HD Supply 8-K Other Events

HD SUPPLY, INC. EXHIBIT 99.2

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to financial statements

	Page
Report of Independent Registered Public Accounting Firm	2
Consolidated statements of operations for (i) the fiscal year ended January 29, 2012, (ii) the fiscal year ended January 30, 2011, and (iii) the fiscal year ended January 31, 2010	3
Consolidated balance sheets as of January 29, 2012 and January 30, 2011	4
Consolidated statements of stockholder’s equity (deficit) and comprehensive income (loss) for (i) the fiscal year ended January 29, 2012, (ii) the fiscal year ended January 30, 2011, and (iii) the fiscal year ended January 31, 2010	5
Consolidated statements of cash flows for (i) the fiscal year ended January 29, 2012, (ii) the fiscal year ended January 30, 2011, and (iii) the fiscal year ended January 31, 2010	6
Notes to consolidated financial statements	7

1

Report of Independent Registered Public Accounting Firm

To The Board of Directors and Shareholder of HD Supply, Inc.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholder’s equity (deficit) and comprehensive income (loss) and cash flows present fairly, in all material respects, the financial position of HD Supply, Inc. and its subsidiaries at January 29, 2012 and January 30, 2011, and the results of their operations and their cash flows for each of the three years in the period ended January 29, 2012 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule (not presented herein) listed in the index appearing under Item 15(c) of the Company’s Annual Report on Form 10-K for the year ended January 29, 2012 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule 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.

PricewaterhouseCoopers LLP (signed)

Atlanta, Georgia

March 23, 2012, except with respect to our opinion on the consolidated financial statements insofar as it relates to the effects of discontinued operations discussed in Note 18, as to which the date is July 20, 2012.

2

	Fiscal Year Ended
	January 29,     2012		January 30,     2011		January 31,     2010
Net Sales		$ 7,028		$ 6,449		$ 6,313
Cost of sales		5,014		4,608		4,545
Gross Profit		2,014		1,841		1,768
Operating expenses:
Selling, general and administrative		1,532		1,455		1,453
Depreciation and amortization		327		341		359
Restructuring		–		8		21
Goodwill impairment		–		–		219
Total operating expenses		1,859		1,804		2,052
Operating Income (Loss)		155		37		(284)
Interest expense		639		623		602
Other (income) expense, net		–		(1)		(208)
Income (Loss) from Continuing Operations Before Provision (Benefit) for Income Taxes		(484)		(585)		(678)
Provision (benefit) for income taxes		79		28		(198)
Income (Loss) from Continuing Operations		(563)		(613)		(480)
Loss from discontinued operations, net of tax		20		(6)		(34)
Net Income (Loss)		$ (543)		$ (619)		$ (514)

The accompanying notes are an integral part of these consolidated financial statements.

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	January 29,     2012		January 30,     2011
ASSETS
Current assets:
Cash and cash equivalents		$     111		$     292
Receivables, less allowance for doubtful accounts of $32 and $36		1,002		907
Inventories		1,108		1,035
Deferred tax asset		58		102
Other current assets		47		45
Total current assets		2,326		2,381
Property and equipment, net		398		390
Goodwill		3,151		3,150
Intangible assets, net		735		992
Other assets		128		176
Total assets		$  6,738		$  7,089
LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)
Current liabilities:
Accounts payable		$     714		$     805
Accrued compensation and benefits		140		118
Current installments of long-term debt		82		10
Other current liabilities		378		272
Total current liabilities		1,314		1,205
Long-term debt, excluding current installments		5,380		5,239
Deferred tax liabilities		111		101
Other liabilities		361		448
Total liabilities		7,166		6,993
Stockholder’s equity (deficit):
Common stock, par value $0.01; authorized 1,000 shares; issued 1,000 shares at January 29, 2012 and January 30, 2011		–		–
Paid-in capital		2,680		2,660
Accumulated deficit		(3,106)		(2,563)
Accumulated other comprehensive loss		(2)		(1)
Total stockholder’s equity (deficit)		(428)		96
Total liabilities and stockholder’s equity (deficit)		$   6,738		$   7,089

The accompanying notes are an integral part of these consolidated financial statements.

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	Common Stock		Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Total Equity
Balance at February 1, 2009		$    –		$    2,625		$  (1,418)		$     (32)		$   1,175
Net loss						(514)				(514)
Other comprehensive income (loss):
Unrealized gains on derivatives, net of tax of $(1)								2		2
Foreign currency translation adjustment								19		19
Total comprehensive income (loss)										(493)
Stock-based compensation				18						18
Change in fiscal year end of subsidiary						(13)				(13)
Other						1				1
Balance at January 31, 2010		$    –		$    2,643		$  (1,944)		$    (11)		$     688
Equity contribution				1						1
Net loss						(619)				(619)
Other comprehensive income (loss):
Unrealized gains on derivatives, net of tax of $(1)								1		1
Foreign currency translation adjustment								9		9
Total comprehensive income (loss)										(609)
Stock-based compensation				17						17
Other				(1)						(1)
Balance at January 30, 2011		$    –		$    2,660		$  (2,563)		$     (1)		$      96
Net loss						(543)				(543)
Other comprehensive income (loss):
Foreign currency translation adjustment								(1)		(1)
Total comprehensive income (loss)										(544)
Stock-based compensation				20						20
Balance at January 29, 2012		$    –		$    2,680		$  (3,106)		$     (2)		$  (428)

The accompanying notes are an integral part of these consolidated financial statements.

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	Fiscal Year Ended
	January 29,     2012		January 30,     2011		January 31,     2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$    (543)		$    (619)		$    (514)
Reconciliation of net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		350		369		392
Provision for uncollectibles		13		12		23
Non-cash interest expense		183		259		239
Stock-based compensation expense		20		17		18
Deferred income taxes		76		20		(221)
Unrealized derivative (gain) loss		(1)		(6)		(11)
Loss (gain) on extinguishment of debt		–		2		(200)
Goodwill and other asset impairments		8		1		256
Gain on sale of businesses		(9)		–		–
Other		(1)		2		2
Changes in assets and liabilities, net of the effects of acquisitions:
(Increase) decrease in receivables		(170)		(61)		221
(Increase) decrease in inventories		(149)		2		186
(Increase) decrease in other current assets		(3)		231		147
(Increase) decrease in other assets		–		1		1
Increase (decrease) in accounts payable and accrued liabilities		58		312		(481)
Increase (decrease) in other long-term liabilities		3		9		11
Net cash provided by (used in) operating activities		(165)		551		69
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(115)		(49)		(58)
Proceeds from sales of property and equipment		4		4		8
Refunds (payments) for businesses acquired, net of cash acquired		(21)		–		6
Proceeds from sales of businesses		128		–		3
Purchase of investments		(23)		–		–
Proceeds from sale of investments		21		–		–
Net cash provided by (used in) investing activities		(6)		(45)		(41)
CASH FLOWS FROM FINANCING ACTIVITIES:
Equity contribution		–		1		–
Repayments of long-term debt		(10)		(40)		(72)
Borrowings on long-term revolver debt		1,053		178		5
Repayments on long-term revolver debt		(1,053)		(860)		(196)
Debt modification and issuance costs		–		(34)		–
Net cash provided by (used in) financing activities		(10)		(755)		(263)
Effect of exchange rates on cash and cash equivalents		–		2		3
Increase (decrease) in cash and cash equivalents		(181)		(247)		(232)
Cash and cash equivalents at beginning of period		292		539		771
Cash and cash equivalents at end of period		$      111		$    292		$    539

The accompanying notes are an integral part of these consolidated financial statements.

6

NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

HD Supply, Inc. (the “Company” or “HD Supply”), a wholly-owned subsidiary of HDS Investment Holding, Inc. (“Holding”), is one of the largest industrial distribution companies in North America. With a diverse portfolio of industry-leading businesses, the Company provides a broad range of products and services to approximately 440,000 professional customers in the infrastructure and energy, maintenance, repair and improvement, and specialty construction markets.

The Company provides an expansive offering of approximately one million stock-keeping units (“SKUs”) of quality, name-brand and propriety-brand products at competitive prices. Through 640 locations across 45 states and 9 Canadian provinces, HD Supply provides localized, customer-driven services including jobsite delivery, will call or direct-ship options, diversified logistics and innovative solutions that contribute to its customers’ success.

HD Supply is managed primarily on a product line basis and reports results of operations in four reportable segments. The reportable segments are Facilities Maintenance, Waterworks, Power Solutions (formerly Utilities/Electrical), and White Cap. Other operating segments include Crown Bolt, Repair & Remodel, Creative Touch Interiors (“CTI”), and HD Supply Canada. In addition, the consolidated financial statements include Corporate, which includes enterprise-wide functional departments.

Principles of Consolidation

The consolidated financial statements present the results of operations, financial position and cash flows of HD Supply, Inc. and its wholly-owned subsidiaries. All material intercompany balances and transactions are eliminated. Results of operations of companies acquired are included from their respective dates of acquisition. The assets, liabilities, and results of operations of all discontinued operations have been separately reported as discontinued operations for all periods presented. Certain amounts in prior-period financial statements have been reclassified to conform to the current period’s presentation.

Prior to February 2, 2009, CTI’s results were reported using a December year-end and therefore were consolidated one month in arrears into the consolidated financial statements of HD Supply, Inc. Effective February 2, 2009, CTI’s results are being consolidated on a January fiscal year-end, eliminating the lag period. The effect of eliminating the lag period for CTI’s results of operations was recorded directly to beginning Accumulated Deficit in the Statement of Stockholders’ Equity as of February 2, 2009.

Fiscal Year

HD Supply’s fiscal year is a 52- or 53-week period ending on the Sunday nearest to January 31. Fiscal years ended January 29, 2012 (“fiscal 2011”), January 30, 2011 (“fiscal 2010”), and January 31, 2010 (“fiscal 2009”) all include 52 weeks.

Estimates

Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities, and reported amounts of revenues and expenses in preparing these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Actual results could differ from these estimates.

Cash and Cash Equivalents

HD Supply considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents.

Allowance for Doubtful Accounts

Accounts receivable are evaluated for collectability based on numerous factors, including past transaction history with customers, their credit worthiness, and an assessment of lien and bond rights. An allowance for doubtful

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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS HD SUPPLY, INC.

accounts is estimated as a percentage of aged receivables. This estimate is periodically adjusted when management becomes aware of a specific customer’s inability to meet its financial obligations (e.g., bankruptcy filing) or as a result of changes in historical collection patterns.

Inventories

Inventories are carried at the lower of cost or market. The cost of substantially all inventories is determined by the moving or weighted average cost method. Inventory value is evaluated at each balance sheet date to ensure that it is carried at the lower of cost or market. This evaluation includes an analysis of historical physical inventory results, a review of excess and obsolete inventories based on inventory aging, and anticipated future demand. Periodically, perpetual inventory records are adjusted to reflect declines in net realizable value below inventory carrying cost.

Consideration Received From Vendors

At the beginning of each calendar year, HD Supply enters into agreements with many of its vendors providing for inventory purchase rebates (“vendor rebates”) upon achievement of specified volume purchasing levels. Vendor rebates are accrued as part of cost of sales for products sold based on progress towards earning the vendor rebates, taking into consideration cumulative purchases of inventory to date and projected purchases through the end of the year. An estimate of unearned vendor rebates is included in the carrying value of inventory at each period end for vendor rebates recognized on products not yet sold. At January 29, 2012 and January 30, 2011, vendor rebates due to HD Supply were $71 million and $60 million, respectively. These receivables are included in Receivables in the accompanying Consolidated Balance Sheets.

Property and Equipment

Property and equipment are recorded at cost and depreciated using the straight-line method based on the following estimated useful lives of the assets:

Buildings and improvements	5  –  45 years
Transportation equipment	5  –  7 years
Furniture, fixtures and equipment	2  –  10 years

Capitalized Software Costs

HD Supply capitalizes certain software costs, which are being amortized on a straight-line basis over the estimated useful lives of the software, ranging from three to six years. At January 29, 2012 and January 30, 2011, capitalized software costs totaled $71 million and $85 million, respectively, net of accumulated amortization of $114 million and $92 million, respectively. Amortization of capitalized software costs totaled $28 million, $31 million, and $29 million, in fiscal 2011, fiscal 2010, and fiscal 2009, respectively.

Goodwill

Goodwill represents the excess of purchase price over fair value of net assets acquired. HD Supply does not amortize goodwill, but does assess the recoverability of goodwill in the third quarter of each fiscal year or whenever events or circumstances indicate that it is “more likely than not” that the fair value of a reporting unit has dropped below its carrying value. For the fiscal 2011 and fiscal 2010 annual impairment tests, the fair values of HD Supply’s identified reporting units were estimated using a discounted cash flow (“DCF”) analysis and a market comparable method, with each method being equally weighted in the calculation. There was no indication of impairment in any of the Company’s reporting units during either the fiscal 2011 or fiscal 2010 annual testing. HD Supply recorded $224 million in non-cash goodwill impairment charges during fiscal 2009. See Note 5, Goodwill and Intangible Assets, for a complete description of the Company’s goodwill.

Impairment of Long-Lived Assets

Long-lived assets, including property and equipment, are reviewed for possible impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. To analyze recoverability, undiscounted future cash flows over the remaining life of the asset are projected. If these projected cash flows are less than the carrying amount, an impairment loss is recognized to the extent the fair value of the asset less any costs of disposition is less than the carrying amount of the asset. Judgments regarding the existence of

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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS HD SUPPLY, INC.

impairment indicators are based on market and operational performance. Evaluating potential impairment also requires estimates of future operating results and cash flows.

Self-Insurance

HD Supply has a high deductible insurance program for most losses related to general liability, product liability, environmental liability, automobile liability, workers’ compensation, and is self-insured for medical claims and certain legal claims. The expected ultimate cost for claims incurred as of the balance sheet date is not discounted and is recognized as a liability. Self-insurance losses for claims filed and claims incurred but not reported are accrued based upon estimates of the aggregate liability for uninsured claims using loss development factors and actuarial assumptions followed in the insurance industry and historical loss development experience. At both January 29, 2012 and January 30, 2011, reserves totaled approximately $101 million.

Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable, accrued compensation and benefits and other current liabilities approximate fair value due to the short-term nature of these financial instruments. The Company’s long-term financial assets and liabilities are recorded at historical costs. See Note 8, Fair Value Measurements, for information on the fair value of long-term financial instruments.

Revenue Recognition

HD Supply recognizes revenue when persuasive evidence of an agreement exists, delivery has occurred or services have been rendered, the price to the buyer is fixed and determinable and collectability is reasonably assured.

HD Supply ships products to customers predominantly by internal fleet and to a lesser extent by third party carriers. Revenues, net of sales tax and allowances for returns and discounts, are recognized from product sales when title to the products is passed to the customer, which generally occurs at the point of destination for products shipped by internal fleet and at the point of shipping for products shipped by third party carriers. Revenues related to services are recognized in the period the services are performed and totaled $73 million, $56 million, and $56 million in fiscal 2011, fiscal 2010, and fiscal 2009, respectively.

Shipping and Handling Fees and Costs

HD Supply includes shipping and handling fees billed to customers in Net sales. Shipping and handling costs associated with inbound freight are capitalized to inventories and relieved through Cost of sales as inventories are sold. Shipping and handling costs associated with outbound freight are included in Selling, general and administrative expenses and totaled $96 million, $91 million, and $84 million in fiscal 2011, fiscal 2010, and fiscal 2009, respectively.

Concentration of Credit Risk

The majority of HD Supply’s sales are credit sales which are made primarily to customers whose ability to pay is dependent, in part, upon the economic strength of the construction industry in the areas where they operate. Concentration of credit risk with respect to trade accounts receivable is limited by the large number of customers comprising HD Supply’s customer base. HD Supply performs ongoing credit evaluations of its customers.

Leases

Leases are reviewed for capital or operating classification at their inception under the guidance of Accounting Standard Codification (“ASC”) 840, Leases. The Company uses its incremental borrowing rate in the assessment of lease classification and assumes the initial lease term includes renewal options that are reasonably assured. HD Supply conducts operations primarily under operating leases. For leases classified as operating leases, the Company records rent expense on a straight-line basis, over the lease term beginning with the date the Company has access to the property which in some cases is prior to commencement of lease payments. Accordingly, the amount of rental expense recognized in excess of lease payments is recorded as a deferred rent liability and is amortized to rental expense over the remaining term of the lease. Capital leases currently in effect are not material.

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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS HD SUPPLY, INC.

Advertising

Advertising costs are charged to expense as incurred except for the costs of producing and distributing certain direct response sales catalogs, which are capitalized and charged to expense over the life of the related catalog. Advertising expenses were approximately $24 million, $21 million, and $20 million in fiscal 2011, fiscal 2010, and fiscal 2009, respectively. Capitalized advertising costs related to direct response advertising were not material.

Income Taxes

The Company provides for federal, state and foreign income taxes currently payable, as well as for those deferred due to temporary differences between reporting income and expenses for financial statement purposes versus tax purposes. Federal, state and foreign tax benefits are recorded as a reduction of income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in income tax rates is recognized as income or expense in the period that includes the enactment date.

The Company consists of corporations, limited liability companies and partnerships. All income tax expense (benefit) of the Company is recorded in the accompanying Consolidated Statements of Operations with the offset recorded through the Company’s current tax accounts, deferred tax accounts, or stockholder’s equity account as appropriate.

Comprehensive Income (Loss)

Comprehensive income (loss) includes Net income (loss) adjusted for certain revenues, expenses, gains and losses that are excluded from net income under U.S. GAAP. Adjustments to net income are for foreign currency translation adjustments and unrealized gains or losses on derivatives, to the extent they are accounted for as an effective hedge under ASC 815, Derivatives and Hedging.

Foreign Currency Translation

Assets and liabilities of foreign subsidiaries with a functional currency of Canadian dollars are translated into U.S. dollars at the current rate of exchange on the last day of the reporting period. Revenues and expenses are translated at a monthly average exchange rate and equity transactions are translated using either the actual exchange rate on the day of the transaction or a monthly average exchange rate.

Derivative Financial Instruments

When the Company enters into derivative financial instruments, it is for hedging purposes. In hedging the exposure to variable cash flows on forecasted transactions, deferral accounting is applied when the derivative reduces the risk of the underlying hedged item effectively as a result of high inverse correlation with the value of the underlying exposure. If a derivative instrument either initially fails or later ceases to meet the criteria for deferral accounting, any subsequent gains or losses are recognized currently in income. Cash flows resulting from derivative financial instruments are classified in the same category as the cash flows from the items being hedged.

Stock-Based Compensation

HDS Investment Holding, Inc. (“Holding”) established an Incentive Stock Plan (the “HDS Plan”) for associates of HD Supply, a wholly-owned subsidiary. The HDS Plan provides for the award of non-qualified stock options and deferred share units of the common stock of Holding. The maximum number of shares of common stock that may be issued under the HDS Plan may not exceed 55.6 million, of which a maximum of 30.9 million shares may be issued in respect of options granted under the HDS Plan. Holding will issue new shares of common stock to satisfy options exercised. The HDS Plan is accounted for under ASC 718, Compensation – Stock Compensation, which requires the recognition of share-based compensation costs in the financial statements.

Recent Accounting Pronouncements

Multiple-deliverable revenue arrangements– In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2009-13, “Multiple-Deliverable Revenue Arrangements – a consensus of the FASB Emerging Issues Task Force” (“ASU 2009-13”). This ASU addresses how to separate

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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS HD SUPPLY, INC.

deliverables under multiple-deliverable arrangements and how to measure and allocate arrangement consideration to one or more units of accounting. In addition, ASU 2009-13 expands the disclosures related to a company’s multiple-deliverable revenue arrangements. The Company adopted the provisions of ASU 2009-13 on January 31, 2011. The adoption did not have an impact on the consolidated financial statements or results of operations.

Fair value measurement – In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”). The amendments in this ASU are intended to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards (“IFRS”). The amendments in this ASU explain how to measure fair value. They do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The amendments in this ASU are to be applied prospectively and are effective during interim and annual periods beginning after December 15, 2011. The Company does not expect the adoption of ASU 2011-04 to have a material impact on the Company’s financial position or results of operations.

Comprehensive income – In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”), to increase the prominence of items reported in other comprehensive income and to facilitate convergence of U.S. GAAP and IFRS. ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity and requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. In December 2011, the FASB issued ASU No. 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” (“ASU 2011-12”), which deferred the requirement to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income while the FASB further deliberates this aspect of the proposal. The amendments contained in ASU 2011-05 do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of ASU 2011-05, as amended by ASU 2011-12, will not have an impact on the Company’s financial position or results of operations. However, adopting the guidance will affect the presentation of components of comprehensive income by eliminating the historical practice of showing these items within the Consolidated Statements of Stockholder’s Equity.

Goodwill impairment testing – In September 2011, the FASB issued ASU No. 2011-08, “Testing Goodwill for Impairment” (“ASU 2011-08”), which simplifies how entities test goodwill for impairment and permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. ASU 2011-08 will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, although early adoption is permitted. The adoption of ASU 2011-08 will not have an impact on the Company’s financial position or results of operations.

NOTE 2 – ACQUISITIONS

HD Supply enters into strategic acquisitions to expand into new markets, new platforms, and new geographies in an effort to better service existing customers and attract new ones. In accordance with the acquisition method of accounting under ASC 805, Business Combinations, the results of the acquisitions completed by HD Supply are reflected in the Company’s consolidated financial statements from the date of acquisition forward.

On May 2, 2011, the Company closed on a transaction to acquire substantially all of the assets of Rexford Albany Municipal Supply Company, Inc. (“RAMSCO”) for approximately $21 million. RAMSCO specializes in distributing water, sanitary and storm sewer materials primarily to municipalities and contractors through four locations in upstate New York. These locations are operated as part of the HD Supply Waterworks business.

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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS HD SUPPLY, INC.

On June 1, 2009, HD Supply acquired substantially all of the assets of ORCO Construction Supply, a former competitor of the White Cap business, out of bankruptcy, for approximately $16 million. The total estimated fair value of the net assets acquired, net of liabilities assumed, at the date of the acquisition was $18 million, resulting in a $2 million bargain purchase gain, which is included in Other (income) expense, net in the Consolidated Statements of Operations.

NOTE 3 – DISCONTINUED OPERATIONS

On September 9, 2011, the Company sold all of the issued and outstanding equity interests in its Plumbing/HVAC (“Plumbing”) business to Hajoca Corporation. The Company received cash proceeds of approximately $116 million, net of $8 million remaining in escrow and $4 million of transaction costs. As a result of the sale, the Company recorded a $7 million pre-tax gain in fiscal 2011.

On February 28, 2011, HD Supply Canada sold substantially all of the assets of SESCO/QUESCO (“SESCO”), an electrical products division of HD Supply Canada, to Sonepar Canada, and received proceeds of approximately $11 million, less $1 million remaining in escrow. As a result of the sale, the Company recorded a $2 million pre-tax gain in fiscal 2011.

Subsequent Event

On March 26, 2012, the Company sold all of the issued and outstanding equity interests in its Industrial Pipes, Valves and Fittings (“IPVF”) business to Shale-Inland Holdings, LLC for proceeds of approximately $469 million, which is subject to a customary working capital adjustment.

Summary Financial Information

In accordance with ASC 205-20, Discontinued Operations, the results of the IPVF, Plumbing/HVAC and SESCO/QUESCO operations and the gains on sales of the businesses are classified as discontinued operations. The presentation of discontinued operations includes revenues and expenses of the discontinued operations and gain on the sale of businesses, net of tax, as one line item on the Consolidated Statements of Operations. All Consolidated Statements of Operations presented have been revised to reflect this presentation. The following tables provide additional detail related to the results of operations of the discontinued operations (amounts in millions):

	Fiscal       2011		Fiscal       2010		Fiscal       2009
Net sales		$969		$1,028		$1,105
Gains on sales of discontinued operations		9		–		–
Income (loss) before provision for income taxes		20		(6)		(53)
Provision for income taxes		–		–		(19)
Income (loss) from discontinued operations, net of tax		$  20		$  (6)		$  (34)

NOTE 4 – RELATED PARTIES

On August 30, 2007, investment funds associated with Clayton, Dubilier & Rice, Inc., The Carlyle Group and Bain Capital Partners, LLC (collectively the “Equity Sponsors”) formed Holding and entered into a stock purchase agreement with The Home Depot, Inc. (“Home Depot” or “THD”) pursuant to which Home Depot agreed to sell to Holding or to a wholly owned subsidiary of Holding certain intellectual properties and all the outstanding common stock of HD Supply, Inc. and the Canadian subsidiary CND Holdings, Inc. On August 30, 2007, through a series of transactions, Holding’s direct wholly owned subsidiary, HDS Holding Corporation, acquired direct control of HD Supply through the merger of its wholly owned subsidiary, HDS Acquisition Corp., with and into HD Supply, Inc. and the Canadian subsidiary CND Holdings, Inc. Through these transactions (the “Transactions”), Home Depot was paid cash of $8.2 billion and 12.5% of Holding’s common stock worth $325 million for certain intellectual property and all of the outstanding common stock of HD Supply, Inc. and CND Holdings, Inc. including all dividends and interest payable associated with those shares. During fiscal 2009, HD Supply, Inc. and the Canadian subsidiary CND Holdings, Inc. received $22 million from Home Depot for the working capital adjustment and settlement of other items finalizing the purchase price of the Transactions.

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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS HD SUPPLY, INC.

Home Depot

Sales and Purchases – HD Supply derived revenue from the sale of products to Home Depot of $275 million, $299 million, and $290 million in fiscal 2011, fiscal 2010, and fiscal 2009, respectively. The revenue was recorded at an amount that generally approximates fair value. Accounts receivable from the sale of products to Home Depot were $45 million and $27 million at January 29, 2012 and January 30, 2011, respectively, and are included within Receivables in the accompanying Consolidated Balance Sheets. In addition to sales, HD Supply purchased product from Home Depot of less than $1 million in each of fiscal 2011, fiscal 2010, and fiscal 2009. All purchases were recorded in Cost of sales when the inventory was sold.

Strategic Agreement – On the date of the Transactions, Home Depot entered into a strategic purchase agreement with Crown Bolt, HD Supply’s distribution services line of business. This agreement provides a guaranteed revenue stream to Crown Bolt through January 31, 2015 by specifying minimum annual purchase requirements from Home Depot. The minimum annual purchase requirements range from $257 million at the outset of the agreement in 2007 to $401 million in the final year. Crown Bolt recorded $20 million and $12 million during fiscal 2011 and fiscal 2010, respectively, in Net sales in accordance with the minimum purchase requirement provisions of this strategic purchase agreement.

Equity Sponsors

In conjunction with the closing of the Transactions, the Company entered into a management agreement whereby the Company will pay the Equity Sponsors a $5 million annual aggregate management fee (“Sponsor Management Fee”) and related expenses through August 2017. During each of fiscal 2011, fiscal 2010, and fiscal 2009, the Company recorded $5 million of Sponsor Management Fees and related expenses, which are included in Selling, general and administrative expense in the Consolidated Statements of Operations.

Management of the Company has been informed that, as of January 29, 2012, affiliates of certain of the Equity Sponsors beneficially owned approximately $833 million aggregate principal amount, or 33%, of the Company’s 12.0% Senior Notes due 2014 and $713 million aggregate principal amount, or 39%, of the Company’s 13.5% Senior Subordinated Notes due 2015.

HD Supply purchased product from affiliates of the Equity Sponsors for approximately $61 million, $46 million, and $60 million in fiscal 2011, fiscal 2010, and fiscal 2009, respectively. In addition, HD Supply sold product to affiliates of the Equity Sponsors for approximately $3 million, $3 million, and $3 million in fiscal 2011, fiscal 2010, and fiscal 2009, respectively. Management believes these transactions were conducted at prices that an unrelated third party would pay.

Other Related Parties

HD Supply leases several buildings and properties from an executive officer of the Company. The leases generally provide that all expenses related to the properties are to be paid by HD Supply. Rents paid under these leases were minimal in fiscal 2011, less than $1 million in fiscal 2010, and $1 million in fiscal 2009. The fiscal 2010 payment included less than $1 million of a prepayment for fiscal 2011 and the fiscal 2009 payment included less than $1 million of a prepayment for fiscal 2010. The Company received a discount for making such prepayments.

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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS HD SUPPLY, INC.

NOTE 5 – GOODWILL AND INTANGIBLE ASSETS

Goodwill

The carrying amount of goodwill by reporting unit as of January 29, 2012 and January 30, 2011 is as follows (amounts in millions):

	January 29, 2012						January 30, 2011
	Gross     Goodwill		Accumulated   Impairments		Net     Goodwill		Gross     Goodwill		Accumulated     Impairments		Net     Goodwill
Waterworks		$  1,867		$    (815)		$  1,052		$  1,855		$    (815)		$  1,040
Facilities Maintenance		1,474		–		1,474		1,474		–		1,474
White Cap		183		(74)		109		183		(74)		109
Utilities		285		(99)		186		296		(99)		197
Crown Bolt		215		–		215		215		–		215
Repair & Remodel		125		(30)		95		125		(30)		95
Electrical		20		–		20		20		–		20
IPVF		82		(82)		–		82		(82)		–
CTI		67		(67)		–		67		(67)		–
Plumbing		–		–		–		111		(111)		–
Total goodwill		$  4,318		$  (1,167)		$  3,151		$  4,428		$  (1,278)		$  3,150

Goodwill represents the excess of purchase price over fair value of net assets acquired. HD Supply does not amortize goodwill, but does assess the recoverability of goodwill in the third quarter of each fiscal year. If an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value, an interim impairment test would be performed between annual tests. Goodwill impairment testing is performed at the reporting unit level. There are nine reporting units within the Company to which goodwill was originally assigned, excluding the Plumbing/HVAC business, which was divested in the third quarter of fiscal 2011.

Under U.S. GAAP (ASC 350, Intangibles – Goodwill and Other), goodwill impairment analysis is a two-step test. The first step, used to identify potential impairment, involves comparing each reporting unit’s fair value to its carrying value including goodwill. If the fair value of a reporting unit exceeds its carrying value, applicable goodwill is considered not to be impaired. If the carrying value exceeds fair value, there is an indication of impairment and the second step is performed to measure the amount of impairment.

The second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated impairment. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, which is the excess of the fair value of the reporting unit, as determined in the first step, over the aggregate fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill in the “pro forma” business combination accounting as described above, exceeds the goodwill assigned to the reporting unit, there is no impairment. If the goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss recognized cannot exceed the amount of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted under U.S. GAAP.

HD Supply performed the annual goodwill impairment testing during the third quarter of fiscal 2011 for the seven reporting units with goodwill balances (goodwill balances at two reporting units were zero prior to the annual testing). The Company determines the fair value of a reporting unit using a discounted cash flow (“DCF”) analysis and a market comparable method, with each method being equally weighted in the calculation.

Determining fair value requires the exercise of significant judgment, including judgment about appropriate discount rates, the amount and timing of expected future cash flows, as well as relevant comparable company earnings multiples for the market comparable approach. The cash flows employed in the DCF analyses are based on the Company’s most recent long-range forecast and, for years beyond the forecast, the Company’s estimates, which are based on estimated exit multiples ranging from six to seven times the final forecasted year earnings before interest, taxes, depreciation and amortization. The discount rates used in the DCF analyses are intended to reflect the risks inherent in the future cash flows of the respective reporting units and range from 13% to 17%. For

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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS HD SUPPLY, INC.

the market comparable approach, the Company evaluated comparable company public trading values, using earnings multiples and sales multiples that are used to value the reporting units.

There was no indication of impairment in any of the Company’s reporting units during either the fiscal 2011 or the fiscal 2010 annual testing and accordingly, the second step of the goodwill impairment analysis was not performed. At the time of our fiscal 2011 annual testing, the fair value of the reporting units exceeded their carrying value by the following percentages: 17% for Waterworks, 50% for Facilities Maintenance, 68% for White Cap, 32% for Utilities, 4% for Crown Bolt, 24% for Repair & Remodel, and 166% for Electrical.

There was an indication of impairment in four of the Company’s reporting units during the third quarter fiscal 2009 impairment test and accordingly, the second step was performed for these reporting units. Based on the results of the second step, HD Supply recorded a $224 million non-cash, pre-tax, goodwill impairment charge in the third quarter of fiscal 2009 on four reporting units.

Total non-cash, pre-tax, goodwill impairment charges for fiscal 2009 were as follows (amounts in millions):

	Fiscal Year Ended January 31, 2010
	Beginning     Goodwill		Impairment     Charge		Remaining     Goodwill
Waterworks		$ 1,174		$  (134)		$  1,040
Utilities		250		(54)		196
Repair & Remodel		125		(30)		95
Other		1,818		–		1,818
Total continuing operations*		$  3,367		(219)		$  3,149
IPVF		6		(6)		–
Total*		$  3,373		$  (224)		$  3,149

    *Does not sum due to rounding

The primary cause of impairment of the goodwill in the reporting units for fiscal 2009 was a reduction in expected future cash flows for these businesses as a result of the decline in the residential and commercial construction markets.

The following table presents the changes in goodwill for the fiscal years ended January 29, 2012, January 30, 2011, and January 31, 2010 (amounts in millions).

	Fiscal 2011		Fiscal 2010		Fiscal 2009
Beginning Balance		$3,150		$3,149		$3,368
Acquisition		12		–		–
Realization of tax deductible goodwill from a prior acquisition		(11)		–		–
Impairment		–		–		(224)
Translation adjustment		–		1		5
Ending Balance		$3,151		$3,150		$3,149

During fiscal 2011, the Company recorded $12 million of goodwill as a result of the RAMSCO business acquisition.

The Company’s discounted cash flow model is based on HD Supply’s expectation of future market conditions for each of the reporting units, as well as discount rates that would be used by market participants in an arms-length transaction. Future events could cause the Company to conclude that market conditions have declined or discount rates have increased to the extent that the Company’s goodwill could be further impaired. It is not possible at this time to determine if any such future impairment charge would result.

Intangible Assets

HD Supply’s intangible assets consisted of the following (amounts in millions):

	January 29, 2012						January 30, 2011
	Gross Intangible		Accumulated Amortization		Net Intangible		Gross Intangible		Accumulated Amortization		Net Intangible
Customer relationships		$1,532		$(983)		$549		$1,548		$(774)		$774
Strategic purchase agreement		166		(99)		67		166		(77)		89
Trade names		152		(34)		118		151		(26)		125
Other		1		–		1		17		(13)		4
Total		$1,851		$(1,116)		$735		$1,882		$(890)		$992

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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS HD SUPPLY, INC.

During fiscal 2011, the Company recorded $4 million of intangible assets, primarily customer relationship intangibles, as a result of the RAMSCO business acquisition. These intangibles will be amortized over three to seven years.

During fiscal 2009, the Company recorded $2 million of customer relationship intangibles as a result of business acquisitions, primarily the transaction to purchase substantially all of the assets of ORCO Construction Supply out of bankruptcy. These intangibles will be amortized over five to seven years.

On the date of the Transactions, Home Depot entered into a strategic purchase agreement with Crown Bolt. This agreement provides a guaranteed revenue stream to Crown Bolt through January 31, 2015 by specifying minimum annual purchase requirements from Home Depot.

Amortization expense for continuing operations related to intangible assets was $244 million, $244 million, and $243 million in fiscal 2011, fiscal 2010, and fiscal 2009, respectively. Estimated future amortization expense for continuing operations for intangible assets recorded as of January 29, 2012 is $239 million, $143 million, $113 million, $27 million and $26 million for fiscal years 2012 through 2016, respectively.

NOTE 6 – DEBT

Long-term debt as of January 29, 2012 and January 30, 2011 consisted of the following (dollars in millions):

	January 29, 2012				January 30, 2011
	Outstanding Principal		Interest Rate %		Outstanding Principal		Interest Rate %
Term Loan due August 30, 2012		$      73		1.53		$      74		1.56
Term Loan due April 1, 2014		855		3.03		864		3.06
ABL Term Loan due April 1, 2014		214		3.56		214		3.53
12.0% Senior Notes due September 1, 2014		2,500		12.00		2,500		12.00
13.5% Senior Subordinated Notes due September 1, 2015		1,820		13.50		1,597		13.50
Total long-term debt		5,462				5,249
Less current installments		(82)				(10)
Long-term debt, excluding current installments		$  5,380				$  5,239

Senior Secured Credit Facility

The Company maintains a senior secured credit facility (the “Senior Secured Credit Facility”) comprised of a $928 million term loan (the “Term Loan”) and a $200 million revolving credit facility (the “Revolving Credit Facility”). On March 19, 2010, the Company entered into Amendment No. 3 (the “Cash Flow Amendment”) to its Senior Secured Credit Facility, dated as of August 30, 2007, by and among the Company, Merrill Lynch Capital Corporation, as administrative agent and collateral agent, and the other lenders and financial institutions from time to time party thereto. The Cash Flow Amendment extended the maturity date from August 30, 2012 to April 1, 2014 of approximately $874 million in principal amount of outstanding Term Loan under the Senior Secured Credit Facility. Home Depot, which guarantees payment of the Term Loan under the Senior Secured Credit Facility (“THD Guarantee”), consented to the Cash Flow Amendment. Concurrently, Home Depot and the Company entered into an agreement pursuant to which Home Depot consented to any later amendment to the Senior Secured Credit Facility, as amended, (similar in form and substance to the Cash Flow Amendment) that would extend the maturity of the remaining approximately $104 million of outstanding Term Loan to a date that is not later than the maturity date in effect from time to time under the Cash Flow Amendment. In addition, the Company entered into a letter agreement with Home Depot, pursuant to which the Company agreed that, while the THD Guarantee is outstanding, the Company would not voluntarily repurchase any 12.0% Senior Notes or 13.5% Senior Subordinated Notes, directly or indirectly, without Home Depot’s prior written consent, subject to certain exceptions, including debt repurchases with equity or permitted refinancings. The Company also agreed to prepay $30 million in aggregate principal amount of non-extending Term Loan under the Senior Secured Credit Facility. This prepayment was completed during the first quarter of fiscal 2010. The maturity date of the extended outstanding Term Loan may be further extended to a date not later than June 1, 2014, without further consent by the lenders, if Home Depot provides a notice electing to extend its guarantee of the Term Loan to such later date. However, Home Depot is under no obligation to provide such notice or make such election to further extend its guarantee, and the Company cannot provide any assurance that Home Depot will provide such notice

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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS HD SUPPLY, INC.

or make such election or on what terms it might do so. The remaining outstanding non-extended Term Loan will mature on the original maturity date of such loan, i.e. August 30, 2012. The Senior Secured Credit Facility can be repaid at any time without penalty or premium.

The Cash Flow Amendment increased the borrowing margins applicable to the extended portion of the Term Loan by 150 basis points, such that the extended Term Loan bears interest at Prime plus 1.75% or LIBOR plus 2.75% at the Company’s election. The remaining non-extended Term Loan continues to bear interest at Prime plus 0.25% or LIBOR plus 1.25% at the Company’s election. Interest on the Term Loan is due at the end of each calendar quarter with respect to Prime rate draws or at the maturity of each LIBOR draw (unless said draw is for a six-, nine-, or twelve-month period, then interest shall be paid quarterly). During fiscal 2011, the Term Loan due August 30, 2012 had an average outstanding balance of $73 million at a weighted average interest rate of 1.56% and the Term Loan due April 1, 2014 had an average outstanding balance of $860 million at a weighted average interest rate of 3.06%. During fiscal 2010, the Term Loan due August 30, 2012 had an average outstanding balance of $149 million at a weighted average interest rate of 1.54% and the Term Loan due April 1, 2014 had an average outstanding balance of $869 million at a weighted average interest rate of 3.11%.

The extended and non-extended portions of the Terms Loan outstanding under the Senior Secured Credit Facility, as amended, amortize in nominal quarterly installments equal to 0.25% of the original aggregate principal amount of the Term Loan. Additionally, beginning in fiscal 2009, the Company is required to pay down the Term Loan in an amount equal to 50% of Excess Cash Flow from the preceding fiscal year, as defined in the Term Loan agreement, such percentage is reduced to 0% upon the attainment of certain leverage ratio targets. Under the Excess Cash Flow provisions of the Senior Secured Credit Facility, the Company is not required to repay a portion of the Term Loan during fiscal 2012 and was not required to repay a portion of the Term Loan during fiscal 2011, fiscal 2010 or fiscal 2009.

The THD Guarantee was valued at $106 million at the issuance of the Senior Secured Credit Facility in August 2007 and was being amortized to interest expense over the original five-year life of the Term Loan on a straight-line basis which approximates the effective interest method. As a result of the extension of the THD Guarantee on the extended Term Loan, the amortization period of a pro-rata portion of the unamortized THD Guarantee has also been extended, on a straight-line basis, until April 1, 2014. During fiscal 2011, fiscal 2010, and fiscal 2009 the Company recorded amortization of the guarantee of $13 million, $14 million, and $21 million, respectively, which is reflected in Interest Expense in the Consolidated Statements of Operations. In connection with the $30 million prepayment of the non-extending portion of the Term Loan under the Senior Secured Credit Facility, the Company wrote-off the unamortized pro-rata portion of the THD Guarantee and the unamortized pro-rata portion of deferred debt costs, resulting in a pre-tax charge of $2 million in fiscal 2010. This charge is reflected in Other (income) expense, net in the Consolidated Statements of Operations.

The Revolving Credit Facility is due August 30, 2013 and bears interest at Prime plus 3.0% or LIBOR plus 4.0% at the Company’s election. The Revolving Credit Facility also has a 0.5% unused commitment fee and a Letter of Credit fee of 4.0% per annum. There were no amounts outstanding under the Revolving Credit Facility as of January 29, 2012 or January 30, 2011. During fiscal 2011, the Revolving Credit Facility had an average outstanding balance of zero. During fiscal 2010, the Revolving Credit Facility had an average outstanding balance of $125 million at a weighted average interest rate of 4.28%. As of January 29, 2012 and January 30, 2011, there were no outstanding Letters of Credit under the Revolving Credit Facility. Interest on the Revolving Credit Facility is due at the end of each calendar quarter with respect to Prime rate draws or at the maturity of each LIBOR draw (unless said draw is for a six-, nine-, or twelve-month period, then interest shall be paid quarterly).

In addition to Home Depot’s guarantee of the Term Loan payments, the Senior Secured Credit Facility is further collateralized by all of the capital stock of HD Supply, Inc. and its subsidiary guarantors and by 65% of the capital stock of its foreign subsidiaries as well as by other tangible and intangible assets owned by the Company subject to the priority of liens described in the guarantee and collateral agreement dated as of August 30, 2007. The Senior Secured Credit Facility contains various restrictive covenants including limitations on additional indebtedness and dividend payments and stipulations regarding the use of proceeds from asset dispositions. The Company is in compliance with all such covenants. The Senior Secured Credit Facility is subject to an acceleration clause under an Event of Default, as defined in the Senior Secured Credit Facility agreement. Management believes the likelihood of such acceleration to be remote.

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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS HD SUPPLY, INC.

Asset Based Lending Credit Agreement

The Company maintains a $2.1 billion asset based lending credit agreement (the “ABL Credit Facility”) subject to borrowing base limitations. On March 19, 2010, the Company entered into the Limited Consent and Amendment No. 3 (the “ABL Amendment”) to its ABL Credit Facility, dated as of August 30, 2007, by and among the Company, certain subsidiaries of the Company, GE Business Financial Services Inc. (formerly known as Merrill Lynch Business Financial Services Inc.), as administrative agent and collateral agent, GE Canada Finance Holding Company, as Canadian administrative agent and Canadian collateral agent, and the several lenders and financial institutions from time to time parties thereto. Pursuant to the ABL Amendment, the Company (i) converted approximately $214 million of commitments under the ABL Credit Facility into a term loan (the “ABL Term Loan”), (ii) extended the maturity date of approximately $1,537 million of the commitments under the ABL Credit Facility (the “ABL Revolving Credit Facility”) from August 30, 2012 to the later of April 1, 2014 and the maturity date of the extended Term Loan under the Cash Flow Amendment, and (iii) reduced the total commitments under the ABL Credit Facility by approximately $45 million. The ABL Term Loan does not amortize and the entire principal amount thereof is due and payable on the later of April 1, 2014 and the maturity date of the extended Term Loan under the Senior Secured Credit Facility, as amended. The remaining approximately $304 million of commitments under the ABL Credit Facility mature on the original maturity date of such commitments, i.e. August 30, 2012. The ABL Credit Facility can be repaid at any time without penalty or premium.

The ABL Amendment provided for a borrowing rate of Prime plus 2.25% or LIBOR plus 3.25% per annum applicable to the ABL Term Loan and increased the borrowing margins applicable to the extended portion of the ABL Revolving Credit Facility by 175 basis points and the commitment fee applicable to such portion by 50 basis points, such that the extended ABL Revolving Credit Facility bears interest at Prime plus 2.25% or LIBOR plus 3.25% per annum at the Company’s election and contains an unused commitment fee of 0.75%. The non-extended ABL Revolving Credit Facility continues to bear interest at Prime plus 0.5% or LIBOR plus 1.5% per annum at the Company’s election and contain an unused commitment fee of 0.25%.

As of January 29, 2012, there were no amounts outstanding under the ABL Revolving Credit Facility due August 30, 2012 or the ABL Revolving Credit Facility due April 1, 2014. During fiscal 2011, the ABL Term Loan had an average outstanding balance of $214 million at a weighted average interest rate of 3.50%, the ABL Revolving Credit Facility due August 30, 2012 had an average outstanding balance of $12 million at a weighted average interest rate of 1.76%, and the ABL Revolving Credit Facility due April 1, 2014 had an average outstanding balance of $77 million at a weighted average interest rate of 3.51%. During fiscal 2010, the ABL Term Loan had an average outstanding balance of $214 million at a weighted average interest rate of 3.60%, the ABL Revolving Credit Facility due August 30, 2012 had an average outstanding balance of $59 million at a weighted average interest rate of 2.01%, and the ABL Revolving Credit Facility due April 1, 2014 had an average outstanding balance of $57 million at a weighted average interest rate of 3.58%.

As of January 29, 2012, the Company had available borrowings under the ABL Credit Facility of $993 million, after giving effect to the borrowing base limitations and letters of credit issued and including $57 million of borrowings available on qualifying cash balances. The Company can use up to $400 million of its available borrowing under the ABL Credit Facility for Letters of Credit which are charged a fee of 1.5% per annum for amounts borrowed under the non-extended portion and 3.25% per annum for amounts borrowed under the extended portion. As of January 29, 2012, there were approximately $9 million and $57 million, respectively, of Letters of Credit outstanding under the ABL Credit Facility due August 30, 2012 and April 1, 2014, respectively. As of January 30, 2011, there were approximately $11 million and $60 million, respectively, of Letters of Credit outstanding under the ABL Credit Facility due August 30, 2012 and April 1, 2014, respectively.

The ABL Credit Facility contains various restrictive covenants including a limitation on the amount of dividends to be paid. In addition, if the Company’s availability under the ABL Credit Facility falls below $210 million (a “Liquidity Event”), the Company will be required to maintain a Fixed Charge Coverage Ratio of at least 1.0:1.0, as defined in the ABL Credit Facility. The Company is in compliance with all such covenants. The ABL Credit Facility is collateralized by all of the capital stock of HD Supply, Inc. and its subsidiary guarantors and by 65% of the capital stock of its foreign subsidiaries as well as by other tangible and intangible assets owned by the Company subject to the priority of liens described in the guarantee and collateral agreement dated as of August 30, 2007. The ABL Credit Facility is subject to an acceleration clause in a Liquidity Event or an Event of

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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS HD SUPPLY, INC.

Default, as defined in the ABL Credit Facility agreement. Under such acceleration, the administrative agent can direct payments from the Company’s depository accounts to directly pay down the outstanding balance under the ABL Credit Facility. Management believes the likelihood of such acceleration to be remote.

In connection with the Cash Flow Amendment and ABL Amendment, the Company incurred financing fees of approximately $34 million, of which approximately $31 million were deferred and is being amortized into interest expense over the term of the amended facilities in accordance with U.S. GAAP for debt modifications (ASC 470-50, Debt-Modifications and Extinguishments). The non-deferred financing fees are reported in Other (income) expense, net in the Consolidated Statements of Operations.

Lehman Brothers and Woodlands Commercial Bank

Lehman Brothers Special Financing Inc. and Lehman Commercial Paper, Inc. (together “Lehman Brothers”) is committed to fund up to $95 million of the non-extended portion of the Company’s $2.1 billion ABL Credit Facility, maturing August 30, 2012, and Woodlands Commercial Bank (“Woodlands,” f/k/a Lehman Commercial Bank, an affiliate of Lehman Brothers) is committed to fund $100 million of the Company’s $300 million original availability under the Revolving Credit Facility.

On September 15, 2008, Lehman Brothers filed a petition under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York (“Lehman’s bankruptcy”). Subsequent to Lehman’s bankruptcy, the Company drew down on the ABL Credit Facility and Lehman Brothers failed to fund their portion of the ABL Credit Facility commitment. Lehman is currently in the process of emerging from bankruptcy and is expected to cure their default on the ABL Credit Facility commitment. As of January 29, 2012, there were no outstanding borrowings under the ABL Credit Facility from Lehman Brothers.

On April 21, 2011, the Company drew down the entire $300 million Revolving Credit Facility and Woodlands failed to fund their $100 million Revolving Credit Facility commitment. The following day, the Company repaid the entire Revolving Credit Facility balance. As a result of Woodlands’ default, the Company no longer pays the 0.5% unused commitment fee on Woodlands’ $100 million Revolving Credit Facility commitment and the Revolving Credit Facility is effectively reduced to $200 million.

12.0% Senior Notes

On August 30, 2007, the Company issued $2.5 billion of Senior Notes bearing interest at a rate of 12.0% (the “12.0% Senior Notes”). Interest payments are due each March 1^st and September 1^st through maturity. The 12.0% Senior Notes mature on September 1, 2014 and can be redeemed by the Company as follows:

Redemption Period	Redemption Price
September 1, 2011 – August 31, 2012	106% plus accrued interest
September 1, 2012 – August 31, 2013	103% plus accrued interest
September 1, 2013 – Thereafter	100% plus accrued interest

The 12.0% Senior Notes contain various restrictive covenants including limitations on additional indebtedness and dividend payments and stipulations regarding the use of proceeds from asset dispositions. The Company is in compliance with all such covenants.

13.5% Senior Subordinated Notes

On August 30, 2007, the Company issued $1.3 billion of Senior Subordinated PIK Notes bearing interest at a rate of 13.5% (the “13.5% Senior Subordinated Notes”). Interest payments are due each March 1^st and September 1^st through maturity except that the first eight payment periods through September 2011 were payments in kind (“PIK”) and therefore increased the balance of the outstanding indebtedness rather than paid in cash. During fiscal 2009, the Company repurchased $252 million principal amount, plus accrued interest of $15 million, of the 13.5% Senior Subordinated Notes for $62 million. As a result, we recognized a $200 million pre-tax gain for the extinguishment of this portion of the 13.5% Senior Subordinated Notes, net of the write-off of unamortized deferred debt issuance costs. As a result of PIK interest capitalizations and the extinguishment of a portion of the principal, as of January 29, 2012, the outstanding principal balance of the 13.5% Senior Subordinated Notes was $1.8 billion.

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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS HD SUPPLY, INC.

The 13.5% Senior Subordinated Notes mature on September 1, 2015 and can be redeemed by the Company as follows:

Redemption Period	Redemption Price
September 1, 2011 – August 31, 2012	106.75% plus accrued interest
September 1, 2012 – August 31, 2013	103.375% plus accrued interest
September 1, 2013 – Thereafter	100% plus accrued interest

The 13.5% Senior Subordinated Notes contain various restrictive covenants including limitations on additional indebtedness and dividend payments and stipulations regarding the use of proceeds from asset dispositions. The Company is in compliance with all such covenants.

The 12.0% Senior Notes and the 13.5% Senior Subordinated Notes are both fully and unconditionally guaranteed by the Company’s direct or indirect wholly-owned domestic subsidiaries. These guarantees can automatically be released under customary circumstances, including the sale of the assets of the subsidiary providing the guarantee. See the section titled “Description of Notes” of the Company’s Registration Statement on Form S-4 filed with the SEC on July 27, 2009 for a detailed description of the Company’s outstanding notes, including a discussion of each of the circumstances under which subsidiary guarantees may be released.

Debt Maturities

Maturities of long-term debt outstanding, in principal amounts, at January 29, 2012 are summarized below (amounts in millions):

Fiscal Year	Maturities
2012	$	82
2013		10
2014		3,550
2015		1,820
Total	$	5,462

NOTE 7 — DERIVATIVE INSTRUMENTS

The Company maintained interest rate swap agreements to exchange fixed and variable rate interest payment obligations without the exchange of the underlying principal amounts. At execution, the swaps were designated as hedging the exposure to variable cash flows of a forecasted transaction, whereby the Company pays fixed interest and receives variable interest, effectively converting $400 million of floating-rate debt to fixed rate debt. Swaps with a combined $200 million notional value matured on January 31, 2010. The remaining swaps with a combined $200 million notional value matured on January 31, 2011, the first day of fiscal 2011. As of January 30, 2011, the fair value of the swaps was a liability of $1 million and was included in Other current liabilities in the Consolidated Balance Sheet.

The following tables summarize the weighted average rates and notional amounts of these agreements for the periods presented (dollars in millions).

	Fiscal Year Ended
	January 29,   2012		January 30,   2011		January 31,   2010
Weighted average notional value outstanding		–		$200		$400
Weighted average fixed rate paid		–		3.9%		3.8%
Weighted average floating rate received		–		0.3%		0.3%
	As of
	January 29,   2012		January 30,   2011
Weighted average notional value outstanding		–		$200
Weighted average fixed rate paid		–		3.9%
Weighted average floating rate received		–		0.3%

A subsidiary of Lehman Brothers Holdings, Inc. (“Lehman”) is the original counterparty to these interest rate swap agreements. The expected and ultimate filing of bankruptcy by Lehman caused HD Supply to conclude on September 12, 2008 (the “date of de-designation”) that the ability of the counterparty to meet its obligations under

20

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS HD SUPPLY, INC.

the swap agreements was remote. Therefore, on September 12, 2008, HD Supply removed the designation of the swaps as cash flow hedges, discontinued hedge accounting and considered these swaps economic hedges until their expiration. On June 16, 2009, Lehman assigned the counterparty position on the two interest rate swaps that matured on January 31, 2011 to Wells Fargo Foothill, LLC.

On the date of de-designation, the aggregate fair value of the swaps was a liability of $6 million. In accordance with the derivatives and hedging principles of U.S. GAAP (ASC 815, Derivatives and Hedging), the net loss was retained in Accumulated other comprehensive income (loss) (“OCI”) and was reclassified into earnings in the same periods in which the original hedged forecasted transactions affected earnings. As of January 30, 2011, all of the unrealized losses have been reclassified from OCI into Interest expense. Changes in the fair value of the swaps following the date of de-designation were recognized in earnings.

The following table summarizes the location and amounts of the gains or losses related to derivatives included in HD Supply’s consolidated financial statements for the periods presented (amounts in millions):

	Location of gain (loss) in     statement of operations	Fiscal     2011		Fiscal     2010		Fiscal     2009
Changes in fair value	Other income (expense), net		$  1		$  (6)		$  11
Amortization of net loss remaining in OCI at de-designation	Interest (expense)		–		(2)		(3)
Settlements	Interest (expense)		–		(8)		(14)

NOTE 8 — FAIR VALUE MEASUREMENTS

The fair value measurements and disclosure principles of U.S. GAAP (ASC 820, Fair Value Measurements and Disclosures) define fair value, establish a framework for measuring fair value and provide disclosure requirements about fair value measurements. These principles define a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1  – Quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2  – Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly;

Level 3  – Unobservable inputs in which little or no market activity exists.

The Company’s financial assets and liabilities measured at fair value on a recurring basis as of January 29, 2012 and January 30, 2011 were as follows (amounts in millions):

	Quoted Prices in     Active Markets for     Identical Assets (Level 1)		Significant Other     Observable Inputs (Level 2)		Significant     Unobservable     Inputs (Level 3)		Total
At January 29, 2012:
Interest Rate Swap Contracts		$    –		$     –		$    –		$     –
At January 30, 2011:
Interest Rate Swap Contracts		$    –		$    (1)		$    –		$    (1)

The Company’s financial instruments that are not reflected at fair value on the balance sheet were as follows as of January 29, 2012 and January 30, 2011 (amounts in millions):

	As of January 29, 2012				As of January 30, 2011
	Recorded     Amount(1)		Estimated     Fair Value		Recorded     Amount(1)		Estimated     Fair Value
Term Loan due August 30, 2012		$       73		$       73		$       74		$       74
Term Loan due April 1, 2014		855		855		864		871
ABL Term Loan due April 1, 2014		214		207		214		207
12.0% Senior Notes due September 1, 2014		2,500		2,388		2,500		2,338
13.5% Senior Subordinated Notes due September 1, 2015		1,820		1,547		1,597		1,198
Total		$  5,462		$  5,070		$  5,249		$  4,688

(1) These amounts do not include accrued interest; accrued interest is classified as Other current liabilities in the accompanying Consolidated Balance Sheets.

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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS HD SUPPLY, INC.

The Company utilized Level 2 inputs, as defined in the fair value hierarchy, to measure the fair value of the long-term debt.

The Term Loan is guaranteed by Home Depot. Based on a review of the fair value of debt issued by companies with similar credit ratings as Home Depot, management estimates that as of January 29, 2012, the fair value of the Term Loan due August 30, 2012 was approximately 99-101% of the principal value, or $73 million, and the Term Loan due April 1, 2014 is approximately 99-101% of principal, or $855 million. Management estimated that as of January 30, 2011, the fair value of the Term Loan due August 30, 2012 was approximately 99-101% of the principal value, or $74 million, and the Term Loan due April 1, 2014 was approximately 100-102% of principal, or $871 million.

The Company’s fair value estimates for the ABL Credit Facility, 12.0% Senior Notes, and 13.5% Senior Subordinated Notes were based on recent similar credit facilities initiated by companies with like credit quality in similar industries, quoted prices for similar instruments, and inquiries with certain investment communities. Based on this data, management estimates that as of January 29, 2012, the fair value of the ABL Term Loan due April 1, 2014 was approximately 94-100% of the principal value, or $207 million, the fair value of the 12.0% Senior Notes was approximately 93-98% of the principal value, or $2,388 million, and the fair value of the 13.5% Senior Subordinated Notes was approximately 80-90% of principal value, or $1,547 million. Management estimated that as of January 30, 2011, the fair value of the ABL Term Loan due April 1, 2014 was approximately 94-100% of the principal value, or $207 million, the fair value of the 12.0% Senior Notes was approximately 87-100% of the principal value, or $2,338 million, and the fair value of the 13.5% Senior Subordinated Notes was approximately 65-85% of principal value, or $1,198 million.

NOTE 9 — INCOME TAXES

The components of Income (Loss) from Continuing Operations before Provision (Benefit) for Income Taxes are as follows (amounts in millions):

	Fiscal Year Ended
	January 29, 2012		January 30, 2011		January 31, 2010
United States		$  (503)		$  (606)		$  (678)
Foreign		19		21		–
Total		$  (484)		$  (585)		$  (678)

The Provision (Benefit) for Income Taxes consisted of the following (amounts in millions):

	Fiscal Year Ended
	January 29, 2012		January 30, 2011		January 31, 2010
Current:
Federal	$	–	$	–	$	–
State		3		2		4
Foreign		–		6		–
		3		8		4
Deferred:
Federal		64		12		(182)
State		6		4		(20)
Foreign		(5)		4		–
Foreign realization of tax deductible goodwill from prior acquisitions		11		–		–
		76		20		(202)
Total	$	79	$	28	$	(198)

The Company’s combined federal, state and foreign effective tax rate for continuing operations for fiscal 2011, fiscal 2010, and fiscal 2009 was approximately (16.4%), (4.8%), and 29.2%, respectively.

The Company’s effective tax rate will vary based on a variety of factors, including overall profitability, the geographical mix of income before taxes and the related tax rates in the jurisdictions where it operates, restructuring and other one-time charges, as well as discrete events, such as settlements of future audits. The Company’s fiscal 2011 and fiscal 2010 effective tax rates were significantly impacted by the recording of a valuation allowance on its net U.S. deferred tax assets. The fiscal 2011 valuation allowance was directly impacted

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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS HD SUPPLY, INC.

by the increasing of the deferred tax liability for U.S. goodwill amortization for tax purposes. The deferred tax liability related to the Company’s U.S. tax deductible goodwill must be considered as a liability related to an asset with an indefinite life. Therefore, the deferred tax liability does not amortize and is not available as a source of taxable income to support the realization of deferred tax assets created by other deductible temporary timing difference. The Company’s fiscal 2009 effective tax rate was significantly impacted by financial goodwill impairments.

The reconciliation of the provision (benefit) for income taxes from continuing operations at the federal statutory rate of 35% to the actual tax provision (benefit) for fiscal 2011, fiscal 2010, and fiscal 2009 is as follows (amounts in millions):

	Fiscal Year Ended
	January 29, 2012		January 30, 2011		January 31, 2010
Income taxes at federal statutory rate		$  (169)		$  (205)		$  (237)
State income taxes, net of federal income tax benefit		(24)		(15)		(25)
Non-deductible goodwill impairment		–		–		41
Non-deductible interest		15		13		12
Valuation allowance		259		228		7
Adjustments to tax reserves		12		4		3
Other, net		(14)		3		1
Total provision (benefit)		$     79		$     28		$  (198)

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of January 29, 2012 and January 30, 2011 were as follows (amounts in millions):

	January 29, 2012		January 30, 2011
Current:
Deferred Tax Assets:
Interest		$     33		$      –
Allowance for doubtful accounts		12		14
Inventory		49		60
Accrued compensation		3		2
Accrued self-insurance liabilities		5		21
Restructuring liabilities		7		31
Other accrued liabilities		27		26
Valuation allowance		(76)		(51)
Current deferred tax assets		60		103
Deferred Tax Liabilities:
Prepaid expense		$      (1)		$     (1)
Current deferred tax liabilities		(1)		(1)
Noncurrent:
Deferred Tax Assets:
Interest		$    212		$  180
Accrued compensation		27		18
Accrued self-insurance liabilities		15		–
Other accrued liabilities		8		8
Deferred revenue		8		8
Restructuring liabilities		32		–
Net operating loss		374		291
Net capital loss carryforward		10		–
Fixed assets		16		22
Other		21		16
Valuation allowance		(415)		(188)
Noncurrent deferred tax assets		308		355
Deferred Tax Liabilities:
Software costs		$     (23)		$    (23)
Intangible assets		(316)		(357)
Income from discharge of indebtedness		(80)		(76)
Noncurrent deferred tax liabilities		(419)		(456)
Deferred tax assets (liabilities), net		$     (52)		$      1

23

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS HD SUPPLY, INC.

In fiscal 2011, the Company recorded a valuation allowance on its total U.S. operations of $252 million of which $259 million related to continuing operations which was reduced by $7 million for discontinued operations. In fiscal 2010, the Company recorded a valuation allowance on its total U.S. operations of $230 million of which $228 million related to continuing operations and $2 million related to discontinued operations. In fiscal 2009, the Company recorded a valuation allowance on its total U.S. operations of $7 million which was comprised entirely of continuing operations. The Company records a valuation allowance when it is “more likely than not” that some portion or all of the deferred income tax assets will not be realized. In reaching this determination, the Company considers the future reversals of taxable temporary differences, future taxable income, exclusive of taxable temporary differences and carryforwards, taxable income in prior carry-back years and tax planning strategies.

During the first quarter of fiscal 2010, the Company designated the undistributed earnings of certain aspects of its foreign operations as not permanently reinvested. In fiscal 2011, the Company did not repatriate cash from its foreign operations to the U.S. If the company had repatriated cash to the U.S., no additional income tax expense would have been generated. In fiscal 2010, the Company repatriated $33 million of cash which resulted in $2 million of income tax expense in the U.S. In general, to the extent the Company’s financial reporting book basis over tax basis of a foreign subsidiary exceeds the cash available for repatriation, deferred taxes have not been provided, as they are essentially permanent in duration. If these amounts were not considered reinvested, it is estimated that additional deferred taxes of zero would have been provided.

As of January 29, 2012, the Company has tax-effected U.S. federal net operating loss carryforwards of $245 million which expire beginning in fiscal 2029. The Company also has $102 million of net state net operating loss carryfowards which expire in various years between fiscal 2012 and fiscal 2030. During fiscal 2011, the Company generated a $10 million capital loss associated with the Company’s exit from the Plumbing business, which can be carried forward to offset future capital gain income. The availability to use the capital loss expires in fiscal 2016. The future utilization of the net operating losses and the capital loss could also be impacted by Sections 382 and 383 of the Internal Revenue Code of 1986 should an “ownership change” occur. Section 382 and 383 contain rules that may limit the ability of a company that undergoes an ��ownership change”, which generally is any change in ownership of more than 50% of its common stock over a three-year period, to utilize its net operating loss carryfowards to offset taxable income in periods after the ownership change.

There was no net income tax benefit or expense included in discontinued operations in fiscal 2011 or fiscal 2010. The amount of income tax benefit included in discontinued operations for fiscal 2009 was $19 million.

Federal, state and foreign income taxes receivable total $4 million and $3 million as of January 29, 2012 and January 30, 2011, respectively, and are included in Other current assets in the Consolidated Balance Sheets.

Accounting for uncertain tax positions

The Company follows the U.S. GAAP guidance for uncertain tax positions within ASC 740, Income Taxes. ASC 740 requires application of a “more likely than not” threshold to the recognition and de-recognition of tax positions. It further requires that a change in judgment related to prior years’ tax positions be recognized in the quarter of such change. A reconciliation of the beginning and ending amount of unrecognized tax benefits for continuing operations for fiscal 2011, fiscal 2010, and fiscal 2009 is as follows (amounts in millions):

	Fiscal Year Ended
	January 29,   2012		January 30,   2011		January 31,   2010
Unrecognized Tax Benefits beginning of period	$	192	$	190	$	206
Gross increases for tax positions in current period		–		1		1
Gross increases for tax positions in prior period		6		4		–
Gross decreases for tax positions in prior period		–		–		(16)
Settlements		(1)		(3)		–
Lapse of statutes		(1)		–		(1)
Unrecognized Tax Benefits end of period	$	196	$	192	$	190

There are $196 million, $192 million, and $140 million of unrecognized tax benefits included in the balance at January 29, 2012, January 30, 2011, and January 31, 2010, respectively, whose resolution could affect the annual effective income tax rate.

24

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS HD SUPPLY, INC.

The Company accrued $5 million, $2 million, and $3 million of net interest and penalties related to unrecognized tax benefits for fiscal 2011, fiscal 2010, and fiscal 2009, respectively. The Company’s ending net accrual for interest and penalties related to unrecognized tax benefits at January 29, 2012, January 30, 2011, and January 31, 2010 was $19 million, $14 million, and $12 million, respectively. The Company’s accounting policy is to classify interest and penalties as components of income tax expense. Accrued interest and penalties from unrecognized tax benefits are included as a component of Other liabilities on the Consolidated Balance Sheet.

The Company is subject to audits and examinations of its tax returns by tax authorities in various jurisdictions, including the Internal Revenue Service. Management regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of provisions for income taxes. Certain of the Company’s tax years 2006 and forward remain open for audit by the IRS and various state governments. The Company does not anticipate any significant changes in its unrecognized tax benefits over the next twelve months.

NOTE 10 – STOCK-BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS

Stock-Based Compensation Plan

Effective December 4, 2007, HDS Investment Holding, Inc. (“Holding”) established a Stock Incentive Plan (the “HDS Plan”) for associates of HD Supply, a wholly-owned subsidiary. The HDS Plan provides for the award of non-qualified stock options and deferred share units of the common stock of Holding. Holding will issue new shares of common stock to satisfy options exercised.

Under the terms of the HDS Plan, non-qualified stock options are to carry exercise prices at, or above, the fair market value of Holding’s stock on the date of the grant. Since Holding common stock is not publicly traded, the fair market value of the stock is determined by the Board of Directors of Holding based on such factors as it deems appropriate, including but not limited to the earnings and other financial and operating information of the Company in recent periods, the potential value of the Company as a whole, the future prospects of the Company and the industries in which it competes, the history and management of the Company, the general condition of the securities markets, the fair market value of securities of companies engaged in businesses similar to those of the Company, and any recent valuation of the common stock of Holding that shall have been performed by an independent valuation firm (although the Board of Directors of Holding is not obligated to obtain such a valuation). The non-qualified stock options generally vest at the rate of 20% per year commencing on the first anniversary date of the grant or 100% on the third anniversary of the grant and expire on the tenth anniversary date of the grant.

On January 15, 2010, the Company initiated a one-time stock option exchange program (“Option Exchange Program”). Under the Option Exchange Program, all participants of the HDS Plan were offered the opportunity to exchange their outstanding options (the “Eligible Options”) to purchase shares of Holding’s common stock (the “Common Stock”) granted under the HDS Plan for a lesser number of new options (as determined in accordance with the exchange ratios below) under the HDS Plan.

The Option Exchange Program covered all options that were outstanding under the HDS Plan, including vested and unvested options, at the time of the offer. Eligible Options that had an exercise price greater than $10.00 per share were offered for exchange for a lesser number of options with a new exercise price equal to $4.15 per share (the “Repriced Options”). For every three Eligible Options with an exercise price greater than $10.00 per share, an eligible employee was offered two new Repriced Options. Options that had an exercise price equal to $10.00 per share were offered for exchange for an equal number of options with an exercise price equal to $10.00 per share (the “New $10.00 Options”, and together with the Repriced Options, the “New Options”).

Regardless of the vesting status of the Eligible Options, the New Options have a five-year vesting period, with 20% of the New Options vesting on each anniversary of the date of exchange and an expiration date that is ten years from the date of exchange. All of the New Options are subject to the terms and conditions of the HDS Plan and the eligible employee’s new stock option agreement.

The offering period for the Option Exchange Program commenced on January 15, 2010 and expired on February 2, 2010. Participation in the Option Exchange Program was voluntary. However, once an eligible employee elected to participate, all of his or her Eligible Options were exchanged. Once the offer to exchange expired, all Eligible Options that were surrendered for exchange were cancelled and the New Options were granted.

25

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS HD SUPPLY, INC.

On February 3, 2010, as a result of employee elections under the Option Exchange Program, the Company exchanged and issued the following options:

Number of Eligible Options Exchanged	20,484,001
Number of Repriced Options issued in the Option Exchange Program	6,828,025
Number of New $10.00 Options issued in the Option Exchange Program	10,242,002

As a result of the exchange, the Company will incur incremental stock-based compensation charges of approximately $1 million per year over the five years following the exchange date. The maximum number of shares of common stock that may be issued under the HDS Plan subsequent to the Option Exchange Program may not exceed 55.6 million, of which a maximum of 30.9 million shares may be issued in respect of options granted under the HDS Plan.

A summary of option activity under the HDS Plan is presented below (shares in thousands):

	Number of Shares		Weighted Average Option  Price
Outstanding at February 1, 2009		22,049		$ 13.13
Granted		1,582		13.13
Exercised		–		–
Canceled		(2,732)		13.13
Outstanding at January 31, 2010		20,899		$ 13.13
Granted1		21,495		7.66
Exercised		–		–
Canceled2		(23,927)		12.41
Outstanding at January 30, 2011		18,467		$  7.69
Granted		12,485		4.62
Exercised		–		–
Canceled		(1,415)		6.63
Outstanding at January 29, 2012		29,537		$  6.44

¹ – Includes shares granted in conjunction with the Option Exchange Program

² – Includes shares canceled in conjunction with the Option Exchange Program

As of January 29, 2012, there were approximately 29.5 million stock options outstanding with a weighted average remaining life of 8.6 years. As of January 29, 2012, there were approximately 3.6 million options exercisable with a weighted average exercise price of $7.78 and a weighted average remaining life of 8.1 years.

The estimated fair value of the options when granted is amortized to expense over the options’ vesting or required service period. The fair value for these options was estimated by management, after considering a third-party valuation specialist’s assessment, at the date of grant based on the expected life of the option and historical exercise experience, using a Black-Scholes option pricing model with the following weighted-average assumptions:

	Fiscal Year Ended
	January 29,   2012		January 30,   2011		January 31,   2010
Risk-free interest rate		2.8%		3.0%		2.9%
Dividend yield		0.0%		0.0%		0.0%
Expected volatility factor		46.0%		48.9%		50.5%
Expected option life in years		6.6		6.8		7.3

The risk free interest rate was determined based on an analysis of U.S. Treasury zero-coupon market yields as of the date of the option grant for issues having expiration lives similar to the expected option life. The expected volatility was based on an analysis of the historical volatility of HD Supply’s competitors over the expected life of the HD Supply options. These volatilities were weighted by the respective HD Supply segment against which they compete, resulting in an overall industry-based volatility for HD Supply. As insufficient data exists to determine the historical life of options issued under the HDS Plan, the expected option life was determined based on the vesting schedule of the options and their contractual life taking into consideration the expected time in which the share price of Holding would exceed the exercise price of the option. The weighted-average fair value of each option granted during fiscal 2011, fiscal 2010, and fiscal 2009 was $1.99, $1.64, and $1.63, respectively. HD

26

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS HD SUPPLY, INC.

Supply recognized $20 million, $17 million, and $18 million of stock-based compensation expense related to stock options, included in Selling, general and administrative expense in the Consolidated Statements of Operations, during fiscal 2011, fiscal 2010, and fiscal 2009, respectively. As of January 29, 2012 the unamortized compensation expense related to stock options was $32 million and was expected to be recognized over a period of 4.8 years.

Employee Benefit Plans

HD Supply offers a comprehensive Health & Welfare Benefits Program which allows employees who satisfy certain eligibility requirements to choose among different levels and types of coverage. The Health & Welfare Benefits program provides employees healthcare coverage in which the employer and employee share costs. In addition, the Program offers employees the opportunity to participate in various voluntary coverages, including flexible spending accounts.

HD Supply maintains a 401(k) defined contribution plan that is qualified under Sections 401(a) and 501(a) of the Internal Revenue Code. Employees who satisfy the plan’s eligibility requirements may elect to contribute a portion of their compensation to the plan on a pre-tax basis. HD Supply may match a percentage of the employees’ contributions to the plan based on approval from the Board of Directors. Matching contributions are generally made shortly after the end of each pay period or shortly after the Company’s fiscal year-end if an additional annual matching contribution based on the Company’s fiscal-year financial results is approved. HD Supply paid $7 million, less than $1 million, and $3 million during fiscal 2011, fiscal 2010, and fiscal 2009, respectively.

NOTE 11 — STOCKHOLDER’S EQUITY

Common Stock

The Company is authorized to issue 1,000 shares of common stock, par value $0.01 per share. As of January 29, 2012 and January 30, 2011, 1,000 shares were issued and outstanding.

Accumulated Other Comprehensive Income (Loss)

As of January 29, 2012 and January 30, 2011 accumulated other comprehensive income (loss) is comprised of $(2) million and $(1) million, respectively, of cumulative foreign currency translation adjustments, net.

NOTE 12 — SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION

Receivables

Receivables as of January 29, 2012 and January 30, 2011 consisted of the following (amounts in millions):

	January 29,   2012		January 30,   2011
Trade receivables, net of allowance for doubtful accounts	$	919	$	837
Vendor rebate receivables		71		60
Other receivables		12		10
Total receivables, net	$	1,002	$	907

Property and Equipment

Property and equipment as of January 29, 2012 and January 30, 2011 consisted of the following (amounts in millions):

	January 29,   2012		January 30,   2011
Land	$	42	$	45
Buildings and improvements		206		214
Transportation equipment		44		20
Furniture, fixtures and equipment		298		288
Capitalized software		185		177
Construction in progress		40		12
		815		756
Less accumulated depreciation & amortization		(417)		(366)
Property and equipment, net	$	398	$	390

27

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS HD SUPPLY, INC.

Other Current Liabilities

Other current liabilities as of January 29, 2012 and January 30, 2011 consisted of the following (amounts in millions):

	January 29,     2012		January 30,     2011
Accrued interest		$    233		$    131
Accrued non-income taxes		31		28
Branch closure & consolidation reserves		16		18
Other		98		95
Total other current liabilities		$    378		$    272

Significant Non-Cash Transactions

Interest payments on the 13.5% Senior Subordinated Notes are due each March 1^st and September 1^st through maturity except that the first eight payment periods through September 2011 were payments in kind (“PIK”) and therefore increased the balance of the outstanding indebtedness rather than paid in cash. The Company made PIK interest payments during fiscal 2011, fiscal 2010, and fiscal 2009 of $223 million, $196 million, and $172 million, respectively, increasing the outstanding balance of the 13.5% Senior Subordinated Notes.

Supplemental Cash Flow Information

Cash paid for interest in fiscal 2011, fiscal 2010, and fiscal 2009 was approximately $356 million, $363 million, and $366 million, respectively. During fiscal 2010, as a result of recent tax legislation regarding net operating loss carry-back periods, the Company filed for and received a cash refund of $220 million from the Internal Revenue Service for income tax previously paid. During fiscal 2009, the Company received a cash refund of $134 million from the Internal Revenue Service for income tax previously paid. Cash paid for income taxes, net of refunds, in fiscal 2011, fiscal 2010, and fiscal 2009 was approximately $5 million net payment, $216 million net refund, and $127 million net refund, respectively.

NOTE 13 — BRANCH CLOSURE AND CONSOLIDATION ACTIVITIES

Fiscal 2009 Plan

In the third quarter of fiscal 2009, the Company initiated a plan to restructure its businesses which included evaluating opportunities to consolidate branches, further reduce costs, more efficiently employ working capital and streamline activities. Under this plan, which was completed in fiscal 2010, management closed or consolidated 25 branches and reduced workforce personnel by approximately 500 employees. The Company does not expect to incur any additional charges related to this plan.

During fiscal 2010 and fiscal 2009, the Company recognized $7 million and $14 million, respectively, in restructuring charges for branch closure and consolidation charges under the Fiscal 2009 Plan. The cash and non-cash restructuring charges were recorded to Restructuring expense in the Consolidated Statements of Operations. The Company regularly reviews the assumptions used to estimate the net present value of the on-going lease liabilities and other occupancy costs, net of expected sublease income. During fiscal 2011, the Company recorded an additional $2 million in occupancy costs due to actual results differing from the original assumptions within the Plumbing/HVAC business. As a result of the sale of the Plumbing/HVAC business, this charge is reflected within Discontinued operations, net of taxes, in the Consolidated Statements of Operations.

28

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS HD SUPPLY, INC.

The following table presents the activity for the liability balance, included in Other current liabilities and Other liabilities in the Consolidated Balance Sheets, related to closure and consolidation activities under the Fiscal 2009 Plan (amounts in millions):

	Severance		Occupancy     Costs		Other		Total
Charges		$    5		$    7		$    2		$    14
Cash payments		(2)		–		–		(2)
Balance – January 31, 2010		$    3		$    7		$    2		$    12
Charges		2		2		2		6
Cash payments		(4)		(3)		(2)		(9)
Other		(1)		1		–		–
Balance – January 30, 2011		$    –		$    7		$    2		$      9
Charges, net of reductions		–		2		–		2
Cash payments		–		(1)		(2)		(3)
Other		–		–		–		–
Balance – January 29, 2012		$    –		$    8		$    –		$      8

Transactions & Acquisition Integration

Concurrent with the Transactions and acquisition integration, management evaluated the operations and performance of individual branches and identified branches for closure or consolidation. In addition, during the fourth quarter of fiscal 2008, as a result of continued acquisition integration efforts, the decline in the residential construction market, and the general decline in economic conditions, management evaluated the operations and performance of individual branches and identified branches for closure or consolidation and a reduction in workforce. Under these plans, management closed or consolidated 210 branches and reduced workforce personnel by approximately 4,500 employees. The Company does not expect to incur additional restructuring charges under these plans.

The following table presents the activity for the liability balance, included in Other current liabilities and Other liabilities, related to closure and consolidation activities under the Transactions and Acquisition Integration plans (amounts in millions):

	Severance		Occupancy     Costs		Other		Total
Balance – February 1, 2009		$    5		$    97		$    3		$    105
Charges, net of reductions		7		(3)		1		5
Cash payments		(12)		(28)		(4)		(44)
Effects of exchange rates		–		1		–		1
Other		–		(8)		–		(8)
Balance – January 31, 2010		$    –		$    59		$    –		$    59
Charges, net of reductions		–		2		–		2
Cash payments		–		(18)		–		(18)
Other		–		1		–		1
Balance – January 30, 2011		$    –		$    44		$    –		$    44
Cash payments		–		(12)		–		(12)
Balance – January 29, 2012		$    –		$    32		$    –		$    32

The Company regularly reviews the assumptions used to estimate the net present value of the on-going lease liabilities and other occupancy costs, net of expected sublease income. During fiscal 2010, the Company recorded an additional $2 million in occupancy costs due to actual results differing from the original assumptions. During the fourth quarter of fiscal 2009, management’s review resulted in a reduction to the lease liabilities due to several favorable lease dispositions, resulting in a reduction to Restructuring expense of $4 million related to previously incurred restructuring charges and a reduction to Selling, general and administrative expense of $8 million related to the lease reserves established under purchase accounting. During the first quarter of fiscal 2009, the Company incurred additional restructuring charges under these plans of $9 million, primarily related to severance.

29

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS HD SUPPLY, INC.

As of January 29, 2012, approximately $16 million of the liability balances for all branch closure and consolidation activities is classified as a current liability on the Company’s Consolidated Balance Sheet. Payments for occupancy costs, which represent the net present value of future lease obligations, including rent, taxes, utilities, etc., less estimated sublease income of the closed branches, are expected to be substantially complete over the next five years, with certain property lease obligations extending out as far as twelve years. The Company continues to actively pursue buyout options or subleasing opportunities for the leased properties. The timing of cash payments related to the branch closure and consolidation activities could change depending on the success and timing of entering into these types of agreements.

NOTE 14 — COMMITMENTS AND CONTINGENCIES

Lease Commitments

HD Supply occupies certain facilities and operates certain equipment and vehicles under leases that expire at various dates through the year 2027. In addition to minimum rentals, there are certain executory costs such as real estate taxes, insurance, and common area maintenance on most of its facility leases. Expense under these leases totaled $151 million, $153 million, and $161 million in fiscal 2011, fiscal 2010, and fiscal 2009, respectively. Capital leases currently in effect are not material.

Future minimum aggregate rental payments under non-cancelable operating leases as of January 29, 2012 are as follows (amounts in millions):

Fiscal Year	Operating     Leases
2012	$	126
2013		102
2014		78
2015		54
2016		36
Thereafter		86
Total	$	482

The Company subleases certain leased facilities to third parties. Total future minimum rentals to be received under non-cancelable subleases as of January 29, 2012 are approximately $19 million. These subleases expire at various dates through the year 2023.

Purchase Obligations

As of January 29, 2012, the Company has agreements in place with various vendors to purchase goods and services, primarily inventory, in the aggregate amount of $671 million. These purchase obligations are generally cancelable, but the Company has no intent to cancel. Payment is due during fiscal 2012 for these obligations.

Internal Revenue Service

The Internal Revenue Service has issued notices of proposed adjustments that propose to disallow certain of the Company’s deductions and the carryback of certain of its net operating losses to taxable years during which the Company was a member of The Home Depot, Inc.’s U.S. federal consolidated income tax return. The Internal Revenue Service is expected to issue in the near future a letter that proposes to assess tax liabilities from such proposed adjustments. The Company is estimating such letter will contain a proposed assessment of tax liabilities for approximately $322 million to $325 million, including accrued interest. The Company believes that the deductions it reported on the tax returns in question and carryback of the net operating losses are accurate and appropriate. Therefore, the Company intends to challenge any proposed assessment by filing a formal protest with the Appeals Division of the Internal Revenue Service. During the protest period, the Company intends to vigorously defend its positions rather than pay any proposed assessments. If the Company is ultimately required to pay any such proposed assessments, it could incur significant liabilities and its cash flows, future results of operations and financial position could be affected in a significant and adverse manner. The carryback of the net operating losses was made in accordance with (and subject to the terms of) an agreement entered into between the Company’s ultimate parent corporation, HDS Investment Holding, Inc., and The Home Depot, Inc.

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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS HD SUPPLY, INC.

Legal Matters

HD Supply is involved in various legal proceedings arising in the normal course of its business. The Company establishes reserves for litigation and similar matters when those matters present loss contingencies that it determines to be both probable and reasonably estimable in accordance with ASC 450, Contingencies. In the opinion of management, based on current knowledge, all reasonably estimable and probable matters are believed to be adequately reserved for or covered by insurance and disclosed herein. For all such other matters, management believes the possibility of losses from such matters are remote or such matters are of such kind or involve such amounts that would not have a material adverse effect on the financial position, results of operations or cash flows of the Company if disposed of unfavorably.

NOTE 15 – SEGMENT INFORMATION

HD Supply’s operating segments are based on management structure and internal reporting. Each segment offers different products and services to the end customer, except for Corporate, which provides general corporate overhead support and HD Supply Canada (included in Other), which is organized based on geographic location. The Company determines the reportable segments in accordance with the principles of segment reporting within U.S. GAAP (ASC 280, Segment Reporting). For purposes of evaluation under these segment reporting principles, the Chief Operating Decision Maker for HD Supply assesses HD Supply’s ongoing performance, based on the periodic review and evaluation of Net sales, Adjusted EBITDA, and certain other measures for each of the operating segments.

During fiscal 2011, the reportable segment presentation for two operating segments changed as compared to prior periods. The CTI operating segment no longer met the quantitative threshold requirements of a reportable segment. In addition, the Electrical operating segment was merged into the Utilities operating segment, which is a reportable segment, and collectively titled Power Solutions. As a result, prior period disclosures reflect the change in reportable segments.

In conjunction with the change in reportable segments, management re-evaluated its use of key performance metrics. Historically, the Company has presented operating income excluding certain charges as its measure of operating performance for presentation of segment results. Management uses both operating income excluding certain charges and Adjusted EBITDA in its evaluation of operating segment performance. However, based on the recent evaluation, management concluded that Adjusted EBITDA is the primary metric management uses to assess operating performance. Therefore, current and prior period segment presentation reflects Adjusted EBITDA as the operating performance measure.

HD Supply has four reportable segments, each of which is presented below:

• Facilities Maintenance – Supplies maintenance, repair and operations (“MRO”) products and upgrade and renovation services largely to the multifamily, healthcare, hospitality, and institutional markets.

• Waterworks – Distributes complete lines of water and wastewater transmission products, serving contractors and municipalities in all aspects of the water and wastewater industries.

• Power Solutions – Distributes electrical transmission and distribution products, power plant maintenance, repair and operations supplies, smart-grid technologies, and provides materials management and procurement outsourcing arrangements to investor-owned utilities, municipal and provincial power authorities, rural electric cooperatives and utility contractors and distributes electrical products such as wire and cable, switch gear supplies, lighting and conduit to residential and commercial contractors.

• White Cap –Distributes specialized hardware, tools, building materials, and safety equipment to professional contractors.

In addition to the reportable segments, the Company’s consolidated financial results include an Other category, Corporate, & Eliminations. Other primarily consists of (i) Repair & Remodel, offering light remodeling and construction supplies primarily to small remodeling contractors and tradesmen; (ii) Crown Bolt, a retail distribution operator, providing program and packaging solutions, sourcing, distribution, and in-store service, primarily serving Home Depot; (iii) CTI, offering turnkey supply and installation services for multiple interior finish options, including flooring, cabinets, countertops, and window coverings, along with comprehensive design center services for residential, commercial, and senior living projects; and (iv) HD Supply Canada, comprised of HD Supply’s Canadian operations (other than the Canadian utilities operations, which is included

31

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS HD SUPPLY, INC.

in the Power Solutions segment, and Commercial Direct, which is included in the Facilities Maintenance segment). Corporate has enterprise management responsibility and centralized support functions for some of the segments, information technology, human resources, sourcing and support services. Eliminations remove intersegment transactions.

The following tables present Net sales, Adjusted EBITDA, and certain other measures for each of the reportable segments and total continuing operations for the periods indicated (amounts in millions):

	Fiscal Year 2011
	Net     Sales		Adjusted     EBITDA		Depreciation(1)     & Software Amortization		Other Intangible      Amortization		Total     Assets(2)		Capital     Expen- ditures
Facilities Maintenance		$  1,870		$  318		$  30		$  75		$  2,264		$  32
Waterworks		1,772		112		5		95		1,562		5
Power Solutions		1,625		50		5		20		775		5
White Cap		981		17		14		19		481		16
Other, Corporate, & Eliminations		780		11		31		35		1,656		51
Total continuing operations		$  7,028		$  508		$  85		$  244		$  6,738		$  109

	Fiscal Year 2010
	Net     Sales		Adjusted     EBITDA		Depreciation(1)     & Software Amortization		Other Intangible      Amortization		Total     Assets(2)		Capital     Expen- ditures
Facilities Maintenance		$  1,682		$  282		$  28		$    75		$  2,265		$  20
Waterworks		1,659		94		5		94		1,582		2
Power Solutions		1,462		49		5		19		740		2
White Cap		852		(10)		20		19		439		3
Other, Corporate, & Eliminations		794		(4)		41		37		2,063		18
Total continuing operations		$  6,449		$  411		$    99		$  244		$  7,089		$  45

	Fiscal Year 2009
	Net     Sales		Adjusted     EBITDA		Depreciation(1)     & Software Amortization		Other Intangible      Amortization		Total     Assets(2)		Capital     Expen- ditures
Facilities Maintenance		$  1,609		$  279		$    24		$    73		$  2,341		$  28
Waterworks		1,652		99		5		95		1,695		2
Power Solutions		1,410		40		5		19		711		3
White Cap		872		(31)		25		20		487		4
Other, Corporate, & Eliminations		770		(44)		62		36		2,611		18
Total continuing operations		$  6,313		$  343		$  121		$  243		$  7,845		$  55

(1) Depreciation includes amounts recorded within Cost of sales in the Consolidated Statements of Operations.

(2) Total Assets include amounts attributable to discontinued operations for the periods prior to the dispositions.

Reconciliation to Consolidated Financial Statements

	Fiscal 2011		Fiscal 2010		Fiscal 2009
Total Adjusted EBITDA		$   508		$   411		$   343
Depreciation and amortization		329		343		364
Stock-based compensation		20		17		18
Management fees and expenses		5		5		5
Restructuring		–		8		21
Goodwill impairment		–		–		219
Other		(1)		1		–
Operating income (loss)		155		37		(284)
Interest expense		639		623		602
Other (income) expense, net		–		(1)		(208)
Income (Loss) from Continuing Operations Before Provision (Benefit) for Income Taxes		(484)		(585)		(678)
Provision (benefit) for income taxes		79		28		(198)
Income (loss) from continuing operations		$  (563)		$  (613)		$  (480)

32

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS HD SUPPLY, INC.

Net sales for HD Supply outside the United States, primarily Canada, were $404 million, $365 million, and $330 million in fiscal 2011, fiscal 2010, and fiscal 2009, respectively. Long-lived assets of HD Supply outside the United States were $18 million and $29 million as of January 29, 2012 and January 30, 2011, respectively.

NOTE 16 — SUBSIDIARY GUARANTORS

The Company has issued 12.0% Senior Notes and 13.5% Senior Subordinated Notes (collectively the “Notes”) guaranteed by certain of its subsidiaries (the “Guarantor Subsidiaries”). The Guarantor Subsidiaries are direct or indirect wholly-owned domestic subsidiaries of the Company. The subsidiaries of the Company that do not guarantee the Notes (“Non-guarantor Subsidiaries”) are direct or indirect wholly-owned subsidiaries of the Company and include the Company’s operations in Canada and a non-operating subsidiary in the United States that holds an investment of $373 million in principal, $261 million net of the discount at January 29, 2012, of the Company’s 13.5% Senior Subordinated Notes, which is eliminated in consolidation.

In connection with the Notes, the Company determined the need for compliance with Rule 3-10 of SEC Regulation S-X (“Rule 3-10”). In lieu of providing separate audited financial statements for the Guarantor Subsidiaries, the Company has included the accompanying Condensed Consolidating Financial Statements in accordance with Rule 3-10(d) of SEC Regulation S-X. The following supplemental financial information sets forth, on a consolidating basis, the condensed statements of operations, the condensed balance sheets, and the condensed statements of cash flows for the parent company issuer of the Notes HD Supply, Inc. (the “Parent Issuer”), for the Guarantor Subsidiaries and for the Non-guarantor Subsidiaries and total consolidated HD Supply, Inc. and subsidiaries (amounts in millions):

CONDENSED CONSOLIDATING INCOME STATEMENTS

	Fiscal Year Ended January 29, 2012
	Parent       Issuer		Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminations		Total
Net Sales	$	–	$	6,630	$	398	$	–	$	7,028
Cost of sales		–		4,720		294		–		5,014
Gross Profit		–		1,910		104		–		2,014
Operating expenses:
Selling, general and administrative		78		1,372		82		–		1,532
Depreciation and amortization		12		313		2		–		327
Total operating expenses		90		1,685		84		–		1,859
Operating Income (Loss)		(90)		225		20		–		155
Interest expense		722		298		1		(382)		639
Interest (income)		(299)		(3)		(80)		382		–
Net loss of equity affiliates		30		–		–		(30)		–
Income (Loss) from Continuing Operations Before Provision (Benefit) for Income Taxes		(543)		(70)		99		30		(484)
Provision (benefit) for income taxes		32		10		37		–		79
Income (Loss) from Continuing Operations		(575)		(80)		62		30		(563)
Loss from discontinued operations, net of tax		32		(15)		3		–		20
Net Income (Loss)	$	(543)	$	(95)	$	65	$	30	$	(543)

33

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS HD SUPPLY, INC.

CONDENSED CONSOLIDATING INCOME STATEMENTS (Continued)

	Fiscal Year Ended January 30, 2011
	Parent       Issuer		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations		Total
Net Sales	$	–	$	6,085	$	364	$	–	$	6,449
Cost of sales		–		4,339		269		–		4,608
Gross Profit		–		1,746		95		–		1,841
Operating expenses:
Selling, general and administrative		82		1,302		71		–		1,455
Depreciation and amortization		16		322		3		–		341
Restructuring		–		8		–		–		8
Total operating expenses		98		1,632		74		–		1,804
Operating Income (Loss)		(98)		114		21		–		37
Interest expense		701		298		–		(376)		623
Interest (income)		(298)		(4)		(74)		376		–
Other (income) expense, net		(1)		–		–		–		(1)
Net loss of equity affiliates		178		–		–		(178)		–
Income (Loss) from Continuing Operations Before Provision (Benefit) for Income Taxes		(678)		(180)		95		178		(585)
Provision (benefit) for income taxes		(17)		6		39		–		28
Income (Loss) from Continuing Operations		(661)		(186)		56		178		(613)
Loss from discontinued operations, net of tax		42		(49)		1		–		(6)
Net Income (Loss)	$	(619)	$	(235)	$	57	$	178	$	(619)
	Fiscal Year Ended January 31, 2010
	Parent Issuer		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations		Total
Net Sales	$	–	$	5,987	$	326	$	–	$	6,313
Cost of sales		–		4,301		244		–		4,545
Gross Profit		–		1,686		82		–		1,768
Operating expenses:
Selling, general and administrative		83		1,304		66		–		1,453
Depreciation and amortization		22		334		3		–		359
Restructuring		1		21		(1)		–		21
Goodwill impairment		–		196		23		–		219
Total operating expenses		106		1,855		91		–		2,052
Operating Income (Loss)		(106)		(169)		(9)		–		(284)
Interest expense		679		305		–		(382)		602
Interest (income)		(304)		(11)		(67)		382		–
Other (income) expense, net		(206)		7		(9)		–		(208)
Net loss of equity affiliates		348		–		–		(348)		–
Income (Loss) from Continuing Operations Before Provision (Benefit) for Income Taxes		(623)		(470)		67		348		(678)
Provision (benefit) for income taxes		(70)		(148)		20		–		(198)
Income (Loss) from Continuing Operations		(553)		(322)		47		348		(480)
Loss from discontinued operations, net of tax		39		(72)		(1)		–		(34)
Net Income (Loss)	$	(514)	$	(394)	$	46	$	348	$	(514)

34

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS HD SUPPLY, INC.

CONDENSED CONSOLIDATING BALANCE SHEETS

	January 29, 2012
	Parent     Issuer			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations		Total
ASSETS
Current assets:
Cash and cash equivalents	$	49		$	12	$	50	$	–	$	111
Receivables, net		4			922		97		(21)		1,002
Inventories		–			1,027		81		–		1,108
Deferred tax asset		–			89		2		(33)		58
Other current assets		8			34		5		–		47
Total current assets		61			2,084		235		(54)		2,326
Property and equipment, net		61			331		6		–		398
Goodwill		–			3,143		8		–		3,151
Intangible assets, net		–			731		4		–		735
Deferred tax asset		158			–		6		(164)		–
Investment in subsidiaries		3,456			–		–		(3,456)		–
Intercompany notes receivable		2,774			641		–		(3,415)		–
Other assets		122			6		261		(261)		128
Total assets	$	6,632		$	6,936	$	520	$	(7,350)	$	6,738
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	21		$	648	$	45	$	–	$	714
Accrued compensation and benefits		42			93		5		–		140
Current installments of long-term debt		82			–		–		–		82
Deferred tax liabilities		33			–		–		(33)		–
Other current liabilities		284			104		11		(21)		378
Total current liabilities		462			845		61		(54)		1,314
Long-term debt, excluding current installments		5,641			–		–		(261)		5,380
Deferred tax liabilities		–			275		–		(164)		111
Intercompany notes payable		641			2,774		–		(3,415)		–
Other liabilities		316			37		8		–		361
Total liabilities		7,060			3,931		69		(3,894)		7,166
Stockholders’ equity		(428	)		3,005		451		(3,456)		(428)
Total liabilities and stockholders’ equity	$	6,632		$	6,936	$	520	$	(7,350)	$	6,738

35

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS HD SUPPLY, INC.

CONDENSED CONSOLIDATING BALANCE SHEETS (Continued)

	January 30, 2011
	Parent     Issuer		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations		Total
ASSETS
Current assets:
Cash and cash equivalents	$	249	$	8	$	35	$	–	$	292
Receivables, net		2		830		75		–		907
Inventories		–		958		77		–		1,035
Deferred tax asset		40		62		4		(4)		102
Intercompany receivable		–		3		–		(3)		–
Other current assets		9		35		1		–		45
Total current assets		300		1,896		192		(7)		2,381
Property and equipment, net		62		322		6		–		390
Goodwill		–		3,132		18		–		3,150
Intangible assets, net		–		988		4		–		992
Deferred tax asset		117		–		–		(117)		–
Investment in subsidiaries		2,752		–		–		(2,752)		–
Intercompany notes receivable		3,054		304		–		(3,358)		–
Other assets		172		4		203		(203)		176
Total assets	$	6,457	$	6,646	$	423	$	(6,437)	$	7,089
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	20	$	730	$	55	$	–	$	805
Accrued compensation and benefits		32		80		6		–		118
Current installments of long-term debt		10		–		–		–		10
Intercompany payables		–		–		3		(3)		–
Other current liabilities		157		104		11		–		272
Total current liabilities		219		914		75		(3)		1,205
Long-term debt, excluding current installments		5,423		–		–		(184)		5,239
Deferred tax liabilities		–		222		–		(121)		101
Intercompany notes payable		304		3,054		–		(3,358)		–
Other liabilities		415		45		7		(19)		448
Total liabilities		6,361		4,235		82		(3,685)		6,993
Stockholders’ equity		96		2,411		341		(2,752)		96
Total liabilities and stockholders’ equity	$	6,457	$	6,646	$	423	$	(6,437)	$	7,089

36

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS HD SUPPLY, INC.

CONDENSED CONSOLIDATING CASH FLOW STATEMENTS

	Fiscal Year Ended January 29, 2012
	Parent       Issuer		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations		Total
Net cash flows from operating activities	$	(629)	$	458	$	6	$	–	$	(165)
Cash flows from investing activities
Capital expenditures		(15)		(98)		(2)		–		(115)
Proceeds from sales of property and equipment		–		4		–		–		4
Payments for businesses acquired		–		(21)		–		–		(21)
Proceeds from sale of a business		117		–		11		–		128
Purchase of investments		(21)		(2)		–		–		(23)
Proceeds from sale of investments		21		–		–		–		21
Proceeds from (payments of) intercompany notes		–		(337)		–		337		–
Net cash flows from investing activities		102		(454)		9		337		(6)
Cash flows from financing activities
Borrowings (repayments) of intercompany notes		337		–		–		(337)		–
Repayments of long-term debt		(10)		–		–		–		(10)
Borrowings on long-term revolver		1,053		–		–		–		1,053
Repayments of long-term revolver		(1,053)		–		–		–		(1,053)
Net cash flows from financing activities		327		–		–		(337)		(10)
Effect of exchange rates on cash		–		–		–		–		–
Net increase (decrease) in cash & cash equivalents	$	(200)	$	4	$	15	$	–	$	(181)
Cash and cash equivalents at beginning of period		249		8		35		–		292
Cash and cash equivalents at end of period	$	49	$	12	$	50	$	–	$	111
	Fiscal Year Ended January 30, 2011
	Parent Issuer		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations		Total
Net cash flows from operating activities	$	452	$	83	$	16	$	–	$	551
Cash flows from investing activities
Capital expenditures		(6)		(41)		(2)		–		(49)
Proceeds from sales of property and equipment		–		4		–		–		4
Proceeds from (payments of) intercompany notes		–		(46)		–		46		–
Return of investment		33		–		–		(33)		–
Net cash flows from investing activities		27		(83)		(2)		13		(45)
Cash flows from financing activities
Equity contribution (return of capital)		1		–		(33)		33		1
Borrowings (repayments) of intercompany notes		46		–		–		(46)		–
Repayments of long-term debt		(40)		–		–		–		(40)
Borrowings on long-term revolver		178		–		–		–		178
Repayments of long-term revolver		(860)		–		–		–		(860)
Debt modification and issuance costs		(34)		–		–		–		(34)
Net cash flows from financing activities		(709)		–		(33)		(13)		(755)
Effect of exchange rates on cash		–		–		2		–		2
Net increase (decrease) in cash & cash equivalents	$	(230)	$	–	$	(17)	$	–	$	(247)
Cash and cash equivalents at beginning of period		479		8		52		–		539
Cash and cash equivalents at end of period	$	249	$	8	$	35	$	–	$	292

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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS HD SUPPLY, INC.

CONDENSED CONSOLIDATING CASH FLOW STATEMENTS (Continued)

	Fiscal Year Ended January 31, 2010
	Parent     Issuer		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations		Total
Net cash flows from operating activities	$	51	$	16	$	13	$	(11)	$	69
Cash flows from investing activities
Capital expenditures		(9)		(48)		(1)		–		(58)
Proceeds from sales of property and equipment		1		7		–		–		8
Refunds (payments) for businesses acquired, net of cash acquired		22		(16)		(3)		3		6
Proceeds from sale of a business		6		–		–		(3)		3
(Payments for) proceeds from debt & other investments		–		5		(67)		62		–
Investments in equity affiliates		(62)		–		–		62		–
Proceeds from (payments of) intercompany notes		12		39		–		(51)		–
Net cash flows from investing activities		(30)		(13)		(71)		73		(41)
Cash flows from financing activities
Equity contribution		–		–		51		(51)		–
Borrowings (repayments) of intercompany notes		(39)		(12)		–		51		–
Repayments of long-term debt		(10)		–		–		(62)		(72)
Borrowings on long-term revolver		5		–		–		–		5
Repayments of long-term revolver		(196)		–		–		–		(196)
Net cash flows from financing activities		(240)		(12)		51		(62)		(263)
Effect of exchange rates on cash		–		–		3		–		3
Net increase (decrease) in cash & cash equivalents		(219)		(9)		(4)		–		(232)
Cash and cash equivalents at beginning of period		698		17		56		–		771
Cash and cash equivalents at end of period	$	479	$	8	$	52	$	–	$	539

NOTE 17 — QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is a summary of the quarterly consolidated results of operations for the fiscal years ended January 29, 2012 and January 30, 2011 (amounts in millions):

	Net Sales		Gross Profit		Net Income   (Loss)
Fiscal Year Ended January 29, 2012:
First Quarter		$  1,608		$    460		$  (164)
Second Quarter		1,875		533		(101)
Third Quarter		1,893		535		(105)
Fourth Quarter		1,652		486		(173)
Fiscal Year 2011		$  7,028		$  2,014		$  (543)
Fiscal Year Ended January 30, 2011:
First Quarter		$  1,552		$443		$  (202)
Second Quarter		1,719		488		(115)
Third Quarter		1,724		488		(99)
Fourth Quarter		1,454		422		(203)
Fiscal Year 2010		$  6,449		$  1,841		$  (619)

The following is a summary of the changes to the previously reported quarterly financial data in order to conform presentation to reflect discontinued operations (amounts in millions):

	Net Sales		Gross Profit		Net Income   (Loss)
Fiscal Year Ended January 29, 2012:
First Quarter		$    (280)		$  (67)		$  –
Second Quarter		(282)		(68)		–
Third Quarter		(182)		(45)		–
Fourth Quarter		(174)		(39)		–
Fiscal Year 2011		$  (918)		$  (219)		$  –

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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS HD SUPPLY, INC.

	Net Sales		Gross Profit		Net Income   (Loss)
Fiscal Year Ended January 30, 2011:
First Quarter		$  (259)		$    (59)		$    –
Second Quarter		(255)		(59)		–
Third Quarter		(269)		(60)		–
Fourth Quarter		(245)		(58)		–
Fiscal Year 2010		$ (1,028)		$  (236)		$    –

NOTE 18 — SUBSEQUENT EVENTS

Disposition

On March 26, 2012, the Company sold all of the issued and outstanding equity interests in its IPVF business to Shale-Inland Holdings LLC for approximately $469 million. In accordance with ASC 205-20, Discontinued Operations, the results of the IPVF operations are classified as discontinued operations. The presentation of discontinued operations includes revenues and expenses of the discontinued operations and gain on the sale of businesses, net of tax, as one line item on the Consolidated Statements of Operations. All Consolidated Statements of Operations presented have been revised to reflect this presentation.

Refinancing Transactions (unaudited)

On April 12, 2012, HD Supply, Inc. consummated the following transactions (the “Refinancing Transactions”) in connection with the refinancing of the senior portion of its debt structure:

• the issuance of $950 million of its 8.125% Senior Secured First Priority Notes due 2019 (the “First Priority Notes”);

• the issuance of $675 million of its 11% Senior Secured Second Priority Notes due 2020 (the “Second Priority Notes”);

• the issuance of approximately $757 million of its 14.875% Senior Notes due 2020 (the “Senior Notes”);

• entry into a new senior term facility (the “Senior Term Facility”) maturing in 2017 and providing for term loans in an aggregate principal amount of $1 billion; and

• entry into a new senior asset based lending facility (the “ABL Facility”) maturing in 2017 and providing for senior secured revolving loans and letters of credit of up to a maximum aggregate principal amount of $1.5 billion.

The proceeds of the First Priority Notes, the Second Priority Notes, the Senior Notes, the Senior Term Facility and the ABL Facility were used to (i) repay all amounts outstanding under the Senior Secured Credit Facility, (ii) repay all amounts outstanding under the ABL Credit Facility, (iii) repurchase all remaining outstanding 12.0% Senior Notes and (iv) pay related fees and expenses.

Acquisition (unaudited)

On June 29, 2012, the Company purchased Peachtree Business Products LLC for approximately $196 million. Headquartered in Marietta, Georgia, Peachtree Business Products specializes in customizable business and property marketing supplies, serving residential and commercial property managers, medical facilities, schools and universities, churches and funeral homes. Peachtree Business Products LLC will be operated as part of the Company’s Facilities Maintenance segment.

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