Broder Bros Co--Form 10-Q

Large accelerated filer

Accelerated filer

Non-accelerated filer

x (Do not check if a smaller reporting company)

Smaller reporting company

10-Q 1 d10q.htm BRODER BROS CO--FORM 10-Q Broder Bros Co--Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED September 27, 2008

¨	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, 6^th Floor, Trevose, PA		19053
(Address of principal executive office)		(Zip code)

(215) 291-6140

(Registrant’s telephone number, including area code)

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

Indicate by check mark 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):

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

As of November 3, 2008, there were 963,637 shares of Class L, Series 1 common stock outstanding; 931,635 shares of Class L, Series 2 common stock outstanding; 2,784,375 shares of Class L, Series 3 common stock outstanding; 2,691,912 shares of Class L, Series 4 common stock outstanding; 9,695,252 shares of Class A common stock outstanding; and 28,709,993 shares of Class B common stock outstanding.

BRODER BROS., CO.

Quarterly Report for the Period Ended September 27, 2008

Table of Contents


		PAGE
Part I. Financial Information

Item 1.	Financial Statements (Unaudited)

	Balance Sheets as of September 27, 2008 and December 29, 2007	3

	Statements of Operations for the Three and Nine Months Ended September 27, 2008 and September 29, 2007	4

	Statements of Cash Flows for the Nine Months Ended September 27, 2008 and September 29, 2007	5

	Notes to Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22

Item 4T.	Controls and Procedures	22

Part II. Other Information

Item 1A.	Risk Factors	23

Item 6.	Exhibits	24

Broder Bros., Co. (the “Company”) is the issuer of $225.0 million aggregate principal amount of 11¹/4% Senior Notes due October 15, 2010. In November 2003, a total of $175.0 million aggregate principal amount of the 11¹/4% Senior Notes due 2010 (the “Initial Notes”) were sold in a private placement to qualified institutional buyers under Rule 144A and to persons outside of the United States under Regulation S. In November 2004, the Company sold in a private placement an additional $50.0 million aggregate principal amount of its 11¹/4% Senior Notes due 2010 (the “Additional Notes” and together with the Initial Notes, the “Senior Notes”) to qualified institutional buyers under Rule 144A and to persons outside the United States under Regulation S. The Additional Notes are additional debt securities issued under an indenture dated September 22, 2003, under which the Company previously issued the Initial Notes.

In September 2003, the Company acquired all of the outstanding capital stock of Alpha Shirt Holdings, Inc. pursuant to a stock purchase agreement entered into in July 2003. The Company acquired all of the outstanding capital stock of NES Clothing Company in August 2004, and in September 2006, the Company acquired virtually all the assets of Amtex Imports Inc. As used herein and except as the context otherwise may require, the “Company,” “we,” “us,” “our,” or “Broder” means Broder Bros., Co. For periods after the acquisition of Alpha Shirt Holdings, Inc., “Alpha” refers to the former business operated by Alpha Shirt Holdings, Inc. and which is now operated as a division of Broder Bros., Co., and for periods after the acquisition of NES Clothing Company, “NES” refers to the former business operated by NES Clothing Company and which is now operated as a division of Broder Bros., Co.

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS (UNAUDITED)

BRODER BROS., CO.

BALANCE SHEETS


	September 27, 2008			December 29, 2007
	(unaudited)
	(dollars in thousands, except per share amounts)
ASSETS
Current assets:
Cash	$	5,982		$	4,634
Accounts receivable, net of allowance for doubtful accounts of $6,749 at September 27, 2008 and $6,847 at December 29, 2007		102,919			85,266
Finished goods inventory		252,723			191,800
Prepaid and other current assets		10,522			9,454
Deferred income taxes		2,772			3,484

Total current assets		374,918			294,638
Fixed assets, net		25,432			31,420
Goodwill		51,266			51,266
Other intangibles		46,486			51,722
Deferred financing fees, net		4,700			6,373
Other assets		1,306			1,813

Total assets	$	504,108		$	437,232


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt and capital lease obligations	$	5,137		$	4,946
Accounts payable		141,713			89,768
Accrued expenses		22,714			22,039
Accrued interest		12,475			6,612

Total current liabilities		182,039			123,365
Long-term debt and capital lease obligations, net of current portion		362,812			337,627
Deferred income taxes		16,288			17,124
Other long-term liabilities		15,732			17,236

Total liabilities		576,871			495,352
Redeemable securities
Class B and Class L, Series 3 and Class L, Series 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 at both September 27, 2008 and December 29, 2007 (aggregate liquidation preference of $42,689 and $38,941 as of September 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 at both September 27, 2008 and December 29, 2007 (aggregate liquidation preference of $31,806 and $28,508 as of September 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 at both September 27, 2008 and December 29, 2007 (aggregate liquidation preference of $123,068 and $112,261 as of September 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; 2,685,805 shares issued and outstanding at both September 27, 2008 and December 29, 2007 (aggregate liquidation preference of $91,693 and $82,186 as of September 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 at both September 27, 2008 and December 29, 2007		102			102
Class B common stock; par value $0.01 per share; 35,000,000 shares authorized; 28,644,854 shares issued and outstanding at both September 27, 2008 and December 29, 2007		288			287
Warrants—Class L, Series 3		1,478			1,477
Additional paid-in capital		123,776			123,466
Accumulated other comprehensive income		5			1
Accumulated deficit		(195,496	)		(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, in each case, at September 27, 2008 and December 29, 2007, respectively		(3,211	)		(3,186	)

Total shareholders’ equity		(72,983	)		(58,365	)

Total liabilities and shareholders’ equity	$	504,108		$	437,232

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

BRODER BROS., CO.

STATEMENTS OF OPERATIONS

For the Three and Nine Months Ended September 27, 2008 and September 29, 2007


	Three Months Ended						Nine Months Ended
	September 27, 2008			September 29, 2007			September 27, 2008			September 29, 2007
	(unaudited) (dollars in thousands)
Net sales	$	252,339		$	246,417		$	706,590		$	696,394
Cost of sales (exclusive of depreciation and amortization included in warehousing, selling and administrative below)		208,390			206,323			583,953			576,569

Gross profit		43,949			40,094			122,637			119,825
Warehousing, selling and administrative		35,958			38,641			109,215			114.697
Restructuring and asset impairment charges, net		182			4,514			1,056			10,747

Total operating expenses		36,140			43,155			110,271			125,444

Income (loss) from operations		7,809			(3,061	)		12,366			(5,619	)
Other (income) expense
Interest expense, net		8,766			9,203			27,311			28,754
Change in fair value of interest rate swaps		(117	)		22			(215	)		(90	)

Total other expense		8,649			9,225			27,096			28,664

Loss before income taxes		(840	)		(12,286	)		(14,730	)		(34,283	)
Income tax provision (benefit)		48			(716	)		179			(7,221	)

Net loss	$	(888	)	$	(11,570	)	$	(14,909	)	$	(27,062	)

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

BRODER BROS., CO.

STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 27, 2008 and September 29, 2007


	Nine Months Ended
	September 27, 2008			September 29, 2007
	(unaudited) (dollars in thousands)
Cash flows from operating activities
Net loss	$	(14,909	)	$	(27,062	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities
Depreciation		8,299			6,999
Amortization		6,721			8,771
Provision for losses on accounts receivable		621			1,519
Deferred income taxes		(80	)		(6,620	)
Stock-based compensation		286			352
Loss on disposal of fixed assets		24			122
Change in fair value of interest rate swaps		(215	)		(90	)
Changes in operating accounts
Accounts receivable		(18,274	)		(15,575	)
Finished goods inventory		(60,923	)		24,501
Prepaid and other current assets		(561	)		4,919
Accounts payable		65,209			28,171
Accrued liabilities and other		5,209			8,176

Net cash (used in) provided by operating activities		(8,593	)		34,183


Cash flows from investing activities
Acquisition of fixed assets		(1,925	)		(6,390	)

Net cash used in investing activities		(1,925	)		(6,390	)


Cash flows from financing activities
Borrowings on revolving credit agreement		394,300			329,900
Repayments on revolving credit agreement		(365,600	)		(351,300	)
Payment for treasury stock purchase		(24	)		(114	)
Payments of principal on capital lease obligations		(3,546	)		(2,575	)
Change in book overdraft		(13,264	)		(1,368	)

Net cash provided by (used in) financing activities		11,866			(25,457	)


Net increase in cash		1,348			2,336
Cash at beginning of period		4,634			4,270

Cash at end of period	$	5,982		$	6,606


Supplemental disclosure of cash flow information
Assets acquired as a result of capital lease obligations	$	411		$	5,198

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

BRODER BROS., CO.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

1. The Company and Summary of Significant Accounting Policies

Description of the Company

Broder Bros., Co. (the “Company”) is a national wholesale distributor of imprintable sportswear and related products which include undecorated or “blank” T-shirts, sweatshirts, polo shirts, 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 a distribution center network of strategically located facilities 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”). In August 2004, the Company acquired all of the shares of beneficial interest of NES Clothing Company (“NES”), a leading distributor of imprintable sportswear in New England. Immediately after consummation of those 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 fiscal year 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 three and nine months ended September 27, 2008 and September 29, 2007 each consisted of thirteen and thirty-nine weeks, respectively. In certain cases, fiscal periods are identified according to the calendar period that they most accurately represent. For example, the quarterly period ended September 27, 2008 is referred to herein as “the three months ended September 30, 2008” and the balance sheet date of September 27, 2008 is referred to herein as “September 30, 2008.”

During the third quarter 2008, the Company determined that out-of-period adjustments primarily relating to the first and second quarter of fiscal year 2008 were required to correct errors in its financial statements. These adjustments related to inventory cycle count adjustments at the Company’s distribution centers. The net impact of the adjustments recorded in the third quarter of fiscal 2008 decreased the net loss before income taxes by approximately $0.4 million. Based on the Company’s analysis, the Company concluded that these matters were not material on a quantitative or qualitative basis to any of the interim periods in 2008 or prior periods.

Basis of Presentation of Unaudited Interim Financial Information

The unaudited financial information herein has been prepared in accordance with generally accepted accounting principles and is in accordance with the Securities and Exchange Commission (“SEC”) regulations for interim financial reporting. In the opinion of management, the financial statements include all adjustments, consisting only of normal recurring adjustments that are considered necessary for a fair statement of the Company’s financial position, results of operations and cash flows for the interim periods. Operating results for the three and nine months ended September 27, 2008 are not necessarily indicative of results that may be expected for the entire year. This financial information should be read in conjunction with the audited financial statements and notes thereto for the year ended December 29, 2007 of the Company, which are included in the Form 10-K filed with the SEC on March 28, 2008.

Use of Estimates

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

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 and an accrual for inventory in-transit shipped Free On Board (“FOB”), when title transfers from the manufacturer to the Company. The inventory in-transit accruals at September 30, 2008 and December 31, 2007 were $15.0 million and $14.2 million, respectively. 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 was $6.8 million and $8.2 million at September 30, 2008 and December 31, 2007, respectively.

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 excluding naked credits, the Company recorded a valuation allowance of $15.6 million during fiscal 2007. As of September 30, 2008, the valuation allowance was increased to $20.9 million due to the pre-tax loss for the nine months ended September 30, 2008. See Note 6 for more information.

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. Refer to Note 9 for additional discussion on fair value measurements. The Company is currently evaluating the impact of SFAS No. 157 related to nonfinancial assets and nonfinancial liabilities on the Company’s financial position, 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.

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 adoption of SFAS No. 160 is not expected to 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. The adoption of SFAS No. 161 is not expected to have a material impact on the Company’s financial condition, results of operations or cash flows.

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 Company is currently evaluating the potential impact, if any, of FSP SFAS 142-3 on its consolidated financial statements.

In May 2008, the FASB issued SFAS No. 162, Hierarchy of Generally Accepted Accounting Principles (“SFAS No. 162”). This statement is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements of nongovernmental entities that are presented in conformity with GAAP. SFAS No. 162 is not expected to result in a change in current practices. This statement will be effective 60 days following the U.S. Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendment to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The Company will adopt the provisions of SFAS No. 162 within the required period.

2. Comprehensive Loss


	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
	(dollars in thousands)
Net loss	$	(888	)	$	(11,570	)	$	(14,909	)	$	(27,062	)
Other, net of taxes (a)		2			3			4			7

Comprehensive loss	$	(886	)	$	(11,567	)	$	(14,905	)	$	(27,055	)

(a)	Net of taxes of $1 for each of the three month periods ended September 30, 2008 and 2007 and $2 and $4 for each of the nine month periods ended September 30, 2008 and 2007, respectively.

3. Long-Term Debt and Capital Lease Obligations

Long-term debt and capital lease obligations consisted of the following at the dates indicated below:


	September 30, 2008		December 31, 2007
	(dollars in thousands)
Revolving credit facility	$	131,400	$	102,700
Senior notes		225,000		225,000
Promissory note payable (to former owner of Amtex)		300		300
Unamortized debt premium		531		719
Capital lease obligations		10,718		13,854

		367,949		342,573
Less: current portion		5,137		4,946

Total long-term debt and capital lease obligations, excluding current portion	$	362,812	$	337,627

Principal payments on the revolving credit facility, senior notes and capital lease obligations for the next five years ending September 30 are as follows:


	(dollars in thousands)
2009	$	5,137
2010		4,553
2011		357,693
2012		23
2013		12
Thereafter		—

Revolving Credit Facility

In August 2006, the Company entered into an Amended and Restated Credit Agreement (the “Credit Agreement”), 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 Senior Notes and the Credit Agreement, the Company 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 provides for a committed $225.0 million senior secured revolver facility (the “Revolver Facility”), which includes a $20.0 million seasonal stretch tranche (the “Seasonal Stretch”). The Credit Agreement provides for interest based upon a fixed spread over the lenders’ LIBOR lending rate and represents a more favorable rate than that of the Revolver Agreement. In addition, the Credit Agreement is secured by a first priority interest in substantially all of the assets of the Company. An unused line fee of 0.25% is charged on the Revolver Facility and 0.5% is charged on the Seasonal Stretch.

The Credit Agreement contains both affirmative and negative covenants which, among other things, may require the Company to meet a minimum consolidated fixed charge coverage ratio, as defined in the Credit Agreement, and places limits upon disposals of assets, mergers and acquisitions, further indebtedness, transactions with affiliates and other customary restrictions. The occurrence of certain of these events may accelerate the timing of required repayments. As of September 30, 2008, the Company was in compliance with all covenants under the Credit Agreement.

Total unused credit line fees under the Credit Agreement were approximately $0.2 million for the nine months ended September 30, 2008. The effective interest rate at September 30, 2008 was 4.4% and the weighted average interest rate on borrowings under the Credit Agreement for the nine months ended September 30, 2008 was 5.1%. As of September 30, 2008, outstanding borrowings on the Credit Agreement were $131.4 million, which left $74.5 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 revolving credit facility 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.

The Credit Agreement also contains 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 not to exceed $225.0 million. As of September 30, 2008 and December 31, 2007, the Company had approximately $9.8 million and $9.1 million, respectively, of outstanding letters of credit primarily related to commitments for the purchase of inventory.

Senior Notes

In September 2003, the Company completed a private offering of $175.0 million in aggregate principal amount of 11¹/4% senior notes due 2010. The proceeds of the private offering were used to finance the Alpha acquisition, repay existing indebtedness and to pay related fees and expenses. In November 2004, the Company completed a private offering of an additional $50.0 million aggregate principal amount of 11¹/4% senior notes due 2010. The proceeds of that private placement were used to repay borrowings under the Revolver Agreement. All senior notes were issued under the same indenture. The senior notes are guaranteed on a senior unsecured basis by all existing and future material domestic subsidiaries, and pay interest semi-annually in arrears on April 15 and October 15 of each year.

The indenture governing the senior notes and the Credit Agreement, among other things, (i) restrict the ability of the Company and its subsidiaries, including any future guarantor of the senior 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, (ii) prohibit certain restrictions on the ability of certain of the Company’s subsidiaries, including any future guarantor of the senior notes, to pay dividends or make certain payments to the Company and (iii) place restrictions on the ability of the Company and its subsidiaries, including any future guarantor of the senior notes, to merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its assets. The indenture related to the senior notes and the Credit Agreement also contain various covenants which limit the Company’s discretion in the operation of its businesses. As of September 30, 2008, the Company was in compliance with all covenants under the indenture.

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.

Interest Rate Swaps

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 (“swaps”). 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 each of September 30, 2008 and December 31, 2007. The interest rate swap agreement matured in October 2008.

The Company had elected to not apply hedge accounting for this swap agreement. The fair value of this interest rate swap was less than $(0.1) million at September 30, 2008 and was approximately $(0.2) million at December 31, 2007. The swap is classified on the balance sheets based on the expected timing of the cash flows related to the swap. Less than $0.1 million and approximately $0.2 million was classified as other current liabilities at September 30, 2008 and December 31, 2007, respectively.

Redeemable Securities

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 and 2007 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 September 30, 2008 and December 31, 2007 in accordance with EITF Topic No. D-98, “Classification and Measurement of Redeemable Securities.” An executive who held shares left the Company during 2007 and the Company purchased such executive’s shares in 2008, which resulted in increases to additional paid-in capital and treasury stock during the first quarter of 2008.

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		Liquidation Preference
	(dollars in thousands)
September 30, 2008
Class B	65,139	$	0.7	$	14	$	—
Class L, Series 3	6,318		0.1		112		279.9
Class L, Series 4	6,107		0.1		94		208.5
December 31, 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

4. 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 conditions and limitations set forth therein. Before any management fees may be paid, EBITDA, as defined in the amended and restated Advisory Services Agreement, after giving effect to payment of the management fee, must be greater than $52.0 million in order 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. No fee was earned in fiscal 2007. During the three and nine months ended September 30, 2008, the Company recorded management fee expense of $0.7 million and $1.6 million, respectively. During the three months ended September 30, 2007, the Company reversed a management fee expense of $0.9 million representing the management fee expense recorded in the first six months of fiscal 2007 as management did not expect the Company to earn $52.0 million in EBITDA, as defined in the Advisory Services Agreement, during fiscal 2007. The management fee expense accrual is included in accrued expenses in the balance sheet.

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 not paid any investment banking fees during fiscal 2007 or during the nine months ended September 30, 2008.

5. Commitments and Contingencies

Self-Insured Health Plan

The Company maintains a self-insured health plan for some of its employees. The Company has purchased stop loss insurance to supplement the health plan, which will reimburse the Company for individual claims in excess of $0.1 million annually or aggregate claims exceeding approximately $6.6 million. At both September 30, 2008 and December 31, 2007, approximately $0.6 million was included in accrued liabilities for self-insured health plan costs.

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 4 for more information.

6. 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 2003.

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. Due to the Company’s continued net operating losses and its net deferred tax asset position excluding naked credits, the Company recorded a valuation allowance of $15.6 million during fiscal year 2007. As of September 30, 2008, the valuation allowance was increased to $20.9 million due to the pre-tax loss for the nine months ended September 30, 2008. The valuation allowance for deferred tax assets at September 30, 2008 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 is 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.

The Company is susceptible to large fluctuations in its effective tax rate and has thereby recognized tax expense on a discrete pro-rata basis for the nine months ended September 30, 2008.

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. As of September 30, 2008 we have recorded a liability related to FIN 48 of $0.8 million which may be payable in the future. This amount is included in “Other long-term liabilities” on the Company’s balance sheet.

7. Segment Information

In accordance with SFAS No. 131, “Disclosure About Segments of an Enterprise and Related Information,” the Company has three operating segments: the Broder division; the Alpha division; and 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 makers 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.

Statement of Operations Information


	Three Months Ended September 30,
	2008								2007
	Broder		Alpha		NES		Consolidated		Broder		Alpha		NES		Consolidated
	(dollars in thousands)
Net sales	$	100,439	$	120,495	$	31,405	$	252,339	$	101,977	$	114,249	$	30,191	$	246,417
Cost of sales (1)		83,036		99,484		25,870		208,390		85,721		95,383		25,219		206,323

Gross profit	$	17,403	$	21,011	$	5,535	$	43,949	$	16,256	$	18,866	$	4,972	$	40,094


	Nine Months Ended September 30,
	2008								2007
	Broder		Alpha		NES		Consolidated		Broder		Alpha		NES		Consolidated
	(dollars in thousands)
Net sales	$	273,817	$	342,954	$	89,819	$	706,590	$	280,785	$	328,641	$	86,968	$	696,394
Cost of sales (1)		227,501		281,747		74,705		583,953		234,416		268,940		73,213		576,569

Gross profit	$	46,316	$	61,207	$	15,114	$	122,637	$	46,369	$	59,701	$	13,755	$	119,825

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

Balance Sheet Information


	Broder		Alpha		NES		Consolidated
	(dollars in thousands)
As of September 30, 2008
Accounts receivable, net	$	35,230	$	51,164	$	16,525	$	102,919
Inventory		85,893		139,124		27,706		252,723
Goodwill, intangible assets and deferred financing fees, net		17,327		82,467		2,658		102,452
Accounts payable		48,284		76,979		16,450		141,713
As of December 31, 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, net		19,443		86,518		3,400		109,361
Accounts payable		27,866		52,388		9,514		89,768

8. Restructuring and Asset Impairment Charges

Following the acquisitions of Alpha in September 2003 and NES in August 2004, the Company executed restructuring activities designed to reduce its cost structure by closing duplicative distribution centers, disposing of the related fixed assets and reducing its corporate workforce for redundant selling, general and administrative functions.

During fiscal 2005, the Company initiated a strategy to create multi-division distribution centers which is expected to provide the Company with several key advantages, including improvement of inventory availability and enhanced service levels which are expected to result in increased revenue and profitability, as well as operational savings realized through higher volume relative to fixed costs.

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 May 2009 and ending March 2015. See Note 15 in the Company’s 2007 Annual Report on Form 10-K for additional information.

During the first quarter of 2007, the Company recorded approximately $7.2 million in restructuring charges, consisting of $6.5 million in distribution center closure costs for the fair value of lease obligations and $0.7 million in severance and related benefits. During the second quarter of 2007, the Company recorded approximately $0.7 million in severance and related benefit obligations 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 the third quarter of 2007, the Company recorded restructuring charges of $4.5 million

consisting of approximately $4.4 million for the fair value of future lease obligations, net of expected sublease rentals, and $0.1 million in severance and related benefit obligations.

During the first quarter of 2008, the Company recorded restructuring charges related to severance of $0.1 million and interest accretion of approximately $0.2 million. During the second quarter of 2008, the Company recorded restructuring charges related to interest accretion of $0.2 million and change in sublease assumptions of approximately $0.4 million. During the third quarter of 2008, the Company recorded restructuring charges related to interest accretion of $0.2 million.

Restructuring activity is summarized as follows:


	Balance at December 31, 2007		Restructuring Charge		Cash Payments			Balance at September 30, 2008
	(dollars in thousands)
Distribution center closure costs
Lease termination and other costs, net	$	15,848	$	913	$	(3,234	)	$	13,527
Severance and related benefits		519		142		(661	)		—
Call center closure costs
Lease termination and other costs		39		—		(23	)		16

	$	16,406	$	1,055	$	(3,918	)	$	13,543

The total of $13.5 million in accrued restructuring costs is recorded as $3.0 million in current liabilities and $10.5 million in long-term liabilities at September 30, 2008.

9. Fair Value Measurement

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities” (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. If the fair value option is elected, unrealized gains and losses will be recognized in earnings at each subsequent reporting date. On December 30, 2007, the Company adopted the provisions of SFAS No. 159 and did not elect the fair value option to measure certain financial instruments.

On December 30, 2007, the Company adopted the provisions of SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value and provides guidance for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. In February 2008, the FASB decided to issue a final Staff Position to allow 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 Company has elected this one-year deferral and thus will not apply the provisions of SFAS No. 157 to nonfinancial assets and nonfinancial liabilities that are recognized at fair value in the financial statements on a nonrecurring basis until its fiscal year beginning December 28, 2008. The FASB also amended SFAS No. 157 to exclude FASB Statement No. 13 and its related interpretive accounting pronouncements that address leasing transactions. SFAS No. 157 enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. SFAS No. 157 requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

The fair value of the Company’s interest rate protection agreement is based on unobservable inputs that are not corroborated by market data. The Company generally applies fair value techniques on a non-recurring basis associated with, (1) valuing potential impairment loss related to goodwill and indefinite-lived intangible assets accounted for pursuant to SFAS No. 142, and (2) valuing potential impairment loss related to long-lived assets accounted for pursuant to SFAS No. 144.

The following table summarizes the carrying amounts and fair values of certain liabilities at September 30, 2008:


	At September 30, 2008 (dollars in thousands)
	Carrying Amount		(Level 1)		(Level 2)		(Level 3)
Interest rate swap agreement ($10 million notional amount)	$	30	$	—	$	—	$	30

ITEM 2.

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. Exclusive or near-exclusive suppliers include retail brands such as Adidas Golf, Champion and Columbia Sportswear. We added Alternative Apparel as an exclusive brand to our 2008 assortment and Dickies to our 2009 assortment. We consider the term “near-exclusive” to represent those arrangements where, although not contractually entitled to exclusivity, we believe we are the only distributor to offer these products in an annual catalog to the imprintable sportswear industry. 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, Desert Wash, Great Republic and Harvard Square brands. Our products are sold to over 80,000 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%.

During the third quarter 2008, the Company determined that out-of-period adjustments relating primarily to the first and second quarter of fiscal year 2008 were required to correct errors in its financial statements. These adjustments related to inventory cycle count adjustments at the Company’s distribution centers. The net impact of the adjustments recorded in the third quarter of fiscal 2008 decreased the net loss before income taxes by approximately $0.4 million. Based on the Company’s analysis, the Company concluded that these matters were not material on a quantitative or qualitative basis to any of the interim periods in 2008 or prior periods.

Results of Operations

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


	Three Months Ended September 30,										Nine Months Ended September 30,
	2008					2007					2008					2007
	(dollars in millions)
Net sales	$	252.3		100.0	%	$	246.4		100.0	%	$	706.6		100.0	%	$	696.4		100.0	%
Cost of sales (exclusive of depreciation and amortization as shown below)		208.4		82.6			206.3		83.7			584.0		82.6			576.6		82.8

Gross profit		43.9		17.4			40.1		16.3			122.6		17.4			119.8		17.2
Warehousing, selling and administrative expenses		31.4		12.5			33.7		13.7			95.2		13.5			99.7		14.3
Depreciation and amortization		4.5		1.8			5.0		2.0			13.9		2.0			15.0		2.2
Restructuring and asset impairment charges, net		0.2		0.1			4.5		1.8			1.1		0.2			10.7		1.5

Income (loss) from operations		7.8		3.1			(3.1	)	(1.3	)		12.4		1.8			(5.6	)	(0.8	)
Interest expense, net		8.6		3.4			9.2		3.7			27.1		3.8			28.7		4.1
Income tax provision (benefit)		0.1		—			(0.7	)	(0.3	)		0.2		—			(7.2	)	(1.0	)

Net loss	$	(0.9	)	(0.4	)%	$	(11.6	)	(4.7	)%	$	(14.9	)	(2.1	)%	$	(27.1	)	(3.9	)%

Three months ended September 30, 2008 compared to the three months ended September 30, 2007

Net Sales. Net sales increased by approximately $5.9 million, or 2.4%, from $246.4 million for the three months ended September 30, 2007 to $252.3 million for the three months ended September 30, 2008. This increase resulted from the combination of an increase in average selling prices and product mix (estimated impact of $11.1 million) partially offset by a decrease in unit volume (estimated impact of $5.2 million).

Gross Profit. Gross profit increased by $3.8 million, or 9.5%, from $40.1 million for the three months ended September 30, 2007 to $43.9 million for the three months ended September 30, 2008. The increase in gross profit was attributable to higher gross profit per unit partially offset by fewer units sold. Gross margin was 17.4% and 16.3% for the three months ended September 30, 2008 and 2007, respectively.

Warehousing, Selling and Administrative Expenses (Including Depreciation and Amortization). Warehousing, selling and administrative expenses, including depreciation and amortization, decreased $2.8 million, or 7.2%, from $38.7 million for the three months ended September 30, 2007 to $35.9 million for the three months ended September 30, 2008. The decrease was primarily the result of: (i) approximately $2.0 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 third quarter 2007 which did not recur in 2008; (ii) $1.1 million in reduced marketing expense related to the sweepstakes promotion which took place in the prior year; (iii) $0.7 million in lower net distribution center operations expense as our new distribution centers operated more efficiently in the current year; (iv) lower employee medical benefits expense of $0.5 million; and (v) approximately $0.5 million in lower depreciation and amortization; offset by (vi) higher management fee expense of $1.6 million due to the higher level of “Adjusted EBITDA” as defined in the Advisory Services Agreement with Bain Capital and an accrual reversal in the prior year; (vii) $0.6 million in higher selling expenses consisting of salaries and benefits for regional sales managers hired during the fourth quarter 2007; and (viii) $0.3 million in higher bonus expense in the current year.

Income from Operations. As a result of the factors described above, income from operations increased by approximately $10.9 million, from a loss of ($3.1) million for the three months ended September 30, 2007 to income of $7.8 million for the three months ended September 30, 2008.

Interest Expense. Interest expense, net was $8.6 million and $9.2 million for the three months ended September 30, 2008 and 2007, respectively. The reduced interest expense is due primarily to the lower weighted average interest rate during the three months ended September 30, 2008, partially offset by higher debt balances.

Income Taxes. Income tax expense was $0.1 million for the three months ended September 30, 2008 compared with an income tax benefit of $0.7 million for the three months ended September 30, 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 excluding naked credits, we recorded a $0.1 million decrease to our valuation allowance during the three months ended September 30, 2008. The valuation allowance for deferred tax assets at September 30, 2008 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 is 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 decreased by $10.7 million from a net loss of $(11.6) million for the three months ended September 30, 2007 to a net loss of $(0.9) million for the three months ended September 30, 2008.

Nine months ended September 30, 2008 compared to the nine months ended September 30, 2007

Net Sales. Net sales increased by approximately $10.2 million, or 1.5%, from $696.4 million for the nine months ended September 30, 2007 to $706.6 million for the nine months ended September 30, 2008. This increase resulted from the combination of an increase in average selling prices and product mix (estimated impact of $24.3 million) partially offset by a decrease in unit volume (estimated impact of $14.1 million).

Gross Profit. Gross profit increased by $2.8 million, or 2.3%, from $119.8 million for the nine months ended September 30, 2007 to $122.6 million for the nine months ended September 30, 2008. The increase in gross profit was attributable to higher gross profit per unit partially offset by lower unit volumes. Gross margin was 17.4% and 17.2% for the nine months ended September 30, 2008 and 2007, respectively.

Warehousing, Selling and Administrative Expenses (Including Depreciation and Amortization). Warehousing, selling and administrative expenses, including depreciation and amortization, decreased $5.6 million, or 4.9%, from $114.7 million for the nine months ended September 30, 2007 to $109.1 million for the nine months ended September 30, 2008. The decrease was primarily the result of: (i) approximately $5.1 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 nine months ended September 2007 which did not recur in 2008; (ii) $1.4 million in reduced marketing expense related to the sweepstakes promotion which took place in the prior year; (iii) approximately $1.1 million in lower depreciation and amortization; (iv) $0.9 million in reduced bad debt expense; (v) $0.9 million in lower net catalog expense; (vi) $0.6 million in lower employee medical benefits expense; (vii) and $0.4 million in lower net distribution center operations expense as our new distribution centers operated more efficiently in the current year; partially offset by (viii) $1.9 million in higher selling expenses consisting of salaries and benefits for regional sales managers and higher sales commissions expenses; (ix) $1.6 million in higher management fee expense due to the higher level of “Adjusted EBITDA” as defined in the Advisory Services Agreement with Bain Capital; and (x) $1.2 million in higher bonus expense.

Restructuring and Asset Impairment Charges, Net. As more fully described in Note 8 to the Financial Statements included in this Form 10-Q, we recorded restructuring charges of $1.1 million and $10.7 million during the nine months ended September 30, 2008 and 2007, respectively. During the nine months ended September 30, 2008, such restructuring charges consisted of $0.5 million of interest accretion on restructuring charges which have been accrued for previously but not yet paid, $0.4 million resulting from changes in our sublease assumptions for distribution centers which were previously closed and $0.1 million in severance charges. The restructuring charges recorded during the nine months ended September 30, 2007 consisted of $10.7 million in lease termination and other costs plus $1.5 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.

Income (Loss) from Operations. As a result of the factors described above, income from operations increased by approximately $18.0 million, from a loss of $5.6 million for the nine months ended September 30, 2007 to income of $12.4 million for the nine months ended September 30, 2008.

Interest Expense. Interest expense, net was $27.1 million and $28.7 million for the nine months ended September 30, 2008 and 2007, respectively. The reduced interest expense is due primarily to the lower weighted average interest rate during the nine months ended September 30, 2008, partially offset by higher debt balances.

Income Taxes. The income tax expense was approximately $0.2 million for the nine months ended September 30, 2008 compared with an income tax benefit of $7.2 million for the nine months ended September 30, 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 excluding naked credits, we recorded a $5.3 million increase to our valuation allowance during the nine months ended September 30, 2008. The valuation allowance for deferred tax assets at September 30, 2008 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 is 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 decreased by $12.2 million from a net loss of $(27.1) million for the nine months ended September 30, 2007 to a net loss of $(14.9) million for the nine months ended September 30, 2008.

Liquidity and Capital Resources

Cash Flows

Nine months ended September 30, 2008 compared to the nine months ended September 30, 2007

Net cash used in operating activities was $8.6 million for the nine months ended September 30, 2008 compared with cash provided by operating activities of $34.2 million for the nine months ended September 30, 2007. The decrease in cash flows from operating activities was due principally to an increase in the inventory balance of $60.9 million in the nine months ended September 30, 2008 compared with a decrease of $24.5 million in the same period in the prior year. The larger increase in the nine months ended September 30, 2008 is due to the lower ending inventory balance at December 31, 2007 (resulting from the completion of our distribution center consolidation) compared with December 31, 2006 and approximately $18.4 million of higher fleece inventory in September 2008. This fleece inventory was received earlier than during 2007 to reduce the risk of out-of-stocks experienced in 2007 caused by supply constraints. This increase in inventory was partly offset by an increase in accounts payable of $65.2 million for the nine months ended September 30, 2008 compared with an increase of $28.2 million in the same period last year, a lower year-to-date net loss of ($14.6) million in the current year compared with a net loss of ($27.1) million in the same period last year and other changes in working capital.

Net cash used in investing activities was $1.9 million and $6.4 million for the nine months ended September 30, 2008 and 2007, respectively. The decrease is due to the reduced purchases of fixed assets in the current year.

Net cash provided by financing activities was approximately $11.9 million for the nine months ended September 30, 2008 compared with net cash used in financing activities of $25.5 million for the nine months ended September 30, 2007. The change in financing cash flows is primarily the result of net borrowings on our revolving credit facility during the nine months ended September 30, 2008 of $28.7 million compared to net repayments of $21.4 million in the nine months ended September 30, 2007, partly offset by a decrease in our book overdraft position during the nine months ended September 30, 2008 of $13.3 million compared to an decrease of $1.4 million in the same period of the prior year. Borrowings against the revolving credit facility support our inventory purchases.

Liquidity Position

In August 2006, we entered into an amended and restated credit agreement (“Credit Agreement”) which provides for aggregate revolver borrowings of up to $225.0 million (subject to borrowing base availability), including provision for up to $25.0 million of letters of credit. As of September 30, 2008, outstanding borrowings on the Credit Agreement were $131.4 million, and outstanding letters of credit were $9.8 million, which left $74.5 million of available borrowing capacity as determined by borrowing base availability.

The Credit Agreement is secured by first priority pledges of all the equity interests owned by us in our domestic subsidiaries and 65% of all equity interests in any future foreign subsidiaries. The Credit Agreement is also secured by first priority security interests in, and mortgages on, substantially all tangible and intangible assets and each of our direct and indirect domestic subsidiaries and 65% of the equity interests of any future foreign subsidiaries. Availability under the Credit Agreement is based on a borrowing base calculated using advance rates applied to eligible accounts receivable and eligible inventory. The Credit Agreement matures in August 2011.

The Credit Agreement contains both affirmative and negative covenants which, among other things, may require us 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. The occurrence of certain of these events may accelerate required repayment. As of September 30, 2008, we were in compliance with all covenants under the Credit Agreement.

In September 2003, we completed a private offering of $175.0 million in aggregate principal amount of 11¹/4% senior notes due 2010. The proceeds of the private offering were used to finance the Alpha acquisition, repay existing indebtedness and to pay related fees and expenses. In November 2004, we completed a private offering of an additional $50.0 million in aggregate principal amount of 11¹/4% senior notes due 2010. The proceeds of the private placement were used to repay borrowings under the revolving credit facility. All senior notes were issued under the same indenture. The senior notes are guaranteed on a senior unsecured basis by all existing and future material domestic subsidiaries, and pay interest semi-annually in arrears on April 15 and October 15 of each year.

The indenture governing the senior notes, among other things, (1) restricts the ability of us and our subsidiaries, including any future guarantor of the senior 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 any future guarantor of the senior notes, to pay dividends or make certain payments to us and (3) places restrictions on the ability of us and our subsidiaries, including any future guarantor of the senior 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 governing the senior notes also contains various covenants which limit our discretion in the operation of our businesses. As of September 30, 2008, we were in compliance with all covenants under the indenture.

We rely primarily upon cash flow from operations and borrowings under our revolving credit facility to finance operations, capital expenditures and fluctuations in debt service requirements. Availability under the revolving credit facility fluctuates due to seasonal flows of the business, which impacts our borrowing base and our decisions around investment in inventory and overall growth of the business. Historically, the low point of our availability arises during the first and second quarters of each fiscal year as revenues reach seasonal lows during December, January and February, compounded by the simultaneous consumption of availability to bolster inventory levels for the ensuing season.

We believe that our ability to manage cash flow and working capital levels, particularly inventory and accounts payable, will allow us to meet our current and future 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 for at least the next twelve months. However, no assurance can be given that this will be the case, and we may require additional debt or equity financing to meet our working capital requirements. 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.

Additionally, our senior notes mature in October 2010 and our Credit Agreement matures in 2011. There can be no assurance that additional financing or refinancing will be available to us when our senior notes or Credit Agreement mature or, if available, that it will be on terms satisfactory to us.

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 were to consummate an 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

Our revolving credit facility provides 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. As of September 30, 2008, we had approximately $9.8 million of outstanding letters of credit primarily related to commitments for the purchase of inventory.

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

Contractual Cash Obligations

The following table presents the aggregate amount of future cash outflows under our contractual cash obligations and commercial commitments as of September 30, 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	$	131.4	$	—	$	131.4	$	—	$	—
Senior notes⁽¹⁾		225.0		—		225.0		—		—
Operating lease obligations⁽²⁾		117.2		17.6		33.8		29.5		36.3
Capital lease obligations		11.8		5.6		6.2		—		—
Expected interest payments⁽³⁾		51.7		25.4		26.3		—		—
Other⁽⁴ ⁾		0.3		0.3		—		—		—

Total contractual cash obligations	$	537.4	$	48.9	$	422.7	$	29.5	$	36.3

⁽¹⁾	Amounts shown do not include $0.5 million of unamortized premium that will be amortized over the term of the senior notes.

⁽²⁾	Operating lease payments have not been reduced by minimum sublease rentals of $2.1 million due to the Company in the future under noncancelable subleases.

⁽³⁾

Represents expected interest payments for the life of our senior notes and interest related to our interest rate swap agreement. The amounts included in this table exclude any interest payments which may be made related to our revolving credit facility. If the September 30, 2008 weighted average interest rate of 5.1% and balance outstanding of $131.4 million were to remain constant throughout the remainder of the revolving credit facility, our total future interest payments under the facility would be approximately $19.4 million. The expected payments on our senior 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. Expected interest payments on our interest rate swap agreement were calculated using a notional amount of $10 million and an interest rate of 8%. The swap agreement matures in October 2008.

⁽⁴⁾	Represents note payable to former owner of Amtex.

In addition, due to the adoption of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”) on December 31, 2006, we have recorded a $0.8 million liability as of September 30, 2008 that may be payable in the future, although timing of payment cannot be reasonably estimated. For more information, see Note 6 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. 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. Due to the level of fixed operating expenses, operating profit is normally significantly lower in the first quarter of our fiscal year. During fiscal year 2006, 100% of our operating income was earned in the second, third and fourth quarters.

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.

Critical Accounting Policies

Our significant accounting policies are described in Note 1 to our financial statements included elsewhere in this report and in Note 2 to our consolidated financial statements included in our Form 10-K filed with the SEC on March 28, 2008. 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 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 excluding naked credits, the Company recorded a valuation allowance of $15.6 million during fiscal 2007. As of September 30, 2008 the valuation allowance was $20.9 million.

Goodwill and Intangible Assets. Goodwill and intangible assets with indefinite lives are not amortized; rather, they are tested for impairment on at least an annual basis. We perform impairment evaluations for goodwill and indefinite-lived assets at least annually in the fourth quarter, or upon a triggering event, using discounted expected future cash flows. In addition, we have recorded other indefinite-lived intangible assets (the trade names “Alpha,” “Alpha Shirt Company,”) as well as certain finite-lived intangible assets (primarily the trade names “NES Clothing” and “Harvard Square,” and customer relationship intangibles). These finite-lived intangible assets are being amortized on a straight-line basis over their average useful lives ranging from 1 to 8 years. Following the Company’s fiscal 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. 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 remaining goodwill has become impaired, which could result in additional impairment charges in the future. If we determine that there are additional impairments to our goodwill or intangibles in the future, the resulting non-cash charge could be substantial.

Recent Accounting Pronouncements

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 142”). The intent of FSP SFAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS 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 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 Company is currently evaluating the potential impact, if any, of FSP SFAS 142-3 on its consolidated financial statements.

Sarbanes-Oxley Section 404 Compliance

We incur certain costs associated with being an SEC registrant because of covenants in the indenture governing our senior notes. We are currently a “non-accelerated filer” under rules promulgated by the SEC. For the year ended December 29, 2007, pursuant to Section 404(a) of the Sarbanes-Oxley Act, management issued its assessment report on 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.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Information contained in this Quarterly Report on Form 10-Q, 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.

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, such as those disclosed in this document and our other filings with the SEC, including our Annual Report on Form 10-K for fiscal 2007. Risk 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 include, but are not limited to, the following:

•

the competitiveness of our industry, including competition based on price, product quality, breadth of product selection, quality of service and delivery times;

•

general economic conditions;

•

disruptions in our distribution centers;

•

evidence that a triggering event has occurred (i.e., a significant reduction in revenues or gross profit) and upon evaluation, we determine that goodwill or other intangible assets are impaired, which could result in a substantial non-cash charge;

•

dependence of a significant portion of our products from a limited group of suppliers;

•

ability to predict customer demand for our private label products and the ability to manage the additional complexity in our operations, including increases to our working capital investment and increased level of inventory risk;

•

ability to execute on our distribution center consolidation plan, including the realization of anticipated inventory reductions and maintaining current customer service levels;

•

ability to realize deferred tax assets, including the potential to record a valuation allowance against deferred tax assets in the future;

•

significant reliance on one shipper to distribute our products to our customers;

•

our substantial level of indebtedness;

•

ability to execute on our acquisition strategy and the related integration of acquired companies, including the realization of anticipated operating synergies and cost savings; and

•

ability to sublet closed facilities following completion of the distribution center consolidation initiative in 2007.

These and other applicable risks are described under the caption “Item 1A. Risk Factors” in our Annual Report on Form 10-K for fiscal year 2007 filed with the SEC. We assume no obligation to publicly update or revise any forward-looking statement made in this report, whether as a result of new information, future events, changes in assumptions or otherwise, after the date of this report. All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk.

As of September 30, 2008, we had $131.4 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 September 30, 2008 level of borrowings, and further considering the interest rate protection agreement currently in place (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 the three and nine months ended September 30, 2008 by approximately $0.3 million and $0.9 million, respectively.

We have entered into an interest rate protection agreement whereby we have 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. We have elected not to apply hedge accounting for the currently outstanding interest rate protection agreement. Accordingly, we record our interest rate swaps at fair value on the balance sheet and record gains and losses on this contract as well as the periodic settlements of this contract through our statement of operations. We recorded other income of $0.1 million and less than $0.1 million for the three months ended September 30, 2008 and 2007, respectively, and other income of $0.2 million and $0.1 million for the nine month ended September 30, 2008 and 2007, respectively.

Item 4T.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, they have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our reports required to be filed under the Securities and Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC, and that material information relating to us and our consolidated subsidiaries is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared.

Changes in Internal Control Over Financial Reporting

There were no changes during the third quarter of fiscal 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.

PART II. OTHER INFORMATION

Item 1A.

Risk Factors.

Our business, financial condition, operating results and cash flows can be impacted by a number of factors, any one of which could cause our actual results to vary materially from recent months or from those anticipated. See the discussion in “Item 1A. Risk Factors” in our 2007 Annual Report on Form 10-K. There have been no material changes in our risk factors from those previously disclosed in our 2007 Annual Report on Form 10-K except for the following:

Economic downturns and declines in consumption in the Company’s markets may affect the levels of both sales and profitability.

Financial markets have been experiencing extreme disruption in recent months, including severely diminished liquidity and credit availability. Concurrently, economic weakness has begun to accelerate globally. We believe these conditions have not materially impacted our financial position as of September 27, 2008 or liquidity for the nine months ended September 27, 2008. However, we could be negatively impacted if either of these conditions exists for a sustained period of time, or if there is further deterioration in financial markets or the economy. The current tightening of credit in financial markets may adversely affect the ability of our customers and suppliers to obtain financing for significant purchases and operations, which could result in a decrease in orders for our products.

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 Senior Notes trade, 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.

Item 6.

Exhibits.


Exhibit No.		Description

31.1		Certification Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished pursuant to Item 601(b)(32) of Regulation S-K).

32.2		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished pursuant to Item 601(b)(32) of Regulation S-K).

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.