10-K 1 d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-K

 

 

 

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

For the fiscal year ended December 27, 2008

OR

 

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

For the transition period from              to            

Commission File Number: 333-110029

 

 

Broder Bros., Co.

(Exact name of Registrant as specified in its charter)

 

 

 

Michigan   38-1911112

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

Six Neshaminy Interplex, 6th Floor

Trevose, PA

  19053
(Address of principal executive office)   (Zip code)

(215) 291-6140

(Registrant’s telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-seasoned issuer, as defined in Rule 405 of the Securities Act:    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act:    Yes  x    No  ¨

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  x.

We are a voluntary filer of reports required of companies with public securities under Sections 13 or 15(d) of the Securities Exchange Act of 1934, and we have filed all reports which would have been required of us during the past 12 months had we been subject to such provisions.


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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Check one:

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act):    Yes  ¨    No  x

As of June 28, 2008, the last business day of the registrant’s most recently completed second fiscal quarter, there was no established public trading market for the registrant’s equity securities.

As of May 15, 2009, there were 963,637 shares of Class L, Series 1 common stock outstanding; 931,635 shares of Class L, Series 2 common stock outstanding; 2,783,553 shares of Class L, Series 3 common stock outstanding; 2,691,118 shares of Class L, Series 4 common stock outstanding; 9,695,252 shares of Class A common stock outstanding; and 28,701,552 shares of Class B common stock outstanding.

 

 

 


Table of Contents

Broder Bros., Co.

Form 10-K

TABLE OF CONTENTS

 

Part I.   
  Item 1.    Business    1
  Item 1A.    Risk Factors    8
  Item 1B.    Unresolved Staff Comments    13
  Item 2.    Properties    13
  Item 3.    Legal Proceedings    13
  Item 4.    Submission of Matters to a Vote of Security Holders    13
Part II.   
  Item 5.    Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities    14
  Item 6.    Selected Financial Data    14
  Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    16
  Item 7A.    Quantitative and Qualitative Disclosures About Market Risk    28
  Item 8.    Financial Statements and Supplementary Data    32
  Item 9.    Changes in and Disagreements With Accountants on Accounting and Financial Disclosures    69
  Item 9A.    Controls and Procedures    69
  Item 9B.    Other Information    70
Part III.   
  Item 10.    Directors, Executive Officers and Corporate Governance    71
  Item 11.    Executive Compensation    72
  Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters    78
  Item 13.    Certain Relationships and Related Transactions, and Director Independence    82
  Item 14.    Principal Accountant Fees and Services    83
Part IV.   
  Item 15.    Exhibits and Financial Statement Schedules    83

 

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As used in this Form 10-K, unless the context indicates otherwise: (i) the “Company,” “Broder,” “we,” “us” and “our” refers to Broder Bros., Co. (ii) “Alpha” refers to the Company’s Alpha Shirt Company division for periods after its acquisition by the Company; (iii) “Broder division” refers to the Company’s Broder division; and (iv) “NES” refers to the Company’s NES Clothing Company division for periods after its acquisition by the Company. In addition to historical facts, this annual report contains forward-looking statements. Forward-looking statements are merely our current predictions of future events. These statements are inherently uncertain, and actual events could differ materially from our predictions. Important factors that could cause actual events to vary from our predictions include those discussed in this annual report under the headings “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and “Item 1A. Risk Factors.” We assume no obligation to update our forward-looking statements to reflect new information or developments. We urge readers to review carefully the risk factors described in this annual report and in the other documents that we file with the Securities and Exchange Commission (“SEC”). You can read these documents at www.sec.gov.

PART I

 

ITEM 1. BUSINESS

The Company

We are the leading distributor of imprintable sportswear and accessories in the United States. We operate within the U.S. imprintable sportswear and accessories market, which is estimated to be a $7 billion market at annual wholesale revenues. Imprintable sportswear and accessories include undecorated or “blank” T-shirts, sweatshirts, polo shirts, outerwear, caps, bags and other imprintable accessories that are decorated for a wide variety of purposes including, but not limited to, advertising and promotion of companies, uniforms, retail, educational institutions, resorts and sport teams. Unit volume within the market is approximately 2.3 billion units and had grown significantly over the last ten years, increasing at a compound annual growth rate of approximately 6% from 1996 to 2006. As a result of the increasingly challenging macroeconomic conditions in 2006 and unprecedented turbulence in the financial and commodities markets in 2008, the market shrank by over 6%. During the fourth quarter of 2008, the market shrank in excess of 11%.

We operate under three well-recognized brands: “Broder,” “Alpha” and “NES.” By maintaining three distinct catalogs, websites, sales forces and call centers, we are able to preserve the strong brand name recognition and customer goodwill that has been generated from over 175 combined years of independent operations. Meanwhile, our integrated back office operations provide significant economies of scale. We provide our decorator customers with value-added merchandising, marketing and promotional support that helps our customers grow their businesses. Our decorator customers in turn sell our products to a wide variety of end-consumers, including corporations, retail stores, educational institutions, resorts and sports teams.

We operate the largest distribution network in the industry, which consists of eight distribution facilities located throughout the United States. In addition, we operate ten “Express” facilities offering pickup room service to customers in the following markets: Los Angeles, CA; Louisville, KY; Detroit, MI; Chicago, IL; St. Louis, MO; Indianapolis, IN; Philadelphia, PA; Charlotte, NC; St. Petersburg, FL; and Stafford, TX. We purchase product from more than 70 suppliers. Our five largest suppliers of basic trade products are Gildan, Russell, Hanes, Fruit of the Loom and Anvil. We buy higher-end, retail products from such brands as Adidas Golf and Champion. We added Alternative Apparel and Dickies as retail brands to our 2008 assortment and Rossignol and Dickies Chef to our 2009 assortment. In addition to purchasing from these suppliers, we develop and source products from over 14 countries to support our private label brands, which include the Devon & Jones, Chestnut Hill, Authentic Pigment, Harriton, HYP and Harvard Square brands. For fiscal year 2008, we had net sales of $926.1 million, a loss from operations of $46.9 million and a net loss of $68.9 million.

We sell our products to over 75,000 customers, primarily advertising specialty companies, screen printers, embroiderers and specialty retailers who decorate our blank product with corporate logos, brands and other images. Our decorator customers then sell imprinted sportswear and accessories to a highly diversified range of end-consumers, including, but not limited to, Fortune 1000 companies, sporting venues, concert promoters, athletic leagues, educational institutions and travel resorts. In addition, some of our products are sold to end-consumers without decoration. We believe corporations recognize imprintable sportswear and accessories as highly differentiated, cost-effective advertising and promotional tools that help them grow their respective businesses and brand images.

We believe that the highly fragmented nature of our customer base enables us to serve a critical function within our industry. We believe none of our suppliers offers a complete line of imprintable sportswear and accessories, and the majority lack the distribution scale, infrastructure and expertise to sell and service a highly fragmented potential customer base. The customer base is estimated at over 100,000 regional and local decorators, who typically place small orders which average approximately $240 consisting of mixed product categories and expect receipt of shipment within one or two days. In addition, approximately 11% of our sales come from pick-up orders at one of our distribution facilities or Express locations. Because of our scale, we are able to purchase truckload quantities directly from suppliers, obtain favorable pricing, efficiently manage our inventory when buying products, maintain a national sales force and produce high quality catalogs and websites to market effectively to our customers.

 

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Our customers choose distributors based on several purchasing criteria, including price, depth of inventory and service. Service has several dimensions, including breadth of product selection, access to leading brands, speed of delivery, marketing resources and customer service, and catalog and website quality. We believe we provide our customers with compelling value across all of these purchasing criteria. We believe this strategy continues to make us a destination point for our customers to buy trade brand products at competitive prices. At year end, we had $235.5 million of finished goods inventory. We offer a broad selection of approximately 50,000 SKUs and over 50 brands. We offer industry-leading retail brands such as Adidas Golf, Champion, Rossignol and Alternative Apparel. In addition, we offer a line of private label brands such as Devon & Jones, Chestnut Hill, Authentic Pigment, Harriton, HYP and Harvard Square, which we believe are complementary to our trade brands. In addition, we believe this strategy affords us higher gross margins and enables us to expand our product assortment to better service our existing channels not adequately serviced by trade brands and also reach new channels, such as specialty retail.

We have the ability to ship via ground parcel service to over 80% of the continental U.S. population within one business day and to over 98% of the continental U.S. population within two business days. Our Broder, Alpha and NES catalog circulation is extensive, totaling approximately 3.6 million comprehensive catalogs distributed in 2008. Our customers use our catalogs as their primary selling tool with end-consumers. As a leading distributor in the industry, we receive favorable terms from our suppliers and can, in turn, pass on these cost savings to our customers. We believe these advantages allow us to effectively compete against our competitors, the vast majority of which are small, regional and local distributors who lack our scale and resources.

We operate on a 52- or 53-week year basis with the fiscal year ending on the last Saturday of December. For convenience, in certain circumstances, the financial information included in this Annual Report on Form 10-K has been presented as ending on the last day of the nearest calendar month. Fiscal years 2008, 2007 and 2006 each consisted of 52 selling weeks.

History

Broder. Since its foundation in 1919 as a haberdashery distributor, Broder has grown to become one of the leading distributors of imprintable sportswear and accessories in the United States. Mr. Jack Brode, one of the founders of Robins & Brode, purchased Broder in 1955. In 1966 Broder was reincorporated in the state of Michigan. In the early 1970s, Broder evolved into a local wholesale distributor of underwear, socks and hosiery. During this time, with the growing acceptance of the T-shirt as daily wear, Broder began selling its products to the rapidly emerging imprinting and embellishment market.

Broder grew region by region. From 1991 to 1999, Broder opened five branches: Orlando, FL in 1991; Dallas, TX in 1993; Albany, NY in 1995; Fresno, CA in 1997; and Wadesboro, NC, adjacent to the central distribution center, in 1999. In addition, Broder added 32,000 square feet to its Plymouth, MI branch in 1998, which served as Broder’s headquarters prior to the Alpha acquisition, as described below. In May 2000, affiliates of Bain Capital LLC acquired Broder in a recapitalization transaction. Following the recapitalization, Broder continued its geographic expansion through the acquisitions of St. Louis T’s in 2000 then Full Line Distributors and Gulf Coast Sportswear in 2001. During that time, Broder also expanded its geographic reach into certain regions to promote organic expansion. To gain more market share, Broder completed more acquisitions: T-Shirts & More, Inc. (“TSM”) and Alpha Shirt Company in 2003, NES Clothing Company in 2004 and Amtex Imports Inc. in 2006. As Broder acquired more companies, the company continued to assess its distribution network for efficiency opportunities, which resulted in the closures of two facilities in the fourth quarter of 2003, two facilities during fiscal 2004 and one facility during fiscal 2005. Then, in December 2005, the Atlanta, GA facility was replaced by a dual-brand facility in Duluth, GA, which carried both Broder and Alpha products. The Duluth, GA facility served as the proof of concept for Broder’s distribution center consolidation strategy. The strategy was initiated to create multi-division distribution centers which provide Broder with several key advantages, including improvement of inventory availability, reduction of inventory levels and a moderate reduction of operating expenses. During 2006 and 2007, Broder consolidated its distribution center network from seventeen facilities to eight facilities. The distribution center consolidation initiative was completed in December 2007.

Alpha. The origins of Alpha date back to 1931 when a predecessor company was founded as a wholesaler of men’s dress shirts, hosiery and underwear serving sportswear and accessories retailers and institutions in the New England region. During the 1970s, Alpha progressively shifted its operations to participate in the evolving imprintable T-shirt industry. In the 1990s, a descendant of one of the founders incorporated Alpha and expanded its operations to three facilities—Philadelphia, PA; Ft. Wayne, IN; and La Mirada, CA. In 1999, Linsalata Capital Partners purchased a majority interest in Alpha. Prior to Broder’s acquisition of Alpha, Alpha successfully completed two acquisitions, Kay’s Enterprises and Good Buy Sportswear, increasing its number of distribution centers from three to five and creating an efficient nationwide distribution platform.

In September 2003, Broder acquired all of the outstanding capital stock of Alpha. Immediately after consummation of the acquisition, Alpha and certain of its subsidiaries were merged with and into Broder. Although Alpha is no longer a distinct legal entity, Broder maintains the Alpha brand and operates separate catalogs, toll-free numbers, websites and sales forces as a means to preserve the customer goodwill generated over more than 70 years of independent operations.

 

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NES. NES is a leading distributor of imprintable sportswear in the New England and Charlotte, NC regions. In August 2004, Broder acquired all of the outstanding capital stock of NES Clothing Company Holdings Trust (“NES”). For consolidation and efficiency purposes, NES and its operating subsidiary, Aprons Unlimited, Inc., as well as NES Acquisition Corp., were merged with and into Broder. Although NES is no longer a distinct legal entity, Broder continues to retain the “NES” and “New England Sportswear Company” brands, as well as operate separate catalogs, websites, sales forces and call centers.

In September 2006, Broder acquired substantially all of the assets of Amtex Imports Inc. (“Amtex”), a regional imprintable activewear distributor with a single location in Northlake, IL. The Amtex acquisition facilitated our entry into the Chicago market. We closed Amtex’s distribution center in March 2007 and opened a smaller facility to service Amtex’s customer pick-up business.

During 2008, weakened economic conditions, largely attributable to the global credit crisis and erosion of consumer confidence, negatively impacted the markets in which we operate. As a result, we explored various strategic and financing alternatives This process culminated in the consummation on May 20, 2009 of an exchange offer for our $225.0 million aggregate principal amount of 11 1/4% Senior Notes due October 15, 2010 (the “2010 Notes”) for $94.9 million of our newly issued 12/15% Senior Payment-In-Kind Notes due October 15, 2013 (the “2013 Notes”) and a pro rata share of 96% of our newly issued common stock (the “Exchange Offer”). We refer to the 2010 Notes and the 2013 Notes collectively in this Annual Report as the “Senior Notes”. Our stockholders who held our common stock prior to the Exchange Offer hold 4% of our currently outstanding common stock and received warrants to purchase 1,474,201 shares of our common stock in the Exchange Offer. We issued $94.9 million in aggregate principal amount of 2013 Notes in connection with the Exchange Offer and approximately $11.5 million in aggregate principal amount of the 2010 Notes remain outstanding. On May 20, 2009, in connection with the Exchange Offer, we cancelled our previously outstanding Class A common stock and Class B common stock and converted our Class L common stock to a new single class of common stock and converted to a Delaware corporation. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 3 to our Financial Statements included elsewhere in this Annual Report on Form 10-K for more information.

Our principal operating segments are grouped into three business units: the Broder division, the Alpha division and the NES division. See Note 14 to our Financial Statements included elsewhere in this Annual Report on Form 10-K for more information on segments.

Industry Overview and Trends

We compete in the estimated $7 billion U.S. wholesale imprintable sportswear and accessories market, which is comprised of products used for corporate promotion, general-use, event promotion and specialty retail sales. The diversity of end-uses of imprintable sportswear and accessories helps to reduce exposure to any one industry or market segment. Within the overall market, imprintable sportswear and accessories sold for corporate promotional purposes in the U.S. is estimated at $3 billion in wholesale revenue. The other $4 billion segment of the market includes items sold for general purposes, such as recreation, sports leagues, educational institutions, specialty retail and for event promotions, such as concerts and tourism.

In the past decade, promotional product spending has been fueled by the increased acceptance of these products as a cost-effective advertising medium. During the same time period, imprintable sportswear used for corporate promotional purposes has grown faster than total promotional products spending because, we believe, it provides superior corporate identity value relative to most other promotional products.

The current economic downturn has negatively impacted the imprintable sportswear market, causing a dramatic decrease in sales during the fourth quarter of 2008. In 2008, the market for imprintable activewear shrank by at least 6%. It shrank at least 11% in the fourth quarter of 2008. Such conditions have continued to persist in 2009 and are not expected to improve significantly in the near-term. In light of these market conditions the need to conserve and generate cash is expected to remain a top priority. We believe that the declines are in large part caused by softness in the corporate promotional segment of the market. As discretionary corporate budgets were reduced, purchases of imprintable activewear declined. When corporate events were cancelled or scaled back, purchases of imprintable activewear were eliminated or reduced. We detected very steep declines in our highest priced, private label and retail brand products. We detected a dramatic shift from basic 6-ounce T-shirts to basic 5-ounce T-shirts. The decline which exceeded 12% in October and 20% in November was dramatically reduced in December by unsustainable price reductions on the part of Trade brand suppliers.

The imprintable sportswear and accessories market is highly fragmented, with regional and local distributors accounting for the majority of sales. In the past, successful distributors possessed the ability to provide quick delivery of a relatively limited number of SKUs. While speed remains important, we believe that having substantial geographic coverage, broad product offerings and sophisticated marketing programs are also competitive advantages. Over the past several years, scale has allowed larger distributors like us to take advantage of favorable volume purchase pricing from suppliers, invest in the development of private label products and leverage investments in distribution systems and software.

 

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Business Strategy

Our goals are to become the most profitable supplier of imprintable sportswear and the provider of choice for our customers in a highly competitive, fragmented commodity industry while growing faster than the market. The following objectives are key components of our business strategy:

Consolidate the unconsolidated. Even prior to the acquisition of Amtex in 2006, we came to believe that continued growth through acquisitions would be challenging. Acquisitions of large competitors appeared legally difficult due to Broder’s high market share and acquisitions of small competitors appeared economically difficult since small competitors, while providing income to the working owner and family members, seldom provided attractive returns on the owner’s net investment. As a result, offers from Broder based on the companies earnings were rejected due to the small amount of cash available after paying bank loans.

At that time, Broder began to focus on consolidating operations that had not been consolidated during earlier acquisitions. In August 2006, Broder completed consolidation of seven legacy, single-brand call centers into three, multi-brand call centers able to answer customer calls for all three Broder brands. By December 2007, Broder completed the consolidation of 17 legacy, single-brand distribution centers into eight, multi-brand distribution centers able to ship orders for all three Broder brands. Since then, other single-brand activities have been consolidated. Certain aspects of credit and collections have been consolidated. All aspects of purchasing, inventory management and accounting have been consolidated.

Improve inventory management. Having consolidated all distribution centers and having completed comprehensive improvements to our Enterprise Resource Planning (“ERP”) system, management believes that it can lower the aggregate amount of inventory required to achieve required service levels. Non-brand-specific inventory management techniques allow Broder to capitalize on its scale to improve inventory productivity on the industry’s most popular products in ways that no competitor can match. In addition, Broder has the ability to “share” inventory among its distribution centers to keep a shortage of one size of a family of products of the same style and color from adversely impacting sales of the entire family.

Eliminating brand-specific purchasing and automating certain purchasing functions has allowed Broder to increase labor productivity among its purchasing and accounts payable personnel.

Reduce operating expenses. In addition to realizing cost reduction through consolidation, we rely on our superior scale, advanced technology, and experience to achieve superior operating expenses. Broder’s size relative to competitors creates opportunities for economies in general and administrative activities such as operations management, distribution center management, call center management, pricing administration, merchandising, purchasing, marketing, etc. Broder also utilizes low-cost, advanced technology in many aspects of its business to reduce costs. Examples of these technologies include using website technology to reduce the cost of order taking, using motorized picking to reduce the cost of fulfillment and using rotogravure to reduce the cost of printing catalogs. Broder uses its experience to achieve lower costs. Various aspects of how its distribution centers operate reflect low-cost, high quality approaches that have been learned after years of analysis and experimentation to determine best practices.

Improve Selling. We have devoted significantly more resources in recent years to improved selling. We have created a regional sales management organization that narrowed the spans of control for sales management. This has permitted sales managers to spend more time coaching salesmen and sharing best practices with them. We have segmented our customer base by their preferred brand, their apparent need for sales attention, and the frequency of sales attention needed. This has allowed us to minimize brand conflict by having one brand take responsibility for satisfying a customer’s sales needs and making certain the customer is called on by the correct combination of outside and inside sales professionals at the appropriate frequency. We have devoted more attention at national sales meetings to sales training. We have created incentive programs to share the benefits of increased sales with sales professionals. We have established recognition programs to honor our best sales personnel.

Improve Pricing. We attempt to satisfy the pricing requirements of our customers while maximizing gross profit. All products have list prices that reflect the typical economics of our products and customer orders. In addition, we evaluate offering special pricing to certain customers based on how our economics in serving them differ from typical economics. As a result, many customers enjoy accommodations that share Broder’s saving in serving them. On at least a weekly basis, Broder offers special pricing to essentially all customers to maintain competitiveness with other imprintable activewear distributors. Frequently, we offer customers special pricing for orders which are unusually large.

During 2008, Broder began to evaluate the financial impact of pricing on gross profit. We intend to use what we have learned to make better pricing decisions in the future.

Products

We distribute a wide range of undecorated or “blank” T-shirts, sweatshirts, polo shirts, outerwear, caps, bags and other imprintable items. Within our product selection, we offer recognizable basic brands purchased from trade brand suppliers such as Gildan, Russell, Hanes, Fruit of the Loom and Anvil. We offer industry-leading retail brands, such as adidas Golf, Champion, Rossignol and Alternative Apparel. Through the success of our premium brand strategy, we have demonstrated that prominent brands

 

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can gain access to a large untapped consumer segment by working with a well-managed, national distributor. These retail brand relationships differentiate our product line from those of our competitors. In addition, we offer a line of private label brands, such as Devon & Jones, HYP, Authentic Pigment, Harvard Square, Chestnut Hill and Harriton, which we believe are complementary to our trade brands. We believe this strategy strengthens our position as a destination point for our customers by providing them with higher quality products that are complementary to our trade brand products. In addition, we believe this strategy affords us higher gross margins and enables us to expand our product assortment to better service our existing channels not adequately serviced by trade brands and also reach new channels, such as specialty retail.

Our brands include:

Trade Brands

 

Adams Cap   Code V   Hanes   Rabbit Skins
American Apparel   Comfort Colors   Izod   Towels Plus
Anvil   Cross Creek   Jerzees   Van Heusen
Augusta   Econscious   LAT   Weatherproof
Bella   Fruit of the Loom   Liberty Bags   Yupoong
Canvas   Gildan   Outer Banks  

Retail Brands

 

Broder

 

Alpha

 

NES

180s   180s   180s
adidas Golf   adidas Golf   adidas Golf
Alternative Apparel   Alternative Apparel   Alternative Apparel
Big Accessories/Bag Edge   Big Accessories/Bag Edge   Big Accessories/Bag Edge
Champion   Champion   Champion
Dickies Chef   Dickies Chef   Dickies Chef
Dickies Workwear   Dickies Workwear   Dickies Workwear
Playback   Hyp Hats   Hyp Hats
Rossignol Pure Mountain Company   Playback   Playback
    Rossignol Pure Mountain Company

Private Label Brands

 

Broder

 

Alpha

 

NES

Chestnut Hill   Devon & Jones   Harvard Square
Harriton   Authentic Pigment   Authentic Pigment
  Apples & Oranges   Harriton
  Harriton   HYP
  HYP  

For the last three fiscal years our sales by brand were:

Percentage of Sales by Brand

 

     Fiscal Year  
     2008     2007     2006  

Trade brands

   79 %   75 %   73 %

Private label brands

   12 %   16 %   19 %

Retail brands

   9 %   9 %   8 %

 

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Competition

We compete in a highly fragmented market where local and small regional distributors with limited geographic coverage and product offerings are common to the industry. Generally, competition in each region also includes a branch of one or more other national distributors.

Competition is based on price, depth of inventory and service. Service includes breadth of product selection, access to leading brands, quality and delivery time and sophisticated marketing programs including catalogs, other marketing materials and websites. Over the past several years, our scale has allowed us to take advantage of favorable volume purchase pricing from suppliers and to leverage investments in distribution systems and software. We believe that we lead the industry in product selection, comprehensive marketing programs, extensive sales and service forces, and expansive distribution infrastructure.

Suppliers

Large scale and long-standing supplier relationships provide us with important purchasing and inventory management advantages relative to our competitors, as noted above. Our scale and purchasing power with our suppliers have resulted in a number of important benefits including marketing support, previews of new product launches and favorable purchasing terms. We do business with most of our suppliers on a purchase order basis. By maintaining close communication with suppliers, we are able to synchronize our inventory management and product purchases with supplier production cycles. Understanding short-term supplier activity enables us to better size our purchases, refine targeted inventory levels and take advantage of special buying opportunities. Approximately 64% of our fiscal 2008 sales were generated from products obtained from our top three suppliers. The table below shows our largest suppliers based on sales for fiscal 2008:

 

Supplier

   Percent of
Fiscal 2008 Sales
 

Gildan

   37.3 %

Hanes(1)

   13.4 %

Russell Corp.(2)

   12.8 %

Anvil

   7.7 %

Fruit of the Loom

   4.4 %

Other

   24.4 %

 

(1)

Includes Hanes, Outer Banks and Champion.

(2)

Includes Jerzees.

Customers

We sell to more than 75,000 customers nationwide, including screen printers, embroiderers and specialty advertisers. Our customer base is highly fragmented, as indicated in the table below:

 

Customer

   Percent of
Fiscal 2008 Sales
 

Top 10 Customers

   3.9 %

Top 100 Customers

   13.1 %

Top 1,000 Customers

   38.1 %

Seasonality

Historically, the first quarter of our fiscal year generates the lowest levels of net sales, gross profit and operating profit. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Seasonality”.

SALES AND MARKETING

Catalogs and Selling Materials

Our catalogs are the cornerstone of our marketing strategy and we believe that the Broder, Alpha and NES catalogs are the industry leaders in quality and breadth of selection. Our catalogs are designed to have the look and feel of high-end consumer retail catalogs with attractive models, appealing photographs and a clear display of products. In addition, we offer generic catalogs that can be customized to include our customers’ logos on the cover. We believe that our customized catalogs enhance the professional image of our customers, promote customer loyalty and allow us to more effectively sell our product lines. During 2008, we distributed over 3.6 million comprehensive catalogs, which included 1.6 million custom catalogs.

 

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National Sales Forces

Our salesmen represent the Broder, Alpha and NES brands to our customers. To minimize unproductive, inter-brand competition, customer relationships are the responsibility of regional sales managers whom we recently hired, as noted above in “Business Strategy and Outlook.” These managers determine which targeted customers will be called on by a team of outside and inside sales professionals and which will be called on by inside sales professionals, which brand-specific salesman will have responsibility for each customer, and how frequently the customer will be contacted.

National Sales Forces

Our salesmen represent the Broder, Alpha and NES brands to our customers. To minimize unproductive, inter-brand competition, customer relationships are the responsibility of regional sales managers whom we recently hired, as noted above in “Business Strategy and Outlook.” These managers determine which targeted customers will be called on by a team of outside and inside sales professionals and which will be called on by inside sales professionals, which brand-specific salesman will have responsibility for each customer, and how frequently the customer will be contacted.

We invest significant time in training and developing our sales forces. Our extensive training provides each sales force with a thorough knowledge of our products, marketing solutions and approaches to help customers growing their sales of our products. Each salesman is responsible for enhancing existing customer relationships as well as for prospecting and developing new relationships.

Call Centers and Customer Service Representatives

We maintain three call centers which as of December 31, 2008 were staffed with 129 full-time and 34 part-time representatives answering phone calls, emails, internet chat sessions and faxes to assist our customers in placing orders, checking stock levels, looking for price quotes or requesting adjustments and returns. While most call agents deal with only one of our three brands—some agents have been trained to respond to calls from multiple brands. During 2008, we began to upgrade customer service beyond traditional functions to include authorizing returns and discussing credit issues. This upgraded customer service is a feature of “Gold Service” which includes other benefits and is offered to customers who our sales organization believes would increase their sales based on this higher level of service. Our call centers are located in California, Florida and Massachusetts.

Trade Shows

During 2008 and 2007, we participated in fewer industry trade shows than in prior years. Instead, Broder, Alpha and NES have developed proprietary trade shows and events to compete with smaller competitors. Our major suppliers participate with us in our proprietary trade shows which allow us offer a more favorable customer experience than participation in industry trade shows by exhibiting our product offerings and sharing customer merchandising strategies and new promotions with our customers. We take advantage of proprietary trade shows and customer events as opportunities to expand and enhance our customer relationships. At customer events, we showcase our product offerings, meet with our customers and sponsor a social event to strengthen our customer relationships.

Websites

We maintain three industry-leading websites to support our Broder, Alpha and NES brands, including www.broderbros.com, www.alphashirt.com and www.nesclothing.com, each of which allow our customers to browse online versions of our catalogs, place orders, track order status, check inventory stock, learn about our promotions, review industry trends, and receive information on marketing resources. We introduced new websites in early 2007 for each of our brands. The new websites are more efficient and offer enhanced functionality, such as online processing of customer returns, freight cost comparisons and access to certain of our marketing materials to help our customers grow their businesses. In addition to our branded websites, we also host generic formats of our websites that allow our decorator customers to insert their own “cover” and branding. This functionality offers our customers a low-cost opportunity to leverage our customer service capabilities, promote our products, effectively service end-users and procure sales over the Internet. Through an ISP and our own internal web servers, we currently host nearly 13,000 active custom websites. In fiscal 2008, approximately 44% of our sales originated from our websites, an increase from approximately 36% of sales in fiscal 2007.

As a national distributor, we experience variation in mix of demand between regions. To accommodate these regional demand variations, we have developed a pricing system that allows us to set distinct prices for the same product in multiple geographic areas. This system allows us to respond to customers’ regional preferences with accuracy not possible under a national pricing strategy. While our catalogs serve as the backbone of our marketing strategy, they are supplemented by a number of other tools designed to

 

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make promoting our products as simple as possible for customers including break-out catalogs and sell sheets. Break-out catalogs are abbreviated versions of the catalogs that highlight a particular category of products. Sell Sheets are one-page summaries that spotlight a particular product and its attributes. Like the catalogs, these tools can be customized for customers.

Information Technology

We believe that we have one of the most sophisticated information technology systems in the industry. The systems include a fully integrated ERP system supporting order-entry, warehouse management, sales, purchasing, and financial requirements. Significant investments in hardware, database, phone, warehouse management, customer relationship management, internet applications, software, e-mail, security and system redundancy have been made during the past five years.

Employees

As of December 27, 2008, we employed a total of approximately 1,221 full-time and 105 part-time employees, none of whom are party to collective bargaining agreements. Our management believes that employee relations are good.

 

ITEM 1A. RISK FACTORS

If our cash provided by operating and financing activities is insufficient to fund our cash requirements, we could face substantial liquidity problems.

Historically, our ability to manage cash flow and working capital levels, particularly inventory and accounts payable, allowed us to meet our obligations during the seasonal low period, pay scheduled principal and interest payments, and provide funds for working capital, capital expenditures and other needs of the business. During fiscal year 2008, cash flow from operating activities decreased $29.9 million compared to fiscal 2007. This decrease in cash flow from operating activities has resulted in significant challenges to liquidity. We were not able to make our April 15, 2009 interest payment in respect of the 2010 Notes as a result of adverse changes in our liquidity position. If we had not consummated the Exchange Offer, holders of our 2010 Notes would have been able to accelerate the indebtedness due under such notes, which would have permitted the lenders under our revolving credit facility to accelerate the indebtedness outstanding thereunder.

As a result, there is a uncertainty regarding our ability to maintain liquidity sufficient to operate our business. Current credit and capital market conditions combined with our recent history of operating losses and negative cash flows, as well as projected industry conditions, are likely to restrict our ability to access capital markets in the near – term and any such access would likely be at an increased cost and under more restrictive terms and conditions. Further, such constraints may also affect our agreements and payment terms with vendors. If our vendors require us to pay for purchases up front or upon delivery, it is unlikely that we will be able to continue operating as a going concern.

We may not be able to satisfy our cash requirements in the near term from cash provided by operating activities. If our cash requirements exceed the cash provided by our operating activities, then we would look to our cash balance and committed credit lines to satisfy those needs. However, we may not be able to access our revolving credit facility if we are in default under our revolving credit agreement. Current credit and capital market conditions combined with our recent history of operating losses and negative cash flows, as well as projected industry conditions, are likely to restrict our ability to access capital markets in the near-term and any such access would likely be at an increased cost and under more restrictive terms and conditions. Further, such constraints may also affect our agreements and payment terms with vendors. If our vendors require us to pay up front or on delivery of products, it is unlikely that we will be able to continue operating as a going concern.

Absent access to additional liquidity from credit markets, which remain severely constrained, or other sources of external financial support, including accommodations from key vendors, we may not have the minimum levels of cash necessary to operate the business during 2009. We may need to delay capital expenditures, curtail, eliminate or dispose of substantial assets or operations. For a discussion of these and other factors affecting our liquidity, refer to “Liquidity Position” in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K.

Following the Exchange Offer, there were $11.5 million in principal amount of 2010 Notes outstanding. We may not have the funds to fulfill these obligations or the ability to refinance the obligations. If the maturity date occurs at a time we do not have the funds to fulfill these obligations or when other

 

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arrangements prohibit us from repaying the 2010 Notes, we would try to obtain waivers of such prohibitions from the lenders under those arrangements, or we could attempt to refinance the borrowings that contain the restrictions. If we could not obtain the waivers or refinance these borrowings, we would be unable to repay the 2010 Notes, which if uncured would cause a default under our revolving credit facility, which would likely cause us to file for bankruptcy.

Slowdowns in general economic activity have detrimentally impacted our customers and have had an adverse effect on our sales and profitability.

Our business is sensitive to the business cycle of the national economy. Deterioration in general economic conditions adversely affect demand for our products, and cause sales of our products to decrease. In addition, slowdowns in economic activity result in our customers shifting their purchases towards our lower-priced products, such as T-shirts, which adversely affects our gross profit margin. The current economic downturn has negatively impacted the imprintable sportswear market, causing a dramatic decrease in sales during the fourth quarter of 2008. In 2008, the market for imprintable activewear shrank by at least 6%. It shrank at least 11% in the fourth quarter of 2008. Such conditions have continued to persist into 2009 and are not expected to improve significantly in the near-term. The current economic crisis has caused many of our customers to cancel or scale back corporate events and purchases of products such as ours. This reduced customer demand has adversely affected our results of operations and may continue to do so. Further deterioration in economic conditions, along with decreasing levels of spending by our customers, will continue to adversely affect our revenues and profits through reduced purchases of our products. In such circumstances, we may reduce prices on certain items, which would further adversely affect our profitability.

In addition, there could be a number of other effects from the ongoing economic downturn. The inability of key suppliers to access liquidity, or the insolvency of key suppliers, could lead to delivery delays or failures. We grant credit to our customers in the normal course of business which subjects us to potential credit risk. Financial difficulties of our customers could adversely impact our results of operations. Finally, other counterparty failures, including banks and counterparties to other contractual arrangements, could negatively impact our business.

Our ability to access the credit and capital markets may be adversely affected by factors beyond our control, including turmoil in the financial services industry, volatility in financial markets and general economic downturns.

We rely upon access to the credit markets as a source of liquidity for the portion of our working capital requirements not provided by cash from operations. Market disruptions such as those currently being experienced in the U.S. and abroad may increase our cost of borrowing or adversely affect our ability to access sources of liquidity upon which we rely to finance our operations and satisfy our obligations as they become due. These disruptions include turmoil in the financial services industry, including substantial uncertainty surrounding particular lending institutions and counterparties with which we do business, unprecedented volatility in the markets where our outstanding indebtedness trades, and general economic downturns. If we are unable to access credit at competitive rates, or if our short-term or long-term borrowing costs dramatically increase, our ability to finance our operations, meet our short-term obligations and implement our operating strategy could be adversely affected. Additionally, if current credit and capital market conditions continue, it could have a material adverse effect on our ability to refinance all or any portion of our existing debt, and we may be unable to refinance our existing debt on terms acceptable to us, if at all.

Our industry is highly competitive and if we are unable to compete successfully we could lose customers and our sales may decline.

The imprintable sportswear and accessories market is a fragmented industry that is highly competitive. We face significant competition from national, regional and local distributors. There can be no assurance that we can continue to compete successfully with such competitors. Competition is based on price, product quality, breadth of product selection, quality of service and delivery times. To the extent that one or more of our competitors gains an advantage with respect to any key competitive factor, we could lose customers and our sales may decline. To remain competitive, we must review and adjust our pricing structure on a constant basis in response to price changes in our industry. To the extent we may be obligated to adjust our pricing policies to meet competition or we delay our pricing adjustments, our financial performance may be adversely affected if any of our competitors reduce their prices or we fail to increase prices in line with increases in our costs and expenses.

Prices of certain of the products we distribute, particularly T-shirts, are determined primarily based on market conditions, including the price of raw materials and available capacity in the industry. In general, we pass along to our customers any changes in the market price we pay for the products we distribute on a real-time basis. Due to competitive market conditions, the average selling

 

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prices for certain of the products we distribute, particularly T-shirts, have historically demonstrated a declining trend. During the fourth quarter of 2007, however, certain of our trade brand suppliers announced price increases. To maintain our gross profit margin, we increased selling prices to our customers. Due to the recent increase in the price of cotton, the five largest trade brand suppliers announced a price increase effective March 2008 and we again increased selling prices to our customers to maintain our gross profit margin.

Disruption in our distribution centers could adversely affect our results of operations.

We maintain eight distribution centers and ten Express locations nationwide. We may establish additional facilities to expand into new markets. A serious disruption to any distribution center or Express location or to the flow of goods in or out of our centers due to fire, earthquake, act of terrorism or any other cause could damage a significant portion of our inventory and could materially impair our ability to distribute our products to customers in a timely manner or at a reasonable cost. We could incur significantly higher costs and longer lead times associated with distributing our products to our customers during the time that it takes for us to reopen or replace a distribution center. As a result, any such disruption could have a material adverse effect on our business, results of operations and financial condition.

We obtain a significant portion of our products from a limited group of suppliers. Any disruption in their ability to deliver products to us or a decrease in demand for their products could have an adverse effect on our results of operations and damage our customer relationships.

We obtain a significant portion of the products we sell from a limited group of suppliers. Approximately 64% of the products we sold in fiscal 2008 were purchased from three suppliers: Gildan, Hanes and Russell Corp. These suppliers each account for 10% or more of the products sold by Broder, Alpha and NES on a combined basis. From time to time, we may experience difficulties in receiving orders from some of these suppliers or certain products may not be available. Their ability to supply us with our products is subject to a number of risks, including production problems at our suppliers’ facilities, work stoppages or strikes by our suppliers’ employees. The partial or complete loss of any of these sources could have an adverse effect on our results of operations and damage customer relationships. Consumer demand for these products may decrease based on a number of factors such as general economic conditions and public perception. In addition, a significant increase in the price of one or more of these products could have a material adverse effect on our results of operations.

Our relationships with most of our suppliers are terminable at will and the loss of any of these suppliers could have an adverse effect on our sales and profitability.

Our relationships with suppliers, including our relationships with suppliers of retail brands such as adidas Golf and Champion , and our trade brands, are generally not governed by written contracts. These relationships may be terminated at will by the supplier at any time. The loss of any of these suppliers could have an adverse effect on our sales and profitability.

We do not have any long-term contracts with our customers and the loss of customers could adversely affect our sales and profitability.

Our business is based primarily upon individual sales orders with our customers. We typically do not enter into long-term contracts with our customers. As such, our customers could cease buying our products from us at any time and for any reason. The fact that we do not have long-term contracts with our customers means that we have no recourse in the event a customer no longer wants to purchase products from us.

We must successfully predict customer demand for our private label products to succeed.

Our success with respect to our private label brands is largely dependent on our ability to predict customer demand. We enter into contracts for the purchase and manufacture of our private label brands in advance of the applicable selling season. Due to longer lead times than those for our other brands, we are vulnerable to demand and pricing shifts and to suboptimal merchandising. To the extent we are unable to accurately predict customer demand, our sales and operating results will be adversely affected and we may experience inventory write-downs in excess of previously established reserves. While we believe our current strategies and initiatives appropriately address this issue, changes in styles and trends could have a material adverse effect on our customer loyalty and on our operating results. Moreover, longer lead times for our private label brands require increased working capital, which could have an adverse effect on our liquidity position.

We rely significantly on one shipper to distribute our products to our customers and any service disruption could have an adverse effect on our sales.

Our ability to both maintain our existing customer base and to attract new customers is highly dependent on our ability to deliver products and fulfill orders in a timely and cost-effective manner. To ensure timely delivery of our products to our customers, we rely significantly on UPS to ship the vast majority of our products to our customers. This shipper may not continue to ship our product at

 

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its current pricing or its current terms. If there is any disruption in our shipper’s ability to deliver our products, including a disruption caused by a strike by our shipper’s employees, we may lose customers and our sales will be adversely affected. Further, should this shipper decide to terminate its contract with us, we may not be able to find an adequate replacement within a reasonable period of time and at a reasonable cost to us. To the extent that our current shipper increases its prices, we are unable to find a replacement or are required to hire a replacement at additional cost, our financial performance could be materially adversely affected.

If any of our distribution facilities were to unionize, we would incur increased risk of work stoppages and possibly higher labor costs.

None of our employees are party to collective bargaining agreements. If employees of any of our distribution facilities were to unionize, we would incur increased risk of work stoppages and possibly higher labor costs. Although all of our facilities are currently non-unionized, organization efforts have taken place in the past. If organization efforts at any of our facilities are successful, it could have an adverse effect on our relationships with employees, labor costs and financial performance.

Loss of key personnel or our inability to attract and retain new qualified personnel could hurt our business and inhibit our ability to operate and grow successfully.

Our success in the highly competitive markets in which we operate will continue to depend to a significant extent on our leadership team and other key management personnel. Our operations could be materially adversely affected if we are unable to retain these important executives and management personnel.

We may incur restructuring or impairment charges that would reduce our earnings.

We may incur restructuring charges in connection with recent or future acquisitions. These restructuring charges could be undertaken to realign our operations, eliminate duplicative functions, rationalize our operating facilities and products, and reduce our staff. We perform impairment evaluations for goodwill and indefinite-lived intangible assets at least annually in the fourth quarter, or upon a triggering event. As a result of the Alpha and NES acquisitions, we carried a significant amount of goodwill and intangible assets. As a result of performing our annual test for fiscal year 2007, we determined that our Alpha division had goodwill impairment and we recorded a non-cash goodwill impairment charge of $87.3 million. After recording the goodwill impairment charge, we had goodwill of approximately $51.3 million and indefinite-lived intangible assets of $35.6 million as of year end. Following our fiscal 2008 annual test for impairment, we determined that the full amount of the remaining goodwill on the Alpha and Broder divisions had become impaired as a result of weakened demand for our products in the fourth quarter of fiscal 2008 and anticipated weakened demand in 2009 relative to the same periods in fiscal 2008. We recorded non-cash impairment charges of $39.0 million and $11.9 million for goodwill on our Alpha and Broder divisions, respectively, in the fourth quarter of 2008. In addition, following our fiscal 2008 annual test for impairment of our Alpha Trade Name asset, we determined that an impairment in value had occurred and we recorded a non-cash impairment charge of $11.6 million in the fourth quarter of 2008. We will likely continue to incur impairment charges if the current economic slowdown continues or becomes worse.

The ability to realize long-lived assets is evaluated periodically as events or circumstances indicate a possible inability to recover their carrying amount. Such evaluation is based on various analyses, including undiscounted cash flow and profitability projections that incorporate, as applicable, the impact on the existing business. The analyses necessarily involve significant management judgment. Any impairment loss, if indicated, is measured as the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset.

The impairment test procedures performed in accordance with our annual impairment testing require us to make comprehensive estimates of future revenues and cash flows. Due to uncertainties associated with such estimates, actual results could differ from such estimates. Material differences between actual results and the estimates used may result in the determination that some or all of our intangible assets have become impaired, which could result in additional impairment charges in the future. If we determine that there are additional impairments to our intangibles in the future, the resulting non-cash charge could be substantial.

We may not successfully identify or complete future acquisitions or establish new distribution facilities, which could adversely affect our business.

We have expanded our business partly through acquisitions and by establishing new distribution facilities in new markets and we may continue to do so in the future. We may not succeed in identifying suitable acquisition candidates, completing acquisitions, integrating acquired operations into our existing operations, or expanding into new markets either through acquisitions or establishing new facilities.

In addition, future acquisitions could have an adverse effect on our operating results, particularly in the fiscal quarters immediately following their completion while we integrate the operations of the acquired business. Acquired operations or new facilities may not achieve levels of revenue, profitability or productivity comparable with those achieved by our existing operations, or otherwise perform as expected.

 

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As a result of the Exchange Offer, former holders of our 2010 Notes have the right to appoint a majority of our board of directors.

As a result of the Exchange Offer, funds affiliated with Bain Capital no longer own a majority of the stock of our company and no longer control our board of directors. Three of our five directors were appointed (or are remaining to be appointed) by former holders of our 2010 Notes in connection with the Exchange Offer. Our future success depends in part on the ability of our new board of directors to successfully implement our strategy while maintaining the strength of our company. If our new board fails to effectively implement our business strategy, we may be unable to maintain or grow our business in the manner in which we expect.

Our substantial level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations.

We have substantial indebtedness. As of December 27, 2008, we had approximately $385.6 million of total indebtedness, which includes $225.0 million related to our 2010 Notes. As of December 27, 2008, on a pro forma basis giving effect to the Exchange Offer, we would have had approximately $266.6 million of total indebtedness, including approximately $11.5 million related to our 2010 Notes and $94.9 million related to our 2013 Notes. In addition, subject to restrictions in the indentures governing our 2013 Notes and our revolving credit facility, we may incur additional indebtedness. The high level of our indebtedness could have important consequences, including the following:

 

   

it may be more difficult for us to satisfy our obligations with respect to our indebtedness;

 

   

our ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes may be impaired;

 

   

we must use a substantial portion of our cash flow from operations to pay interest and principal on our indebtedness, which will reduce the funds available to us for other purposes, such as capital expenditures;

 

   

we may be limited in our ability to borrow additional funds;

 

   

we may have a higher level of indebtedness than some of our competitors, which may put us at a competitive disadvantage and reduce our flexibility in planning for, or responding to, changing conditions in our industry, including increased competition; and

 

   

we are more vulnerable to economic downturns and adverse developments in our business.

We expect to obtain the money to pay our expenses and to pay the principal and interest on our 2013 Notes, our revolving credit facility and other debt from cash flow from our operations. Our ability to meet our expenses thus depends on our future performance, which will be affected by financial, business, economic and other factors. We will not be able to control many of these factors, such as economic conditions in the markets where we operate and pressure from competitors. Our cash flow may not be sufficient to allow us to pay principal and interest on our debt and meet our other obligations. If we do not have enough liquidity, we may be required to refinance all or part of our existing debt, sell assets or borrow more money. We may not be able to do so on terms acceptable to us, if at all. In addition, the terms of existing or future debt agreements, including our revolving credit facility, may restrict us from pursuing any of these alternatives.

Our failure to comply with restrictive covenants contained in our revolving credit facility or the indentures governing our 2013 Notes could lead to an event of default under such instruments.

Our revolving credit facility and the indenture that governs the 2013 Notes impose significant covenants on us. The agreement governing our revolving credit facility also requires us to achieve specified financial and operating results and maintain compliance with specified financial ratios and satisfy other financial condition tests. Our ability to comply with these ratios may be affected by events beyond our control. Our breach of any of these restrictive covenants or our inability to comply with the required financial ratios could result in a default under the agreement governing our revolving credit facility. If a default occurs, the lenders under our revolving credit facility may elect to declare all borrowings outstanding, together with all accrued interest and other fees, to be immediately due and payable which would result in an event of default under the 2013 Notes. The lenders would also have the right in these circumstances to terminate any commitments under our revolving credit facility they have to provide further borrowings. If we are unable to repay outstanding borrowings when due, the lenders under our revolving credit facility will also have the right to proceed against our collateral, including our available cash, granted to them to secure the indebtedness. If the indebtedness under our revolving credit facility or 2013 Notes were to be accelerated, we cannot assure you that our assets would be sufficient to repay in full that indebtedness and our other indebtedness.

Despite current anticipated indebtedness levels and restrictive covenants, we may incur additional indebtedness in the future.

Despite our current level of indebtedness, we may be able to incur substantial additional indebtedness, including additional secured indebtedness. The terms of the indenture governing our Senior Notes do not limit the amount of unsecured indebtedness we

 

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may incur. Although our existing credit agreement contains restrictions on our ability to incur additional indebtedness, these restrictions are subject to important exceptions and qualifications, including with respect to our ability to incur additional senior secured debt. If we or our subsidiaries incur additional indebtedness which is permitted under these agreements, the risks that we and they now face as a result of our leverage could intensify. If our financial condition or operating results deteriorate, our relations with our creditors, including the holders of the Senior Notes, the lenders under our secured credit facility and our suppliers, may be materially and adversely affected.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2. PROPERTIES

We are headquartered in Trevose, Pennsylvania, and operate eight distribution centers and ten Express locations nationwide. Our distribution facilities are located strategically throughout the country to take advantage of ground parcel service, shipping regions and population density. We use UPS for the vast majority of our shipments. Each of our facilities is leased. The leases for such facilities are scheduled to expire between 2010 and 2018. We believe our current facilities are generally well maintained and provide adequate warehouse and distribution capacity for future operations. Our facility locations at December 27, 2008 are listed below:

 

Location

  

Division

   Distribution
Center
   Express
Facility
   Call
Center
   Office    Sq. Feet
(000s)(1)
Trevose, Pennsylvania    Corporate             ü      46
Bolingbrook, Illinois    Broder/Alpha/NES    ü               425
Lewisberry, Pennsylvania    Broder/Alpha/NES    ü               413
Dallas, Texas    Broder/Alpha    ü               358
Orlando, Florida    Broder/Alpha    ü               340
Fresno, California    Broder/Alpha    ü         ü         332
Duluth, Georgia    Broder/Alpha/NES    ü               321
Middleboro, Massachusetts    Broder/Alpha/NES    ü         ü      ü      290
Seattle, Washington    Broder/Alpha    ü               160
Philadelphia, Pennsylvania (2)    Broder/Alpha/NES       ü            25
Stafford, Texas    Broder/Alpha       ü            32
Plymouth, Michigan (3)    Broder/Alpha/NES       ü            25
St. Petersburg, Florida    Broder/Alpha       ü      ü         69
Charlotte, North Carolina (4)    Broder/Alpha/NES       ü            25
St. Louis, Missouri    Broder/Alpha       ü            33
Santa Fe Springs, California    Broder/Alpha       ü            33
Indianapolis, Indiana    Broder/Alpha       ü            25
Louisville, Kentucky    Broder/Alpha       ü            25
Bensenville, Illinois    Broder       ü            4

 

(1) Includes warehouse and corporate space.
(2) Total leased space is 286,000 square feet. Location previously served as an Alpha distribution center.
(3) Total leased space is 117,000 square feet. Location previously served as a Broder distribution center.
(4) Total leased space is 63,000 square feet. Location previously served as an NES distribution center.

 

ITEM 3. LEGAL PROCEEDINGS

We are involved from time to time in routine legal matters and other claims incidental to our business. When it appears probable in management’s judgment that we will incur monetary damages or other costs in connection with such claims and proceedings, and such costs can be reasonably estimated, liabilities are recorded in the financial statements and charges are recorded against earnings. We believe the resolution of such routine matters and other incidental claims, taking into account reserves and insurance, will not have a material adverse effect on our financial condition or results of operations.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

 

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PART II

 

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

There is currently no established public trading market for any class of our common stock. As of May 15, 2009, there were: (1) 9 record holders of our Class A common stock; (2) 10 record holders of our Class B common stock; (3) 9 record holders of our Class L, Series 1 common stock; (4) 9 record holders of our Class L, Series 2 common stock; (5) 10 record holders of our Class L, Series 3 common stock; (6) 10 record holders of our Class L, Series 4 common stock; (7) 9 record holders of our Class L, Series 1 warrants; and (8) 10 record holders of our Class L, Series 3 warrants. As a result of the Exchange Offer and our subsequent conversion to a Delaware corporation, we will have one class of common stock with approximately 110 record holders after May 20, 2009.

We have not in the past paid, and do not expect for the foreseeable future to pay, dividends on any classes of our common stock. Instead, we anticipate that all of our earnings in the foreseeable future will be used in the operation and expansion of our business. Any future determination to pay dividends will be at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements and contractual restrictions, including restrictions under our revolving credit facility and the indenture governing our 2013 Notes, and any other considerations our board of directors deems relevant.

 

ITEM 6. SELECTED FINANCIAL DATA

The following tables present the summary historical financial data of the Company as of the dates and for the periods indicated. The financial information for the Company as of December 31, 2008, 2007, 2006, 2005 and 2004 and for the fiscal years ended December 31, 2008, 2007, 2006, 2005 and 2004 has been derived from the historical financial statements audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm.

The following financial information reflects the acquisitions of certain businesses during the period 2004 through 2006, including:

 

   

NES, a leading distributor of imprintable sportswear in New England, which was acquired in August 2004; and

 

   

Amtex Imports Inc., a regional distributor located in the Chicago, IL market, which was acquired in September 2006.

 

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The summary information below should be read in conjunction with Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Financial Statements and Notes thereto, included in Item 8 in this Form 10-K.

 

     Fiscal Year Ended December 31, (1)  
     2008     2007     2006     2005     2004  
     (dollars in thousands)  

Statement of Income Data:

          

Net sales

   $ 926,074     $ 929,124     $ 959,268     $ 978,417     $ 877,373  

Cost of sales (exclusive of depreciation and amortization included in warehousing, selling and administrative below)

     762,047       762,971       778,549       798,419       720,056  
                                        

Gross profit

     164,027       166,153       180,719       179,998       157,317  

Warehousing, selling and administrative (2)

     127,662       137,267       130,483       126,833       108,112  

Depreciation and amortization

     18,041       20,108       19,562       19,124       19,590  

Restructuring and asset impairment charges, net (3)

     2,717       12,994       4,089       1,880       3,528  

Goodwill and trade name impairment (4)

     62,504       87,261       —         —         —    
                                        

Total operating expenses

     210,924       257,630       154,134       147,837       131,230  
                                        

Income (loss) from operations

     (46,896 )     (91,477 )     26,585       32,161       26,087  

Interest expense, net (5)

     35,728       38,416       40,358       36,713       28,541  

Other (income) expense

     —         —         —         —         400  
                                        

Total other expense, net

     35,728       38,416       40,358       36,713       28,941  
                                        

Loss before income tax benefit

     (82,625 )     (129,893 )     (13,773 )     (4,552 )     (2,854 )

Income tax benefit

     (13,755 )     (5,834 )     (6,036 )     (1,641 )     (1,349 )
                                        

Net Loss

   $ (68,870 )   $ (124,059 )   $ (7,737 )   $ (2,911 )   $ (1,505 )
                                        

Other Financial Data:

          

Cash flow from (used in) operating activities (6)

   $ (8,821 )   $ 21,137     $ (1,076 )   $ (35,797 )   $ 5,382  

Cash flow from (used in) investing activities

     (2,794 )     (8,460 )     (15,646 )     (6,226 )     (34,693 )

Cash flow from (used in) financing activities

     9,736       (12,313 )     17,687       43,007       28,457  

Capital expenditures (7)

     3,032       8,460       8,892       6,323       4,198  

Balance Sheet Data (at period end):

          

Cash

   $ 2,755     $ 4,634     $ 4,270     $ 3,305     $ 2,321  

Working capital

     204,690       171,273       211,288       195,107       140,300  

Total assets

     388,959       437,232       580.278       566,462       538,208  

Total debt and capital lease obligations

     385,624       342,573       344,297       319,148       271,422  

Shareholders’ equity (deficit)

     (126,875 )     (58,365 )     65,643       73,313       76,083  

 

(1)

We operate on a 52- or 53-week year basis with the year ending on the last Saturday of December. Fiscal years 2008, 2007, 2006 and 2004 consisted of 52 selling weeks and fiscal year 2005 consisted of 53 selling weeks.

(2)

Warehousing, selling and administrative expenses include management and advisory fees to Bain Capital totaling $3.0 million, $1.6 million, $1.9 million and $0.6 million for the fiscal years ended December 31, 2006, 2005, 2004 and 2003, respectively. There were no management or advisory fees paid to Bain Capital in fiscal 2008 or 2007.

(3)

Restructuring charges of $2.8 million in fiscal 2008 consist of $1.1 million in severance charges, $0.7 million in interest accretion, and $1.4 million resulting from changes in sublease assumptions partially offset by a reduction to the restructuring charge of approximately $0.5 million as the Company executed a buyout agreement for its Stafford, TX distribution center. The severance expense includes approximately $1.0 million related to a workforce reduction announced by the Company in December 2008. Restructuring charges of $13.0 million in fiscal 2007 consist primarily of distribution center closure costs incurred in connection with our distribution center consolidation plan, net of a reduction of $1.5 million related to two sublease agreements entered into in 2007 for the former LaMirada facility. Restructuring charges of $4.1 million recorded in fiscal 2006 consist primarily of distribution center closure costs incurred in connection with our distribution center consolidation plan and call center closure costs resulting from the reduction in call centers we operate from seven to three. Restructuring charges of $1.9 million recorded in fiscal 2005 consist of distribution center closure costs in connection with our distribution center consolidation plan and NES division corporate staff reductions resulting from the NES integration. Restructuring charges of $3.5 million recorded in fiscal 2004 consist of a non-cash fixed asset impairment charge for the disposal of computer software resulting from the Alpha integration, lease termination costs and severance and related benefits charges resulting from the Alpha and NES integrations.

 

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(4)

During the quarter ended December 31, 2007, as part of our annual impairment evaluation, we recorded a non-cash goodwill impairment charge of $87.3 million related to the goodwill associated with our acquisition of Alpha Shirt Company in September 2003. During the quarter ended December 31, 2008, as part of our annual impairment evaluation, we recorded an additional non-cash goodwill impairment charge of $50.9 million related to the goodwill and a non-cash impairment charge of $11.6 million related to the value of our Alpha Trade Name asset. See Note 2 for more information.

(5)

We sold $175.0 million in 11  1/4% Senior Notes due 2010 in September 2003 to finance the Alpha acquisition and repay existing indebtedness of Broder and Alpha. In November 2004, we sold an additional $50.0 million in 11  1/4% Senior Notes due 2010 to repay a portion of our then-outstanding borrowings under our revolving credit facility. In August 2006, we entered into an amended and restated revolving credit facility and wrote off $3.0 million of unamortized debt issuance costs related to the former revolving credit agreement.

(6)

Cash flow used in operating activities in fiscal 2005 included a $41.8 million increase in inventory due to the introduction of four new private label brands and an expansion of styles within brands.

(7)

Capital expenditures exclude non-cash capital expenditures financed through capital leases.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

We are a leading distributor of imprintable sportswear and accessories in the United States. Imprintable sportswear and accessories is an estimated $8 billion U.S. market at wholesale prices and includes undecorated or “blank” T-shirts, sweatshirts, polo shirts, outerwear, caps, bags and other imprintable accessories that are decorated for various purposes. We purchase product from more than 70 suppliers, including Russell, Fruit of the Loom, Hanes, Anvil and Gildan. Retail brand suppliers include Adidas Golf and Champion. We added Alternative Apparel and Dickies as retail brands to our 2008 assortment and Rossignol and Dickies Chef to our 2009 assortment. In addition to purchasing from these distribution suppliers, we develop and source products from over 13 countries to support our private label brands, which include the Devon & Jones, Chestnut Hill, Authentic Pigment, Harriton, HYP and Harvard Square brands. Our products are sold to over 75,000 customers, primarily advertising specialty companies, screen printers, embroiderers and specialty retailers who decorate our blank product with corporate logos, brands and other images. Our decorator customers then sell imprinted sportswear and accessories to a highly diversified range of end-consumers, including Fortune 1000 companies, sporting venues, concert promoters, athletic leagues, educational institutions and travel resorts. We believe our end-consumers are increasingly recognizing imprintable sportswear and accessories as highly differentiated, cost-effective advertising and promotional tools that help them grow their respective businesses and brand images. As a result, imprintable sportswear unit volume has grown significantly over the last ten years, increasing at a compound annual growth rate of approximately 6%.

Gross profit declined in the fourth quarter of 2008 compared to 2007. Management believes that gross profit will continue to decline for at least part of 2009 compared to same periods in 2008 due to the softened demand for our products. While we remain optimistic about our ability to continue to grow sales of lower-priced products, we are concerned about continuing declines in demand for higher-priced products.

Beginning in the forth quarter of fiscal 2008, we began to face increased challenges related to our liquidity. We attribute these challenges to the following factors:

 

   

deterioration in economic conditions;

 

   

decreasing levels of spending by our customers; and

 

   

a recent lack of vendor financing.

Further deterioration in economic conditions may continue to adversely affect our revenues and profits through reduced purchases of our products. In such circumstances, we may reduce prices on certain items, which would further adversely affect our profitability and liquidity and may inhibit our ability to finance our operations service our debt, manage our working capital or obtain additional capital.

Exchange Offer and Liquidity Considerations

During 2008, weakened economic conditions, largely attributable to the global credit crisis and erosion of consumer confidence, negatively impacted the markets in which we operate. As a result, we explored various strategic and financing alternatives This process culminated in the consummation on May 20, 2009 of an exchange offer for our $225.0 million aggregate principal amount of 11 1/4% Senior Notes due October 15, 2010 for $94.9 million of our newly issued 2013 Notes and a pro rata share of 96% of our

 

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outstanding common stock. Our stockholders who held our common stock prior to the Exchange Offer hold 4% of our currently outstanding common stock and received warrants to purchase 1,474,201 shares of our common stock in the Exchange Offer. Approximately $11.5 million in aggregate principal amount of the 2010 Notes remain outstanding. On May 20, 2009, in connection with the Exchange Offer, cancelled our previously outstanding Class A common stock and Class B common stock and converted our Class L common stock to a new single class of common stock and we converted to a Delaware corporation. See Note 3 to our Financial Statements included elsewhere in this Annual Report on Form 10-K for more information.

Following the exchange offer, there were $11.5 million in principal amount of 2010 Notes outstanding. These notes will mature on October 15, 2010, upon which the entire outstanding principal amount of the 2010 Notes, together with accrued and unpaid interest, will become due and payable. As of December 27, 2008, we had $2.8 million in cash. If the maturity date occurs at a time when we do not have the funds to fulfill these obligations or other arrangements prohibit us from repaying the 2010 Notes, we would try to obtain waivers of such prohibitions from the lenders under those arrangements, or we could attempt to refinance the borrowings that contain the restrictions. If we could not obtain the waivers or refinance these borrowings, we would be unable to repay the 2010 Notes, which if uncured would cause a default under our revolving credit facility, which would likely cause us to file for bankruptcy.

Acquisitions and Related Cost Savings

In September 2003, we acquired all of the outstanding capital stock of Alpha pursuant to a stock purchase agreement entered into in July 2003. Immediately after consummation of the acquisition, Alpha and its subsidiaries were merged with and into Broder Bros., Co., except for ASHI, Inc., which became a direct, wholly owned subsidiary of the Company until it also was subsequently merged with and into Broder Bros., Co. in 2005. The total cash consideration in the acquisition was $246.5 million. The aggregate cash costs of the acquisition, together with the funds necessary to refinance certain existing indebtedness and pay the related fees and expenses, were financed by $76.0 million of new equity contributed by Bain Capital, management and other investors; borrowings of $92.0 million under a $175.0 million revolving credit facility; and net proceeds from the issuance and sale of $175.0 million of 2010 Notes.

In August 2004, we acquired all the shares of beneficial interest of NES Clothing Company Holdings Trust (“NES”), a leading distributor of imprintable sportswear in New England. The purchase price was approximately $31.7 million, which included payment of consideration to NES shareholders, retirement of all NES indebtedness and payment of transaction fees. We funded the acquisition with $12.4 million of new equity invested by Bain Capital and $19.3 million of borrowings using available capacity under our revolving credit facility. NES and its subsidiary were merged with and into Broder Bros., Co. As a result of such merger, NES’s and its subsidiary’s corporate existences were terminated.

In September 2006, we acquired substantially all of the assets of Amtex Imports Inc. (“Amtex”), an imprintable activewear distributor based in Northlake, Illinois. Amtex was a single location distributor and the acquisition facilitated our entry into the Chicago market. The acquisition was financed with borrowings under our asset-based revolving credit facility and was substantially supported by the incremental borrowing capacity provided by the assets of Amtex.

RESULTS OF OPERATIONS

We operate on a 52- or 53-week year basis with the fiscal year ending on the last Saturday of December. For convenience, the financial information included in this Annual report on Form 10-K has been presented as ending on the last day of the nearest calendar month. Fiscal years 2008, 2007 and 2006 each consisted of 52 selling weeks. Tables and other data in this section may not total due to rounding.

The following table sets forth the amounts and the percentages of net sales that items in the statement of operations constitute for the periods indicated:

Fiscal Year 2008 Compared to Fiscal Year 2007

 

     Fiscal Year Ended December 31,  
     2008     2007     Increase/
(Decrease)
 
     (dollars in millions)  

Net sales

   $ 926.1    100.0 %   $ 929.1    100.0 %   $ (3.0 )   (0.3 )%

Cost of sales (exclusive of depreciation and amortization as shown below)

     762.1    82.3       762.9    82.1       (0.8 )   (0.1 )
                              

Gross profit

     164.0    17.7       166.2    17.9       (2.2 )   (1.3 )

Warehousing, selling and administrative expenses

     127.7    13.8       137.3    14.8       (9.6 )   (7.0 )

Depreciation and amortization

     18.0    1.9       20.1    2.2       (2.1 )   (10.4 )

 

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     Fiscal Year Ended December 31,  
     2008     2007     Increase/
(Decrease)
 
     (dollars in millions)  

Restructuring and asset impairment charges

     2.7     0.3       13.0     1.4       (10.3 )   (79.2 )

Goodwill and trade name impairment charge

     62.5     6.7       87.3     9.4       (24.8 )   (28.4 )
                                

Loss from operations

     (46.9 )   (5.1 )     (91.5 )   (9.8 )     44.6     (48.7 )

Interest expense, net

     35.7     3.9       38.4     4.1       (2.7 )   (7.0 )

Income tax benefit

     (13.7 )   (1.5 )     (5.8 )   (0.6 )     (7.9 )   136.2  
                                

Net loss

   $ (68.9 )   (7.4 )%   $ (124.1 )   (13.4 )%   $ 55.2     (44.5 )%

Net Sales. Net sales decreased by approximately $3.0 million, or 0.3%, from $929.1 million for the year ended December 29, 2007 to $926.1 million for the year ended December 27, 2008. This decrease resulted from the combination of a decrease in unit volume (estimated impact of $25.2 million) partially offset by an increase in average selling prices and product mix (estimated impact of $22.2 million).

Gross Profit. Gross profit decreased by $2.2 million, or 1.3%, from $166.2 million for the year ended December 29, 2007 to $164.0 million for the year ended December 27, 2008. The decrease in gross profit was attributable to lower unit volumes partially offset by higher gross profit per unit. Gross margin was 17.7% and 17.9% for the years ended December 27, 2008 and December 29, 2007, respectively.

Warehousing, Selling and Administrative Expenses (Including Depreciation and Amortization). Warehousing, selling and administrative expenses, including depreciation and amortization, decreased $11.7 million, or 7.4%, from $157.4 million for the year ended December 29, 2007 to $145.7 million for the year ended December 27, 2008. The decrease was primarily the result of: (i) approximately $7.1 million of incremental travel and training costs and duplicative rent expense associated with the opening of multi-branded distribution centers that were recorded in the year end December 29, 2007; (ii) $2.7 million in reduced marketing expense related to the sweepstakes promotion which took place in the prior year; (iii) and $2.4 million in lower variable distribution center operations expense as our new distribution centers operated more efficiently in the current year; (iv) approximately $2.1 million in lower depreciation and amortization resulting from higher depreciation due to fixed asset additions in our new multi-branded distribution centers, partially offset by less amortization expense due to definite-lived intangible assets which have become fully amortized ; (v) $1.5 million in lower net catalog expense; (vi) $1.2 million in lower customer service variable expense; (vii) $1.1 million in lower bonus expense; (viii) $1.1 million in lower employee medical benefits expense; partially offset by (ix) $3.0 million in higher bad debt expense; (x) $1.9 million in higher selling expenses consisting of salaries and benefits for regional sales managers and higher sales commissions expenses primarily as a result of the hiring of regional sales managers in late 2007 and early 2008; (xi) $1.4 million in higher rent expense; and (xii) $1.1 million in higher marketing events expense, partially offset by $0.4 million in lower trade show expense.

Restructuring and Asset Impairment Charges, Net. As more fully described in Note 15 to the Financial Statements included in this Form 10-K, we recorded restructuring charges of $2.7 million and $13.0 million during the years ended December 27, 2008 and December 29, 2007, respectively. During the year ended December 27, 2008 such restructuring charges consisted of $1.1 million in severance charges, $0.7 million in interest accretion and $1.4 million resulting from changes in sublease assumptions partially offset by a reduction to the restructuring charge of approximately $0.5 million as the Company executed a buyout agreement for its Stafford, TX distribution center. The severance expense includes approximately $1.0 million related to a workforce reduction announced by the Company in December 2008. The restructuring charges recorded during the year ended December 29, 2007 consisted of $12.8 million in lease termination and other costs plus $1.7 million in severance and related benefits charges resulting from our distribution center consolidation initiative, offset by a $1.5 million reversal of restructuring charges previously recorded due to executing a sublease for our La Mirada, CA distribution center in excess of the amount originally estimated.

Goodwill and Trade Name Impairment Charges. Following the Company’s fiscal 2008 annual test for impairment, we determined that the full amount of the remaining goodwill on the Alpha and Broder divisions had become impaired. As a result of weakened demand for the Company’s products in the fourth quarter of fiscal 2008 and anticipated weakened demand in 2009 relative to the same periods in fiscal 2008, the Company recorded non-cash impairment charges of $39.0 million and $11.9 for goodwill on its Alpha and Broder divisions, respectively, in the fourth quarter of 2008. In addition, following the Company’s fiscal 2008 annual test for impairment of its Alpha Trade Name asset, we determined that an impairment in value had occurred and we recorded a non-cash impairment charge of $11.6 million in the fourth quarter of 2008. Following the Company’s fiscal year 2007 annual test for goodwill impairment, we determined that a change in the composition of the Alpha division’s tangible and intangible assets had occurred. Due primarily to an increase in the value of Alpha’s tangible assets, the Alpha division recorded a non-cash goodwill impairment charge of $87.3 million during the fourth quarter 2007. These non-cash impairment charges do not affect the Company’s compliance with any covenants under the agreements governing its indebtedness, including the 2010 Notes.

 

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Income (Loss) from Operations. As a result of the factors described above, loss from operations decreased by approximately $44.6 million, from a loss of $91.5 million for the year ended December 29, 2007 to a loss of $46.9 million for the year ended December 27, 2008.

Interest Expense. Interest expense, net was $35.7 million and $38.4 million for the years ended December 27, 2008 and December 29, 2007, respectively. The reduced interest expense is due primarily to the lower weighted average interest rate during the year ended December 27, 2008, partially offset by higher debt balances.

Income Taxes. The income tax benefit was approximately $13.7 million for the year ended December 27, 2008 compared with an income tax benefit of $5.8 million for the year ended December 29, 2007. The difference between the U.S. federal statutory rate and the effective benefit rate relates primarily to the valuation allowance recorded during the quarter. Due to our continued net operating losses and our net deferred tax asset position, we recorded a $14.6 million increase to our valuation allowance during the year ended December 27, 2008. The valuation allowance for deferred tax assets relates principally to the uncertainty of the utilization of certain deferred tax assets, primarily tax loss carryforwards in various jurisdictions. The valuation allowance was calculated in accordance with the provisions of SFAS No. 109, which requires that a valuation allowance be established and maintained when it is “more likely than not” that all or a portion of deferred tax assets will not be realized. The Company recorded an additional increase to the valuation allowance of $14.6 million during the year ended December 27, 2008 which is primarily attributable to the impairment of tax deductible goodwill and management’s decision to reclassify the Alpha trade name from an indefinite lived intangible asset to a definite lived intangible asset starting in the first quarter of fiscal 2009. The associated deferred tax liability related to the Alpha trade name was previously treated as a naked credit and not included in the netting of deferred tax assets and liabilities. As a result of the change in the life of the Alpha trade name, there is now a defined period of time related to the reversal of the deferred tax liability. Management considered this future source of income when determining the yearend deferred taxes and valuation allowance.

Net Loss. As a result of the factors described above, net loss decreased by $55.2 million from a net loss of $124.1 million for the year ended December 29, 2007 to a net loss of $68.9 million for the year ended December 27, 2008.

Fiscal Year 2007 Compared to Fiscal Year 2006

 

     Fiscal Year Ended December 31,  
     2007     2006     Increase/
(Decrease)
 
     (dollars in millions)  

Net sales

   $ 929.1     100.0 %   $ 959.3     100.0 %   $ (30.2 )   (3.1 )%

Cost of sales (exclusive of depreciation and amortization as shown below)

     762.9     82.1       778.6     81.2       (15.7 )   (2.0 )
                                

Gross profit

     166.2     17.9       180.7     18.8       (14.5 )   (8.0 )

Warehousing, selling and administrative expenses

     137.3     14.8       130.4     13.6       6.9     5.3  

Depreciation and amortization

     20.1     2.2       19.6     2.0       0.5     2.6  

Restructuring and asset impairment charges

     13.0     1.4       4.1     0.4       8.9     217.1  

Goodwill impairment charge

     87.3     9.4       —       —         87.3     —    
                                

Income (loss) from operations

     (91.5 )   (9.8 )     26.6     2.8       (118.1 )   (444.0 )

Interest expense, net

     38.4     4.1       40.3     4.2       (1.9 )   (4.7 )

Income tax benefit

     (5.8 )   (0.6 )     (6.0 )   (0.6 )     (0.2 )   (3.3 )
                                

Net loss

   $ (124.1 )   (13.4 )%   $ (7.7 )   (0.8 )%   $ (116.4 )   1,511.7  

 

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Net Sales. Net sales decreased by approximately $30.2 million, or 3.1%, from $959.3 million for the year ended December 30, 2006 to $929.1 million for the year ended December 29, 2007. This decrease resulted from the combination of a decrease in average selling prices and product mix (estimated impact $15.1 million) and a decrease in unit volume (estimated impact of $14.8 million). Trade brand revenues declined on lower volume and higher margin products as we continued to sell fewer low margin white T-shirts. Lower pricing in key styles did not increase volumes and revenues. Insufficient private label inventory levels in key styles during the second and third quarters of 2006 contributed to volume declines during fiscal year 2007 compared to fiscal year 2006 due to a greater than anticipated loss of placement of some important products in customer programs.

Gross Profit. Gross profit decreased by $14.5 million, or 8.0%, from $180.7 million for the year ended December 30, 2006 to $166.2 million for the year ended December 29, 2007. The decrease in gross profit was attributable to lower unit volumes in trade and private label brands. We continued to sell fewer low margin white t-shirts during fiscal 2007. Gross profit from private label brand products declined compared to the prior year due to lower unit volumes sold at higher gross margins. Gross margin was 17.9% and 18.8% for the years ended December 29, 2007 and December 30, 2006, respectively.

Warehousing, Selling and Administrative Expenses (Including Depreciation and Amortization). Warehousing, selling and administrative expenses, including depreciation and amortization, increased $7.4 million, or 4.9%, from $150.0 million for the year ended December 30, 2006 to $157.4 million for the year ended December 29, 2007. The increase was primarily the result of: (i) approximately $3.9 million in incremental travel and training costs and duplicative rent expense attributable to the opening of multi-branded distribution centers; (ii) approximately $2.4 million in higher health benefits expense resulting from a higher number of high dollar self-insured medical claims; (iii) approximately $2.7 million in higher marketing costs resulting from various marketing initiatives to stimulate unit volumes; (iv) approximately $1.3 million in higher bad debt expense due to a reduction of bad debt expense recorded during the year ended December 30, 2006; (v) approximately $1.9 million in higher variable distribution center costs resulting from higher lines picked despite fewer units ordered; (vi) approximately $0.9 million in higher legal, accounting and recruiting professional fees; (vii) approximately $0.5 million in higher depreciation and amortization resulting from higher depreciation due to fixed asset additions in our new multi-branded distribution centers, slightly offset by less amortization expense due to definite-lived intangible assets which became fully amortized during fiscal 2007; (viii) approximately $0.1 million in higher workers’ compensation and benefits costs; partially offset by (ix) lower management fee expense of $3.2 million since we did not achieve the operating threshold in order for a management fee to be paid to Bain Capital in fiscal 2007; (x) a $2.2 million decrease in consulting costs attributable to an inventory and supply chain improvement initiative during 2006; (xi) decreased amortization of prepaid catalog costs of $1.1 million due to the incremental amortization that was recorded during 2006 related to our accelerated mailing date of October 2006 for our 2007 catalogs; and (xii) a $0.6 million reduction in bonus expense resulting from less than expected profitability during fiscal 2007.

Restructuring and Asset Impairment Charges, net. As more fully described in Note 15 to the Financial Statements included elsewhere in this Form 10-K, we recorded restructuring charges of $13.0 million and $4.1 million during the years ended December 29, 2007 and December 30, 2006, respectively. The restructuring charges recorded during the year ended December 29, 2007 consisted of $12.8 million in lease termination and other costs plus $1.7 million in severance and related benefits charges resulting from our distribution center consolidation initiative, offset by a $1.5 million reversal of restructuring charges previously recorded due to executing a sublease for our La Mirada, CA distribution center in excess of the amount originally estimated.

During fiscal 2007, the Company’s Alpha division’s Ft. Wayne, IN and Broder division’s Plymouth, MI, St. Louis, MO and Amtex distribution centers were consolidated into a new multi-branded facility in Chicago, IL. The Broder division Albany, NY distribution center was consolidated into a tri-branded Broder-Alpha-NES facility in Middleboro, MA. The Alpha division Philadelphia, PA distribution center was consolidated into a new tri-branded facility near Harrisburg, PA. The NES division Charlotte, NC distribution center consolidated into a new tri-branded Broder-Alpha-NES facility in Atlanta, GA. The Alpha division St. Petersburg, FL distribution center consolidated into a new multi-branded facility in Orlando, FL. The Company consolidated its distribution centers in Dallas, TX and Stafford, TX into a new multi-branded facility in Dallas, TX.

During fiscal 2006, restructuring charges consisted of $3.1 million related to the distribution center consolidation of our Texas, California and Midwest markets, $0.5 million in call center closure costs and $0.4 million of cash severance and related benefit payments due to the consolidation of call centers from seven to three. We also recorded a $0.1 million reversal of severance and benefit costs related to the NES corporate staff reductions that were previously recorded.

Goodwill Impairment Charge. Following the Company’s fiscal year 2007 annual test for goodwill impairment, we determined that a change in the composition of the Alpha division’s tangible and intangible assets had occurred. Due primarily to an increase in the value of Alpha’s tangible assets, the Alpha division recorded a non-cash goodwill impairment charge of $87.3 million during the fourth quarter 2007. As of December 29, 2007, we had remaining goodwill of approximately $51.3 million and indefinite-lived intangible assets of $35.6 million. This non-cash goodwill impairment charge does not affect the Company’s compliance with any covenants under the agreements governing its indebtedness, including the 2010 Notes.

 

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To compute the goodwill impairment charge in accordance with SFAS No. 142, (i) the Company identified its tangible and intangible assets for its Alpha division (which, in effect, constitutes a purchase price allocation for the reporting unit as if it were recently acquired), such as vendor relationships, the assembled workforce and trademarks, (ii) determined the valuation of intangible assets with the assistance of an independent appraisal firm, (iii) determined the fair value of Alpha’s goodwill based on the residual of Alpha’s summed identified tangible and intangible assets and the fair value of the enterprise, then (iv) determined the magnitude of goodwill impairment based on a comparison of the fair value residual goodwill and the carrying value (or book value) of Alpha goodwill.

The magnitude of the goodwill impairment charge was primarily driven by an increase in Alpha’s tangible assets to improve performance and drive growth. The table below compares Alpha’s summarized purchase price allocation in September 2003 to its enterprise value at December 29, 2007.

 

     December 29,
2007
   September 22,
2003
   Increase/
(Decrease)
 
     (dollars in millions)  
     (Unaudited)  

Tangible Assets

   $ 114.0    $ 32.0    $ 82.0  

Intangible Assets

   $ 88.0    $ 88.4    $ (0.4 )

Goodwill

   $ 39.0    $ 126.3    $ (87.3 )
                      

Enterprise Value / Purchase Price

   $ 241.0    $ 246.7    $ (5.7 )
                      

Income (Loss) from Operations. As a result of the factors described above, income from operations decreased by approximately $118.1 million, from income from operations of $26.6 million for the year ended December 30, 2006 to a loss of $(91.5) million for the year ended December 29, 2007.

Interest Expense. Interest expense, net decreased by $1.9 million from $40.3 million for the year ended December 30, 2006 to $38.4 million for the year ended December 29, 2007. The decrease was primarily due to the inclusion in fiscal 2006 of approximately $3.0 million of deferred financing fees that were written off related to our revolving credit facility refinancing which was completed during the third quarter 2006. Lower interest rates on the revolver balance in fiscal 2007 and a $0.4 million net positive effect of changes in the fair value of interest rate swaps ($0.1 million positive and approximately $0.3 million negative effects for the years ended December 29, 2007 and December 30, 2006, respectively), were offset by higher average outstanding balances on variable rate debt.

Income Taxes. The income tax benefit was approximately $5.8 million and $6.0 million for fiscal years 2007 and 2006, respectively. The difference between the U.S. federal statutory rate and the effective benefit rate relates primarily to the valuation allowance recorded in the current year. Due to our continued net operating losses and our net deferred tax asset position excluding naked credits, we recorded a valuation allowance of $15.6 million during fiscal year 2007. The valuation allowance for deferred tax assets at December 29, 2007 relates principally to the uncertainty of the utilization of certain deferred tax assets, primarily tax loss carryforwards in various jurisdictions. The valuation allowance was calculated in accordance with the provisions of SFAS No. 109, which requires that a valuation allowance be established and maintained when it is “more likely than not” that all or a portion of deferred tax assets will not be realized. The valuation allowance established in 2007 was primarily attributable to the recording of deferred tax assets associated with federal and state tax loss carryforwards at full value which required a valuation allowance.

Net Loss. As a result of the factors described above, net loss increased by $116.4 million, from a net loss of $(7.7) million for the year ended December 30, 2006 to a net loss of $(124.1) million for the year ended December 29, 2007.

Cash Flows

Fiscal year 2008 compared to fiscal year 2007. Net cash used in operating activities was $8.8 million for fiscal 2008 compared with cash provided by operating activities of $21.1 million for fiscal 2007. The decrease in cash flows from operating activities was principally due to an increase in the inventory balance of $43.2 million in fiscal 2008 compared with a decrease of $41.5 million in fiscal 2007, partially offset by an increase in accounts payable of $30.2 million in fiscal 2008 compared with a decrease of $5.8 million in the prior year and a lower net loss, excluding the non-cash impairment charges of $62.5 million, of $6.4 million in fiscal 2008 compared with a loss, excluding the non-cash goodwill impairment charge of $87.3 million, of $36.8 million in the fiscal 2007.

Net cash used in investing activities was $2.8 million and $8.5 million for fiscal 2008 and 2007, respectively. The decrease is primarily due to lower fixed asset expenditure in fiscal 2008.

 

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Net cash provided by financing activities was approximately $9.7 million for fiscal 2008 compared to net cash used financing activities of $12.3 million for fiscal 2007. The change in cash flows from financing activities is primarily attributable to the change to net borrowing on our revolving credit facility of $47.3 million during fiscal 2008 compared to net repayments of $7.7 million in fiscal 2007 partially offset by a decrease in our book overdraft position of $32.8 million in fiscal 2008 compared to a decrease of $1.7 million in fiscal 2007. Borrowings against the revolving credit facility support our inventory purchases and other working capital requirements.

Fiscal year 2007 compared to fiscal year 2006. Net cash provided by operating activities was $21.1 million for fiscal 2007 compared with cash used in operating activities of $1.1 million for fiscal 2006. The increase in cash flows from operating activities was principally due to a reduction in the inventory balance of $41.5 million in fiscal 2007 compared with an increase of $8.7 million in fiscal 2006. This increase was partly offset by an increase in the net loss, net of the non-cash goodwill impairment charge of $87.3 million, of $36.8 million in fiscal 2007 compared with $7.7 million in fiscal 2006.

Net cash used in investing activities was $8.5 million and $15.6 million for fiscal 2007 and 2006, respectively. The decrease is primarily due to the $6.8 million acquisition of Amtex Imports Inc., which occurred in September 2006.

Net cash used in financing activities was approximately $12.3 million for fiscal 2007 compared to net cash provided by financing activities of $17.7 million for fiscal 2006. The change in cash flows from financing activities is primarily attributable to the change in net repayments on our revolving credit facility of $7.7 million during fiscal 2007 compared to net borrowings of $20.4 million in fiscal 2006 and a decrease in our book overdraft position of $1.7 million in fiscal 2007 compared to an increase of $0.9 million in fiscal 2006. Borrowings against the revolving credit facility support our inventory purchases and other working capital requirements.

Liquidity Position

In August 2006, we entered into an amended and restated credit agreement (“Credit Agreement”) which provided for aggregate revolver borrowings of up to $225.0 million (subject to borrowing base availability), including a provision for up to $25.0 million of letters of credit. In April 2009, we entered into an amendment, waiver and consent (the “First Amendment”) of our revolving credit facility, which reduced the commitment to $200.0 million. As of December 31, 2008, outstanding borrowings on the Credit Agreement were $150.0 million, and outstanding letters of credit were $10.7 million, which left $35.9 million of available borrowing capacity as determined by borrowing base availability.

We have relied primarily upon cash flow from operations and borrowings under our revolving credit facility to finance operations, capital expenditures and debt service requirements. Borrowings and availability under the revolving credit facility fluctuate due to seasonal demands. Historical borrowing levels have reached peaks during the middle of a given year and low points during the last quarter of the year.

Historically, our ability to manage cash flow and working capital levels, particularly inventory and accounts payable, allowed us to meet our obligations during the seasonal low period, pay scheduled principal and interest payments, and provide funds for working capital, capital expenditures and other needs of the business.

Our business is sensitive to the business cycle of the national economy. Deterioration in general economic conditions adversely affect demand for our products, and cause sales of our products to decrease. In addition, slowdowns in economic activity result in our customers shifting their purchases towards lower-priced products, such as T-shirts, which adversely affects gross profit margin. The current economic downturn has negatively impacted the imprintable sportswear market, causing a dramatic decrease in sales during the fourth quarter of 2008 which continued into 2009. In 2008, the market for imprintable activewear shrank by at least 6%. It shrank at least 11% in the fourth quarter of 2008 and 18% in the first quarter of 2009. Such conditions are not expected to improve significantly in the near-term. The current economic crisis has caused many of our customers to cancel or scale back corporate events and purchases of products such as those we sell. This reduced customer demand has adversely affected our revenues and operating profits through reduced purchases of our products despite our reduction in operating expenses resulting from the execution of several cost reducing initiatives.

During fiscal year 2008, cash flow from operating activities decreased $29.9 million compared to fiscal 2007. This decrease in cash flow from operating activities has resulted in significant challenges to liquidity. During the fourth quarter of 2008, adverse economic conditions coupled with a decline in revenues, gross profits and operating margins described above, as well as uncertainty about our ability to make a $12.7 million interest payment due on April 15, 2009, resulted in reduced trade credit terms from several of our key suppliers. The reduction in trade credit led to lower inventory levels, which reduced our borrowing capacity under our revolving credit facility.

 

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On March 30, 2009, we filed a Form 12b-25 with the SEC indicating that we were unable to file our Form 10-K for our fiscal year ended December 27, 2008 within the time period prescribed by the SEC without unreasonable effort or expense because we were devoting substantial resources in addressing our liquidity needs in light of recent and ongoing adverse economic and industry conditions. The failure to deliver financial statements by April 6, 2009 constituted a default under our existing revolving credit facility.

On March 31, 2009, we announced that we were negotiating with an ad hoc committee of holders of its 2010 Notes regarding a refinancing transaction designed to enhance our near-term liquidity, reduce our cash interest payments and improve our working capital. We explored various strategic and financing alternatives, including filing of a voluntary petition under Chapter 11 of the Bankruptcy Code, and had retained legal and financial advisors to assist in this regard. We also commenced discussions with certain of our major vendors to address our liquidity and capital requirements.

On April 9, 2009, we entered into an amendment, waiver and consent (the “First Amendment”) of our Amendment and Restated Credit Agreement (“Credit Agreement”) (as amended and waived, the “Revised Credit Agreement”). Pursuant to the terms of the First Amendment, the commitment under the Revised Credit Agreement was reduced from $225 million to $200 million, and the borrowing base was amended to provide for a seasonal stretch tranche (previously $20 million) of up to $13.5 million, through April 30, 2009 and up to $10.0 million through May 31, 2009. No seasonal stretch is provided for after June 1, 2009. The First Amendment also provided lender consent to the general terms of an Exchange Offer with respect to our 2010 Notes, waived certain defaults which have occurred or may occur before the Exchange Offer closed and permitted a change of control which may arise in connection with the Exchange Offer. The First Amendment included a waiver of our requirement to deliver our consolidated financial statements without a “going concern” opinion until May 15, 2009. On April 15, 2009, we defaulted on the interest payment required to be made by us under the 2010 Notes.

On April 17, 2009, we launched the Exchange Offer for all of our outstanding $225.0 million aggregate principal amount of 2010 Notes. In exchange for their 2010 Notes, note holders who participated in the exchange (the “Participating Note Holders”) were entitled to receive our newly issued 12%/15% Senior Payment-in-Kind Toggle Notes due 2013 and a pro-rata share of our newly issued common stock.

On April 28, 2009, we entered into a second amendment (the “Second Amendment”) and a third amendment (the “Third Amendment”) with respect to our Revised Credit Agreement. The Second Amendment extended, until May 26, 2009, the date on which we must deliver our audited financial statements for fiscal 2008 to the Revised Revolver Facility lenders. The Third Amendment permitted us to change the consent payment being offered in connection with the Exchange Offer.

On May 20, 2009, we completed the exchange offer for our $225.0 million aggregate principal amount of 11 1/4% Senior Notes due October 15, 2010 for $94.9 million of our newly issued 2013 Notes and a pro rata share of 96% of our outstanding common stock. Our stockholders who held our common stock prior to the Exchange Offer hold 4% of our currently outstanding common stock and received warrants to purchase approximately 1.4 million shares of our common stock in the Exchange Offer. We issued $94.9 million in aggregate principal amount of 2013 Notes in connection with the Exchange Offer and approximately $11.5 million in aggregate principal amount of the 2010 Notes remain outstanding. The 2010 Notes mature on October 15, 2010. The noteholders who did not participate in the Exchange Offer were paid the April 15, 2009 interest payment on May 15, 2009 thereby curing the default for failure to pay the interest on the April 15, 2009 due date.

The indenture governing the 2013 Notes, among other things, (1) restricts our ability and our subsidiaries, including the guarantors of the 2013 Notes, to incur additional indebtedness, issue shares of preferred stock, incur liens, pay dividends or make certain other restricted payments and enter into certain transactions with affiliates, (2) prohibits certain restrictions on the ability of certain of our subsidiaries, including the guarantors of the 2013 Notes, to pay dividends or make certain payments to us and (3) places restrictions on our ability and our subsidiaries, including the guarantors of the 2013 Notes, to merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our assets. The indenture related to the 2013 Notes also contains various covenants which limit the management’s discretion in the operation of our businesses.

Noteholders of the 2010 Notes who participated in the Exchange Offer consented to the proposed amendments to waive any and all existing defaults and events of default that have arisen or may arise under the existing indenture, eliminate substantially all of the covenants in the existing indenture governing our actions, other than the covenants to pay principal of and interest on the 2010 Notes when due, and eliminate or modify the related events of default. The waivers relate to defaults that have arisen from our failure to make the interest payment due and payable on April 15, 2009, to file our Annual Report on Form 10-K for fiscal 2008 within the time period prescribed by the SEC’s rules and regulations and to provide the trustee notice of these defaults. Noteholders for the 2010 who did not participate in the Exchange Offer retain the right to collect interest due on the 2010 Notes until maturity and to collect the principal amount when due in October 2010.

 

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Going Concern and Covenant Compliance

Following completion of the series of transactions described above which were designed to obtain stable bank financing and stable bond financing, our management believes that we can achieve stable vendor financing. Subsequent to the May 15, 2009 announcement that approximately 95% of the 2010 were validly tendered and not withdrawn, key suppliers increased credit limits and began shipping significant amounts of inventory on commercially reasonable terms. None of our key suppliers require us to pay cash in advance or cash on delivery.

Management believes that we have the ability to manage cash flow and working capital levels, particularly inventory and accounts payable, to allow us to meet our current and future obligations during the seasonal low point in June 2009, pay scheduled principal and interest payments, and provide funds for working capital, capital expenditures and other needs of the business for at least fiscal 2009. Management believes we have the ability to continue as a going concern due to having evaluated various scenarios using a detailed liquidity model. The model is used to project liquidity and availability under the Revised Credit Agreement, including factors affecting liquidity, such as management of working capital, the borrowing base and financial performance. The model also tracks historical liquidity and borrowing base availability.

Management believes that the assumptions with respect to our performance relative to the market are consistent with the overall market (in 2008, the market for imprintable activewear shrank by at least 6% and it shrank at least 11% in the fourth quarter of 2008 and 18% in the first quarter of 2009) and we have the ability to outperform our competitors in fiscal 2009 as we had done during fiscal 2008. In addition, we expect to generate cash flow through working capital by selling inventory on hand.

The following key assumptions were used in evaluating our ability to continue as a going concern: year-over-year revenue and margin declines of 20% and 200 basis points, respectively; operating expenses in line with the actual performance, which includes the impact of fixed headcount reductions of approximately 140 and 60 employees in December 2008 and March 2009, respectively; approximately $7 million of cash disbursements for capital expenditures and capital lease obligations; cash interest payments that considers the impact of the 2010 Notes that remain outstanding and the increase in interest on the revolving credit facility following the amendment executed on April 9, 2009; and commercially reasonable payment terms to our trade creditors. Based on these assumptions and sensitivities to these assumptions, we expect to remain in compliance with the fixed charge coverage ratio covenant included in our Revolving Credit Agreement during fiscal 2009.

In the event that year-over-year revenue and margin declines are greater than 20% and 200 basis points, we believe we have the ability to manage through the additional liquidity constraints by further reducing our variable operating expenses, including personnel costs to operating our distribution centers and call centers, and controlling the timing of certain of our cash disbursements due to a change in the Revolving Credit Agreement. Our fulfillment costs are very responsive to volume and we have taken action to reduce our fixed operating expenses. In addition, whereas payables aged greater than 30 days past due per the terms of the original invoice date were required to be deducted from the borrowing base, the First Amendment to the Revolving Credit Agreement eliminated that requirement.

Our revolving credit facility and the indenture that governs the 2013 Notes impose restrictive covenants on us. See Note 18. The agreement governing the revolving credit facility also requires us to achieve specified financial and operating results and maintain compliance with specified financial ratios and satisfy other financial condition tests. Based on our assumptions and alternative scenarios to these assumptions, we expect to remain in compliance with the fixed charge coverage ratio covenant included in our Revolving Credit Agreement during fiscal 2009.

Our ability to comply with these ratios may be affected by events beyond management’s control. A breach of any of these restrictive covenants or the inability to comply with the required financial ratios could result in a default under the agreement governing the revolving credit facility. If a default occurs, the lenders under the revolving credit facility may elect to declare all borrowings outstanding, together with all accrued interest and other fees, to be immediately due and payable which would result in an event of default under the 2013 Notes. The lenders would also have the right in these circumstances to terminate any commitments they have to provide further borrowings. If we were unable to repay outstanding borrowings when due, the lenders under the revolving credit facility will also have the right to proceed against our collateral, including available cash, granted to them to secure the indebtedness. If the indebtedness under the revolving credit facility or 2013 Notes were to be accelerated, our assets might not be sufficient to repay in full that indebtedness and our other indebtedness, which would likely cause us to file a voluntary petition under Chapter 11 of the Bankruptcy Code.

 

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As a part of our business strategy, we may consider acquisitions of distributors with high local market share in regions that are not well served by our existing facilities. We have historically engaged in discussions with several potential acquisition candidates. Most of these discussions were preliminary in nature, with limited due diligence conducted. We cannot guarantee that any acquisitions will be consummated. If we do consummate any acquisition, it could be material to our business and require us to incur additional debt under our revolving credit facility or otherwise. There can be no assurance that additional financing will be available when required or, if available, that it will be on terms satisfactory to us.

OFF- BALANCE SHEET ARRANGEMENTS

As of December 31, 2008, the revolving credit facility contained a provision for up to $25.0 million of letters of credit, subject to borrowing base availability and total amounts outstanding under the revolving credit agreement of $225.0 million and we had approximately $10.7 million of outstanding letters of credit related to commitments for the purchase of inventory. In April 2009, we entered into an amendment, waiver and consent (the “First Amendment”) of our revolving credit facility, which reduced the commitment to $200.0 million.

We purchase product in the normal course through the use of short term purchase orders representing quantities for normal business needs at current market prices.

 

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CONTRACTUAL CASH OBLIGATIONS

The following table presents the aggregate amount of future cash outflows under our contractual cash obligations and commercial commitments as of December 31, 2008:

 

     Payments Due by Period
     Total    Less than
1 year
   1 to 3
years
   4 to 5
years
   After 5
years
     (dollars in millions)

Revolving credit facility

   $ 150.0    $ —      $ 150.0    $ —      $ —  

2010 Notes(1)

     225.0      —        225.0      —        —  

Operating lease obligations(2)

     112.3      17.9      33.1      28.3      33.0

Capital lease obligations

     10.5      5.6      4.8      —        —  

Expected interest payments(3)

     45.4      25.3      20.1      —        —  

Other(4)

     0.5      0.5      —        —        —  
                                  

Total contractual cash obligations

   $ 543.7    $ 49.3    $ 433.0    $ 28.3    $ 33.0
                                  

 

(1)

Amounts shown do not include $0.5 million of unamortized premium that will be amortized over the term of the 2010 Notes. On May 20, 2009 the Company exchanged $213.5 million of its 2010 Notes for approximately $94.9 million of 2013 Notes and 96% of the Company’s issued and outstanding common stock. Approximately $11.5 million of the 2010 Notes remain outstanding.

(2)

Operating lease payments have not been reduced by minimum sublease rentals of $2.7 due to the Company in the future under noncancelable subleases.

(3)

Represents expected interest payments for the life of our 2010 Notes. The amounts included in this table exclude any interest payments which may be made related to our revolving credit facility. If the December 27, 2008 weighted average interest rate of 4.8% and balance outstanding of $150.0 million were to remain constant throughout the remainder of the revolving credit facility, our total future interest payments under the facility would be approximately $19.2 million. The expected payments on our 2010 Notes were calculated using the principal amount of the notes outstanding of $225.0 million, the stated interest rate of 11.25% and the semi-annual payment dates of April 15 and October 15 of each year. Following the Exchange Offer, we have $11.5 million of 2010 Notes outstanding, which will result in $1.3 million in interest during fiscal 2010, and we have $94.9 million of 2013 Notes outstanding, which are 12%/15% payment-in kind notes. The 2013 notes will result in $11.4 million in interest during fiscal years 2010 through 2013 if paid in cash.

(4)

Represents note payable related to lease buy-out agreement.

We also have obligations related to uncertain income tax provisions. For more information, see Note 12 to the financial statements.

INFLATION

Prices of certain of the products we distribute, particularly T-shirts, are determined primarily based on market conditions, including the price of raw materials and available capacity in the industry. In general, we pass along to our customers any changes in the market price we pay for the products we distribute on a real-time basis. Due to competitive market conditions, the average selling prices for certain of the products we distribute, particularly T-shirts, have historically demonstrated a declining trend. During the fourth quarter of 2007, however, certain of our trade brand suppliers announced price increases. To maintain our gross profit margin, we increased selling prices to our customers. Due to the recent increase in the price of cotton, the five largest trade brand suppliers announced a price increase effective March 2008 and we again increased selling prices to our customers to maintain our gross profit margin.

SEASONALITY

Historically, the first quarter of our fiscal year generates the lowest levels of net sales, gross profit and operating profit.

Due to the level of fixed operating expenses, operating profit is normally significantly lower in the first quarter of our fiscal year. During 2006, first quarter net sales were approximately 21.9% of the total for the year and first quarter gross profit was approximately 21.0% of the total for the year. During fiscal year 2006, 100% of our operating income was earned in the second, third and fourth quarters.

 

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During 2007, first quarter net sales were approximately 21.2% of the total for the year and first quarter gross profit was approximately 21.6% of the total for the year. During fiscal year 2007, excluding the goodwill impairment charge of $87.3 million recorded in the fourth fiscal quarter, we earned combined operating income of $3.6 million in the second, third and fourth quarters compared to a full year loss of $4.2 million.

During 2008, first quarter net sales were approximately 21.2% of the total for the year and first quarter gross profit was approximately 20.3% of the total for the year. During fiscal year 2008, excluding the goodwill and trade name impairment charge of $62.5 million recorded in the fourth fiscal quarter, we earned combined operating income of $19.6 million in the second, third and fourth quarters compared to full year operating income of $15.6 million.

We have historically realized, and expect to continue to realize, slightly higher gross profit in the second half of the fiscal year. On a combined basis for Broder, Alpha and NES for 2006, 2007 and 2008, approximately 51% of the Company’s net sales and gross profit occurred in the second half of the year. This seasonality is primarily a result of the sale of higher priced products during the second half of the year, such as sweatshirts and winter-oriented outerwear.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Information contained in this Annual Report on Form 10-K, other than historical information, may be considered forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the use of forward-looking words such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates” or “anticipates” or the negative of these terms or other comparable words, or by discussions of strategy, plans or intentions. Examples of forward-looking statements are statements that concern future revenues, future costs, future capital expenditures, business strategy, competitive strengths, competitive weaknesses, goals, plans, references to future success or difficulties relating to acquisitions or similar strategic transactions and other similar information.

You should understand that various factors, in addition to those discussed elsewhere in this document, could affect our future results and could cause results to differ materially from those expressed in such forward-looking statements, including:

 

   

If our cash provided by operating and financing activities continues to be insufficient to fund our cash requirements, we could face substantial liquidity problems.

 

   

Slowdowns in general economic activity have detrimentally impact our customers and will likely continue to have an adverse effect on our sales and profitability.

 

   

Our ability to access the credit and capital markets may be adversely affected by factors beyond our control, including turmoil in the financial services industry, volatility in financial markets and general economic downturns.

 

   

Our industry is highly competitive and if we are unable to compete successfully we could lose customers and our sales may decline.

 

   

Disruption in our distribution centers could adversely affect our results of operations.

 

   

Any disruption in the ability of our suppliers to deliver products to us or a decrease in demand for their products could have an adverse effect on our results of operations and damage our customer relationships.

 

   

Our relationships with most of our suppliers are terminable at will and the loss of any of these suppliers could have an adverse effect on our sales and profitability.

 

   

We do not have any long-term contracts with our customers and the loss of customers could adversely affect our sales and profitability.

 

   

We must successfully predict customer demand for our private label products to succeed.

 

   

We rely significantly on one shipper to distribute our products to our customers and any service disruption could have an adverse effect on our sales.

 

   

If any of our distribution facilities were to unionize, we would incur increased risk of work stoppages and possibly higher labor costs.

 

   

Loss of key personnel or our inability to attract and retain new qualified personnel could hurt our business and inhibit our ability to operate and grow successfully.

 

   

We may incur restructuring or impairment charges that would reduce our earnings.

 

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We may not successfully identify or complete future acquisitions or establish new distribution facilities, which could adversely affect our business.

 

   

As a result of our Exchange Offer, holders of our 2010 Notes have the right to appoint a majority of our board of directors;

 

   

Our substantial level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations;

 

   

Our failure to comply with restrictive covenants contained in our revolving credit facility or the indentures governing our 2013 Notes could lead to an event of default under such instruments; and

 

   

Despite current anticipated indebtedness levels and restrictive covenants, we may incur additional indebtedness in the future.

The forward-looking statements in this document are based on our expectations and are necessarily dependent upon assumptions, estimates and data that we believe are reasonable and accurate but may be incorrect, incomplete or imprecise.

Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent risks and uncertainties. Certain important factors that could cause our actual results, performance and achievements, or industry results to differ materially from estimates or projections contained in forward-looking statements are included in “Item 1A. Risk Factors.”

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of December 27, 2008, we had $150.0 million of debt outstanding under our revolving credit facility. Our revolving credit facility is subject to variable interest rates. Accordingly, our earnings and cash flow are affected by changes in interest rates. Assuming the December 27, 2008 level of borrowings, and further considering the interest rate protection agreement which was in place through October (see following paragraph), we estimate that a one percentage point increase in interest on our variable rate debt agreements would have increased interest expense for fiscal 2008 by approximately $1.4 million. If the interest rate protection agreement had not been in place for any portion of the year, the increased interest expense for fiscal 2008 would have been approximately $1.5 million.

We had entered into interest rate protection agreements whereby we contracted to pay a fixed interest rate in exchange for receipt of a variable rate. The $10.0 million notional principal amount under the interest rate protection agreement terminated in October 2008 and has not been renewed. We elected not to apply hedge accounting for the interest rate protection agreement. Accordingly, we recorded our interest rate swap at fair value on the balance sheet and recorded gains and losses on this contract as well as the periodic settlements of this contract through our statement of operations. We recorded other income (expense) of approximately $0.2 million, $0.1 million and ($0.3) million during the years ended December 31, 2008, 2007 and 2006, respectively.

As of December 31, 2008 and 2007, we had outstanding $225.0 million of our 2010 Notes. We believe that the fair value of our 2010 Notes approximated $49.5 million and $173.3 million at December 31, 2008 and 2007, respectively, based on quoted market values of the instruments.

CRITICAL ACCOUNTING POLICIES

Our significant accounting policies are described in Note 2 to the Financial Statements included in Item 8 of this Form 10-K. While all significant accounting policies are important to our financial statements, some of these policies may be viewed as being critical. Such policies are those that are both most important to the portrayal of our financial condition and require our most difficult, subjective and complex estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. These estimates are based upon our historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Our actual results may differ from these estimates under different assumptions or conditions. We believe our most critical accounting policies are as follows:

Revenue Recognition. Revenue is recognized when title and risk of loss is transferred to the customer, which, for the majority of our customers who have FOB shipping point terms, is upon shipment of the product to the customer. Revenue includes selling price of the product and all shipping and handling costs paid by the customer. Under certain circumstances, customers may submit a claim for damaged or shorted shipments. Based on historical experience, we establish a reserve for potential returns at the time of sale. Revenue is further reduced at the time of sale for estimated customer-related incentives. These incentives primarily consist of volume and growth rebates.

Accounts Receivable. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments, which is included in bad debt expense. We determine the adequacy of this allowance by regularly reviewing our accounts receivable aging and evaluating individual customer receivables, considering customers’ financial condition, credit history and current economic conditions. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Inventories. We maintain an allowance for potential losses on the disposal of our discontinued and slow moving inventory. Estimates for the allowance are based on past and estimated future sales of the product, historical realization of similar discontinued

 

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product and potential return of slow moving and discontinued product back to the mill. Cost of sales includes (i) the cost of product, (ii) inbound and outbound freight costs, (iii) the costs of purchasing, receiving, inspecting and handling and (iv) adjustments for various incentive programs offered to us by our vendors.

Income Taxes. The Company accounts for income taxes in accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). SFAS No. 109 requires an asset and liability approach which requires the recognition of deferred income tax assets and deferred income tax liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. No valuation allowance was recorded as of December 31, 2006 since the Company had sufficient deferred tax liabilities to shield its deferred tax assets and was not relying on projected, future taxable income to be able to realize its deferred tax assets. Due to the Company’s continued net operating losses and its net deferred tax asset position, the Company recorded a valuation allowance of $14.6 million and $15.6 million during fiscal 2008 and 2007 respectively.

Goodwill. SFAS No. 142, “Goodwill and Other Intangible Assets,” requires that goodwill be tested for impairment at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. The Company has three reporting units consisting of its Alpha, Broder, and NES divisions. The Company’s goodwill was allocated between the Alpha and Broder reporting units. The Company tested goodwill for impairment as of December 29, 2007 and concluded that, due primarily to an increase in the value of Alpha’s tangible assets, the Alpha division recorded a non-cash goodwill impairment charge of $87.3 million during the fourth quarter 2007. After this impairment charge, as of December 29, 2007, we had remaining goodwill of approximately $50.9 million.

The Company performed the first step of the two-step impairment test and compared the fair value of its Alpha and Broder reporting units to their respective carrying values. Consistent with the Company’s approach in its annual impairment testing, in assessing the fair value of the reporting unit, the Company used equal weighting of two methods: the market approach and income approach. Under the market approach, the fair value of the reporting is based on comparisons of multiples of enterprise values to earnings before interest, taxes, depreciation and amortization (EBITDA). Under the income approach, the fair value of the reporting unit is based on the present value of estimated future cash flows of each reporting unit discounted at rates consistent with the cost of capital specific to the reporting unit. If the carrying value of the reporting unit exceeds the indicated fair value of the reporting unit, a second analysis is performed to measure the fair value of all assets and liabilities. If, based on the second analysis, it is determined that the implied fair value of the goodwill of the reporting unit is less than the carrying value, goodwill is considered impaired.

As a result, of the weakened economy and associated demand for the Company’s products in the fourth quarter 2008 and anticipated weakened demand in 2009, the anticipated cash flows for the Alpha and Broder reporting units have declined significantly. As a result, the carrying value of the two reporting units was greater than the calculated fair values in step one of the goodwill impairment test. In step two of the impairment test, the Company determined the implied fair value of the goodwill and compared it to the carrying value of the goodwill. The Company allocated the fair value of the reporting unit to all of its assets and liabilities as if the reporting unit had been acquired in a business combination and the fair value of the Alpha and Broder reporting units was the price paid to acquire the reporting unit. The excess of the fair value of the reporting units over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. The Company’s step two analysis resulted in no implied fair value of goodwill, and therefore, the Company recognized an impairment charge of $39.0 million and $11.9 million respectively for the Alpha and Broder reporting units, representing a write off of the entire amount of the Company’s previously recorded goodwill.

Intangible Assets. Intangible assets are assets acquired that lack physical substance and that meet the specified criteria for recognition apart from goodwill. Intangible assets acquired are comprised mainly of customer relationships and trade names / trademarks. The fair value of trade names / trademarks is estimated by the use of a relief from royalty method, which values an intangible asset by estimating the royalties saved through the ownership of an asset. The royalty, which is based on a reasonable rate applied against forecasted sales, is tax-effected and discounted to present value using a discount rate commensurate with the relative risk of achieving the cash flow. The fair value of acquired customer relationships is estimated by the use of an income approach known as the excess earnings method. The excess earnings method measures economic benefit indirectly by calculating residual profit attributable to an asset after appropriate returns are paid to complementary or contributory assets. The residual profit is tax-effected and discounted to present value at an appropriate discount rate that reflects the risk factors associated with the estimated income stream. Determining the useful life of an intangible asset requires judgment as different types of intangible assets will have different useful lives and certain assets may even be considered to have indefinite useful lives.

 

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Management tests indefinite-lived intangible assets on at least an annual basis, or more frequently if necessary. In connection with the analysis, management tests for impairment by comparing the carrying value of intangible assets to its estimated fair value. Since quoted market prices are seldom available for intangible assets, we utilize present value techniques to estimate fair value. Common among such approaches is the “relief from royalty” methodology. This methodology estimates the direct cash flows associated with the intangible asset. Management must estimate the hypothetical royalty rate, discount rate, and residual growth rate to estimate the forecasted cash flows associated with the asset.

The Company historically had one indefinite lived intangible asset, the Alpha trade name. A discount rate of 14% was utilized in the impairment test. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows generated as a result of the respective intangible assets. A long-term growth rate of 4% was assumed which is consistent with the assumption used in the impairment test of the Alpha trade name during the fourth quarter of 2008. A royalty rate of 1.0% was assumed. Assumptions about royalty rates are based on the rates at which similar trademarks or technologies are being licensed in the marketplace.

This analysis indicated that the Alpha trade name was impaired by $11.6 million and this was charged to goodwill and trade name impairment charge during the fourth quarter of 2008. Had the fair value of each Company’s Alpha trade name been hypothetically lower than presently estimated by 10% as of December 27, 2008, the Alpha trade name would have been impaired by an additional $2.4 million.

The Company has concluded that the Alpha trade name is no longer an indefinite lived intangible asset and starting December 28, 2008 will begin to amortize the new carrying value of the trade name, $24 million at December 27, 2008, over a life of 9 years.

Long-lived assets, including finite-lived intangible assets (e.g., customer relationships), do not require that an annual impairment test be performed; instead, long-lived assets are tested for impairment upon the occurrence of a triggering event. Triggering events include the likely (i.e., more likely than not) disposal of a portion of such assets or the occurrence of an adverse change in the market involving the business employing the related assets. Significant judgments in this area involve determining whether a triggering event has occurred and re-assessing the reasonableness of the remaining useful lives of finite-lived assets by, among other things, validating customer attrition rates.

Long-lived asset impairments. The Company accounts for its long-lived assets in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). The carrying values of long-lived assets are evaluated whenever changes in circumstances indicate the carrying amounts of such assets may not be recoverable. In performing such reviews for recoverability, the Company compares the expected undiscounted cash flows to the carrying values of long-lived assets. If the expected undiscounted future cash flows are less than the carrying amounts of such assets, the Company recognizes an impairment loss for the difference between the carrying amount and its estimated fair value. Fair value is estimated using expected future cash flows.

RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 establishes a common definition for fair value to be applied to U.S. GAAP guidance requiring use of fair value, establishes a framework for measuring fair value and expands disclosure about such fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued a final Staff Position to allow for a one-year deferral of adoption of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The FASB also decided to amend SFAS No. 157 to exclude FASB Statement No. 13 and its related interpretive accounting pronouncements that address leasing transactions. The Company has adopted SFAS No. 157 as of December 30, 2007 related to financial assets and financial liabilities and at December 27, 2008, the Company did not have any financial assets or liabilities which required the Company to apply the provisions of SFAS No. 157. As of December 28, 2008, the Company adopted the provisions of SFAS No. 157 with respect to non-financial assets and liabilities and this adoption did not have a material impact on the Company’s financial condition, results of operations and cash flows

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 permits entities to measure at fair value, at specified election dates, many financial instruments and certain other assets and liabilities that are not otherwise required to be measured at fair value. Subsequent changes in fair value will be required to be reported in earnings each reporting period. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company adopted SFAS No. 159 as of December 30, 2007 and has elected not to measure any additional financial instruments at fair value.

 

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In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (“SFAS No. 141(R)”). SFAS No. 141(R) will significantly change the accounting for business combinations. Under SFAS No. 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. It also amends the accounting treatment for certain specific items including acquisition costs and non-controlling minority interests and includes a substantial number of new disclosure requirements. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after December 15, 2008.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements – An Amendment of ARB No. 51 (“SFAS No. 160”). SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS No. 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS No. 160 is effective for fiscal years and interim periods beginning after December 15, 2008. The Company has adopted the provisions of SFAS No. 160 as of December 27, 2008 and this adoption did not have a material impact on the Company’s financial condition, results of operations or cash flows.

In March 2008, the FASB issued SFAS No. 161, Disclosures About Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133 (“SFAS No. 161”). SFAS No. 161 expands quarterly disclosure requirements in SFAS No. 133 about an entity’s derivative instruments and hedging activities. SFAS No. 161 is effective for fiscal years beginning after November 15, 2008. Accordingly, the Company will ensure it meets the enhanced disclosure provisions of SFAS No. 161 upon the effective date for any outstanding derivative contracts.

In April 2008, the FASB issued FASB Staff Position (“FSP”) No. SFAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP SFAS 142-3”). FSP SFAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”). The intent of FSP SFAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141R (revised 2007), Business Combinations (“SFAS No. 141R”) and other applicable accounting literature. FSP SFAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and must be applied prospectively to intangible assets acquired after the effective date. The application of FSP SFAS 142-3 did not have a material impact on the Company’s financial condition, results of operations and cash flows upon adoption; however, future transactions entered into by the Company will need to be evaluated under the requirements of this FSP

In June 2008, the FASB ratified EITF Issue No. 07-5, “Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity’s Own Stock” (EITF 07-5). EITF 07-5 provides that an entity should use a two step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. It also clarifies on the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation. EITF 07-5 is effective for fiscal years beginning after December 15, 2008. The implementation of this standard is not expected to have a material impact on the Company’s financial position and results of operations.

Sarbanes-Oxley Section 404 Compliance

We incur certain costs associated with being an SEC registrant because of covenants in the indenture governing our 2010 Notes. We are currently a “non-accelerated filer.” For the year ended December 27, 2008, under current rules, pursuant to Section 404(a) of the Sarbanes-Oxley Act, management is required to deliver a report that assesses the effectiveness of our internal controls over financial reporting. The SEC issued a release in June 2008, however, announcing that the Commission approved a one-year extension of the date by which non-accelerated filers must begin to comply with the Section 404(b) requirement to provide an auditor’s attestation report on management’s assessment report on internal controls over financial reporting. Under the SEC extension, the first auditor’s attestation report will be included with our annual report for the fiscal year ending on or after December 15, 2009.

As part of our ongoing emphasis on risk management and internal control, we will continue our efforts to identify business and fraud risks, to implement process enhancements, and to document and test the system of internal controls over key processes.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

Broder Bros., Co.

The following Financial Statements, and the related Notes thereto, of Broder Bros., Co. and Report of Independent Registered Public Accounting Firm are filed as a part of this Form 10-K.

 

     Page

Report of Independent Registered Public Accounting Firm

   33

Financial Statements:

  

Balance Sheets as of December 27, 2008 and December 29, 2007

   34

Statements of Operations for the Years Ended December 27, 2008, December 29, 2007 and December  30, 2006

   36

Statements of Changes in Shareholders’ Equity (Deficit) for the Years Ended December 27, 2008,  December 29, 2007 and December 30, 2006

   37

Statements of Cash Flows for the Years Ended December 27, 2008, December 29, 2007 and December  30, 2006

   39

Notes to Financial Statements

   40

Schedule II. Valuation and Qualifying Accounts

   69

All other schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.

 

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Report of Independent Registered Public Accounting Firm

To the Board of Directors of Broder Bros., Co.:

In our opinion, the financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Broder Bros., Co. (the “Company”) at December 27, 2008 and December 29, 2007, and the results of their operations and their cash flows for each of the fiscal three years in the period ended December 27, 2008 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 12 to the financial statements, the Company changed the manner in which it accounts for uncertain tax positions in 2007.

 

/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
May 21, 2009

 

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Broder Bros., Co.

BALANCE SHEETS

December 27, 2008 and December 29, 2007

 

     2008    2007
     (dollars in thousands,
except share amounts)

ASSETS

     

Current assets

     

Cash

   $ 2,755    $ 4,634

Accounts receivable, net of allowance for doubtful accounts of $10,832 at December 27, 2008 and $6,847 at December 29, 2007

     72,430      85,266

Finished goods inventory

     235,547      191,800

Prepaid and other current assets

     8,652      9,454

Deferred income taxes

     3,180      3,484
             

Total current assets

     322,564      294,638

Fixed assets, net

     23,816      31,420

Goodwill

     —        51,266

Other intangibles

     33,698      51,722

Deferred financing fees, net

     4,142      6,373

Other assets

     4,739      1,813
             

Total assets

   $ 388,959    $ 437,232
             

LIABILITIES AND SHAREHOLDERS’ DEFICIT

     

Current liabilities

     

Current portion of long-term debt and capital lease obligations

   $ 5,498    $ 4,946

Accounts payable

     87,597      89,768

Accrued expenses

     12,426      13,737

Payroll and benefit related liabilities

     6,553      8,302

Accrued interest

     5,800      6,612
             

Total current liabilities

     117,874      123,365

Long-term debt and capital lease obligations, net of current portion

     380,126      337,627

Deferred income taxes

     3,375      17,124

Other long-term liabilities

     14,239      17,236
             

Total liabilities

     515,614      495,352

Redeemable Securities

     

Class B and L, Series 3 and 4 common stock

     220      245

Commitments and contingencies

     

Shareholders’ equity

     

Class L, Series 1 common stock; par value $0.01 per share; 2,000,000 shares authorized; 963,637 shares issued and outstanding (aggregate liquidation preference of $44,009 and $38,941 as of December 27, 2008 and December 29, 2007, respectively)

     10      10

Class L, Series 2 common stock; par value $0.01 per share; 2,000,000 shares authorized; 931,635 shares issued and outstanding (aggregate liquidation preference of $32,999 and $28,508 as of December 27, 2008 and December 29, 2007, respectively)

     10      10

Class L, Series 3 common stock; par value $0.01 per share; 4,000,000 shares authorized; 2,778,057 shares issued and outstanding (aggregate liquidation preference of $126,874 and $112,261 as of December 27, 2008 and December 29, 2007, respectively)

     28      28

Class L, Series 4 common stock; par value $0.01 per share; 4,000,000 shares authorized; 2,685,802 shares issued and outstanding (aggregate liquidation preference of $95,131 and $82,186 as of December 27, 2008 and December 29, 2007, respectively)

     27      27

Class A, common stock; par value $0.01 per share; 15,000,000 shares authorized; 9,695,252 shares issued and outstanding

     102      102

Class B, common stock; par value $0.01 per share; 35,000,000 shares authorized; 28,644,854 issued and outstanding

     288      287

 

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Table of Contents
     2008     2007  
     (dollars in thousands,
except share amounts)
 

Warrants—Class L, Series 3

     1,478       1,477  

Additional paid-in capital

     123,850       123,466  

Accumulated other comprehensive income

     —         1  

Accumulated deficit

     (249,457 )     (180,587 )

Treasury stock; 615,859 and 615,859 shares of Class A common stock; 315,694 and 308,132 shares of Class B common stock; 36,363 and 36,363 shares of Class L, Series 1 common stock; 35,156 and 35,156 shares of Class L, Series 2 common stock; 30,619 and 29,885 shares of Class L, Series 3 common stock; 29,598 and 28,889 shares of Class L, Series 4 common stock; 5,930 and 5,930 Class L, Series 1 warrants; and 1,512 and 1,430 Class L, Series 3 warrants, at cost, at December 27, 2008 and December 29, 2007, respectively

     (3,211 )     (3,186 )
                

Total shareholders’ deficit

     (126,875 )     (58,365 )
                

Total liabilities and shareholders’ deficit

   $ 388,959     $ 437,232  
                

The accompanying notes are an integral part of the financial statements.

 

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Table of Contents

Broder Bros., Co.

STATEMENTS OF OPERATIONS

For the Years Ended December 27, 2008, December 29, 2007 and December 30, 2006

 

     2008     2007     2006  
     (dollars in thousands)  

Net sales

   $ 926,074     $ 929,124     $ 959,268  

Cost of sales (exclusive of depreciation and amortization included in warehousing, selling and administrative below)

     762,047       762,971       778,549  
                        

Gross profit

     164,027       166,153       180,719  

Warehousing, selling and administrative

     145,703       157,375       150,045  

Restructuring and asset impairment charges

     2,717       12,994       4,089  

Goodwill and trade name impairment charges

     62,504       87,261       —    
                        

Total operating expenses

     210,924       257,630       154,134  
                        

Income (loss) from operations

     (46,896 )     (91,477 ) )     26,585  

Other (income) expense

      

Interest

     35,974       38,512       40,093  

Change in fair value of interest rate swaps

     (246 )     (96 ) )     265  
                        

Total other expense

     35,728       38,416       40,358  
                        

Loss before income taxes

     (82,625 )     (129,893 )     (13,773 )

Income tax benefit

     (13,755 )     (5,834 )     (6,036 )
                        

Net loss

   $ (68,870 )   $ (124,059 )   $ (7,737 )
                        

The accompanying notes are an integral part of the financial statements.

 

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Broder Bros., Co.

STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)

For the Years Ended December 27, 2008, December 29, 2007 and December 30, 2006

 

     Common stock
     Shares (A)    Amount    Shares
(L-1)
   Amount    Shares
(L-2)
   Amount    Shares
(L-3)
   Amount    Shares
(L-4)
   Amount    Shares (B)    Amount
     (dollars in thousands)

Balance, December 31, 2005

   9,695,252    $ 96    963,637    $ 10    931,635    $ 10    2,778,057    $ 28    2,685,802    $ 27    28,644,854    $ 286

Amortization of FAS 133 transition adjustment net of taxes of $7

   —        —      —        —      —        —      —        —      —        —      —        —  

Issuance of stock upon redemption of redeemable securities (see Notes 3 and 5)

   —        —      —        —      —        —      —        —      —        —      —        —  

Exchange for treasury shares

   —        6    —        —      —        —      —        —      —        —      —        1

Stock-based compensation expense

   —        —      —        —      —        —      —        —      —        —      —        —  

Net loss

   —        —      —        —      —        —      —        —      —        —      —        —  
                                                                       

Balance, December 30, 2006

   9,695,252    $ 102    963,637    $ 10    931,635    $ 10    2,778,057    $ 28    2,685,805    $ 27    28,644,854    $ 287

FIN-48 Adoption Amortization of FAS 133 transition adjustment net of taxes of $7

   —        —      —        —      —        —      —        —      —        —      —        —  

Issuance of stock upon redemption of redeemable securities (see Notes 3 and 5)

   —        —      —        —      —        —      —        —      —        —      —        —  

Stock-based compensation expense

   —        —      —        —      —        —      —        —      —        —      —        —  

Net loss

   —        —      —        —      —        —      —        —      —        —      —        —  
                                                                       

Balance, December 29, 2007

   9,695,252    $ 102    963,637    $ 10    931,635    $ 10    2,778,057    $ 28    2,685,805    $ 27    28,644,854    $ 287

Amortization of FAS 133 transition adjustment net of taxes of $4

   —        —      —        —      —        —      —        —      —        —      —        —  

Issuance of stock upon redemption of redeemable securities (see Notes 3 and 5)

   —        —      —        —      —        —      —        —      —        —      —        —  

Stock-based compensation expense

   —        —      —        —      —        —      —        —      —        —      —        1

Net loss

   —        —      —        —      —        —      —        —      —        —      —        —  
                                                                       

Balance, December 27, 2008

   9,695,252    $ 102    963,637    $ 10    931,635    $ 10    2,778,057    $ 28    2,685,805    $ 27    28,644,854    $ 288
                                                                       

 

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     Warrants    Additional
paid-in-
capital
   Accumulated
other
comprehensive
income
    Accumulated
deficit
    Treasury stock
(See Note 3)
    Total     Comprehensive
income (loss)
 
             Shares    Amount      
     (dollars in thousands)  

Balance, December 31, 2005

     1,472      120,807      (34 )     (48,417 )   310,773      (972 )     73,313       (2,834 )

Amortization of FAS 133 transition adjustment net of taxes of $7

     —        —        19       —       —        —         19       19  

Issuance of stock upon redemption of redeemable securities (see Notes 3 and 5)

     5      319      —         —       —        —         324       —    

Exchange for treasury shares

     —        1,250      —         —       710,161      (2,037 )     (780 )     —    

Stock-based compensation expense

     —        504      —         —       —        —         504       —    

Net loss

     —        —        —         (7,737 )   —        —         (7,737 )     (7,737 )
                                                           

Balance, December 30, 2006

   $ 1,477    $ 122,880    $ (15 )   $ (56,154 )   1,020,934    $ (3,009 )   $ 65,643     $ (7,820 )

FIN-48 Adoption

             (374 )          (374 )  

Amortization of FAS 133 transition adjustment net of taxes of $7

     —        —        16       —       —        —         16       16  

Issuance of stock upon redemption of redeemable securities (see Notes 3 and 5)

     —        119      —         —       40,712      (177 )     (58 )     —    

Stock-based compensation expense

     —        467      —         —       —        —         467       —    

Net loss

     —        —        —         (124,059 )   —        —         (124,059 )     (124,059 )
                                                           

Balance, December 29, 2007

   $ 1,477    $ 123,466    $ 1     $ (180,587 )   1,061,646    $ (3,186 )   $ (58,365 )   $ (124,043 )

Amortization of FAS 133 transition adjustment net of taxes of $4

     —        —        (1 )     —       —        —         (1 )     (1 )

Issuance of stock upon redemption of redeemable securities (see Notes 3 and 5)

     1      25      —         —       9,087      (25 )     2       —    

Stock-based compensation expense

     —        359      —         —       —        —         359       —    

Net loss

     —        —        —         (68,870 )   —        —         (68,870 )     (68,870 )
                                                           

Balance, December 27, 2008

   $ 1,478    $ 123,850    $ —       $ (249,457 )   1,070,733    $ (3,211 )   $ (126,875 )   $ (68,871 )
                                                           

The accompanying notes are an integral part of the financial statements.

 

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Broder Bros., Co.

STATEMENTS OF CASH FLOWS

For the Years Ended December 27, 2008, December 29, 2007 and December 30, 2006

 

     2008     2007     2006  
     (dollars in thousands)  

Cash flows from operating activities

      

Net loss

   $ (68,870 )   $ (124,059 )   $ (7,737 )

Adjustments to reconcile net loss to net cash (used in) provided by operating activities

      

Depreciation

     11,035       10,107       7,967  

Amortization

     8,405       11,034       16,887  

Provision for losses on accounts receivable

     5,239       2,231       923  

Deferred income taxes

     (14,055 )     (5,746 )     (6,091 )

Stock-based compensation

     360       466       504  

Change in fair value of interest rate swaps

     (246 )     (96 )     (265 )

(Gain) loss on disposal of fixed assets

     (143 )     130       172  

Goodwill and trade name impairment charges

     62,504       87,261       107  

Changes in operating accounts

      

Accounts receivable

     7,597       (2,394 )     949  

Finished goods inventory

     (43,217 )     41,487       (8,744 )

Prepaid and other current assets

     (2,124 )     859       459  

Accounts payable

     30,173       (5,822 )     (10,845 )

Accrued liabilities and other

     (5,479 )     5,679       4,638  
                        

Net cash (used in) provided by operating activities

     (8,821 )     21,137       (1,076 )
                        

Cash flows from investing activities

      

Acquisition of fixed assets

     (3,032 )     (8,460 )     (8,892 )

Proceeds from disposal of fixed assets

     238       —         —    

Acquisition of Amtex Imports Inc.

     —         —         (6,754 )
                        

Net cash used in investing activities

     (2,794 )     (8,460 )     (15,646 )
                        

Cash flows from financing activities

      

Borrowings on revolving credit agreement

     535,500       469,500       498,700  

Repayments on revolving credit agreement

     (488,200 )     (477,200 )     (478,300 )

Payments of principal on capital lease obligations

     (4,728 )     (2,751 )     (1,216 )

Payment of financing fees

     —         —         (828 )

Redemption of redeemable securities

     (24 )     (177 )     (2,036 )

Proceeds from payment of employee note receivable

     —         —         463  

Change in book overdraft

     (32,812 )     (1,685 )     904  
                        

Net cash provided by (used in) financing activities

     9,736       (12,313 )     17,687  
                        

Net (decrease) increase in cash

     (1,879 )     364       965  

Cash at beginning of year

     4,634       4,270       3,305  
                        

Cash at end of year

   $ 2,755     $ 4,634     $ 4,270  
                        

Supplemental disclosure of cash flow information

      

Interest paid

   $ 34,559     $ 36,423     $ 34,931  
                        

Taxes paid, net of refunds

   $ 146     $ 420     $ 170  
                        

Assets acquired as a result of capital lease obligations

   $ 494     $ 8,977     $ 5,915  
                        

The accompanying notes are an integral part of the financial statements.

 

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Broder Bros., Co.

NOTES TO FINANCIAL STATEMENTS

1. Organization and Nature of Business

Broder Bros., Co. (the “Company”) is a national wholesale distributor of imprintable sportswear and accessories which include undecorated or “blank” T-shirts, sweatshirts, polo shirts, outerwear, caps, bags and other imprintable accessories that are decorated primarily for advertising and promotional purposes. Products are sold to screen printers, embroiderers and advertising specialty companies through eight distribution centers and ten Express locations, facilities offering pickup room service, strategically located throughout the United States. These customers decorate the Company’s products with corporate logos, brands and other images, and then sell the imprinted sportswear and accessories to a highly diversified range of end-customers including Fortune 1000 companies, sporting venues, concert promoters, athletic leagues, educational institutions and travel resorts.

In September 2003, the Company acquired all of the outstanding capital stock of Alpha Shirt Holdings, Inc. (“Alpha”), pursuant to a stock purchase agreement entered into in July 2003. In August 2004, the Company acquired all of the shares of beneficial interest of NES, a leading distributor of imprintable sportswear in New England. Immediately after consummation of the acquisitions, Alpha and its subsidiaries and NES and its subsidiary were merged with and into Broder Bros., Co., except for ASHI, Inc., which became a direct, wholly owned non-operating subsidiary of the Company until it also was subsequently merged with and into Broder Bros., Co. in 2005. In addition, the Company acquired substantially all of the assets of Amtex Imports Inc. in September 2006.

The Company operates on a 52/53-week year basis with the year ending on the last Saturday of December. The years ended December 27, 2008, December 29, 2007 and December 30, 2006 each consisted of 52 weeks. Fiscal periods are identified according to the calendar period that they most accurately represent. For example, the year ended December 27, 2008 is referred to herein as “fiscal 2008,” “fiscal year 2008” or “fiscal year ended December 31, 2008.”

Exchange Offer and Liquidity Considerations

During 2008, weakened economic conditions, largely attributable to the global credit crisis, and erosion of consumer confidence, negatively impacted the markets in which the Company operates. Significant factors including the deterioration of corporate profits and decreased corporate spending, equity market volatility, and rising unemployment levels resulted in consumers delaying, canceling or limiting purchases of our goods. As a result, the Company’s liquidity has been adversely affected. The Company has had difficulty in maintaining sufficient inventory levels due to some of its vendors limiting its trade credit. The Company was unable to make its interest payment on its 2010 Notes on April 15, 2009, and the holders of the 2010 Notes would have been able to accelerate the indebtedness outstanding under those notes if the Company had not completed the Exchange Offer. Additionally, current credit and capital market conditions combined with the Company’s credit ratings and recent history of operating losses and negative cash flows as well as projected industry and global economic conditions are likely to restrict the Company’s ability to access capital markets in the near-term and any such access would likely be at an increased cost and under more restrictive terms and conditions.

The Company explored various strategic and financing alternatives and has retained legal and financial advisors to assist in this regard. The Company also commenced discussions with certain of its major vendors to address its liquidity and capital requirements. This process culminated in the consummation on May 20, 2009 of an exchange offer for the Company’s $225.0 million aggregate principal amount of 11 1/4% Senior Notes due October 15, 2010 for $94.9 million of its newly issued 2013 Notes and a pro rata share of 96% of its outstanding common stock. The Company’s stockholders who held its common stock prior to the Exchange Offer hold 4% of its currently outstanding common stock and received warrants to purchase 1,474,201 shares of its common stock in the Exchange Offer. The Company issued $94.9 million in aggregate principal amount of 2013 Notes in connection with the Exchange Offer and approximately $11.5 million in aggregate principal amount of the 2010 Notes remain outstanding.

As a result of the successful completion of the Exchange Offer, the indenture governing the 2010 Notes was amended to waive any and all existing defaults and events of default that had arisen or may arise under the indenture, eliminate substantially all of the covenants in the indenture governing the Company’s actions (other than the covenants to pay principal of and interest on the 2010 Notes when due), and eliminate or modify the related events of default.

2. Summary of Significant Accounting Policies

Cash

The Company considers all highly-liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents.

 

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Accounts receivable

The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make required payments, which is included in bad debt expense. The Company determines the adequacy of this allowance by regularly reviewing its accounts receivable aging and evaluating individual customer receivables, considering customers’ financial condition, credit history and current economic conditions.

Activity in the allowance for doubtful accounts for the years ended December 31, 2008, 2007 and 2006 was as follows:

 

     December 31,
2008
    December 31,
2007
    December 31,
2006
 
     (dollars in thousands)  

Balance, beginning of year

   $ 6,847     $ 5,814     $ 5,352  

Provision charged to expense

     5,239       2,231       923  

Charges to allowance

     (1,254 )     (1,198 )     (461 )
                        

Balance, end of year

   $ 10,832     $ 6,847     $ 5,814  
                        

Inventory

Inventory is stated at the lower of cost or market using the first-in, first-out method. Inventory consists of finished goods held for sale. The Company’s reported inventory cost consists of the cost of product, net of vendor incentives related to unsold inventory, and certain costs incurred to bring inventory to its existing condition or location, including freight-in, purchasing, receiving, inspection and other material handling costs. Amounts due to the Company related to vendor incentives are recorded as reductions to vendor payables.

The Company maintains an allowance for potential losses on the disposal of its discontinued and slow moving inventory. The allowance for excess and discontinued inventory balances at December 31, 2008 and 2007 were approximately $6.2 million and $8.2 million, respectively.

Fixed assets

Fixed assets are stated at cost less accumulated depreciation. Depreciation of property and equipment is computed using the straight-line method based upon estimated useful lives. Improvements are capitalized and depreciated over the estimated useful life of the asset. Repair and maintenance costs are charged to expense as incurred. When property is retired or otherwise disposed of, the cost of the property and the related accumulated depreciation are removed from the accounts, and any resulting gains or losses are reflected as a component of operating income.

Long-lived asset impairments

The Company accounts for its long-lived assets in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). The carrying values of long-lived assets are evaluated whenever changes in circumstances indicate the carrying amounts of such assets may not be recoverable. In performing such reviews for recoverability, the Company compares the expected undiscounted cash flows to the carrying values of long-lived assets. If the expected undiscounted future cash flows are less than the carrying amounts of such assets, the Company recognizes an impairment loss for the difference between the carrying amount and its estimated fair value. Fair value is estimated using expected future cash flows.

Revenue recognition

Revenue is recognized when title and risk of loss is transferred to the customer. This generally occurs when products are shipped. Revenue includes selling price of the product and all shipping and handling costs paid by the customer. Under certain circumstances, customers may submit a claim for damaged or shorted shipments. Based on historical experience, the Company establishes a reserve for potential returns at the time of sale. Revenue is further reduced at the time of sale for estimated customer-related incentives. These incentives primarily consist of volume and growth rebates.

 

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Internal use software costs

The Company capitalizes certain costs incurred in connection with developing or obtaining internal use software. These costs are being amortized over a period of three years. The Company capitalized approximately $1.6 million and $2.2 million of purchased or developed computer software for the years ended December 31, 2008 and 2007, respectively. The unamortized computer software costs were approximately $2.7 million and $3.2 million at December 31, 2008 and 2007, respectively. The amounts charged to depreciation expense for the amortization of software costs were approximately $1.9 million, $2.1 million and $1.4 million in fiscal 2008, 2007 and 2006, respectively.

Catalog costs, co-op and marketing allowances and other advertising expenses

The Company incurs catalog and advertising costs to promote its products. Catalog costs, consisting primarily of the Company’s annual production for its catalogs, printing and postage costs, are capitalized and amortized over the life of the catalog, not to exceed twelve months for the subsequent year. Until fiscal 2006, catalogs were mailed in January. In October 2006, however, the Company mailed its fiscal 2007 catalogs. As a result, the fiscal 2006 catalog was amortized during the period January through September 2006 and the fiscal 2007 catalog was amortized over the period October 2006 through September 2007 and the fiscal 2008 catalog was amortized over the period October 2007 through September 2008. The fiscal 2009 catalog is being amortized over its useful life.

At December 31, 2008 and 2007, approximately $4.8 million and $7.1 million, respectively, of prepaid catalog costs were reported as other current assets. At December 31, 2008, approximately $3.6 million of prepaid catalog costs were reported as other long term assets. Prepaid catalog costs at December 31, 2008 represent the unamortized portion of the fiscal 2009 catalog. Prepaid catalog costs at December 31, 2007 represent prepaid catalog costs incurred for the fiscal 2008 catalog. Total catalog expense, net of expected vendor co-op advertising allowances earned and reimbursements by customers for catalogs purchased, was approximately $2.0 million, $3.4 million and $5.2 million in fiscal 2008, 2007 and 2006, respectively.

The Company records co-op marketing and advertising allowances received from vendors as a reduction of directly corresponding costs incurred within warehousing, selling and administrative expenses. Such amounts netted against warehousing, selling and administrative expenses were approximately $7.4 million, $6.3 million and $7.2 million for fiscal 2008, 2007 and 2006, respectively.

The Company periodically advertises through means other than its catalog and these costs are expensed as incurred. Other advertising expense was approximately $0.6 million, $0.7 million and $0.6 million for the years ended December 31, 2008, 2007 and 2006, respectively.

Goodwill and other intangibles

Goodwill

SFAS No. 142, “Goodwill and Other Intangible Assets,” requires that goodwill be tested for impairment at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. The Company has three reporting units consisting of its Alpha, Broder, and NES divisions. The Company’s goodwill was allocated between the Alpha and Broder reporting units. The Company tested goodwill for impairment as of December 29, 2007 and concluded that, due primarily to an increase in the value of Alpha’s tangible assets, the Alpha division recorded a non-cash goodwill impairment charge of $87.3 million during the fourth quarter 2007. After this impairment charge, as of December 29, 2007, we had remaining goodwill of approximately $50.9 million.

The Company performed the first step of the two-step impairment test and compared the fair value of its Alpha and Broder reporting units to their respective carrying values. Consistent with the Company’s approach in its annual impairment testing, in assessing the fair value of the reporting unit, the Company used equal weighting of two methods: the market approach and income approach. Under the market approach, the fair value of the reporting is based on comparisons of multiples of enterprise values to earnings before interest, taxes, depreciation and amortization (EBITDA). Under the income approach, the fair value of the reporting unit is based on the present value of estimated future cash flows of each reporting unit discounted at rates consistent with the cost of capital specific to the reporting unit. If the carrying value of the reporting unit exceeds the indicated fair value of the reporting unit, a second analysis is performed to measure the fair value of all assets and liabilities. If, based on the second analysis, it is determined that the implied fair value of the goodwill of the reporting unit is less than the carrying value, goodwill is considered impaired.

As a result, of the weakened economy and associated demand for the Company’s products in the fourth quarter 2008 and anticipated weakened demand in 2009, the anticipated cash flows for the Alpha and Broder reporting units have declined significantly. As a result, the carrying value of the two reporting units was greater than the calculated fair values in step one of the goodwill impairment test. In step two of the impairment test, the Company determined the implied fair value of the goodwill and compared it to

 

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the carrying value of the goodwill. The Company allocated the fair value of the reporting unit to all of its assets and liabilities as if the reporting unit had been acquired in a business combination and the fair value of the Alpha and Broder reporting units was the price paid to acquire the reporting unit. The excess of the fair value of the reporting units over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. The Company’s step two analysis resulted in no implied fair value of goodwill, and therefore, the Company recognized an impairment charge of $39.0 million and $11.9 million respectively for the Alpha and Broder reporting units, representing a write off of the entire amount of the Company’s previously recorded goodwill.

Intangible assets

Intangible assets are assets acquired that lack physical substance and that meet the specified criteria for recognition apart from goodwill. Intangible assets acquired are comprised mainly of customer relationships and trade names / trademarks. The fair value of trade names / trademarks is estimated by the use of a relief from royalty method, which values an intangible asset by estimating the royalties saved through the ownership of an asset. The royalty, which is based on a reasonable rate applied against forecasted sales, is tax-effected and discounted to present value using a discount rate commensurate with the relative risk of achieving the cash flow. The fair value of acquired customer relationships is estimated by the use of an income approach known as the excess earnings method. The excess earnings method measures economic benefit indirectly by calculating residual profit attributable to an asset after appropriate returns are paid to complementary or contributory assets. The residual profit is tax-effected and discounted to present value at an appropriate discount rate that reflects the risk factors associated with the estimated income stream. Determining the useful life of an intangible asset requires judgment as different types of intangible assets will have different useful lives and certain assets may even be considered to have indefinite useful lives.

Management tests indefinite-lived intangible assets on at least an annual basis, or more frequently if necessary. In connection with the analysis, management tests for impairment by comparing the carrying value of intangible assets to its estimated fair value. Since quoted market prices are seldom available for intangible assets, we utilize present value techniques to estimate fair value. Common among such approaches is the “relief from royalty” methodology. This methodology estimates the direct cash flows associated with the intangible asset. Management must estimate the hypothetical royalty rate, discount rate, and residual growth rate to estimate the forecasted cash flows associated with the asset.

The Company has one indefinite lived intangible asset, the Alpha trade name. A discount rate of 14% was utilized in the impairment test. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows generated as a result of the respective intangible assets. A long-term growth rate of 4% was assumed which is consistent with the assumption used in the impairment test of the Alpha trade name during the fourth quarter of 2008. A royalty rate of 0.8% was assumed. Assumptions about royalty rates are based on the rates at which similar trademarks or technologies are being licensed in the marketplace.

This analysis indicated that the Alpha trade name was impaired by $11.6 million and this was charged to goodwill and trade name impairment charge during the fourth quarter of 2008. Had the fair value of each Company’s Alpha trade name been hypothetically lower than presently estimated by 10% as of December 27, 2008, the Alpha trade name would have been impaired by an additional $2.4 million.

The Company has concluded that the Alpha trade name is no longer an indefinite lived intangible asset and starting December 28, 2008 will begin to amortize the new carrying value of the trade name, $24.0 million at December 27, 2008, over a life of 9 years.

Long-lived assets, including finite-lived intangible assets (e.g., customer relationships), do not require that an annual impairment test be performed; instead, long-lived assets are tested for impairment upon the occurrence of a triggering event. Triggering events include the likely (i.e., more likely than not) disposal of a portion of such assets or the occurrence of an adverse change in the market involving the business employing the related assets. Significant judgments in this area involve determining whether a triggering event has occurred and re-assessing the reasonableness of the remaining useful lives of finite-lived assets by, among other things, validating customer attrition rates.

 

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The gross carrying amounts and accumulated amortization for the Company’s intangible assets at December 31, 2008 and 2007 are summarized below:

 

          December 31, 2008     December 31, 2007  
     Amortizable
Life
   Gross
Carrying
Amount
   Accumulated
Amortization
    Gross
Carrying
Amount
   Accumulated
Amortization
 
     (dollars in thousands)  

Trademarks / Trade names—Definite life

   9 years    $ 24,000    $ —       $ 35,600    $ —    

Trademark / Trade names—Defined life

   1 to 5 years      8,700      (8,700 )     8,700      (8,040 )

Customer Relationships

   2 to 8 years      61,480      (51,873 )     61,480      (46,233 )

Other

   3 to 5 years      1,706      (1,615 )     1,706      (1,526 )
                                 
        95,886      (62,188 )     107,486      (55,799 )
                                 

The Company’s trade name intangible assets with a nine year useful life was the result of the Alpha acquisition in September 2003. The Company owns the rights to “Alpha Shirt Company” under which the Alpha division markets its product portfolio.

The Company’s net trademarks and trade name intangible assets with defined lives resulted from the Alpha acquisition in September 2003, the NES acquisition in August 2004, and the Amtex acquisition in September 2006. Amortization expense of these trademark and trade name intangible assets was approximately $0.7 million, $1.9 million and $2.3 million for the years ended December 31, 2008, 2007 and 2006, respectively.

The Company’s net customer relationship intangible assets are being amortized over the estimated useful lives on a basis proportionate to the discounted expected future cash flows underlying the initial valuation of the intangible.

The Company’s other intangible assets consist primarily of supply agreement intangible assets resulting from the Full Line and Alpha acquisitions and a non-compete agreement resulting from the Amtex acquisition. Other intangible assets are being amortized on a straight-line basis over the average life of the asset.

Amortization expense for intangible assets approximated $6.4 million, $9.1 million and $11.0 million for the years ended December 31, 2008, 2007 and 2006, respectively. Estimated amortization expense for the next four fiscal years beginning December 31, 2008 is expected to be approximately $7.1 million, $5.8 million, $4.6 million, $3.0 million and $2.7 million, respectively.

Derivative accounting

The Company entered into interest rate swaps to fix a portion of its variable rate debt under a revolving credit facility that was retired in September 2003 (see Note 5). These interest rate swaps matured in October 2008. Under SFAS No. 133, all derivative instruments are recognized in the balance sheet at their fair values and changes in fair value are recognized immediately in earnings, unless the derivatives qualify as hedges of future cash flows. The Company did not apply hedge accounting to its outstanding interest rate swaps, as described in Note 5.

Stock options

Effective December 26, 2004 the Company adopted SFAS No. 123R, “Share-Based Payment” (“SFAS No. 123R”). SFAS No. 123R is a revision of SFAS No. 123, and its related implementation guidance. With the adoption of SFAS No. 123R, the Company is required to record compensation expense on stock options granted to employees. In accordance with SFAS No. 123R, the Company has applied the prospective transition method, whereby it will continue to account for any portion of awards outstanding at the date of transition using the accounting principles originally applied to those awards. Accordingly, upon adoption of SFAS No. 123R, there was no effect on income from continuing operations, income before income taxes, net income, cash flow from operations, or cash flow from financing activities. During the period from adoption through December 31, 2008, there were no modifications or repurchases of existing awards.

During 2005, options to purchase 118,647 shares of Class B common stock, 12,785 shares of Class L, Series 3 common stock and 11,125 shares of Class L, Series 4 common stock were issued. During 2006, options to purchase 1,357,147 shares of Class B common stock, 146,242 shares of Class L, Series 3 common stock and 127,249 shares of Class L, Series 4 common stock were issued, which resulted in the recognition of approximately $0.5 million in stock compensation expense. During 2008 and 2007, there were no new options granted. The Company recognized $0.4 million and $0.5 million in stock compensation expense, in fiscal years 2008 and

 

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2007 respectively, associated with the vesting of options granted in prior years. The Black-Scholes option pricing model was used to estimate the fair value for the option grants in prior years. The Company used the fair value method using a risk-free rate of 5.0%, an expected life of 5 years, a volatility of 25% and a dividend yield of zero.

Fair value of financial instruments

Cash, accounts receivable, net, accounts payable and accrued expenses approximate fair value because of the short maturity of those instruments. The fair value of the Company’s revolving debt is estimated to approximate carrying value based on the variable nature of the interest rates and current market rates available to the Company. The Company believes the fair value of the 2010 Notes approximated $49.5 million and $173.3 million at December 31, 2008 and 2007, respectively, based on quoted market values of the instruments. Included in the accounts payable balance at December 31, 2008 and 2007 were outstanding checks of approximately $8.0 million and $40.9 million, respectively.

Accounting changes

On December 31, 2006, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”). Among other things, FIN 48 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. The December 31, 2006 transition reduced the Company’s retained earnings by $0.9 million, which included an adjustment to the liability for unrecognized tax benefits of $1.8 million that was reported in “other long-term liabilities” on the Company’s balance sheet. See Note 12 for additional information.

Income taxes

The Company accounts for income taxes in accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). SFAS No. 109 requires an asset and liability approach which requires the recognition of deferred income tax assets and deferred income tax liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

A valuation allowance is recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. No valuation allowance was recorded as of December 31, 2006 since the Company had sufficient deferred tax liabilities to shield its deferred tax assets and was not relying on projected, future taxable income to be able to realize its deferred tax assets.

Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and disclosure of contingent assets and liabilities reported in its financial statements and accompanying notes. These assumptions also affect the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates and assumptions.

New accounting pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 establishes a common definition for fair value to be applied to U.S. GAAP guidance requiring use of fair value, establishes a framework for measuring fair value and expands disclosure about such fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued a final Staff Position to allow for a one-year deferral of adoption of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The FASB also decided to amend SFAS No. 157 to exclude FASB Statement No. 13 and its related interpretive accounting pronouncements that address leasing transactions. The Company has adopted SFAS No. 157 as of December 30, 2007 related to financial assets and financial liabilities and at December 27, 2008, the Company did not have any financial assets or liabilities which required the Company to apply the provisions of SFAS No. 157. As of December 28, 2008, the Company adopted the provisions of SFAS No. 157 with respect to non-financial assets and liabilities and this adoption did not have a material impact on the Company’s financial condition, results of operations and cash flows.

 

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In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 permits entities to measure at fair value, at specified election dates, many financial instruments and certain other assets and liabilities that are not otherwise required to be measured at fair value. Subsequent changes in fair value will be required to be reported in earnings each reporting period. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company adopted SFAS No. 159 as of December 30, 2007 and has elected not to measure any additional financial instruments at fair value.

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (“SFAS No. 141(R)”). SFAS No. 141(R) will significantly change the accounting for business combinations. Under SFAS No. 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. It also amends the accounting treatment for certain specific items including acquisition costs and non-controlling minority interests and includes a substantial number of new disclosure requirements. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after December 15, 2008.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements – An Amendment of ARB No. 51 (“SFAS No. 160”). SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS No. 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS No. 160 is effective for fiscal years and interim periods beginning after December 15, 2008. . The Company has adopted the provisions of SFAS No. 160 as of December 28, 2008 and this adoption did not have a material impact on the Company’s financial condition, results of operations or cash flows.

In March 2008, the FASB issued SFAS No. 161, Disclosures About Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133 (“SFAS No. 161”). SFAS No. 161 expands quarterly disclosure requirements in SFAS No. 133 about an entity’s derivative instruments and hedging activities. SFAS No. 161 is effective for fiscal years beginning after November 15, 2008. Accordingly, the Company will ensure it meets the enhanced disclosure provisions of SFAS No. 161 upon the effective date for any outstanding derivative contracts.

In April 2008, the FASB issued FASB Staff Position (“FSP”) No. SFAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP SFAS 142-3”). FSP SFAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”). The intent of FSP SFAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141R (revised 2007), Business Combinations (“SFAS No. 141R”) and other applicable accounting literature. FSP SFAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and must be applied prospectively to intangible assets acquired after the effective date. The application of FSP SFAS 142-3 did not have a material impact on the Company’s financial condition, results of operations and cash flows upon adoption; however, future transactions entered into by the Company will need to be evaluated under the requirements of this FSP.

In June 2008, the FASB ratified EITF Issue No. 07-5, “Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity’s Own Stock” (EITF 07-5). EITF 07-5 provides that an entity should use a two step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. It also clarifies on the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation. EITF 07-5 is effective for fiscal years beginning after December 15, 2008. The implementation of this standard is not expected to have a material impact on the Company’s financial position and results of operations.

3. Liquidity

The Company has relied primarily upon cash flow from operations and borrowings under its revolving credit facility to finance operations, capital expenditures and debt service requirements. Borrowings and availability under the revolving credit facility fluctuate due to seasonal demands. Historical borrowing levels have reached peaks during the middle of a given year and low points during the last quarter of the year.

Historically, the Company’s ability to manage cash flow and working capital levels, particularly inventory and accounts payable, allowed the Company to meet its obligations during the seasonal low period, pay scheduled principal and interest payments, and provide funds for working capital, capital expenditures and other needs of the business.

 

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The Company’s business is sensitive to the business cycle of the national economy. Deterioration in general economic conditions adversely affect demand for the Company’s products, and cause sales of its products to decrease. In addition, slowdowns in economic activity result in the Company’s customers shifting their purchases towards lower-priced products, such as T-shirts, which adversely affects gross profit margin. The current economic downturn has negatively impacted the imprintable sportswear market, causing a dramatic decrease in sales during the fourth quarter of 2008 which continued into 2009. In 2008, the market for imprintable activewear shrank by at least 6%. It shrank at least 11% in the fourth quarter of 2008 and 18% in the first quarter of 2009. Such conditions are not expected to improve significantly in the near-term. The current economic crisis has caused many of the Company’s customers to cancel or scale back corporate events and purchases of products such as those the Company sells. This reduced customer demand has adversely affected the Company’s revenues and operating profits through reduced purchases of the Company’s products despite the Company’s reduction in operating expenses resulting from the execution of several cost reducing initiatives.

During fiscal year 2008, cash flow from operating activities decreased $29.9 million compared to fiscal 2007. This decrease in cash flow from operating activities has resulted in significant challenges to liquidity. During the fourth quarter of 2008, adverse economic conditions coupled with a decline in revenues, gross profits and operating margins described above, as well as uncertainty about the Company’s ability to make a $12.7 million interest payment due on April 15, 2009, resulted in reduced trade credit terms from several of the Company’s key suppliers. The reduction in trade credit led to lower inventory levels, which reduced the Company’s borrowing capacity under its revolving credit facility.

On March 30, 2009, the Company filed a Form 12b-25 with the SEC indicating that it was unable to file its Form 10-K for its fiscal year ended December 27, 2008 within the time period prescribed by the SEC without unreasonable effort or expense because the Company was devoting substantial resources in addressing its liquidity needs in light of recent and ongoing adverse economic and industry conditions. The failure to deliver financial statements by April 6, 2009 constituted a default under the Company’s existing revolving credit facility.

On March 31, 2009, the Company announced that it was negotiating with an ad hoc committee of holders of its 2010 Notes regarding a refinancing transaction designed to enhance the Company’s near-term liquidity, reduce its cash interest payments and improve its working capital. The Company explored various strategic and financing alternatives, including filing of a voluntary petition under Chapter 11 of the Bankruptcy Code, and had retained legal and financial advisors to assist in this regard. The Company also commenced discussions with certain of its major vendors to address its liquidity and capital requirements.

On April 9, 2009, the Company entered into an amendment, waiver and consent (the “First Amendment”) of its Amendment and Restated Credit Agreement (“Credit Agreement”) (as amended and

 

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waived, the “Revised Credit Agreement”). Pursuant to the terms of the First Amendment, the commitment under the Revised Credit Agreement was reduced from $225 million to $200 million, and the borrowing base was amended to provide for a seasonal stretch tranche (previously $20 million) of up to $13.5 million, through April 30, 2009 and up to $10.0 million through May 31, 2009. No seasonal stretch is provided for after June 1, 2009. The First Amendment also provided lender consent to the general terms of an Exchange Offer with respect to the Company’s 2010 Notes, waived certain defaults which have occurred or may occur before the Exchange Offer closed and permitted a change of control which may arise in connection with the Exchange Offer. The First Amendment included a waiver of the Company’s requirement to deliver its consolidated financial statements without a “going concern” opinion until May 15, 2009. On April 15 ,2009, the Company defaulted on the interest payment required to be made by it under the 2010 Notes.

On April 17, 2009, the Company launched the Exchange Offer for all of its outstanding $225.0 million aggregate principal amount of 2010 Notes. In exchange for their 2010 Notes, note holders who participated in the exchange (the “Participating Note Holders”) were entitled to receive the Company’s newly issued 12%/15% Senior Payment-in-Kind Toggle Notes due 2013 (the “2013 Notes”) and a pro-rata share of the Company’s newly issued common stock.

On April 28, 2009, the Company entered into a second amendment (the “Second Amendment”) and a third amendment (the “Third Amendment”) with respect to its Revised Credit Agreement. The Second Amendment extended, until May 26, 2009, the date on which the Company must deliver its audited financial statements for fiscal 2008 to the Revised Revolver Facility lenders. The Third Amendment permitted the Company to change the consent payment being offered in connection with the Exchange Offer.

On May 20, 2009, the Company completed the exchange offer for the Company’s $225.0 million aggregate principal amount of 11 1/4% Senior Notes due October 15, 2010 for $94.9 million of its newly issued 2013 Notes and a pro rata share of 96% of its outstanding common stock. The Company’s stockholders who held its common stock prior to the Exchange Offer hold 4% of its currently outstanding common stock and received warrants to purchase approximately 1.4 million shares of its common stock in the Exchange Offer. The Company issued $94.9 million in aggregate principal amount of 2013 Notes in connection with the Exchange Offer and approximately $11.5 million in aggregate principal amount of the 2010 Notes remain outstanding. The 2010 Notes mature on October 15, 2010. The noteholders who did not participate in the Exchange Offer were paid the April 15, 2009 interest payment on May 15, 2009 thereby curing the default for failure to pay the interest on the April 15, 2009 due date.

The indenture governing the 2013 Notes, among other things, (1) restricts the Company’s ability and its subsidiaries, including the guarantors of the 2013 Notes, to incur additional indebtedness, issue shares of preferred stock, incur liens, pay dividends or make certain other restricted payments and enter into certain transactions with affiliates, (2) prohibits certain restrictions on the ability of certain of the Company’s subsidiaries, including the guarantors of the 2013 Notes, to pay dividends or make certain payments to the Company and (3) places restrictions on the Company’s ability and its subsidiaries, including the guarantors of the 2013 Notes, to merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the Company’s assets. The indenture related to the 2013 Notes also contains various covenants which limit the management’s discretion in the operation of the Company’s businesses.

Noteholders of the 2010 Notes who participated in the Exchange Offer consented to the proposed amendments to waive any and all existing defaults and events of default that have arisen or may arise under the existing indenture, eliminate substantially all of the covenants in the existing indenture governing the Company’s actions, other than the covenants to pay principal of and interest on the 2010 Notes when due, and eliminate or modify the related events of default. The waivers relate to defaults that have arisen from the Company’s failure to make the interest payment due and payable on April 15, 2009, to file its Annual Report on Form 10-K for fiscal 2008 within the time period prescribed by the SEC’s rules and regulations and to provide the trustee notice of these defaults. Noteholders for the 2010 who did not participate in the Exchange Offer retain the right to collect interest due on the 2010 Notes until maturity and to collect the principal amount when due in October 2010.

 

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Going Concern and Covenant Compliance

Following completion of the series of transactions described above which were designed to obtain stable bank financing and stable bond financing, management of the Company believes that it can achieve stable vendor financing. Subsequent to the May 15, 2009 announcement that approximately 95% of the 2010 were validly tendered and not withdrawn, key suppliers increased credit limits and began shipping significant amounts of inventory on commercially reasonable terms. None of the Company’s key suppliers require the Company to pay cash in advance or cash on delivery.

Management believes that it has the ability to manage cash flow and working capital levels, particularly inventory and accounts payable, to allow the Company to meet its current and future obligations during the seasonal low point in June 2009, pay scheduled principal and interest payments, and provide funds for working capital, capital expenditures and other needs of the business for at least Fiscal 2009. Management believes the Company has the ability to continue as a going concern due to having evaluated various scenarios using a detailed liquidity model. The model is used to project liquidity and availability under the Revised Credit Agreement, including factors affecting liquidity, such as management of working capital, the borrowing base and financial performance. The model also tracks historical liquidity and borrowing base availability.

The following key assumptions were used in evaluating the Company’s ability to continue as a going concern: year-over-year revenue and margin declines of 20% and 200 basis points, respectively; operating expenses in line with the actual performance, which includes the impact of fixed headcount reductions of approximately 140 and 60 employees in December 2008 and March 2009, respectively; approximately $7 million of cash disbursements for capital expenditures and capital lease obligations; cash interest payments that considers the impact of the 2010 Notes that remain outstanding and the increase in interest on the revolving credit facility following the amendment executed on April 9, 2009; and commercially reasonable payment terms to the Company’s trade creditors. Based on these assumptions and sensitivities to these assumptions, the Company expects to remain in compliance with the fixed charge coverage ratio covenant included in its Revolving Credit Agreement during Fiscal 2009.

In the event that year-over-year revenue and margin declines are greater than 20% and 200 basis points, the Company believes it has the ability to manage through the additional liquidity constraints by further reducing the Company’s variable operating expenses, including personnel costs to operating the Company’s distribution centers and call centers, and controlling the timing of certain of its cash disbursements due to a change in the Revolving Credit Agreement. The Company’s fulfillment costs are very responsive to volume and the Company has taken action to reduce its fixed operating expenses. In addition, whereas payables aged greater than 30 days past due per the terms of the original invoice date were required to be deducted from the borrowing base, the First Amendment to the Revolving Credit Agreement eliminated that requirement.

The Company’s revolving credit facility and the indenture that governs the 2013 Notes impose restrictive covenants on the Company. See Note 18. The agreement governing the revolving credit facility also requires the Company to achieve specified financial and operating results and maintain compliance with specified financial ratios and satisfy other financial condition tests. Based on management’s assumptions and alternative scenarios to these assumptions, the Company expects to remain in compliance with the fixed charge coverage ratio covenant included in its Revolving Credit Agreement during Fiscal 2009.

The Company’s ability to comply with these ratios may be affected by events beyond management’s control. A breach of any of these restrictive covenants or the inability to comply with the required financial ratios could result in a default under the agreement governing the revolving credit facility. If a default occurs, the lenders under the revolving credit facility may elect to declare all borrowings outstanding, together with all accrued interest and other fees, to be immediately due and payable which would result in an event of default under the 2013 Notes. The lenders would also have the right in these circumstances to terminate any commitments they have to provide further borrowings. If the Company is unable to repay

 

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outstanding borrowings when due, the lenders under the revolving credit facility will also have the right to proceed against the Company’s collateral, including available cash, granted to them to secure the indebtedness. If the indebtedness under the revolving credit facility or 2013 Notes were to be accelerated, the Company’s assets might not be sufficient to repay in full that indebtedness and the Company’s other indebtedness, which would likely cause the Company to file a voluntary petition under Chapter 11 of the Bankruptcy Code.

4. Shareholders’ Deficit

In August 2004, in connection with the acquisition of NES, the Company issued new equity to Bain Capital and related investors with proceeds aggregating approximately $12.4 million, less related fees and expenses of approximately $0.4 million. The $12.4 million in new equity was comprised of:

 

   

3,504,129 shares of Class B common stock with a par value of $0.01 per share. These shares are non-voting, but are otherwise identical to the existing shares of Class A common stock.

 

   

339,840 shares of Class L, Series 3 common stock with a par value of $0.01 per share. These shares are non-voting and have a liquidation preference over the Class A and B common stock. The liquidation preference per share is calculated as $26.84 plus an amount accumulating from the date of issuance at a rate of 12.5% per annum, and compounding quarterly, on the outstanding accumulated preference. In addition, the Class L, Series 3 shareholders were also issued warrants for the purchase of 37,760 shares of Class L, Series 3 common stock at an exercise price of $15.75 per share which expire on September 22, 2013. The Class L, Series 3 warrants are valued at approximately $0.2 million in the accompanying financial statements.

 

   

328,554 shares of Class L, Series 4 common stock with a par value of $0.01 per share. These shares are non-voting and have a liquidation preference over the Class A and B common stock. The liquidation preference per share is calculated at $18.75 plus an amount accumulating from the date of issuance at a rate of 15.0% per annum, and compounding quarterly.

In September 2004, the Company issued new equity to certain executive officers of the Company with proceeds aggregating approximately $0.8 million. The shares may be put to the Company at their then fair market value if the executive or Company terminates employment for any reason other than for cause or without good reason. The fair value of these shares, net of a related executive note receivable of $0.4 million at December 31, 2005, was recorded as other long-term liabilities on the balance sheets as of December 31, 2006 and 2005 (see Note 4). The new equity issued to certain executive officers was comprised of:

 

   

238,597 shares of Class B common stock with a par value of $0.01 per share. These shares are non-voting, but are otherwise identical to the existing shares of Class A common stock.

 

   

23,140 shares of Class L, Series 3 common stock with a par value of $0.01 per share. These shares are non-voting and have a liquidation preference over the Class A and B common stock. The liquidation preference per share is calculated as $27.00 plus an amount accumulating from the date of issuance at a rate of 12.5% per annum, and compounding quarterly, on the outstanding accumulated preference. In addition, the Class L, Series 3 shareholders were also issued warrants for the purchase of 2,571 shares of Class L, Series 3 common stock at an exercise price of $15.75 per share which expire on September 22, 2013. The Class L, Series 3 warrants are valued at approximately $12,000 in the accompanying financial statements.

 

   

22,371 shares of Class L, Series 4 common stock with a par value of $0.01 per share. These shares are non-voting and have a liquidation preference over the Class A and B common stock. The liquidation preference per share is calculated at $18.88 plus an amount accumulating from the date of issuance at a rate of 15.0% per annum, and compounding quarterly.

 

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During each of 2008, 2007 and 2006, executives who held Company shares resigned and the Company purchased their shares (see Note 8). Treasury shares are valued at cost and summarized below (dollars in thousands).

 

     Class A    Class B    Class
L-1
   Class
L-2
   Class
L-3
   Class
L-4
   L-1
Warrants
   L-3
Warrants
   Total
Shares
   Cost  

Balance, December 31, 2005

   100,000    175,422    —      —      17,014    16,447    1,890    —      310,773    $ (972 )

Redemption of redeemable securities

   515,859    98,827    36,363    35,156    9,585    9,266    4,040    1,065    710,161      (2,037 )
                                                     

Balance, December 31, 2006

   615,859    274,249    36,363    35,156    26,599    25,713    5,930    1,065    1,020,934    $ (3,009 )

Redemption of redeemable securities

   —      33,883    —      —      3,286    3,176       365    40,712      (177 )
                                                     

Balance, December 31, 2007

   615,859    308,132    36,363    35,156    29,885    28,889    5.930    1,430    1,061,646    $ (3,186 )

Redemption of redeemable securities

   —      7,562    —      —      734    709       82    9,087      (25 )

Balance, December 31, 2008

   615,859    315,694    36,363    35,156    30,619    29,598    5,930    1,512    1,070,733    $ (3,211 )
                                                     

In connection with the Exchange Offer described in Note 3. Liquidity, the redeemable securities will be converted to shares of new common stock.

5. Long-Term Debt and Capital Lease Obligations

Long-term debt and capital lease obligations consisted of the following:

 

     December 31,
2008
   December 31,
2007
     (dollars in thousands)

Revolving credit facility

   $ 150,000    $ 102,700

2010 Notes

     225,000      225,000

Promissory note payable

     535      —  

Promissory note payable (to former owner of Amtex)

     —        300

Unamortized debt premium

     469      719

Capital lease obligations

     9,620      13,854
             
     385,624      342,573

Less: current portion

     5,498      4,946
             

Total long-term debt and capital lease obligations, excluding current portion

   $ 380,126    $ 337,627
             

At December 31, 2008, the Company was contractually obligated to pay the principal payments on the revolving credit facility, 2010 Notes and capital lease obligations for the next five years and thereafter included in the table below.:

 

     (dollars in thousands)

2009

   $ 4,963

2010

     228,893

2011

     150,738

2012

     19

2013

     7

Thereafter

     —  

As disclosed in Note 18, in May 2009, the Company completed transactions which resulted in the issuance of $94.9 million in New Notes with maturity in October 2013 and $11.5 million in Old Notes matures in October 2010.

 

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Revolving Credit Facility

In August 2006, the Company entered into an Amended and Restated Credit Agreement (“Credit Agreement”). The Credit Agreement matures on August 31, 2011, and amended and restated the Company’s revolving credit agreement, dated as of September 22, 2003, by and among the Company, the lenders thereto and the agents named therein (the “Revolver Agreement”). Certain of the Lenders under the Credit Agreement were also lenders under the Revolver Agreement. Subject to compliance with the terms of the Indenture governing the 2010 Notes and the Credit Agreement, the Borrower may borrow up to $225 million under the Credit Agreement for working capital, capital expenditures, permitted acquisitions and other corporate purposes. The Credit Agreement matures on August 31, 2011.

The Credit Agreement and the indenture governing the 2010 Notes impose significant covenants on the Company. The Credit Agreement contains both affirmative and negative covenants which, among other things, require the Company to meet a minimum consolidated fixed charge coverage ratio, as defined in the Credit Agreement, and places limits upon capital expenditures, disposals of assets, mergers and acquisitions, further indebtedness, transactions with affiliates and other customary restrictions. A breach of any of these restrictive covenants or an inability to comply with the required financial ratios could result in a default under the Credit Agreement. If a default occurs, the lenders under the revolving credit facility may elect to declare all borrowings outstanding, together with all accrued interest and other fees, to be immediately due and payable which would result in an event of default under the 2010 Notes. The lenders would also have the right in these circumstances to terminate any commitments they have to provide further borrowings. If the Company is unable to repay outstanding borrowings when due, the lenders under the revolving credit facility will also have the right to proceed against the Company’s collateral, including available cash, granted to them to secure the indebtedness. If the indebtedness under the revolving credit facility and the 2010 Notes were to be accelerated, management cannot provide assurance that the Company’s assets would be sufficient to repay in full that indebtedness and the Company’s other indebtedness. As of December 31, 2008, the Company was in compliance with all covenants under the Credit Agreement.

The Credit Agreement provides for interest based upon a fixed spread above the bank’s prime lending rate, or other rate options which are periodically fixed at a spread over the bank’s LIBOR lending rate. Total unused credit facility fees under the Credit Agreement and the Revolver Agreement were approximately $0.3 million for the twelve months ended December 31, 2008. The effective interest rate at December 31, 2008 was 2.4% and the weighted average interest rate on borrowings under a Revolver Facility for the twelve months ended December 31, 2008 was 4.8%. As of December 31, 2008, outstanding borrowings on the Credit Agreement were $150.0 million, which left $35.9 million of available borrowing capacity as determined by borrowing base availability. The effective interest rate at December 31, 2007 was 6.4%. As of December 31, 2007, outstanding borrowings on the Revolver Agreement were $102.7 million, which left $55.5 million of available borrowing capacity as determined by borrowing base availability.

The Company incurred $0.8 million in debt issuance costs in connection with the Credit Agreement. These costs are being amortized to interest expense on a straight-line basis over the life of the Credit Agreement.

In accordance with EITF 96–19, “Debtor’s Accounting for a Modification or Exchange of Debt Instruments,” the Company wrote off approximately $3.0 million of unamortized debt issuance costs in fiscal 2006 related to the Revolver Agreement. These costs are included in interest expense in the statement of operations.

The Credit Agreement also contained a provision for up to $25.0 million of letters of credit, subject to borrowing base availability and total amounts outstanding under the Credit Agreement of $225.0 million. As of December 27, 2008 and December 29, 2007, the Company had approximately $10.7 million and $9.1 million, respectively, of outstanding letters of credit primarily related to commitments for the purchase of inventory.

On April 9, 2009 and April 28, 2009, the Company amended the Credit Agreement. See Note 18 for further details of the amendments.

2010 Notes

In November 2004, the Company sold in a private placement $50.0 million aggregate principal amount of its 11  1/4% 2010 Notes due 2010 (the “Additional Notes”) to qualified institutional buyers under Rule 144A and to persons outside the United States under Regulation S. The Additional Notes were sold at 103% of aggregate principal amount for net proceeds of approximately $49.0 million, after deducting estimated fees and expenses related to the offering. The Company used such net proceeds to repay a portion of the outstanding borrowings under its revolving credit facility. In May 2005, the Additional Notes were the subject of an exchange offer that was registered with the SEC (File No. 333-123991).

The $50.0 million in Additional Notes described above are additional debt securities issued under an indenture dated September 22, 2003 (the “Indenture”), between the Company, the Guarantor named therein and Wachovia Bank, National Association, as Trustee, under which the Company previously issued $175.0 million aggregate principal amount of 11  1/4% Senior Notes due 2010 (the “Initial Notes”).

 

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In September 2003, in connection with the Alpha acquisition, the Company sold the Initial Notes, the proceeds of which were used to finance the Alpha acquisition, repay existing indebtedness of the Company and Alpha, and to pay related fees and expenses.

ASHI, Inc. was acquired in connection with the September 2003 acquisition of Alpha Shirt Holdings, Inc. On March 28, 2005, ASHI, Inc. was merged with and into Broder Bros., Co. and ceased to be a guarantor of any of the Company’s debt.

On May 20, 2009, the Company announced the successful completion of an exchange offer whereby, among other things, approximately $213.5 million in aggregate principal amount of the 2010 Notes were exchanged for approximately $94.9 million in aggregate principal amount of the Company’s newly issued 2013 Notes and a pro rata share of 96% of the Company’s outstanding common stock. Refer to Note 18 for further details.

Interest Rate Swap Agreement

As a condition of its revolving credit facility that was retired in September 2003, the Company was required to enter into interest rate protection agreements. The Company does not use derivatives for speculative purposes. The Company had an outstanding interest rate swap agreement with a commercial bank that had a notional amount of $10.0 million at December 31, 2007. The Company elected not to apply hedge accounting for this swap agreement. The fair value of this interest rate swap approximated $(0.2) million at December 31, 2007. The decrease in negative value during fiscal 2007 was recognized in earnings. The swap was classified on the balance sheets based on the expected timing of the cash flows related to the swap. Approximately $0.2 million was classified as a current liability as of December 31, 2007. The interest rate swap agreement matured in October 2008 and the Company had no interest rate protection agreement outstanding at December 31, 2008.

Redeemable Securities

Certain key executives of the Company hold common shares that may be put to the Company at their then fair market value if the executive is terminated for any reason other than for cause, or if the executive resigns with good reason as defined in the employment agreements. As of December 31, 2005, the recorded fair value of the redeemable securities was net of the related executive note receivable outstanding of approximately $0.5 million. This note receivable was repaid during fiscal 2006. During 2003, one executive experienced a triggering event which resulted in the exercise of the put feature of the related common shares. As a result, the common shares owned by that executive were re-valued in September 2003 and the related accretion was recorded resulting in an adjustment to additional paid-in capital of $55,000 during the year ended December 31, 2003. During 2004, Bain Capital redeemed this executive’s shares at fair market value for approximately $0.3 million, which resulted in an increase to additional paid-in-capital.

Also during 2004, Bain Capital sold shares of its common stock of the Company to certain executives at their fair market value. These shares may be put to the Company at their fair market value if the executive is terminated for any reason other than for cause, or if the executive resigns with good reason as defined in the applicable employment agreement. The Company repurchased shares during fiscal years 2005, 2006, 2007 and 2008 that were owned by former executives who left the Company voluntarily. These shares are recorded below liabilities and outside of permanent equity on the balance sheets at December 27, 2008 and December 29, 2007 in accordance with EITF Topic No. D-98, “Classification and Measurement of Redeemable Securities.”

One executive who held Company shares left the Company during 2008 and the Company purchased such shares, which resulted in increases to additional paid-in capital and treasury stock during fiscal 2008. Two executives who held Company shares left the Company during 2007 and the Company purchased such shares, which resulted in increases to additional paid-in capital and treasury stock during fiscal 2007. In addition, two executives who held Company shares left the Company during 2006 and the Company purchased the executives’ shares, which resulted in increases to additional paid-in capital and treasury stock (see Note 3) during fiscal 2006.

 

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These shares have been recorded on the balance sheets at each of the following dates:

 

     Number
of Shares
   Common
Stock at
Par Value
   Additional
Paid-in
Capital
   Liquidated
Preference
     (dollars in thousands)

December 27, 2008

           

Class B

   65,139    $ 0.7    $ 14    $ —  

Class L, Series 3

   6,318      0.1      112      288.5

Class L, Series 4

   6,107      0.1      94      216.3

December 29, 2007

           

Class B

   72,701    $ 0.7    $ 16    $ —  

Class L, Series 3

   7,052      0.1      124      285.0

Class L, Series 4

   6,816      0.1      106      208.6

The Class L, Series 3 and Series 4 common shares are non-voting and have a liquidation preference over the Class A and B common stock. The Class L, Series 3 liquidation preference per share is calculated as $26.84 plus an amount accumulating from the date of issuance at a rate of 12.5% per annum, and compounding quarterly, on the outstanding accumulated preference. Class L, Series 4 liquidation preference per share is calculated at $18.75 plus an amount accumulating from the date of issuance at a rate of 15.0% per annum, and compounding quarterly. See Note 3 for more information. In connection with the Exchange Offer, all of the Company’s shares of Class B Common Stock were cancelled and the Class L Common Stock was converted into the Company’s current common stock.

In connection with the Exchange Offer described in Note 3. Liquidity, the redeemable securities will be converted to shares of new common stock.

6. Fixed Assets

Property and equipment (and the estimated useful lives of the related assets) consisted of the following:

 

     December 31,
2008
   December 31,
2007
     (dollars in thousands)

Leasehold improvements (lesser of 10 years or remaining lease term)

   $ 5,926    $ 5,698

Machinery and equipment (5–7 years)

     26,167      29,194

Furniture and fixtures (7 years)

     7,375      7,728

Computers and software (3–5 years)

     26,254      22,479

Vehicles (5 years)

     24      73

Construction in process

     589      2,097
             
     66,335      67,269

Less: accumulated depreciation

     42,519      35,849
             

Fixed assets, net

   $ 23,816    $ 31,420
             

Depreciation expense, which includes depreciation on capital lease assets, was approximately $11.0 million, $10.1 million and $8.0 million for the years ended December 31, 2008, 2007 and 2006, respectively.

7. Leases

Capital leases

As of December 31, 2008, capital lease obligations included in long-term debt are as follows:

 

     (dollars in thousands)

Payable in:

  

2009

   $ 5,594

2010

     4,098

2011

     750

2012

     23

 

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     (dollars in thousands)  

2013

     7  
        

Total minimum capital lease payments

     10,472  

Less—imputed interest

     (852 )
        

Present value of net minimum capital lease payments

   $ 9,620  
        

The net book value of property and equipment recorded under capital leases as of December 31, 2008 and 2007 was approximately $8.8 million and $11.6 million, respectively, representing certain warehouse equipment, computer hardware and software and furniture and fixtures. Accumulated depreciation of the property and equipment recorded under capital leases was approximately $8.2 million and $3.1 million as of December 31, 2008 and 2007, respectively. Depreciation expense on the outstanding obligations under the capital leases was approximately $4.8 million, $3.0 million and $1.0 million in fiscal 2008, 2007 and 2006, respectively.

Operating leases

The Company leases facilities and equipment pursuant to operating leases expiring at various times over the next ten years. Total rent expense incurred under the leases was approximately $15.6 million, $13.6 million and $13.3 million in fiscal 2008, 2007 and 2006, respectively. The Company has certain operating lease agreements which contain provisions for scheduled rent increases. Rent expense for these agreements is recognized on a straight-line basis over the minimum lease term.

The future minimum operating lease payments for noncancelable operating leases are as follows:

 

     (dollars in thousands)

Payable in:

  

2009

   $ 17,861

2010

     17,056

2011

     16,112

2012

     15,154

2013

     13,134

Thereafter

     33,008
      

*Total future minimum operating lease payments

   $ 112,325
      

 

* Minimum payments have not been reduced by minimum sublease rentals of $2,678 due to the Company in the future under noncancelable subleases.

8. Related Party Transactions

In connection with the Alpha acquisition, the Company amended and restated its existing advisory services agreement with Bain Capital (the “Advisory Services Agreement”). The Advisory Services Agreement is a discretionary, contingency-based agreement, subject to certain limitations set forth therein. Before any such management fees may be paid, EBITDA, as defined in the Advisory Services Agreement, after giving effect to payment of the management fee, must be greater than $52.0 million for Bain Capital to earn a fee. The Company believes that the terms of such Advisory Services Agreement with Bain Capital are no less favorable than those that could have been obtained pursuant to a similar agreement with an unrelated third party.

The Advisory Services Agreement states that for each full fiscal year beginning in fiscal 2006, Bain Capital may be paid a fee up to an annual maximum of $3.0 million at the discretion of the Company’s board of directors. The Company paid Bain Capital fees of $3.0 million in fiscal 2006. No fees were earned in fiscal 2008 or 2007.

The Advisory Services Agreement also requires the Company to pay investment banking fees in the amount of one percent of certain prescribed transactions. Bain Capital was paid fees of approximately $0.1 million upon the completion of the Amtex acquisition in September 2006.

The Advisory Services Agreement was terminated in connection with the Exchange Offer.

In March 2006, the Company entered into a separation agreement with its former chief executive officer Vince Tyra. The agreement provided for, among other items, payments to the former executive in an aggregate amount of approximately $1.8 million, payable in 39 monthly installments; the purchase by the Company of equity securities owned by the former executive for an aggregate purchase price of approximately $2.0 million; and repayment to the Company by the former executive of approximately $0.5 million in payment of notes receivable issued by the Company in connection with the recapitalization which occurred in fiscal 2000. The

 

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monthly payments to the former executive are being made in consideration for a twenty-four month extension of a non-compete period, which resulted in a forty-two month non-compete period. At December 31, 2008, the balance sheet includes approximately $0.2 million in accrued expenses related to the future payments.

9. Defined Contribution Plans

The Company is a sponsor of an employee savings 401(k) plan covering substantially all employees who meet predetermined eligibility requirements. Contributions made by the Company are at the discretion of the Board of Directors. For the years ended December 31, 2008, 2007 and 2006, such contributions amounted to 100% of the first 2% and 25% of the next 4% of compensation deferred by the employee. Contributions to the plan were approximately $0.8 million each year for 2008, 2007 and 2006.

10. Commitments and Contingencies

Self-Insured Health Plan

The Company maintains a self-insured health plan for some of its employees. The Company purchased stop loss insurance to supplement the health plan, which will reimburse the Company for individual claims in excess of $0.1 million annually in fiscal 2008, 2007 and 2006 and for aggregate claims exceeding approximately $6.6 million, $5.0 million and $5.4 million in fiscal 2008, 2007 and 2006, respectively. Approximately $0.5 million and $0.6 million were included in accrued liabilities for self-insured health plan costs at December 31, 2008 and 2007, respectively.

Litigation

The Company is a party to various lawsuits arising out of the normal conduct of its business, none of which, individually or in the aggregate, are expected to have a material adverse effect on the Company’s results of operations or financial position.

Employment Agreements

The Company has entered into employment agreements with certain employees, which provide that the employee will not compete in the wholesale distribution of imprintable sportswear and accessories business for a specified period after their respective termination dates. The employment agreements also define employment terms including salary, bonus and benefits to be provided to the respective employees.

Advisory Agreement

In connection with the acquisition of Alpha, the Company entered into a new Advisory Services Agreement with Bain Capital in September 2003. See Note 8.

11. Stock Option Plans

The Company adopted a Stock Option Plan (the “2000 Plan”) effective with the May 2000 recapitalization under which officers, key employees, non-employee directors or consultants may be granted options to purchase shares of the Company’s authorized but unissued Class A and Class L common stock. The maximum number of shares of the Company’s Class A and Class L common stock available for issuance under the 2000 Plan is 1,500,000 and 50,000 shares, respectively. As of December 31, 2008, the maximum number of shares available for future grants under the 2000 Plan was 718,000 Class A shares and 50,000 Class L, Series 1 shares. During fiscal 2000, 550,000 shares of Class A common stock options were authorized at an exercise price of $0.1944 per share (the Tranche I options) and an additional 550,000 shares of Class A common stock options were authorized at an exercise price of $3.41 per share (the Tranche II options). Options otherwise unallocated from Tranche I and Tranche II will be allocated on a pro rata basis to the then current option holders in the event of certain corporate transactions. Options expire no later than ten years from the grant date and vest ratably over four years. Vesting may be accelerated in the event of specified transactions.

In fiscal 2004, the Company adopted the 2004 Executive Stock Option Plan (the “2004 Plan”) under which present and future executives, directors, consultants or advisers of the Company or its subsidiaries may be granted options to purchase shares of the Company’s authorized but unissued Class B and Class L, Series 3 or 4 common stock. The maximum number of shares of the Company’s stock available for issuance under the 2004 Plan is 426,174 Class L, Series 3 common shares, 370,820 Class L, Series 4 common shares and 3,954,897 Class B common shares. As of December 31, 2008, the maximum number of shares available for future grants under the 2004 Plan was 236,608 Class L, Series 3 common shares, 205,874 Class L, Series 4 common shares and 2,195,691 Class B common shares. Options expire no later than ten years from the grant date and vest ratably over four years. Vesting may be accelerated in the event of specified transactions.

 

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During fiscal 2006, pursuant to its 2004 Plan, the Company granted to certain of its executives the following options: (a) options to purchase 146,242 shares of its Class L, Series 3, common stock at a weighted average exercise price of $23.3219 per share, (b) options to purchase 127,249 shares of its Class L, Series 4, common stock at a weighted average exercise price of $17.1397 per share and (c) options to purchase 1,357,147 shares of its Class B common stock at a weighted average exercise price of $0.1944 per share.

No options were granted during fiscal years 2007 or 2008.

 

     Options Allocated to
Key Employees
    Unallocated
Options
   Total # of
Shares
   Weighted Avg.
Price Per Share

2000 Plan

          

Tranche I

          

Options outstanding at December 31, 2005

   118,000     182,000    300,000      0.1944
                  

Options exercised

   —       —      —        —  

Options granted

   —       —      —        —  

Options cancelled

   (13,000 )   13,000    —        0.1944
                  

Options outstanding at December 31, 2006

   105,000     195,000    300,000      0.1944
                  

Options exercised

   —       —      —        —  

Options granted

   —       —      —        —  

Options cancelled

   (39,000 )   39,000    —        0.1944
                  

Options outstanding at December 31, 2007

   66,000     234,000    300,000      0.1944
                  

Options exercised

   —       —      —        —  

Options granted

   —       —      —        —  

Options cancelled

   —       —      —        —  
                  

Options outstanding at December 31, 2008

   66,000     234,000    300,000      0.1944
                  

Exercisable at December 31, 2006

   96,500     —      96,500    $ 0.1944
     Options Allocated to
Key Employees
    Unallocated
Options
   Total # of
Shares
   Weighted Avg.
Price Per Share

Exercisable at December 31, 2007

   66,000     —      66,000    $ 0.1944

Exercisable at December 31, 2008

   66,000     —      66,000    $ 0.1944

Tranche II

          

Options outstanding at December 31, 2005

   268,000     282,000    550,000      3.4100
                  

Options exercised

   —       —      —        —  

Options granted

   —       —      —        —  

Options cancelled

   (163,000 )   163,000    —        3.4100
                  

Options outstanding at December 31, 2006

   105,000     445,000    550,000      3.4100
                  

Options exercised

   —       —      —        —  

Options granted

   —       —      —        —  

Options cancelled

   (39,000 )   39,000    —        3.4100
                  

Options outstanding at December 31, 2007

   66,000     484,000    550,000      3.4100
                  

Options exercised

   —       —      —        —  

Options granted

   —       —      —        —  

Options cancelled

   —       —      —        —  
                  

Options outstanding at December 31, 2008

   66,000     484,000    550,000      3.4100
                  

Exercisable at December 31, 2006

   94,000     —      94,000    $ 3.4100

Exercisable at December 31, 2007

   66,000     —      66,000    $ 3.4100

Exercisable at December 31, 2008

   66,000     —      66,000    $ 3.4100

 

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     Options Allocated to
Key Employees
    Unallocated
Options
    Total # of
Shares
   Weighted Avg.
Price Per Share

2004 Plan

         

Options outstanding at December 31, 2005

         

Class B Common Stock

   2,577,253     1,377,644     3,954,897    0.1944
                   

Class L Common Stock, Series 3

   277,718     148,456     426,174    16.3388
                   

Class L Common Stock, Series 4

   241,649     129,171     370,820    13.9948
                   

Options exercised during 2006

         

Options exercised for Class B Common Stock

   —       —       —      —  

Options exercised for Class L Common Stock, Series 3

   —       —       —      —  

Options exercised for Class L Common Stock, Series 4

   —       —       —      —  

Option grants during 2006

         

Options granted for Class B Common Stock

   1,357,147     (1,357,147 )   —      0.1944

Options granted for Class L Common Stock, Series 3

   146,242     (146,242 )   —      23.3219

Options granted for Class L Common Stock, Series 4

   127,249     (127,249 )   —      17.1397

Options cancelled during 2006

         

Options cancelled for Class B Common Stock

   (1,305,116 )   1,305,116     —      0.1944

Options cancelled for Class L Common Stock, Series 3

   (140,637 )   140,637     —      17.2536

Options cancelled for Class L Common Stock, Series 4

   (122,372 )   122,372     —      14.3655

Options outstanding at December 31, 2006

         

Class B Common Stock

   2,629,284     1,325,613     3,954,897    0.1944
                   

Class L Common Stock, Series 3

   283,323     142,851     426,174    19.4891
                   

Class L Common Stock, Series 4

   246,526     124,294     370,820    15.4341
                   

Options exercised during 2007

         

Options exercised for Class B Common Stock

   —       —       —      —  

Options exercised for Class L Common Stock, Series 3

   —       —       —      —  

Options exercised for Class L Common Stock, Series 4

   —       —       —      —  

Option grants during 2007

         

Options granted for Class B Common Stock

   —       —       —      —  

Options granted for Class L Common Stock, Series 3

   —       —       —      —  

Options granted for Class L Common Stock, Series 4

   —       —       —      —  

Options cancelled during 2007

         

Options cancelled for Class B Common Stock

   (790,980 )   790,980     —      0.1944

Options cancelled for Class L Common Stock, Series 3

   (85,234 )   85,234     —      15.9029

Options cancelled for Class L Common Stock, Series 4

   (74,164 )   74,164     —      13.723

Options outstanding at December 31, 2007

         

Class B Common Stock

   1,838,304     2,116,593     3,954,897    0.1944
                   

Class L Common Stock, Series 3

   198,089     228,085     426,174    21.0322
                   

Class L Common Stock, Series 4

   172,362     198,458     370,820    16.1703
                   

Options exercised during 2008

         

Options exercised for Class B Common Stock

   —       —       —      —  

Options exercised for Class L Common Stock, Series 3

   —       —       —      —  

Options exercised for Class L Common Stock, Series 4

   —       —       —      —  

Option grants during 2008

         

Options granted for Class B Common Stock

   —       —       —      —  

Options granted for Class L Common Stock, Series 3

   —       —       —      —  

Options granted for Class L Common Stock, Series 4

   —       —       —      —  

Options cancelled during 2008

         

Options cancelled for Class B Common Stock

   (79,098 )   79,098     —      0.1944

Options cancelled for Class L Common Stock, Series 3

   (8,523 )   8,523     —      23.800

Options cancelled for Class L Common Stock, Series 4

   (7,416 )   7,416     —      17.470

Options outstanding at December 31, 2008

         

Class B Common Stock

   1,759,206     2,195,691     3,954,897    0.1944
                   

Class L Common Stock, Series 3

   189,566     236,608     426,174    20.9078
                   

Class L Common Stock, Series 4

   164,946     205,874     370,820    16.1119
                   

 

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     Options Allocated to
Key Employees
   Unallocated
Options
   Total # of
Shares
   Weighted Avg.
Price Per Share

Exercisable at December 31, 2006 for:

           

Class B Common Stock

   993,652    —      993,652    $ 0.1944

Class L Common Stock, Series 3

   107,073    —      107,073    $ 19.4891

Class L Common Stock, Series 4

   93,166    —      93,166    $ 15.4341

Exercisable at December 31, 2007 for:

           

Class B Common Stock

   903,959    —      903,959    $ 0.1944

Class L Common Stock, Series 3

   97,407    —      97,407    $ 21.0322

Class L Common Stock, Series 4

   84,757    —      84,757    $ 16.1703

Exercisable at December 31, 2008 for:

           

Class B Common Stock

   1,195,633    —      1,195,633    $ 0.1944

Class L Common Stock, Series 3

   128,837    —      128,837    $ 20.9078

Class L Common Stock, Series 4

   112,105    —      112,105    $ 16.1119

A summary of options outstanding as of December 31, 2008 is as follows:

 

     Exercise Prices    Number of Options
Outstanding
   Number of Options
Exercisable
   Weighted Average
Exercise Price
   Weighted Average
Remaining
Contractual Life

2000 Plan:

              

Tranche I

   $ 0.1944    66,000    66,000    0.1944    4.0 yrs.

Tranche II

   $ 3.4100    66,000    66,000    3.4100    4.0 yrs.

2004 Plan:

              

Class B

     0.1944    1,759,206    1,195,633    0.1944    7.1 yrs.

Class L, Series 3

     15.75-23.80    189,566    128,837    20.9078    7.1 yrs.

Class L, Series 4

     13.69-17.47    164,946    112,105    16.1119    6.4 yrs.

All of the Company’s outstanding options were cancelled in connection with the Exchange Offer and the Company plans to enter into a new management equity incentive plan. See Note 18.

12. Income Taxes

The Company files income tax returns in the U.S. federal jurisdiction and in various state and local jurisdictions. In general, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before 2004. As disclosed in Note 1, the Company accounts for income taxes in accordance with the provision of SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). In accordance with SFAS No. 109, a valuation allowance is recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. No valuation allowance was recorded as of December 30, 2006 since the Company had sufficient deferred tax liabilities to shield its deferred tax assets and was not relying on projected, future taxable income to be able to realize its deferred tax assets. Due to the Company’s continued net operating losses and its net deferred tax asset position, the Company recorded a valuation allowance of $15.6 million during fiscal year 2007. The Company recorded an additional increase of $14.6 million during fiscal 2008, which is primarily attributable to the impairment of tax deductible goodwill and the Company’s decision to reclassify the Alpha trade name from an indefinite lived intangible asset to a definite lived intangible asset starting in the first quarter of fiscal 2009. The associated deferred tax liability related to the Alpha trade name was previously treated as a naked credit and not included in the netting of deferred tax assets and liabilities. As a result of the change in the life of the Alpha trade name, there is now a defined period of time related to the reversal of the deferred tax liability. The Company considered this future source of income when determining the yearend deferred taxes and valuation allowance.

 

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As disclosed in Note 2, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), on December 31, 2006. FIN 48 creates a single model to address uncertainty in tax positions and clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. The provisions of FIN 48 apply to all material tax positions in all taxing jurisdictions for all open tax years. FIN 48 establishes a two-step process for evaluating tax positions. Step 1 – Recognition, requires the Company to determine whether a tax position, based solely on its technical merits, has a likelihood of more than 50 percent (“more likely than not”) that the tax position taken will be sustained upon examination. Step 2 – Measurement, which is only addressed if Step 1 has been satisfied, requires the Company to measure the tax benefit as the largest amount of benefit, determined on a cumulative probability basis that is more likely than not to be realized upon ultimate settlement.

Under FIN 48 the Company determined that certain income tax positions did not meet the more-likely-than-not recognition threshold and, therefore, required a 100% reserve. The Company records accrued interest and penalties related to unrecognized tax benefits in income tax expense.

 

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The effect of unrecognized tax benefits on our balance sheets and results of operations is as follows:

 

FIN 48 Impact to Retained Earnings upon adoption at December 31, 2006

   $ 374  

FIN 48 Interest and Penalties Accrued

   $ 232  

FIN 48 Interest and Penalties Expensed

   $ 39  

Total Unrecognized Tax Benefit with potential ETR Impact at December 29, 2007

   $ 347  

FIN 48 Interest and Penalties Accrued

   $ 66  

FIN 48 Interest and Penalties Expensed

   $ (166 )

Total Unrecognized Tax Benefit with potential ETR Impact at December 27, 2008

   $ 54  

Total Unrecognized Benefit that will significantly increase/(decrease) within 12 months

   $ (151 )

The following table summarizes the activity related to our gross unrecognized tax benefits from December 31, 2006 to December 27, 2008:

 

Unrecognized tax benefits balance at December 31, 2006

   $ 1,177  

Gross Increases for tax positions of prior years

     (150 )

Gross Decreases for tax positions of prior years

     —    

Gross Increases—current-period tax positions

     —    

Settlements during the period

     —    

Lapse of statute of limitations

     (339 )
        

Unrecognized Tax Benefits—as of December 29, 2007

   $ 688  
        

Gross Increases for tax positions of prior years

     —    

Gross Decreases for tax positions of prior years

     —    

Gross Increases—current-period tax positions

     —    

Settlements during the period

     —    

Lapse of statute of limitations

     (474 )
        

Unrecognized Tax Benefits—as of December 27, 2008

   $ 214  

It is expected that the amount of unrecognized tax benefits that will change during the next 12 months will be a reduction of approximately $151 due to the lapse of the statute of limitations in certain jurisdictions.

The federal and state income tax provision is summarized as follows:

 

     Year Ended December 31,  
     2008     2007     2006  
     (dollars in thousands)  

Current

      

Federal

   $ (611 )   $ 145     $ (4 )

State

     301       299       159  
                        
     (310 )     444       155  
                        

Deferred

      

Federal

     (12,032 )     (5,568 )     (3,730 )

State

     (1,413 )     (710 )     (2,461 )
                        
     (13,445 )     (6,278 )     (6,191 )
                        

Total income tax benefit

   $ (13,755 )   $ (5,834 )   $ (6,036 )
                        

 

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Total income tax benefit differed from the amount computed by applying the U.S. federal income tax rate of 34% to earnings before income tax benefit as a result of the following:

 

     Year Ended December 31,  
     2008     2007     2006  
     (dollars in thousands)  

Computed expected tax rate at the statutory rate

   $ (28,092 )   $ (44,165 )   $ (4,681 )

State and local taxes, net of federal tax benefit

     (2,447 )     (2,276 )     (750 )

Change in state deferred tax rate

     —         —         (769 )

Goodwill Impairment

     2,102       24,905       —    

FIN 48 Tax and Interest

     (403 )     (429 )     87  

Valuation Allowance

     14,607       15,642       —    

Other

     479       489       77  
                        

Income tax benefit

   $ (13,755 )   $ (5,834 )   $ (6,036 )
                        

Deferred income tax assets and liabilities at December 31, 2008 and 2007 are as follows:

 

     December 31,
2008
    December 31,
2007
 
     (dollars in thousands)  

Deferred tax assets

    

Inventory, principally due to costs capitalized for tax purposes in excess of those capitalized for financial reporting purposes and obsolescence reserve

   $ 4,687     $ 5,095  

Reserve for self insurance

     204       226  

Reserve for bad debts

     4,060       2,594  

Deferred compensation

     —         517  

Deferred rent

     1,700       1,667  

Acquisition costs

     157       22  

Vacation and bonus

     347       445  

Unrealized loss on interest rate swaps

     —         93  

NOL carryforward

     17,006       12,093  

Goodwill and amortization

     9,235       —    

Restructuring costs

     4,012       6,059  

Other

     892       —    
                

Gross deferred tax assets

     42,300       28,811  
                

Valuation Allowance

    

Federal valuation allowance

   $ (25,335 )   $ (12,651 )

State valuation allowance

     (4,914 )     (2,991 )
                

Total valuation allowance

     (30,249 )     (15,642 )
                

Net deferred tax assets

     12,051       13,169  

Deferred tax liabilities

    

Other intangibles related to the acquisition of Alpha and NES

     (11,349 )     (17,869 )

Other

     —         (699 )

Tax depreciation in excess of book depreciation

     (897 )     (794 )

Goodwill and amortization

     —         (7,446 )
                

Total deferred tax liabilities

     (12,246 )     (26,808 )
                

Net deferred tax liability

   $ (195 )   $ (13,639 )
                

Total income tax benefit differed from the amount computed by applying the U.S. federal income tax rate of 34% to earnings before income tax benefit primarily as a result of state and local taxes. At December 27, 2008, the Company had a net operating loss carry forward of $15.0 million net of tax, and a state net operating loss carry forward of $1.7 million net of tax. These tax-effected net operating loss carry forwards are offset by a valuation allowance of $16.7 million. The net operating loss carry forwards have expiration dates ranging from 2009 to 2029.

 

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13. Deferred Financing Costs and Unamortized Note Premium

In connection with the Alpha acquisition in September 2003, the Company retired its existing revolving credit facility and entered into an amended revolving credit facility (see Note 4). Costs to secure the facility of approximately $7.1 million were included in deferred financing fees and were being amortized over the term of the facility, which would have expired in September 2008.

In September 2005, the Company exercised its option to increase the revolving credit facility by $50.0 million for total borrowings of up to $225.0 million (see Note 4). The Company incurred deferred financing fees of approximately $0.2 million in connection with this transaction which were being amortized on a straight-line basis over the remaining life of the facility.

In August 2006, the Company entered into an Amended and Restated Credit Agreement (“Credit Agreement”) (see Note 4). The Credit Agreement matures on August 31, 2011, and amended and restated the Company’s revolving credit agreement dated as of September 22, 2003. Total fees incurred in connection with the amended Credit Agreement were $0.8 million and are being amortized over the term of the facility.

In September 2003, the Company completed a private offering of $175.0 million 11  1/4% Senior Notes due October 2010 (see Note 4). The Company incurred approximately $11.0 million in financing fees in connection with the placement of the 2010 Notes and the fees are being amortized on a straight-line basis over the life of the 2010 Notes.

In November 2004, the Company completed a private offering of $50.0 million 11  1/4% Senior Notes due October 2010 (see Note 4). The 2010 Notes were sold at a 3% premium of $1.5 million over the $50.0 million aggregate principal amount, and the Company incurred approximately $3.0 million in financing fees in connection with the placement of the 2010 Notes. The premium credit and the fees expense are being amortized on a straight-line basis over the life of the 2010 Notes beginning in November 2004.

Amortization of deferred financing fees charged to interest expense were approximately $2.2 million, $2.2 million and $6.2 million during the fiscal years ended December 31, 2008, 2007 and 2006, respectively. The amortization of the note premium credit netted against the amount above was approximately $0.3 million in fiscal 2008, 2007 and 2006.

Additional deferred financing fees have been incurred in connection with the transactions disclosed in Note 18 and certain of deferred financing fees recorded on the balance sheet at December 31, 2008 will be written off in the second quarter of 2009 resulting from these transactions.

 

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14. Segment Information

In accordance with SFAS No. 131, “Disclosure About Segments of an Enterprise and Related Information,” the Company’s principal operating segments are grouped into three business units: the Broder division, and with the September 2003 acquisition of Alpha, the Alpha division, and with the August 2004 acquisition of NES, the NES division. Operating segments are defined as components of the business for which separate information is available and is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The following table presents information used by the Company’s chief operating decision makers in deciding how to allocate resources and in assessing performance. The information for the Broder division includes the results of operations of Amtex from the date of acquisition (September 28, 2006).

 

     Broder    Alpha    NES    Total
     (dollars in thousands)

Statement of Operations Information for Fiscal 2008

           

Net sales

   $ 362,148    $ 448,097    $ 115,829    $ 926,074

Cost of sales (1)

     298,946      367,709      95,392      762,047
                           

Gross profit

     63,202      80,388      20,437      164,027
                           

Statement of Operations Information for Fiscal 2007

           

Net sales

   $ 370,800    $ 442,574    $ 115,750    $ 929,124

Cost of sales (1)

     306,763      359,973      96,235      762,971
                           

Gross profit

     64,037      82,601      19,515      166,153
                           

Statement of Operations Information for Fiscal 2006

           

Net sales

   $ 375,032    $ 460,590    $ 123,646    $ 959,268

Cost of sales (1)

     308,406      368,801      101,342      778,549
                           

Gross profit

     66,626      91,789      22,304      180,719
                           

Balance Sheet Information as of December 27, 2008

           

Accounts receivable, net

   $ 25,679    $ 34,876    $ 11,875    $ 72,430

Inventory

     83,036      127,020      25,491      235,547

Goodwill, intangible assets and deferred financing fees

     4,434      30,968      2,438      37,840

Accounts payable

     29,329      48,270      9,998      87,597

Balance Sheet Information as of December 29, 2007

           

Accounts receivable, net

   $ 28,979    $ 43,777    $ 12,510    $ 85,266

Inventory

     63,851      108,087      19,862      191,800

Goodwill, intangible assets and deferred financing fees

     19,443      86,518      3,400      109,361

Accounts payable

     27,866      52,388      9,514      89,768

 

(1) Cost of sales is exclusive of depreciation and amortization included in warehousing, selling and administrative expense.

15. Restructuring and Asset Impairment

During fiscal years 2005, 2006 and 2007 the Company recorded restructuring charges related to its distribution center consolidation initiative and its initiative to reduce the number of call centers it operates from seven to three. The distribution center and call center closure costs include accruals for the fair value of future lease obligations, net of expected sublease rentals. These future lease obligations are expected to be paid over the remaining lease terms, which end on dates beginning March 2009 and ending March 2015.

During fiscal year 2007, the Company recorded approximately $13.0 million in restructuring charges resulting from the distribution center consolidation initiative consisting of $12.8 million in lease termination and other costs and $1.7 million in severance and related benefits partially offset by a reduction to the restructuring charge of approximately $1.5 million as the Company executed two sublease agreements for its LaMirada, CA distribution center.

During fiscal year 2008, the Company recorded approximately $2.7 million in restructuring charges consisting of $1.1 million in severance charges, $0.7 million in interest accretion and $1.4 million resulting from changes in sublease assumptions, relating to the amounts and timing of sublease rents, partially offset by a reduction to the restructuring charge of approximately $0.5 million as the Company executed a buyout agreement for its Stafford, TX distribution center. The 2008 severance expense includes approximately $1.0 million related to a workforce reduction announced in December 2008. The December 2008 workforce reduction of approximately 140 positions in its distribution centers, call centers, management and other corporate functions was initiated in anticipation of a further weakening in the U.S. economy.

 

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Restructuring activity is summarized as follows:

 

     Balance at
December 31,
2005
   Restructuring
Charge
    Cash
Payments
    Non-Cash
Items
Expensed
Immediately
    Balance at
December 31,
2006
     (dollars in thousands)

Distribution center closure costs, net

           

Lease termination and other costs, net

   $ 6,344    $ 2,821     $ (1,467 )     —       $ 7,698

Severance and related benefits

     —        362       (271 )     —         91

Non-cash asset write-offs

     —        107       —         (107 )     —  

Corporate workforce reduction

           

NES severance and related benefits

     303      (94 )     (209 )     —         —  

Call center closure costs

           

Lease termination and other costs

     —        517       (79 )     —         438

Severance and related benefits

     —        376       (376 )     —         —  
                                     
   $ 6,647    $ 4,089     $ (2,402 )   $ (107 )   $ 8,227
                                     
     Balance at
December 31,
2006
   Restructuring
Charge