and December 31, 2012. The term of Mr. Sweder's employment agreement is subject to automatic one-year extensions unless we or Mr. Sweder give at least 60 days' prior written notice of non-extension. Mr. Sweder's annual base salary is currently $520,000, subject to increase at the discretion of our CEO. Mr. Sweder is eligible to receive an annual cash bonus and shares of restricted stock based upon the achievement of annual performance targets established by our Compensation Committee. Mr. Sweder is also eligible to participate in the benefits plans and arrangements generally available to our senior executives, which include a monthly automotive allowance. His employment agreement also provides for severance upon certain terminations of employment, as described under "Potential Payments upon Termination or Change in Control".

On September 7, 2012, Mr. Sweder was awarded time-vesting and performance-vesting options under the 2012 Plan. Generally, the terms of the time-vesting option award agreement provide that subject to Mr. Sweder's continued employment, the options vest in equal installments of 20% on each of the first, second, third fourth, and fifth anniversaries of the grant date. The terms of Mr. Sweder's performance-vesting option award agreement provide that options will generally vest and become exercisable with respect to 20% of the shares subject to the option based upon the Company's achievement of specified EBITDA targets for the Company's 2012, 2013, 2014, 2015 and 2016 Annual Performance Periods, subject to Mr. Sweder's remaining employed through the date on which the audited financial statements for the applicable Annual Performance Period are presented to the board of directors. The treatment of Mr. Sweder's time-vesting and performance-vesting option awards upon a termination of employment or a change in control of the Company is described below in the section entitled “Potential Payments upon Termination or a Change in Control.”

On September 14, 2012, we and Interline New Jersey entered into a retention bonus agreement with Mr. Sweder (the “Sweder Retention Bonus Agreement”). In light of Mr. Sweder's position and responsibilities, and his value to the organization, the Board of Directors of the Company approved the Sweder Retention Bonus Agreement to encourage Mr. Sweder to remain with the Company on a long-term basis and to add additional shareholder value. The Sweder Retention Bonus Agreement provides that, subject to Mr. Sweder's continued employment with Interline New Jersey through the applicable payment date, Mr. Sweder will be entitled to cash payments in the aggregate amount of $575,000 (the “Sweder Retention Bonus”), payable in six installments in accordance with the

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following schedule: (i) $95,834 payable on December 1, 2012; (ii) $95,834 payable on April 1, 2013; (iii) $95,833 payable on July 1, 2013; (iv) $95,833 payable on October 1, 2013; (v) $95,833 payable on January 1, 2014; and (vi) $95,833 payable on April 1, 2014.

Jonathan S. Bennett

We entered into an employment agreement with Mr. Bennett dated August 12, 2013. The term of his employment agreement is subject to automatic one-year extensions unless we or Mr. Bennett give at least 60 days' prior written notice of non-extension. Mr. Bennett’s annual base salary is currently $307,500, subject to increase at the discretion of our CEO or President. Mr. Bennett is eligible to receive an annual cash bonus based upon the achievement of annual performance targets established by our Compensation Committee. Mr. Bennett is also eligible to participate in the benefits plans and arrangements generally available to our senior executives, which include a monthly automotive allowance. His employment agreement also provides for severance upon certain terminations of employment, as described under "Potential Payments upon Termination or Change in Control."

Additionally, on August 21, 2013, Mr. Bennett was awarded time-vesting and performance-vesting options under the 2012 Plan. Generally, the terms of the time-vesting option award agreement provide that, subject to Mr. Bennett's continued employment, the options vest in equal installments of 20% on each of the first, second, third fourth, and fifth anniversaries of the grant date. The terms of Mr. Bennett's performance-vesting option award agreement provide that options will generally vest and become exercisable with respect to 20% of the shares subject to the option based upon the Company's achievement of specified EBITDA targets for the Company's 2013, 2014, 2015, 2016 and 2017 Annual Performance Periods, subject to Mr. Bennett's remaining employed through the date on which the audited financial statements for the applicable Annual Performance Period are presented to the board of directors. The treatment of Mr. Bennett's time-vesting and performance-vesting option awards upon a termination of employment or a change in control of the Company is described below in the section entitled “Potential Payments upon Termination or a Change in Control.”

Kevin O'Meara
          
We entered into an employment agreement with Mr. O'Meara dated January 28, 2014. The initial term of his employment agreement is one year subject to automatic one-year extensions unless we or Mr. O'Meara give at least 60 days' prior written notice of non-extension. Mr. O'Meara's annual base salary is currently $260,000, subject to increase at the discretion of our CEO or President. Mr. O'Meara is eligible to receive an annual cash bonus based upon the achievement of annual performance targets established by our Compensation Committee. Mr. O'Meara is also eligible to participate in the benefits plans and arrangements generally available to our senior executives, which include a monthly automotive allowance. In addition, the employment agreement provides that we will reimburse Mr. O'Meara for actual costs incurred in conjunction with his relocation, provided that the reimbursement will not exceed $62,000 and we will provide a monthly allowance of $3,000 for temporary lodging in Jacksonville, Florida (for up to a maximum of six months). His employment agreement also provides for severance upon certain terminations of employment, as described under "Potential Payments upon Termination or Change in Control."

Additionally, on January 28, 2014, Mr. O'Meara was awarded time-vesting and performance-vesting options under the 2012 Plan. Generally, the terms of the time-vesting option award agreement provide that subject to Mr. O'Meara's continued employment, the options vest in equal installments of 20% on each of the first, second, third fourth, and fifth anniversaries of the grant date. The terms of Mr. O'Meara's performance-vesting option award agreement provide that options will generally vest and become exercisable with respect to 20% of the shares subject to the option based upon the Company's achievement of specified EBITDA targets for the Company's 2014, 2015, 2016, 2017 and 2018 Annual Performance Periods, subject to Mr. O'Meara's remaining employed through the date on which the audited financial statements for the applicable Annual Performance Period are presented to the board of directors. The treatment of Mr. O'Meara's time-vesting and performance-vesting option awards upon a termination of employment or a change in control of the Company is described below in the section entitled “Potential Payments upon Termination or a Change in Control.”


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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

The following table summarizes the number of securities underlying the equity awards held by each of our named executive officers as of the fiscal year ended December 26, 2014.

 
 
Option Awards
 
Stock Awards
Name
 
Number of Securities Underlying Unexercised Options Exercisable
 
Number of Securities Underlying Unexercised Options Unexercisable
 
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options
 
Option Exercise Price
 
Option Expiration Date
 
Number of Shares or Units of Stock That Have Not Vested
 
Market Value of Shares or Units That Have Not Vested
 
Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested
 
Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested
Michael J. Grebe
 
11,111

(1) 

 

 
$
78.90

 
2/25/2016
 
 
 
 
 
 
 
 
 
9,286

(2) 

 
13,930

(2) 
$
255.00

 
10/1/2022
 
 
 
 
 
 
 
 
 
9,286

(3) 
13,930

(3) 


$
255.00

 
10/1/2022
 
 
 
 
 
 
 
 
Federico L. Pensotti
 

(4) 
 
 
4,685

 
$
311.00

 
5/19/2014
 
 
 
 
 
 
 
 
 

(3) 
4,685

(3) 
 
 
$
311.00

 
5/19/2014
 
 
 
 
 
 
 
 
John K. Bakewell (5)
 



 

 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Kenneth D. Sweder
 
4,444

(1) 

 

 
$
78.90

 
2/25/2016
 
110

 
$
34,135

 
 
 
 
 
2,817

(1) 

 

 
$
179.20

 
2/24/2017
 
 
 
 
 
 
 
 
 
6,754

(2) 

 
10,131

(2) 
$
255.00

 
10/1/2022
 
 
 
 
 
 
 
 
 
6,754

(3) 
10,131

(3) 

 
$
255.00

 
10/1/2022
 
 
 
 
 
 
 
 
Kevin O'Meara
 

(4) 

 
2,059

(4) 
$
311.00

 
1/28/2024
 
 
 
 
 
 
 
 
 

(3) 
2,059

(3) 

 
$
311.00

 
1/28/2024
 
 
 
 
 
 
 
 
Jonathan S. Bennett
 
371

(6) 

 
1,486

(4) 
$
255.00

 
8/21/2013
 
 
 
 
 
 
 
 
 
371

(3) 
1,486

(3) 

 
$
255.00

 
8/21/2013
 
 
 
 
 
 
 
 
____________________
(1)
Represents stock options awarded prior to the Merger, which were converted into vested options of Parent and ultimately converted into options of the Company, effective September 7, 2012.
(2)
The performance-vesting stock options vest 20% annually based upon certification of achievement of certain performance targets for the Company's 2012, 2013, 2014, 2015 and 2016 fiscal years (each period, an “Annual Performance Period”). Upon the occurrence of a change in control of us prior to the end of any Annual Performance Period, a number of options will vest equal to the number of unvested options multiplied by a fraction, the numerator of which is the number of performance periods in which the targets have been achieved and the denominator of which is the number of periods that have elapsed since the date of grant.
(3)
The time-vesting stock options vest in equal increments of 20% on each of the first, second, third, fourth and fifth anniversaries of the date of grant, subject to continued employment. Upon a change of control of the Company, these time-vesting options become fully vested, subject to continued employment through the date of the change of control.
(4)
The performance-vesting stock options vest 20% annually based upon certification of achievement of certain performance targets for the Company's 2014, 2015, 2016, 2017 and 2018 fiscal years for Messrs. Pensotti and O'Meara, and 2013, 2014, 2015, 2016 and 2017 for Mr. Bennett (each period, an “Annual Performance Period”). Upon the occurrence of a change in control of us prior to the end of any Annual Performance Period, a number of options will vest equal to the number of unvested options multiplied by a fraction, the numerator of which is the number of performance periods in which the targets have been achieved and the denominator of which is the number of periods that have elapsed since the date of grant.
(5)
Mr. Bakewell resigned from the Company effective May 16, 2014.
(6)
The performance-vesting stock options vest 20% annually based upon certification of achievement of certain performance targets for the Company's 2013, 2014, 2015, 2016 and 2017 fiscal years (each period, an “Annual Performance Period”). Upon the occurrence of a change in control of us prior to the end of any Annual Performance Period, a number of options will vest equal to the number of unvested options multiplied by a fraction, the numerator of which is the number of performance periods in which the targets have been achieved and the denominator of which is the number of periods that have elapsed since the date of grant.


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OPTION EXERCISES AND STOCK VESTED

The following table summarizes the stock options exercised by each of our named executive officers during the fiscal year ended December 26, 2014.

 
 
Option Awards
 
Stock Awards
Name
 
Number of Shares Acquired on Exercise
 
Value Realized on Exercise
 
Number of Shares Acquired on Vesting
 
Value Realized on Vesting
Michael J. Grebe
 
16,603

(1) 
$
2,673,115

 

 
$

Federico L. Pensotti
 

 
$

 

 
$

John K. Bakewell (2)
 

 
$

 

 
$

Kenneth D. Sweder
 

 
$

 

 
$

Kevin O’Meara
 

 
$

 

 
$

Jonathan S. Bennett
 

 
$

 

 
$

____________________
(1)These stock options were granted to Mr. Grebe on December 16, 2004 and were scheduled to expire on December 16, 2014 unless exercised.
(2)Mr. Bakewell resigned from the Company effective May 16, 2014.

POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL

The following summaries set forth potential payments payable to our executive officers upon termination of employment or a change in control of us under their current employment agreements, option award agreements or change-in-control agreements.

Michael J. Grebe
            
Mr. Grebe's employment may be terminated by us for "cause" (as defined below) or by Mr. Grebe for any reason upon 30 days' prior written notice, which notice must be authorized by a majority of the members of our Board of Directors in the case of a termination for cause. Upon either such termination, we are required to pay his accrued and unpaid base salary and benefits 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 following the date of termination and (iii) a prorated bonus for the calendar year in which termination occurs. Mr. Grebe's time-vesting option award agreement provides that upon termination of his employment as a result of disability or death, Mr. Grebe's unvested equity awards will be forfeited, and he or his estate will have until the earlier of (x) the stock option's expiration date and (y) the later of two years following the date of grant and one year following the date of termination to exercise any vested stock options.
            
If Mr. Grebe's employment is terminated by us without “cause," or by Mr. Grebe for "good reason" (as defined below), upon 10 days' prior written notice, Mr. Grebe will be entitled to receive any accrued and unpaid base salary and benefits and severance equal to one (1.5 in the case of any such termination upon or following a Change in Control that occurs following the second anniversary of the consummation of the Merger (a “Qualifying Change in Control”)) times the sum of (a) his base salary as of the date of termination and (b) the average of the bonus amounts paid for the prior three year period, such amount payable in a lump sum upon the date of termination; provided, that Mr. Grebe shall be deemed to have been terminated upon or following a Qualifying Change in Control (1) if he reasonably demonstrates that his employment was terminated prior to a Qualifying Change in Control without “cause” (x) at the request of an individual, entity or group who has entered into an agreement with the Company (a “Person”), the consummation of which will constitute a Qualifying Change in Control (or who has taken other steps reasonably calculated to effect a Qualifying Change in Control) or (y) otherwise in connection with, as a result of or in anticipation of a Qualifying Change in Control, or (2) if he terminates his employment for “good reason” prior to a Qualifying Change in Control and he reasonably demonstrates that the circumstance(s) or event(s) which constitute such “good reason” occurred at the request of such Person or otherwise in connection with, as a result of or in anticipation of a Qualifying Change in Control. Mr. Grebe will also be entitled to continuation of certain health and welfare benefits at our expense for a period of one year (18 months in the case of any such termination following a Qualifying Change in Control) following his termination. In addition, Mr. Grebe's employment agreement provides for a tax gross-up for any amounts due or paid to him under the employment agreement or any of our other plans or arrangements that are considered an

118


"excess parachute payment" under the Internal Revenue Code. All severance payments under this agreement are conditioned upon and subject to Mr. Grebe's execution of a general waiver and release.

Upon Mr. Grebe's termination for “cause,” any unexercised portion of his time-vesting option, whether or not vested, will terminate. Upon his termination of employment other than by the Company for “cause” or by Mr. Grebe without “good reason” (i) prior to the first year anniversary of the date of grant, Mr. Grebe would have become vested as to 40% of the shares subject to the option and (ii) at any time on or following the first anniversary of the date of grant, he will become vested in an additional 20% of the shares subject to the option. Upon termination of employment of Mr. Grebe other than by the Company for “cause” or by him without “good reason,” the unvested portion of the option will expire on the date of termination and the vested portion will remain exercisable through the earlier of (y) the expiration date of the option or (z) the later of two years following the date of grant and one year following the date of termination. Upon Mr. Grebe's resignation other than for “good reason,” the unvested portion of the option will expire and the vested portion will remain exercisable until the earlier of the expiration date and the date that is 90 days following the date of termination.

Upon Mr. Grebe's termination for “cause,” any unexercised portion of his performance-vesting option, whether or not vested, will terminate. Upon termination of Mr. Grebe other than by the Company for “cause” or by him without “good reason” at any time following December 31, 2013, the option with respect to option shares attributable to the Annual Performance Period in which such termination occurs will remain outstanding until the performance determination date for such period and become eligible to vest subject to the attainment of the EBITDA target for such period. Any portion of the option which becomes vested in accordance with the preceding sentence will remain exercisable through the first anniversary of the date on which such portion(s) become vested and exercisable, and any portion of the option which was already vested as of the date of the termination will remain exercisable through the earlier of (x) the expiration date of the option and (y) the later of two years following the date of grant and one year following the date of termination of employment. If Mr. Grebe resigns without “good reason,” the unvested portion of the option will expire on the resignation date and the vested portion would remain exercisable through the earlier of (x) the expiration date of the option and (y) a period of 90 days following the termination.
            
If Mr. Grebe's employment agreement is not renewed on account of us giving notice to Mr. Grebe of our desire not to extend his employment term, this termination will be treated as a termination "without cause" entitling Mr. Grebe to the severance outlined above.
           
Pursuant to his employment agreement, Mr. Grebe is subject to a non-compete agreement during his employment and for a period of (i) one year following the termination of his employment by us for cause or by Mr. Grebe without good reason and (ii) two years following the termination of his employment by us without cause or by Mr. Grebe for good reason. Following the termination of his employment by us for cause or by Mr. Grebe without good reason, Mr. Grebe is also subject to a one-year prohibition against the solicitation of (i) clients who were our clients within the six-month period prior to his termination of employment and (ii) any of our employees. Mr. Grebe is also subject to a confidentiality agreement during and after his employment with us, as well as certain restrictive covenants contained in his time-vesting option agreement and performance-vesting option agreement.

Upon a change in control of us, Mr. Grebe's time-vesting options will become fully vested and exercisable. With respect to his performance-vesting options, upon the occurrence of a change in control of us (i) prior to the first anniversary of the date of grant, the options would have become fully vested and (ii) prior to the end of any of the other Annual Performance Periods, a number of options will vest equal to the number of unvested options multiplied by a fraction, the numerator of which is the number of performance periods in which the targets have been achieved and the denominator of which is the number of periods that have elapsed since the date of grant.
            
In the event of a change in control of us, Mr. Grebe will also be entitled to a "success" bonus in an amount which will be negotiated in good faith and agreed upon between Mr. Grebe and us. This success bonus will be paid in cash to Mr. Grebe in a lump sum on the date of the closing of such change in control.
            
For purposes of Mr. Grebe's employment agreement, "cause" is defined as (1) conviction of, or pleading nolo contendere to, a felony or any other crime involving the trading of securities, mail or wire fraud, theft or embezzlement of our property, (2) gross negligence in performance of duties, (3) willful misconduct or material breach of the employment agreement or (4) failure to follow lawful instructions of the Board. "Good reason" is defined as any of the following actions, taken without Mr. Grebe's prior express written consent, and which are not cured by us within 30 days of receiving notice of the event from Mr. Grebe: (1) a material reduction in position, duties, responsibilities, title or authority, including reporting rights and obligations, provided that a material reduction shall not be deemed to have occurred solely due to the fact that the Company is no longer a reporting company under the Securities Exchange Act of 1934, (2) a reduction in compensation or a material reduction in aggregate benefits (other than generally applicable benefit reductions), (3) a failure by us to pay compensation or benefits to Mr. Grebe when due, (4) a change in Mr. Grebe's principal

119


employment location by more than 35 miles, if this would materially increase his commute, (5) removal of Mr. Grebe as Chairman of the Board of Directors (other than for cause or Mr. Grebe's resignation or inability to serve as a result of his incapacity), or (6) any material breach by us of Mr. Grebe's employment agreement.
           
For purposes of Mr. Grebe's employment agreement, "change in control" generally means (1) the acquisition by an unrelated third party, pursuant to a sale, merger, consolidation, reorganization or similar transaction, of more than 50% of our common stock, (2) the liquidation or dissolution of us or a sale of substantially all of our assets, or (3) at any time after August 13, 2006, a change in a majority of the membership of our Board of Directors as such membership was constituted on August 13, 2004 (the "Incumbent Board"), excluding membership changes approved by a two-thirds majority of the Incumbent Board. Notwithstanding the foregoing, a "change in control" will not be deemed to occur unless it is a qualifying change in control event under Section 409A of the Internal Revenue Code.

Federico L. Pensotti, Kenneth D. Sweder, Jonathan S. Bennett, and Kevin O'Meara
            
The executive's employment may be terminated by us for "cause" (as defined in each executive's employment agreement). Upon termination of the executive'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 the executive's employment terminates due to disability or death, the executive or his estate will be entitled to receive (i) any earned or accrued and unpaid base salary and benefits and (ii) a prorated bonus for the calendar year in which termination occurs (excluding Messrs. Bennett and O'Meara). Unless otherwise provided by the award agreement entered into by the executive at the time the executive was granted a particular equity award, upon termination of the executive's employment as a result of disability or death, the executive will forfeit any outstanding unvested equity awards and the executive or the executive's estate will have until the earlier of the stock option's expiration date or one year from date of termination to exercise any vested stock options.
            
If the executive's employment is terminated by us "without cause", or by the executive for "good reason" (as defined in his employment agreement), the executive will be entitled to receive (i) any accrued and unpaid base salary and benefits, (ii) continuation of his base salary for a period of one year (eighteen months for Mr. Sweder) from the date of termination, (iii) continuation of his medical and dental benefits at our expense for a period of one year (eighteen months for Mr. Sweder) following his termination; (iv) a prorated bonus for the calendar year in which termination occurs (excluding Messrs. Bennett and O'Meara); and (v) reimbursement for outplacement services, not to exceed $5,000 (only for excluding Messrs. Bennett and O'Meara). All severance payments are conditioned upon and subject to the executive's execution of a general waiver and release. The executive is required to provide us 30 days' advance written notice in the event the executive terminates the executive's employment other than for "good reason."
            
Each executive's employment agreement provides that the executive is subject to a non-compete agreement during his employment and for two years thereafter (18 months Messrs. Bennett and O'Meara). The executive is subject to a non-solicitation agreement during his employment and for three years thereafter (two years for Messrs. Bennett and O'Meara). The executive is subject to a confidentiality agreement during and after his employment with us. The executives are also subject to certain restrictive covenants contained in their time-vesting option agreements and performance-vesting option agreements.
            
For each of the executives, upon termination for “cause,” any unexercised portion of either the executive's time-vesting and performance-vesting options, whether or not vested, will terminate. With respect to each of Messrs. Pensotti, Bennett and O'Meara, upon the termination by the Company without “cause” or due to death or disability, or by the executive for any reason, the unvested portion of the time-vesting option will expire on the date of termination and the vested portion of the option would remain exercisable until the earlier of the expiration date or 90 days (180 days in the case of death or disability) following the termination date. With respect to Mr. Sweder, upon his termination of employment other than by the Company for “cause” or by him for “good reason” (i) prior to the first year anniversary of the date of grant, Mr. Sweder will become vested as to 40% of the shares subject to the time-vesting option and (ii) at any time on or following the first anniversary of the date of grant, he will become vested in an additional 20% of the shares subject to the time-vesting option. Upon termination of employment of Mr. Sweder other than by the Company for “cause” or by him without “good reason,” the unvested portion of the time-vesting option will expire on the date of termination and the vested portion will remain exercisable through the earlier of (y) the expiration date of the option or (z) the later of two years following the date of grant and one year following the date of termination. Upon Mr. Sweder's resignation without “good reason,” the unvested portion of the time-vesting option will expire and the vested portion will remain exercisable until the earlier of the expiration date and the date that is 90 days following the date of termination.

With respect to each of Messrs. Pensotti, Bennett and O'Meara, upon the executive's termination by the Company without cause or by the executive, the unvested portion of the performance-vesting option will terminate, provided, that, the unvested portion attributable to a completed Annual Performance Period with respect to which the performance determination date has not yet occurred

120


will remain outstanding until the performance determination date and, if the applicable EBITDA targets are achieved, will be eligible to vest and will remain outstanding for 90 days following the determination date. Any portion of the performance-vesting option that was vested as of the date of termination will remain exercisable until the earlier of the expiration date of the option or the 90th day following such termination.

With respect to Mr. Sweder, upon termination other than by the Company for “cause” or by him without “good reason” at any time following December 31, 2013, the performance-vesting option with respect to option shares attributable to the Annual Performance Period in which such termination occurs will remain outstanding until the performance determination date for such period and become eligible to vest subject to the attainment of the EBITDA target for such period. Any portion of the option which becomes vested in accordance with the preceding sentence will remain exercisable through the first anniversary of the date on which such portion(s) become vested and exercisable, and any portion of the option which was already vested as of the date of the termination will remain exercisable through the earlier of (x) the expiration date of the option and (y) the later of two years following the date of grant and one year following the date of termination of employment. If Mr. Sweder resigns without “good reason,” the unvested portion of the option will expire on the resignation date and the vested portion would remain exercisable through the earlier of (x) the expiration date of the option and (y) a period of 90 days following the termination.
        
For purposes of the executive's employment agreement, "cause" is defined as (1) gross neglect or willful failure to perform duties, (2) a willful act by the executive against us or which causes or is intended to harm us, (3) conviction of, or plea of no contest or guilty to, a felony, or lesser offence involving dishonesty, the theft of our property or moral turpitude, or (4) a material breach of the employment agreement by the executive which is not cured within 20 days of receipt of notice from us. For purposes of the executive's employment agreement, "good reason" is defined as (1) a material breach of the terms of the employment agreement by us, (2) a change in the executive's place of employment by more than 35 miles, if this would materially increase the executive's commute, or (3) a material diminution of the executive's responsibility which is not cured by us within 20 days of receipt of notice from the executive.
            
On April 30, 2007, we entered into a change-in-control agreement with Mr. Sweder, which was then amended on October 20, 2008. On May, 19 2014, we entered into a change-in-control agreement with Mr. Pensotti. These change-in-control agreements have a perpetual term, although we may unilaterally amend them with one year's notice. The change-in-control agreements provide that in the event that the executive is terminated by us "without cause" (as defined in the change-in-control agreement), or by the executive for "good reason" (as defined in the change-in-control agreement) within two years following a change in control of us, the executive will be entitled to receive in a cash lump sum (i) any accrued and unpaid base salary and benefits, (ii) a prorated bonus for the calendar year in which termination occurs, (iii) an amount equal to 1.5 times (1.75 times for Mr. Sweder) the sum of the executive's base salary and the average of the annual bonus earned over the prior three fiscal years, and (iv) continuation of his medical benefits at our expense for a period of 18 months (21 months for Mr. Sweder) following his termination.
           
In the event of a change in control of us, the executive's time-vesting options will become fully vested and exercisable. With respect to the executive's performance-vesting options, upon the occurrence of a change in control of us (i) prior to the first anniversary of the date of grant, the options would have become fully vested and (ii) prior to the end of any of the other Annual Performance Periods, a number of options will vest equal to the number of unvested options multiplied by a fraction, the numerator of which is the number of performance periods in which the targets have been achieved and the denominator of which is the number of periods that have elapsed since the date of grant.
            
In addition, , each of the change of control agreements with the executives who remain employed with the Company provides for a tax gross-up for any amounts due or paid to him or her under the change-in-control agreement or any of our other plans or arrangements that are considered an "excess parachute payment" under the Internal Revenue Code, provided that the "excess parachute payments" are at least 110% of the "safe harbor" amount that would result in no excise tax liability. All severance payments under the change-in-control agreement are conditioned upon and subject to the executive's execution of a general waiver and release.
                        
The executive is subject to restrictive covenants under the executive's change-in-control agreement that are the same as those under his employment agreement. The executive is also subject to a confidentiality agreement during and after his employment with us. The executive is also subject to certain restrictive covenants contained in his time-vesting option agreement and performance-vesting option agreement.
            
For purposes of the executive's change-in-control agreement:

"cause" is defined as (1) the executive's conviction of, or pleading nolo contendere to, a felony, (2) gross neglect of duties, (3) willful misconduct in connection with the performance of duties, which results in material and demonstrable damage to us or (4) failure to follow the lawful directions of the Board, consistent with the executive's position with us; "good reason" is

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defined as (1) a material and adverse change in duties and responsibilities, (2) a material breach of the terms of the executive's employment agreement by us, (3) a reduction in annual base salary or target annual bonus, (4) a change in the executive's principal employment location by more than 35 miles, if this would increase his commute by more than 20 miles, (5) substantially greater business travel, (6) a reduction of more than 5% in aggregate benefits, (7) failure to provide paid vacation, (8) termination of employment in a manner inconsistent with the notice provisions of the change-in-control agreement, or (9) failure by us to obtain the assumptions and guarantees from any successor or parent corporation; and "change in control" generally means (1) the acquisition by an unrelated third party, pursuant to a sale, merger, consolidation, reorganization or similar transaction, of more than 50% of our common stock, (2) the liquidation or dissolution of us or a sale of substantially all of our assets, (3) during any 24-month period, a change in a majority of the membership of our Board of Directors (the "Incumbent Board"), excluding membership changes approved by a majority of the Incumbent Board, or (4) a merger, reorganization or consolidation of us; notwithstanding the foregoing, a "change in control" will not be deemed to occur unless it is a qualifying change in control event under Section 409A of the Internal Revenue Code.

John K. Bakewell

On May 16, 2014, Mr. Bakewell resigned from his position as Chief Financial Officer of Interline and Interline New Jersey and did not receive any severance or other benefits in connection with his resignation pursuant to his employment agreement or otherwise.

Incremental Payments Associated with an Involuntary Termination without Cause or for Good Reason in the Absence of a Change in Control

The following table summarizes the incremental payments associated with the termination of each of our named executive officers by us without cause or by such named executive officers for good reason on December 26, 2014, in the absence of a change in control.
Name
 
Cash Severance
 
Intrinsic Value of Stock Options
 
Benefits
 
Total
Michael J. Grebe
 
$
1,067,025

(1)
$
260,022

(2)
$
17,920

(3) 
$
1,344,967

Federico L. Pensotti
 
$
444,231

(4)
$

(5)
$
17,812

(3) 
$
462,043

Kenneth D. Sweder
 
$
1,559,318

(6)
$
189,107

(2)
$
31,359

(7)
$
1,779,784

Kevin O'Meara
 
$
260,000

(8)
$

(5)
$
17,882

(9)
$
277,882

Jonathan S. Bennett
 
$
307,500

(8)
$

(5)
$
22,688

(9)
$
330,188

____________________
(1)
Represents one times the sum of (a) Mr. Grebe's base salary as of the date of termination and (b) the average of the bonus amounts paid for the prior three-year period, such amount payable in a lump sum upon the date of termination.
(2)
Represents the value equal to the (i) number of time-vesting options that would automatically vest upon a termination of employment multiplied by (ii) the spread between the valuation of the common stock as of that date and the applicable exercise price of each stock option. An additional 20% of the time-vesting options would become vested upon the termination of employment. The performance-vesting option with respect to the option shares attributable to the 2014 Annual Performance Periods would remain outstanding until the performance determination date for the 2014 Annual Performance Period and eligible to vest based on the attainment of the EBITDA targets for such period.
(3)
Represents the value of twelve months of continued health and welfare benefits.
(4)
Represents twelve months of base salary continuation and the prorated annual bonus under the ECIP for 2014.
(5)
Unvested time-vesting stock and performance-vesting options are forfeited for no consideration.
(6)
Represents 1.75 times the sum of (a) Mr. Sweder's base salary and (b) the average of the bonus amounts paid for the prior three-year period, plus the annual bonus under the ECIP for 2014, such amounts payable in a lump sum upon the date of termination.
(7)
Represents the value of 21 months of continued health and welfare benefits.
(8)
Represents twelve months of base salary continuation.
(9)
Represents the value of twelve months of continued health and welfare benefits, plus reimbursement for outplacement services (not to exceed $5,000).



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Incremental Payments Associated With an Involuntary Termination as a Result of Disability or Death

The following table summarizes the incremental payments associated with the termination of each of our named executive officers as a result of disability or death on December 26, 2014.
Name
 
Cash Severance
 
Intrinsic Value of Stock Options
 
Total
Michael J. Grebe
 
$
1,807,000

(1) 
$
260,022

(2) 
$
2,067,022

Federico L. Pensotti
 
$
69,231

(3) 
$

(4) 
$
69,231

Kenneth D. Sweder
 
$
300,000

(3) 
$
189,107

(2) 
$
489,107

Kevin O'Meara
 
$

 
$

(4) 
$

Jonathan S. Bennett
 
$

 
$

(4) 
$

___________________
(1)
Represents 24 months of base salary continuation and the annual bonus under the ECIP for 2014.
(2)
Represents the value equal to the (i) number of time-vesting options that would automatically vest upon a termination of employment multiplied by (ii) the spread between the valuation of the common stock as of that date and the applicable exercise price of each stock option. An additional 20% of the time-vesting options would become vested upon the termination of employment. The performance-vesting option with respect to the option shares attributable to the 2014 Annual Performance Period would remain outstanding until the performance determination date for the 2014 Annual Performance Period and eligible to vest based on the attainment of the EBITDA targets for such period.
(3)
Represents the prorated annual bonus under the ECIP for 2014.
(4)
Unvested time-vesting stock and performance-vesting options are forfeited for no consideration.

Incremental Payments Associated With a Change-in-Control Termination

The following table summarizes the incremental payments associated with a termination in connection with a change in control for each of our named executive officers if the change in control had occurred as of December 26, 2014.
Name
 
Cash Severance
 
Intrinsic Value of Stock Options
 
Restricted Stock
 
Benefits
 
Excise Tax Gross-Up
 
Total
Michael J. Grebe
 
$
1,067,025

(1) 
$
1,560,130

(2) 
$

 
$
17,920

(3) 
$

 
$
2,645,075

Federico L. Pensotti
 
$
912,981

(4) 
$

(2) 
$

 
$
26,718

(5) 
n/a

 
$
939,699

Kenneth D. Sweder
 
$
1,559,318

(6) 
$
1,134,640

(2) 
$
34,135

(7) 
$
31,359

(8) 
$

 
$
2,759,452

Kevin O'Meara
 
$
260,000

(9) 
$

(2) 
$

 
$
17,882

(10) 
n/a

 
$
277,882

Jonathan S. Bennett
 
$
307,500

(9) 
$
166,414

(2) 
$

 
$
22,688

(10) 
n/a

 
$
496,602

____________________
(1)
Represents one times the sum of (a) Mr. Grebe's base salary as of the date of termination and (b) the average of the bonus amounts paid for the prior three-year period, such amount payable in a lump sum upon the date of termination.
(2)
Represents the value equal to (i) the number of time-vesting and performance-vesting options that would automatically vest upon a change in control multiplied by (ii) the spread between the valuation of the common stock as of that date and the applicable exercise price of each stock option.
(3)
Represents the value of 12 months of continued health and welfare benefits.
(4)
Represents 1.5 times the sum of (a) Mr. Pensotti's base salary as of the date of termination and (b) the average of the bonus amounts paid for the prior three-year period, plus the annual bonus under the ECIP for 2014, such amounts payable in a lump sum upon the date of termination.
(5)
Represents the value of 18 months of continued health and welfare benefits.
(6)
Represents 1.75 times the sum of (a) Mr. Sweder's base salary as of the date of termination and (b) the average of the bonus amounts paid for the prior three-year period, plus the annual bonus under the ECIP, such amounts payable in a lump sum upon the date of termination.
(7)
Represents the value of restricted stock that would automatically vest upon a change in control.
(8)
Represents the value of twenty-one months of continued health and welfare benefits.
(9)
Represents twelve months of base salary continuation.

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(10)
Represents the value of twelve months of continued health and welfare benefits, plus reimbursement for outplacement services (not to exceed $5,000).

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth the number and percentage of our outstanding shares of common stock beneficially owned by (i) our named executive officers and each of our Directors individually, (ii) all executive officers and Directors as a group and (iii) principal shareholders who are known to us to be the beneficial owner of more than five percent of our common stock as of February 20, 2015. Unless otherwise indicated in the table or footnotes below, the address for each beneficial owner is c/o Interline Brands, Inc., 701 San Marco Boulevard, Jacksonville, Florida, 32207.
Name of Beneficial Owner
 
Amount of Common Stock Ownership
 
Percent of Common Stock
5% or greater stockholders:
 
 
 
 
 
Investment funds affiliated with GS Capital Partners(1)
 
854,410

 
57.0
%
Investment funds affiliated with P2 Capital Partners, LLC(2)
 
588,235

 
39.2
 
 
 
 
 
 
 
Directors and executive officers:
 
 
 
 
 
Michael Agliata(3)
 
4,510

 
*
 
Jonathan S. Bennett(4)
 
1,310

 
*
 
Ann Berry(1)
 
854,410

 
57.0
 
Christopher Crampton(1)
 
854,410

 
57.0
 
Lucretia D. Doblado(5)
 
9,084

 
*
 
Michael J. Grebe(6)
 
62,695

 
4.1
 
Bradley Gross(1)
 
854,410

 
57.0
 
Dennis J. Letham(7)
 
2,745

 
*
 
Sanjeev Mehra(1)
 
854,410

 
57.0
 
Claus J. Moller(2)
 
588,235

 
39.2
 
Kevin O'Meara(8)
 
492

 
*
 
Jozef Opdeweegh(7)
 
1,765

 
*
 
Joshua D. Paulson(2)
 
588,235

 
39.2
 
Federico L. Pensotti(9)
 
1,744

 
*
 
David C. Serrano(10)
 
2,077

 
*
 
Kenneth D. Sweder(11)
 
27,884

 
1.8
 
All executive officers and directors as a group (16 persons)
 
1,556,951

 
98.8
%
____________________
*
Indicates less than 1% ownership.
(1)
GS Capital Partners VI Fund, L.P., GS Capital Partners VI Parallel, L.P., GS Capital Partners VI Offshore Fund, L.P., GS Capital Partners VI GmbH & Co. KG, MBD 2011 Holding, L.P., Bridge Street 2012 Holdings, L.P. own 373,203; 102,624; 310,417; 13,264; 25,490; and 29,412 shares of our common stock, respectively (the “Goldman Sachs Funds”). The Goldman Sachs Group, Inc., and Goldman, Sachs & Co. may be deemed to beneficially own indirectly, in the aggregate, all of the common stock owned by the Goldman Sachs Funds because affiliates of Goldman, Sachs & Co. and The Goldman Sachs Group, Inc. are the general partner, managing general partner, managing partner, managing member or member of the Goldman Sachs Funds. Goldman, Sachs & Co. is a direct and indirect wholly owned subsidiary of The Goldman Sachs Group, Inc. Goldman, Sachs & Co. is the investment manager of certain of the Goldman Sachs Funds. The Goldman Sachs Group, Inc. and Goldman, Sachs & Co. each disclaim beneficial ownership of the shares of common stock owned directly or indirectly by the Goldman Sachs Funds, except to the extent of their pecuniary interest therein, if any. Messrs. Crampton, Gross, and Mehra are managing directors of Goldman, Sachs & Co., and Ms. Berry is a vice president of Goldman, Sachs & Co., and each may be deemed to beneficially own indirectly, in the aggregate, all of the common stock owned by the Goldman Sachs Funds; each disclaim beneficial ownership of the shares of common stock owned directly or indirectly by the Goldman Sachs Funds, except to the

124


extent of their pecuniary interest therein, if any. The address of the Goldman Sachs Funds, The Goldman Sachs Group, Inc. and Goldman, Sachs & Co. is 200 West Street, New York, NY 10282.
(2)
P2 Capital Master Fund I, L.P. and P2 Capital Master Fund VII, L.P (collectively, the “P2 Funds”) own 136,078 and 452,157 shares of our common stock, respectively. Mr. Moller is a managing partner and Mr. Paulson is a partner of P2 Capital Partners, and each may be deemed to beneficially own indirectly, in the aggregate, all of the common stock owned by the P2 Funds; each disclaim beneficial ownership of the shares of common stock owned directly or indirectly by the P2 Funds, except to the extent of their pecuniary interest therein, if any. The address of the principal office is 590 Madison Avenue, 25th Floor, New York, NY 10022.
(3)
Includes 3,350 shares of common stock issuable pursuant to stock options.
(4)
Includes 1,114 shares of common stock issuable pursuant to stock options.
(5)
Includes 8,231 shares of common stock issuable pursuant to stock options.
(6)
Includes 34,327 shares of common stock issuable pursuant to stock options.
(7)
Includes 784 shares of common stock issuable pursuant to stock options.
(8)
Includes 412 shares of common stock issuable pursuant to stock options.
(9)
Includes 937 shares of common stock issuable pursuant to stock options.
(10)
Includes 2,077 shares of common stock issuable pursuant to stock options.
(11)
Includes 351 shares of restricted stock and 24,146 shares of common stock issuable pursuant to stock options.

EQUITY COMPENSATION PLANS

The following table sets forth information as of December 26, 2014 regarding compensation plans under which the Company's equity securities are authorized for issuance:
 
 
(a)
 
(b)
 
(c)
 
 Plan Category
 
Number of securities to be issued upon exercise of outstanding options, warrants and rights
 
Weighted-average exercise price of outstanding options, warrants and rights
 
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
 
Equity compensation plans approved by security holders
 
201,191
(1)
$236.01
 
1,603
(2)
Equity compensation plans not approved by security holders
 
 
 
 
 Total
 
201,191
(1)
$236.01
 
1,603
(2)
____________________
(1)
Includes time-vesting and performance-vesting options granted to management and non-employee Directors, respectively, pursuant to the 2012 Plan, and options which had been granted under the 2004 Plan and were replaced with rollover options in connection with the Merger.
(2)
These securities are available for future issuance under the 2012 Plan. Each of these securities is available for issuance as a full value award or otherwise.

ITEM 13. Certain Relationships and Related Transactions, and Director Independence

Independence of Board Members

As a private company whose securities are not listed on any national securities exchange, we are not required to have a majority of, or any, independent directors. However, the rules of the SEC require us to disclose which of our directors would be considered independent within the meaning of the rules of a national securities exchange that we may choose. Messrs. Mehra, Gross and Crampton and Ms. Berry are employed by GS Capital Partners, and Messrs. Moller and Paulson are employed by P2 Capital Partners. Our Board of Directors also includes two members of the Company's management - Messrs. Grebe and Sweder. We currently have two directors, Messrs. Letham and Opdeweegh, who would be considered independent within the definition of the rules of the New York Stock Exchange.

Related Party Transactions
    
We recognize that related party transactions may present potential or actual conflicts of interest and may create the appearance that Company decisions are based on considerations other than the best interests of Interline and its shareholders.

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Therefore, the Board has adopted a written policy which provides that prior to entering into any related party transaction, a formal written notice has to be submitted to the Chief Financial Officer and General Counsel, disclosing all relevant terms of the proposed transaction. If the Chief Financial Officer or General Counsel determines that the proposed transaction is a related party transaction, he or she shall refer such transaction to the Audit Committee for review. The Audit Committee shall approve only those related party transactions that are in, or are not inconsistent with, the best interests of the Company. For purposes of this policy, a “related party transaction” is a transaction, arrangement or relationship in which the Company and/or any of its subsidiaries participate and in which any related party has a direct or indirect interest. Related parties include executive officers, directors, vice presidents, director nominees, beneficial owners of more than 5% of the Company's voting securities, immediate family members of any of the foregoing persons, and any firm, corporation or other entity in which any of the foregoing persons is employed and in which such person has a beneficial ownership interest.

Item 404(a) of SEC Regulation S-K requires disclosure of various transactions with related persons since the beginning of the last fiscal year, or that are currently proposed, and in which the Company was or is to be a participant, the amount involved exceeds $120,000 and any related person had or will have a direct or indirect material interest in the transaction.

Stockholders Agreement

The Stockholders Agreement among GS Capital Partners and its affiliates, P2 Capital and its affiliates and certain stockholders of the Company described in Item 10 above provides that GS Capital Partners has the right to designate five members of our Board of Directors and P2 Capital Partners has the right to designate two members of our Board of Directors, unless otherwise agreed by GS Capital Partners and P2 Capital Partners. In addition, the Stockholders Agreement includes limitations on the transferability of the parties' respective holdings of our equity securities as well as certain drag-along and tag-along rights.

Equity Registration Rights Agreement

In connection with the Merger, we entered into an equity registration rights agreement with GS Capital Partners and its affiliates and P2 Capital and its affiliates, and certain stockholders of the Company (the “Equity Registration Rights Agreement”). The Equity Registration Rights Agreement grants GS Capital Partners and P2 Capital the right to require us to register under the Securities Act of 1933 for public resale of their shares of our stock that constitute “registrable securities,” whether owned at the closing of the Merger or acquired thereafter. The term “registrable securities” includes any shares of our stock, including any shares issued upon conversion or exercise of all options, warrants or other securities convertible into, or exchangeable or exercisable for, shares of our stock. Shares of our stock will cease to be “registrable securities” when a registration statement relating to the shares has been declared effective and the shares have been disposed of, or when the shares may be sold in compliance with the requirements of Rule 144 under the Securities Act.

Subject to certain exceptions, our stockholders have been granted piggyback rights on any registration statement that we may file on behalf of itself or on behalf of another stockholder. The ability of stockholders to utilize piggyback rights is subject to certain notice requirements specified in the Equity Registration Rights Agreement as well as such stockholder's ability to provide certain information for inclusion in any registration statement.

Indemnification Agreements

We have entered into indemnification agreements with each of our directors, pursuant to which we have agreed to indemnify each of them against certain liabilities that may arise by reason of their status or service as a director of the Company, and to advance each of them the expenses incurred as a result of a proceeding as to which they may be indemnified. The indemnification agreement is intended to provide rights of indemnification to the fullest extent permitted and is in addition to any other rights each indemnitee may have under our certificate of incorporation, its by-laws and applicable law. The indemnification agreements also requires us to maintain directors' and officers' liability insurance with respect to each indemnitee for so long as each indemnitee continues to serve as a director and shall continue thereafter so long as each indemnitee shall be subject to any proceeding by reason of his or her former or current capacities at the Company.

Other Transactions with Related Persons

In connection with the Merger, we entered into a transaction fee agreement with GS Capital Partners and P2 Capital pursuant to which we paid a one-time $10.0 million transaction fee at the closing of the Merger. In addition, Goldman, Sachs & Co., one of the initial purchasers of the Holdco Notes, is an affiliate of GS Capital Partners, and therefore an affiliate of us. We entered into a registration rights agreement with respect to the Holdco Notes pursuant to which we agreed to file a “market-making prospectus” in order to allow Goldman, Sachs & Co. to engage in market-making activities for the Holdco Notes. Also, Goldman Sachs Lending

126


Partners LLC, an affiliate of Goldman, Sachs & Co., acted as a joint bookrunner, joint lead arranger and a co-syndication agent under the ABL Facility. In connection with the Merger, we also paid approximately $10.9 million in various financing fees associated with the HoldCo Notes and ABL Facility to Goldman, Sachs & Co.  Goldman Sachs Lending Partners LLC is also one of the lenders under the Term Loan Facility and acted as a joint bookrunner, joint lead arranger and a co-syndication agent under the Term Loan Facility. We paid Goldman Sachs Lending Partners LLC fees of approximately $2.3 million in connection with entering into the Term Loan Facility on March 17, 2014. In addition, Goldman, Sachs & Co. received $0.3 million in connection with services it provided as dealer manager and solicitation agent for the tender offer and consent solicitation for the OpCo Notes.

ITEM 14. Principal Accounting Fees and Services

The following table represents a summary of the fees billed to us by PricewaterhouseCoopers LLP ("PwC"), the Company's principal accountant, for professional services rendered for the fiscal years ended December 26, 2014 and December 27, 2013 (in thousands):

 
 
Successor
 
 
For the fiscal year ended
Fee Category
 
December 26, 2014
 
December 27, 2013
Audit Fees (1)
 
$
1,034

 
$
1,054

Tax Fees  (2)
 
35

 
125

Total Fees
 
$
1,069

 
$
1,179


(1)
Audit Fees. Consists of fees billed for professional services rendered for the audits of our annual consolidated financial statements, review of interim condensed consolidated financial statements included in quarterly reports on Form 10-Q, and other services provided in connection with our statutory and regulatory filings or engagements.
(2)
Tax Fees. Consists of fees for tax services including compliance, planning and advice.

In accordance with the requirements of the Sarbanes-Oxley Act of 2002, our Audit Committee pre-approves and is responsible for the engagement of all services provided by our independent registered certified public accountants, including the proposed fees for such work. During fiscal years 2014 and 2013, 100% of all services performed by PwC were pre-aapproved by the Audit Committee.

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PART IV

ITEM 15. Exhibits, Financial Statement Schedules

(a)
1.
Financial Statements
 
 
(i)
The following financial statements of Interline Brands, Inc. and Subsidiaries are included in Item 8:
 
 
 
Reports of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm - for the year ended December 27, 2013 (Successor), the periods from September 8, 2012 through December 28, 2012 (Successor) and December 31, 2011 through September 7, 2012 (Predecessor)
 
 
 
Consolidated Balance Sheets - December 26, 2014 (Successor) and December 27, 2013 (Successor)
 
 
 
Consolidated Statements of Operations - for the year ended December 26, 2014 (Successor), December 27, 2013 (Successor), and the periods from September 8, 2012 through December 28, 2012 (Successor) and December 31, 2011 through September 7, 2012 (Predecessor)
 
 
 
Consolidated Statements of Comprehensive (Loss) Income - for the year ended December 26, 2014 (Successor), December 27, 2013 (Successor), and the periods from September 8, 2012 through December 28, 2012 (Successor) and December 31, 2011 through September 7, 2012 (Predecessor)
 
 
 
Consolidated Statements of Stockholders' Equity - for the year ended December 26, 2014 (Successor), December 27, 2013 (Successor), and the periods from September 8, 2012 through December 28, 2012 (Successor) and December 31, 2011 through September 7, 2012 (Predecessor)
 
 
 
Consolidated Statements of Cash Flows - for the year ended December 26, 2014 (Successor), December 27, 2013 (Successor), and the periods from September 8, 2012 through December 28, 2012 (Successor) and December 31, 2011 through September 7, 2012 (Predecessor)
 
 
 
Notes to the Consolidated Financial Statements
 
 
 
 
 
2.
 
Financial Statements Schedules
 
 
 
Schedules have been omitted because they are not applicable, not required, or the information is contained within the financial statements or notes thereto.
 
 
 
 
 
3.
 
Exhibits
 
 
 
The exhibits listed on the accompanying Exhibit Index are incorporated in this Annual Report on Form 10-K by this reference and filed as part of this report.
 
 
 
 
(b)
 
 
See Item 15(a)3 above
 
 
 
 
(c)
 
 
See Item 15(a)1 and 15(a)2 above


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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
Chief Executive Officer
 
 
 
 
 
Date: February 25, 2015

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities indicated and on the dates indicated.
 
Signature
 
Title
 
Date
 
 
 
 
 
/s/ Michael J. Grebe
 
Chairman of the Board and Chief Executive Officer
 
February 25, 2015
Michael J. Grebe
 
(Principal Executive Officer)
 
 
 
 
 
 
 
/s/ Federico L. Pensotti
 
Chief Financial Officer (Principal Financial Officer)
 
February 25, 2015
Federico L. Pensotti
 
 
 
 
 
 
 
 
 
/s/ David C. Serrano
 
Chief Accounting Officer and Corporate
 
February 25, 2015
David C. Serrano
 
    Controller (Principal Accounting Officer)
 
 
 
 
 
 
 
/s/ Kenneth D. Sweder
 
Director, President and Chief Operating Officer
 
February 25, 2015
Kenneth D. Sweder
 
 
 
 
 
 
 
 
 
/s/ Ann Berry
 
Director
 
February 25, 2015
Ann Berry
 
 
 
 
 
 
 
 
 
/s/ Christopher Crampton
 
Director
 
February 25, 2015
Christopher Crampton
 
 
 
 
 
 
 
 
 
/s/ Bradley Gross
 
Director
 
February 25, 2015
Bradley Gross
 
 
 
 
 
 
 
 
 
/s/ Dennis J. Letham
 
Director
 
February 25, 2015
Dennis J. Letham
 
 
 
 
 
 
 
 
 
/s/ Sanjeev Mehra
 
Director
 
February 25, 2015
Sanjeev Mehra
 
 
 
 
 
 
 
 
 
/s/ Claus J. Moller
 
Director
 
February 25, 2015
Claus J. Moller
 
 
 
 
 
 
 
 
 
/s/ Jozef Opdeweegh
 
Director
 
February 25, 2015
Jozef Opdeweegh
 
 
 
 
 
 
 
 
 
/s/ Joshua D. Paulson
 
Director
 
February 25, 2015
Joshua D. Paulson
 
 
 
 
 


129


EXHIBIT INDEX
Exhibit Number
 
Document
 
 
PLAN OF ACQUISITION, REORGANIZATION ARRANGEMENT, LIQUIDATION OR SUCCESSION
2.1
 
Agreement and Plan of Merger among Isabelle Holding Company Inc., Isabelle Acquisition Sub Inc., and Interline Brands, Inc., dated as of May 29, 2012 (incorporated by reference to Exhibit 2.1 of Current Report on Form 8-K filed on May 29, 2012).
 
 
 
 
 
ARTICLES OF INCORPORATION AND BYLAWS
3.1
 
Third Amended and Restated Certificate of Incorporation of Interline Brands, Inc. (incorporated by reference to Exhibit 3.1 of Current Report on Form 8-K filed on September 13, 2012).
3.2
 
Sixth Amended and Restated By-Laws of Interline Brands, Inc., effective as of November 9, 2012 (incorporated by reference to Exhibit 3.3 of Quarterly Report on Form 10-Q filed on November 13, 2012).
 
 
 
 
 
INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES
4.1
 
Form of Specimen Certificate of Common Stock of the Company (incorporated by reference to Exhibit 4.2 to the Company's Amendment No. 4 to Registration Statement on Form S-1 filed on December 3, 2004 (No. 333-116482)).
4.2
 
Purchase Agreement, dated November 4, 2010, among Interline New Jersey, the Company, as guarantor, subsidiary guarantors named therein and Barclays Capital Inc. as the representative of several initial purchasers named therein (incorporated by reference to Exhibit 10.35 to the Company's Registration Statement on Form S-4 filed on December 16, 2010 (No. 333-171215)).
4.3
 
Indenture, dated as of November 16, 2010, among Interline New Jersey, as issuer, the Company, as guarantor, subsidiary guarantors named therein and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-4 filed on December 16, 2010 (No. 333-171215)).
4.4
 
Registration Rights Agreement, dated as of November 16, 2010, by and among Interline New Jersey, the guarantors named therein, Barclays Capital Inc., J.P. Morgan Securities LLC, BB&T Capital Markets, a division of Scott Stringfellow, LLC, Goldman, Sachs & Co., Lazard Capital Markets LLC, SunTrust Robinson Humphrey, Inc. and U.S. Bancorp Investments, Inc. (incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-4 filed on December 16, 2010 (No. 333-171215)).
4.5
 
Second Supplemental Indenture among Interline Brands, Inc., the Subsidiary Guarantors, and Wells Fargo Bank, National Association, as Trustee, dated as of June 19, 2012 (incorporated by reference to Exhibit 4.1 of Current Report on Form 8-K filed on June 29, 2012).
4.6
 
Indenture Agreement for 10%/10.75% Senior Notes due 2018, among Isabelle Acquisition Sub Inc., as Issuer and Wells Fargo Bank, National Association, as Trustee, dated as of August 6, 2012 (incorporated by reference to Exhibit 4.1 of Current Report on Form 8-K filed on September 13, 2012).
4.7
 
Successor Supplemental Indenture, among Interline Brands, Inc. (as successor by merger to Isabelle Acquisition Sub Inc.) and Wells Fargo Bank, National Association, as trustee under the Indenture, dated as of September 7, 2012 (incorporated by reference to Exhibit 4.2 of Current Report on Form 8-K filed on September 13, 2012).
4.8
 
Exchange and Registration Rights Agreement, among Interline Brands, Inc., Goldman, Sachs & Co., and Merrill Lynch, Pierce, Fenner & Smith Incorporated, dated August 6, 2012 (incorporated by reference to Exhibit 4.3 of Current Report on Form 8-K filed on September 13, 2012).
4.9
 
Joinder Agreement, among Interline Brands, Inc., Goldman, Sachs & Co., and Merrill Lynch, Pierce, Fenner & Smith Incorporated, dated September 7, 2012 (incorporated by reference to Exhibit 4.4 of Current Report on Form 8-K filed on September 13, 2012).
4.10
 
Fifth Supplemental Indenture, dated as of March 12, 2014, among Interline New Jersey, the Company, the Subsidiary Guarantors and Wells Fargo Bank, National Association, as Trustee, to the Indenture dated as of November 16, 2010 (as amended and supplemented) (incorporated by reference to Exhibit 4.1 of Current Report on Form 8-K filed on March 12, 2014).
 
 
 

130


Exhibit Number
 
Document
 
 
MATERIAL CONTRACTS
10.1
 
Credit Agreement, among Interline Brands, Inc., Wilmar Holdings, Inc., and Wilmar Financial, Inc., as Borrowers; Bank of America, N.A., as Administrative Agent; Goldman Sachs Lending Partners LLC, as Syndication Agent; Wells Fargo Bank, National Association, Keybank National Association, U.S. Bank National Association, and TD Bank, N.A., as Co-Documentation Agents; and Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Goldman Sachs Lending Partners LLC, as Joint Bookrunners and Joint Lead Arrangers; dated as of September 7, 2012 (incorporated by reference to Exhibit 10.1 of Current Report on Form 8-K filed on September 13, 2012).
10.2
 
First Lien Term Loan Agreement, dated as of March 17, 2014, among Interline Brands, Inc., a New Jersey Corporation, as the borrower, Interline Brands, Inc., a Delaware corporation, the subsidiaries of the borrower from time to time party thereto, the lenders from time to time party thereto, and Barclays Bank PLC, as administrative agent (incorporated by reference to Exhibit 10.1 of Current Report on Form 8-K filed on March 19, 2014).
10.3
 
First Amendment to Credit Agreement, dated as of March 17, 2014, among Interline Brands, Inc., a New Jersey corporation, Wilmar Financial, Inc., JanPak, LLC, JanPak of South Carolina, LLC, IBI Merchandising Services, Inc., each as a borrower, Interline Brands, Inc., a Delaware corporation, Glenwood Acquisition LLC and Zip Technology, LLC, as additional loan parties, the lenders from time to time party thereto, and Bank of America, N.A., as administrative agent (incorporated by reference to Exhibit 10.2 of Current Report on Form 8-K filed on March 19, 2014).
10.4
 
Pledge and Security Agreement, dated as of March 17, 2014, among Interline Brands, Inc., a New Jersey corporation, certain of its subsidiaries party thereto, and Barclays Bank PLC, as administrative agent (incorporated by reference to Exhibit 10.3 of Current Report on Form 8-K filed on March 19, 2014).
10.5
 
Amended and Restated Pledge and Security Agreement, dated as of March 17, 2014, among Interline Brands, Inc., a New Jersey corporation, certain of its subsidiaries party thereto, and Bank of America, N.A., as administrative agent (incorporated by reference to Exhibit 10.4 of Current Report on Form 8-K filed on March 19, 2014).
10.6
 
Intercreditor Agreement, dated as of March 17, 2014, among Interline Brands, Inc., a New Jersey corporation, Interline Brands, Inc., a Delaware corporation, the other grantors from time to time party thereto, Bank of America, N.A., as revolving facility agent, and Barclays Bank PLC, as first lien administrative agent and first lien security agent (incorporated by reference to Exhibit 10.5 of Current Report on Form 8-K filed on March 19, 2014).
10.7
 
Second Amendment to Credit Agreement, dated as of April 8, 2014, among Interline Brands, Inc., a New Jersey corporation, Wilmar Financial, Inc., JanPak, LLC, JanPak of South Carolina, LLC, IBI Merchandising Services, Inc., each as a borrower, Interline Brands, Inc., a Delaware corporation, Glenwood Acquisition LLC and Zip Technology, LLC, as additional loan parties, the lenders from time to time party thereto, and Bank of America, N.A., as administrative agent (incorporated by reference to Exhibit 10.1 of Current Report on Form 8-K filed on April 11, 2014).
10.8
 
First Amendment to Amended and Restated Pledge and Security Agreement, dated as of April 8, 2014, among Interline Brands, Inc., a New Jersey corporation, certain of its subsidiaries party thereto, and Bank of America, N.A., as administrative agent (incorporated by reference to Exhibit 10.2 of Current Report on Form 8-K filed on April 11, 2014).
10.9
 
Increase Agreement, dated as of December 10, 2014, among Interline Brands, Inc., a New Jersey corporation, Wilmar Financial, Inc., JanPak, LLC, JanPak of South Carolina, LLC, IBI Merchandising Services, Inc., each as a borrower, Interline Brands, Inc., a Delaware corporation, Glenwood Acquisition LLC and Zip Technology, LLC, as additional loan parties, the lenders from time to time party thereto, and Bank of America, N.A., as administrative agent (incorporated by reference to Exhibit 10.1 of Current Report on Form 8-K filed on December 11, 2014).
10.10
 
Form of Change in Control Severance Agreement (incorporated by reference to Exhibit 10.42 to the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2006).
10.11
 
Form of Amendment to Change in Control Severance Agreement (incorporated by reference to Exhibit 10.45 to the Company's Annual Report on Form 10-K for the fiscal year ended December 26, 2008).
10.12
 
Interline Brands, Inc. 2012 Stock Option Plan, effective September 7, 2012 (incorporated by reference to Exhibit 10.9 of Current Report on Form 8-K filed on September 13, 2012).
10.13
 
Interline Brands, Inc. 2012 Stock Option Plan, Time-Vesting Nonqualified Stock Option Agreement, form applicable to option holders other than Mssrs. Grebe and Sweder (incorporated by reference to Exhibit 10.10 of Current Report on Form 8-K filed on September 13, 2012).
10.14
 
Interline Brands, Inc. 2012 Stock Option Plan, Time-Vesting Nonqualified Stock Option Agreement, form applicable to Mssrs. Grebe and Sweder (incorporated by reference to Exhibit 10.11 of Current Report on Form 8-K filed on September 13, 2012).
10.15
 
Interline Brands, Inc. 2012 Stock Option Plan, Performance-Vesting Nonqualified Stock Option Agreement, form applicable to option holders other than Mssrs. Grebe and Sweder (incorporated by reference to Exhibit 10.12 of Current Report on Form 8-K filed on September 13, 2012).

131


Exhibit Number
 
Document
10.16
 
Interline Brands, Inc. 2012 Stock Option Plan, Performance-Vesting Nonqualified Stock Option Agreement, form applicable to Mssrs. Grebe and Sweder (incorporated by reference to Exhibit 10.13 of Current Report on Form 8-K filed on September 13, 2012).
10.17
 
Interline Brands, Inc. Form of Amended and Restated 2012 Stock Option Plan, as amended through February 12, 2014 (incorporated herein at Exhibit 10.9).
10.18
 
Interline Brands, Inc. Amended and Restated 2012 Stock Option Plan, Form of Restricted Stock Agreement (incorporated herein at Exhibit 10.10).
10.19
 
Employment Agreement, dated as of August 13, 2004, by and between Interline New Jersey and Michael J. Grebe (incorporated by reference to Exhibit 10.32 to the Company's Amendment No. 2 to Registration Statement on Form S-1 filed on September 27, 2004 (No. 333-116482)).
10.20
 
Amendment One to Employment Agreement, dated as of December 2, 2004, by and between Interline New Jersey and Michael J. Grebe (incorporated by reference to Exhibit 10.37 to the Company's Amendment No. 4 to Registration Statement on Form S-1 filed on December 3, 2004 (No. 333-116482)).
10.21
 
Amendment to Employment Agreement, dated as of December 31, 2008, by and between Interline New Jersey and Michael J. Grebe (incorporated by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year ended December 26, 2008).
10.22
 
Amendment to Employment Agreement, dated as of March 31, 2011, by and between Interline New Jersey and Michael J. Grebe (incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K filed on March 31, 2011).
10.23
 
Fourth Amendment to Employment Agreement, by and between Interline Brands, Inc. and Michael J. Grebe, dated September 7, 2012 (incorporated by reference to Exhibit 10.5 of Current Report on Form 8-K filed on September 13, 2012).
10.24
 
Employment Agreement, dated April 30, 2007, by and between Interline New Jersey and Kenneth D. Sweder (incorporated by reference to Exhibit 10.27 to the Company's Annual Report on Form 10-K for the fiscal year ended December 26, 2008).
10.25
 
First Amendment to Employment Agreement, dated October 20, 2008, by and between Interline New Jersey and Kenneth D. Sweder (incorporated by reference to Exhibit 10.28 to the Company's Annual Report on Form 10-K for the fiscal year ended December 26, 2008).
10.26
 
Amendment to Employment Agreement, dated as of December 31, 2008, by and between Interline New Jersey and Kenneth D. Sweder (incorporated by reference to Exhibit 10.29 to the Company's Annual Report on Form 10-K for the fiscal year ended December 26, 2008).
10.27
 
Change in Control Severance Agreement, dated April 30, 2007, by and between the Company and Kenneth D. Sweder (incorporated by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K for the fiscal year ended December 26, 2008).
10.28
 
First Amendment to Change in Control Severance Agreement, dated October 20, 2008, by and between the Company and Kenneth D. Sweder (incorporated by reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K for the fiscal year ended December 26, 2008).
10.29
 
Transaction Bonus Agreement, by and among Interline Brands, Inc., and Kenneth D. Sweder, dated September 7, 2012 (incorporated by reference to Exhibit 10.6 of Current Report on Form 8-K filed on September 13, 2012).
10.30
 
Retention Bonus Agreement, by and among Interline Brands, Inc. and Kenneth D. Sweder, dated as of September 14, 2012 (incorporated by reference to Exhibit 10.1 of Current Report on Form 8-K filed on September 19, 2012).
10.31
 
Employment Agreement, dated as of October 30, 2006, by and between Interline New Jersey and Lucretia D. Doblado (incorporated by reference to Exhibit 10.44 to the Company's Annual Report on Form 10-K for the fiscal year ended December 25, 2009).
10.32
 
Amendment to Employment Agreement, dated as of March 23, 2007, by and between Interline New Jersey and Lucretia D. Doblado (incorporated by reference to Exhibit 10.45 to the Company's Annual Report on Form 10-K for the fiscal year ended December 25, 2009).
10.33
 
Amendment to Employment Agreement dated as of December 31, 2008, by and between Interline New Jersey and Lucretia D. Doblado (incorporated by reference to Exhibit 10.46 to the Company's Annual Report on Form 10-K for the fiscal year ended December 25, 2009).
10.34
 
Transaction Bonus Agreement, by and among Interline Brands, Inc., and Lucretia Doblado dated September 7, 2012 (incorporated by reference to Exhibit 10.7 of Current Report on Form 8-K filed on September 13, 2012).
10.35
 
Employment Agreement, dated as of April 9, 2009, by and between Interline New Jersey and Michael Agliata (incorporated by reference to Exhibit 10.29 to the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2012).

132


Exhibit Number
 
Document
10.36
 
Change in Control Severance Agreement, dated as of March 16, 2009, by and between the Company and Michael Agliata (incorporated by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2012).
10.37
 
Employment Agreement, dated as of June 10, 2013, by and between Interline New Jersey and John K. Bakewell (incorporated by reference to Exhibit 10.1 of Current Report on Form 8-K filed June 11, 2013).
10.38
 
Employment Agreement, dated as of May 19, 2014, by and between Interline Brands, Inc. and Federico Pensotti (incorporated by reference to Exhibit 10.1 of Current Report on Form 8-K filed on May 16, 2014).
10.39
Employment Agreement, dated as of August 12, 2013, by and between Interline Brands, Inc. and Jonathan S. Bennett.
10.40
Employment Agreement, dated as of January 28, 2014, by and between Interline Brands, Inc. and Kevin O'Meara.
10.41
 
Registration Rights Agreement, by and among Interline Brands, Inc., GS Capital Partners VI Fund, L.P., GS Capital Partners VI Parallel, L.P., GS Capital Partners VI Offshore Fund, L.P., GS Capital Partners VI GmbH & Co. KG, MBD 2011 Holdings, L.P., Bridge Street 2012 Holdings, L.P., P2 Capital Partners, LLC, P2 Capital Master Fund I, L.P., P2 Capital Master Fund VII, L.P., and Other Stockholders that are Signatories Thereto, dated as of September 7, 2012 (incorporated by reference to Exhibit 10.2 of Current Report on Form 8-K filed on September 13, 2012).
10.42
 
Stockholders Agreement, by and among Interline Brands, Inc., GS Capital Partners VI Fund, L.P., GS Capital Partners VI Parallel, L.P., GS Capital Partners VI Offshore Fund, L.P., GS Capital Partners VI GmbH & Co. KG, MBD 2011 Holdings, L.P., Bridge Street 2012 Holdings, L.P., P2 Capital Master Fund I, L.P., P2 Capital Master Fund VII, L.P., and Other Stockholders that are Signatories Thereto, dated as of September 7, 2011 (incorporated by reference to Exhibit 10.3 of Current Report on Form 8-K filed on September 13, 2012).
10.43
 
First Amendment to Stockholders Agreement, by and among Interline Brands, Inc., GS Capital Partners VI Fund, L.P., GS Capital Partners VI Parallel, L.P., GS Capital Partners VI Offshore Fund, L.P., GS Capital Partners VI GmbH & Co. KG, MBD 2011 Holdings, L.P., Bridge Street 2012 Holdings, L.P., P2 Capital Master Fund I, L.P., P2 Capital Master Fund VII, L.P., and Other Stockholders that are Signatories Thereto, dated as of November 13, 2012 (incorporated by reference to Exhibit 10.36 to the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2012).
10.44
 
Form of Indemnification Agreement, by and between Interline Brands, Inc., and Indemnitee, dated as of September 7, 2012 (incorporated by reference to Exhibit 10.4 of Current Report on Form 8-K filed on September 13, 2012).
10.45
 
Interline Brands, Inc. Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.14 of Current Report on Form 8-K filed on September 13, 2012).
 
 
 
 
 
STATEMENTS RE COMPUTATION OF RATIOS
12.1
Computation of earnings to fixed charges and earnings to combined fixed charges and preferred dividends of Interline Brands, Inc. (furnished herewith).
 
 
 
 
 
SUBSIDIARIES OF THE REGISTRANT
21.1
List of Subsidiaries of the Company.
 
 
 
 
 
CERTIFICATIONS
31.1
Certification of the Chief Executive Officer of Interline Brands, Inc., pursuant to Rule 13a-14 of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of the Chief Financial Officer of Interline Brands, Inc., pursuant to Rule 13a-14 of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of the Chief Executive Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of the Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
INTERACTIVE DATA FILES
101.INS
*
XBRL Instance Document
101.SCH
*
XBRL Taxonomy Extension Schema Document
101.CAL
*
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
*
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
*
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
*
XBRL Taxonomy Extension Presentation Linkbase Document


133


† Furnished herewith.
* Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language):

1
Consolidated Balance Sheets as of December 26, 2014 and December 27, 2013;
2
Consolidated Statements of Operations for the fiscal year ended December 26, 2014, the period from September 8, 2012 through December 28, 2012, the period from December 31, 2011 through September 7, 2012, and the fiscal year ended December 28, 2012;
3
Consolidated Statements of Comprehensive (Loss) Income for the fiscal year ended December 26, 2014, the period from September 8, 2012 through December 28, 2012, the period from December 31, 2011 through September 7, 2012, and the fiscal year ended December 28, 2012;
4
Consolidated Statements of Stockholders' Equity for the fiscal year ended December 26, 2014, the period from September 8, 2012 through December 28, 2012, the period from December 31, 2011 through September 7, 2012, and the fiscal year ended December 28, 2012;
5
Consolidated Statements of Cash Flows for the fiscal year ended December 26, 2014, the period from September 8, 2012 through December 28, 2012, the period from December 31, 2011 through September 7, 2012, and the fiscal year ended December 28, 2012;
6
Notes to the Consolidated Financial Statements.
 



134