jun2808_10q.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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 June 28, 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: 333-119902

Nortek, Inc.
(exact name of registrant as specified in its charter)

Delaware	05-0314991
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification Number)

50 Kennedy Plaza Providence, Rhode Island	02903-2360
(Address of principal executive offices)	(zip code)

Registrant’s Telephone Number, Including Area Code: (401) 751-1600

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

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

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

Large accelerated filer [_]

Accelerated filer [_]

Non-accelerated filer [X]

Smaller reporting company [_]

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

There is no established public trading market for any of the common stock of the Company. The aggregate market value of voting stock held by non-affiliates is zero.

The number of shares of Common Stock outstanding as of August 8, 2008 was 3,000.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

NORTEK, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET

(Dollar amounts in millions)

	June 28,		December 31,
	2008		2007
Assets
Current Assets:
Unrestricted cash and cash equivalents	$	79.1	$	53.4
Restricted cash		1.0		1.0
Accounts receivable, less allowances of $12.7 and $12.2		368.2		320.0
Inventories:
Raw materials		101.5		91.6
Work in process		34.9		29.9
Finished goods		194.0		187.1
		330.4		308.6

Prepaid expenses		14.4		11.7
Other current assets		19.1		19.8
Prepaid income taxes		30.5		28.9
Total current assets		842.7		743.4

Property and Equipment, at Cost:
Land		10.9		10.4
Buildings and improvements		115.0		110.1
Machinery and equipment		231.6		217.1
		357.5		337.6
Less accumulated depreciation		120.6		99.7
Total property and equipment, net		236.9		237.9

Other Assets:
Goodwill		1,520.9		1,528.9
Intangible assets, less accumulated amortization of $96.1 and $80.7		151.7		156.6
Deferred debt expense		46.2		27.4
Restricted investments and marketable securities		2.3		2.3
Other assets		9.7		10.3
		1,730.8		1,725.5
Total Assets	$	2,810.4	$	2,706.8

Liabilities and Stockholder’s Investment

Current Liabilities:
Notes payable and other short-term obligations	$	68.4	$	64.0
Current maturities of long-term debt		15.6		32.4
Accounts payable		250.0		192.7
Accrued expenses and taxes, net		235.5		247.1
Total current liabilities		569.5		536.2

Other Liabilities:
Deferred income taxes		31.6		36.2
Long-term payable to affiliate (see Note A)		39.1		43.2
Other		127.4		123.5
		198.1		202.9

Notes, Mortgage Notes and Obligations Payable, Less Current Maturities		1,418.9		1,349.0

Commitments and Contingencies (see Note G)

Stockholder’s Investment:
Common stock, $0.01 par value, authorized 3,000 shares;
3,000 issued and outstanding at June 28, 2008 and December 31, 2007		---		---
Additional paid-in capital		416.7		412.4
Retained earnings		168.2		168.6
Accumulated other comprehensive income		39.0		37.7
Total stockholder's investment		623.9		618.7
Total Liabilities and Stockholder's Investment	$	2,810.4	$	2,706.8

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

NORTEK, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

	For the second quarter ended
	June 28, 2008			June 30, 2007
	(Dollar amounts in millions)

Net Sales	$	647.1		$	644.3

Costs and Expenses:
Cost of products sold (see Note D)		473.3			452.1
Selling, general and administrative expense, net (see Note D)		118.5			121.1
Amortization of intangible assets		8.4			6.4
		600.2			579.6
Operating earnings		46.9			64.7
Interest expense		(31.3	)		(30.8	)
Loss from debt retirement		(9.9	)		---
Investment income		0.2			0.5
Earnings before provision for income taxes		5.9			34.4
Provision for income taxes		2.2			15.7
Net earnings	$	3.7		$	18.7

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

NORTEK, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

	For the first six months ended
	June 28, 2008			June 30, 2007
	(Dollar amounts in millions)

Net Sales	$	1,187.3		$	1,196.8

Costs and Expenses:
Cost of products sold (see Note D)		864.9			836.7
Selling, general and administrative expense, net (see Note D)		237.0			238.1
Amortization of intangible assets		15.1			12.4
		1,117.0			1,087.2
Operating earnings		70.3			109.6
Interest expense		(58.7	)		(60.0	)
Loss from debt retirement		(9.9	)		---
Investment income		0.4			0.9
Earnings before provision for income taxes		2.1			50.5
Provision for income taxes		2.5			22.6
Net (loss) earnings	$	(0.4	)	$	27.9

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

NORTEK, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

	For the first six months ended
	June 28, 2008			June 30, 2007
	(Dollar amounts in millions)
Cash Flows from operating activities:
Net (loss) earnings	$	(0.4	)	$	27.9

Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:
Depreciation and amortization expense		36.0			31.1
Non-cash interest expense, net		3.3			2.8
Non-cash stock-based compensation expense		0.1			0.2
(Gain) loss on property and equipment		(2.5	)		0.2
Loss from debt retirement		9.9			---
Deferred federal income tax (benefit) provision		(4.7	)		4.1
Changes in certain assets and liabilities, net of effects from acquisitions and dispositions:
Accounts receivable, net		(44.8	)		(47.2	)
Inventories		(20.4	)		(33.7	)
Prepaids and other current assets		(4.0	)		2.3
Accounts payable		53.9			49.5
Accrued expenses and taxes		12.3			9.7
Long-term assets, liabilities and other, net		5.9			(0.8	)
Total adjustments to net (loss) earnings		45.0			18.2
Net cash provided by operating activities		44.6			46.1
Cash Flows from investing activities:
Capital expenditures		(15.9	)		(14.1	)
Net cash paid for businesses acquired		(32.7	)		(76.3	)
Payment in connection with NTK Holdings' senior unsecured loan facility rollover		---			(4.5	)
Proceeds from the sale of property and equipment		6.2			0.1
Change in restricted cash and marketable securities		---			1.2
Other, net		(1.9	)		(0.6	)
Net cash used in investing activities		(44.3	)		(94.2	)
Cash Flows from financing activities:
Increase in borrowings		133.0			89.0
Payment of borrowings		(66.7	)		(23.0	)
Net proceeds from sale of the 10% Senior Secured Notes due 2013		742.2			---
Redemption of Nortek's senior secured credit facility		(755.5	)		---
Fees paid in connection with new debt facilities		(31.7	)		---
Equity investment by THL-Nortek Investors, LLC		4.2			---
Other, net		(0.1	)		---
Net cash provided by financing activities		25.4			66.0
Net change in unrestricted cash and cash equivalents		25.7			17.9
Unrestricted cash and cash equivalents at the beginning of the period		53.4			57.4
Unrestricted cash and cash equivalents at the end of the period	$	79.1		$	75.3

Supplemental disclosure of cash flow information:

Interest paid	$	47.4		$	52.8

Income taxes paid (refunded), net	$	6.8		$	(0.4	)

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

NORTEK, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER’S INVESTMENT

FOR THE SECOND QUARTER ENDED JUNE 30, 2007

(Dollar amounts in millions)

					Accumulated
	Additional				Other
	Paid-in		Retained		Comprehensive			Comprehensive
	Capital		Earnings		Income (Loss)			Income (Loss)


Balance, March 31, 2007	$	412.2	$	145.4	$	13.0		$	---
Net earnings		---		18.7		---			18.7
Other comprehensive income (loss):
Currency translation adjustment		---		---		7.2			7.2
Pension liability adjustment		---		---		(0.1	)		(0.1	)
Comprehensive income								$	25.8
Stock-based compensation		0.1		---		---
Balance, June 30, 2007	$	412.3	$	164.1	$	20.1

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

NORTEK, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER’S INVESTMENT

FOR THE FIRST SIX MONTHS ENDED JUNE 30, 2007

(Dollar amounts in millions)

						Accumulated
	Additional					Other
	Paid-in		Retained			Comprehensive			Comprehensive
	Capital		Earnings			Income (Loss)			Income (Loss)


Balance, December 31, 2006	$	412.1	$	139.4		$	11.6		$	---
Net earnings		---		27.9			---			27.9
Other comprehensive income (loss):
Currency translation adjustment		---		---			8.6			8.6
Pension liability adjustment		---		---			(0.1	)		(0.1	)
Comprehensive income									$	36.4
Adoption of FIN 48 (see Note F)		---		(3.2	)		---
Stock-based compensation		0.2		---			---
Balance, June 30, 2007	$	412.3	$	164.1		$	20.1

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

NORTEK, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER’S INVESTMENT

FOR THE SECOND QUARTER ENDED JUNE 28, 2008

(Dollar amounts in millions)

					Accumulated
	Additional				Other
	Paid-in		Retained		Comprehensive		Comprehensive
	Capital		Earnings		Income		Income


Balance, March 29, 2008	$	412.4	$	164.5	$	38.1	$	---
Net earnings		---		3.7		---		3.7
Other comprehensive income:
Currency translation adjustment		---		---		0.9		0.9
Comprehensive income							$	4.6
Capital contribution from parent		4.2		---		---
Stock-based compensation		0.1		---		---
Balance, June 28, 2008	$	416.7	$	168.2	$	39.0

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

NORTEK, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER’S INVESTMENT

FOR THE FIRST SIX MONTHS ENDED JUNE 28, 2008

(Dollar amounts in millions)

						Accumulated
	Additional					Other
	Paid-in		Retained			Comprehensive		Comprehensive
	Capital		Earnings			Income		Income (Loss)


Balance, December 31, 2007	$	412.4	$	168.6		$	37.7	$	---
Net loss		---		(0.4	)		---		(0.4	)
Other comprehensive income:
Currency translation adjustment		---		---			1.3		1.3
Comprehensive income								$	0.9
Capital contribution from parent		4.2		---			---
Stock-based compensation		0.1		---			---
Balance, June 28, 2008	$	416.7	$	168.2		$	39.0

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

NORTEK, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 28, 2008 AND JUNE 30, 2007

(A)

The unaudited condensed consolidated financial statements presented herein (the “Unaudited Financial Statements”) reflect the financial position, results of operations and cash flows of Nortek, Inc. (the “Company” or “Nortek”) and all of its wholly-owned subsidiaries. The Company is a wholly-owned subsidiary of Nortek Holdings, Inc., which is a wholly-owned subsidiary of NTK Holdings, Inc. (“NTK Holdings” or the “Parent Company”). The Unaudited Financial Statements include the accounts of Nortek, as appropriate, and all of its wholly-owned subsidiaries, after elimination of intercompany accounts and transactions, without audit and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair statement of the interim periods presented. Although certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted, the Company believes that the disclosures included are adequate to make the information presented not misleading. Operating results from the second quarter and first six months ended June 28, 2008 are not necessarily indicative of the results that may be expected for other interim periods or for the year ending December 31, 2008. Certain amounts in the prior year’s Unaudited Financial Statements have been reclassified to conform to the current year presentation. It is suggested that these Unaudited Financial Statements be read in conjunction with the consolidated financial statements and the notes included in the Company’s latest annual report on Form 10-K and its latest Current Reports on Form 8-K as filed with the Securities and Exchange Commission (“SEC”).

Stock-Based Compensation of Employees, Officers and Directors

The Company follows the modified-prospective transition method of accounting for stock-based compensation in accordance with SFAS No. 123R. Under the modified-prospective transition method, the Company is required to recognize compensation cost for share-based payments to employees based on their grant-date fair value. Measurement and attribution of compensation cost for awards that were granted prior to, but not vested as of the date SFAS No. 123R was adopted, are based on the same estimate of the grant-date fair value and the same attribution method used previously under SFAS No. 123.

At June 28, 2008, certain employees and consultants held approximately 23,291 C-1 units and approximately 43,811 C-2 units, which represent equity interests in THL-Nortek Investors, LLC (“Investors LLC”), the parent of NTK Holdings, that function similar to stock awards. The C-1 units vest pro rata on a quarterly basis over a three-year period and approximately 22,991 and 22,613 were vested at June 28, 2008 and December 31, 2007, respectively. The total fair value of the C-1 units is approximately $1.2 million and approximately $0.1 million remains to be amortized at June 28, 2008. The C-2 units only vest in the event that certain performance-based criteria, as defined, are met. At June 28, 2008 and December 31, 2007, there was approximately $1.6 million of unamortized stock-based employee compensation with respect to the C-2 units, which will be recognized in the event that it becomes probable that the C-2 units or any portion thereof will vest. The C-1 and C-2 units were valued using the Black-Scholes option pricing model to determine the freely-traded call option value based upon information from comparable public companies, which was then adjusted to reflect the discount period, the minority interest factor and the lack of marketability factor to arrive at the final valuations.

The Company recorded stock-based compensation charges in selling, general and administrative expense, net of approximately $0.1 million in the second quarter and first six months of 2008 and approximately $0.1 million and $0.2 million for the second quarter and first six months ended June 30, 2007, respectively, in accordance with SFAS No. 123R.

Goodwill and Other Long-Live Assets

The following table presents a summary of the activity in goodwill for the first six months ended June 28, 2008:

	(Amounts in millions)

Balance as of December 31, 2007	$	1,528.9
Purchase accounting adjustments		(7.8	)
Impact of changes in foreign currency exchange rates and other		(0.2	)
Balance as of June 28, 2008	$	1,520.9

At June 28, 2008, the Company had an approximate carrying value of Goodwill as follows:

	(Amounts in millions)
Segment:
Residential Ventilation Products	$	790.5
Home Technology Products		415.8
Air Conditioning and Heating Products *		314.6
	$	1,520.9

Primarily relates to the Residential HVAC reporting unit.

The Company has classified as goodwill the cost in excess of fair value of the net assets (including tax attributes) of companies acquired in purchase transactions (see Note C). Approximately $47.3 million of goodwill associated with certain companies acquired during the year ended December 31, 2007 will be deductible for income tax purposes. Purchase accounting adjustments relate principally to final revisions resulting from the completion of fair value adjustments and adjustments to deferred income taxes that impact goodwill.

The Company accounts for acquired goodwill and intangible assets in accordance with Statement of Financial Standards (“SFAS”) No. 141, “Business Combinations” (“SFAS No. 141”), SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”) and SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”) which involves judgment with respect to the determination of the purchase price and the valuation of the acquired assets and liabilities in order to determine the final amount of goodwill.

Under SFAS No. 142, goodwill determined to have an indefinite useful life is not amortized. Instead these assets are evaluated for impairment on an annual basis, or more frequently when an event occurs or circumstances change between annual tests that would more likely than not reduce the fair value of the reporting unit below its carrying value, including, among others, a significant adverse change in the business climate. The Company has set the annual evaluation date as of the first day of its fiscal fourth quarter. The Company has evaluated whether there have been any indicators of impairment as a result of the recent downturn in the economy, including performing a second test as of December 31, 2007, as well as various analyses through the second quarter of 2008.

The Company primarily utilizes a discounted cash flow approach in order to value the Company’s reporting units required to be tested for impairment by SFAS No. 142, which requires that the Company forecast future cash flows of the reporting units and discount the cash flow stream based upon a weighted average cost of capital that is derived from comparable companies within similar industries. The reporting units evaluated for goodwill impairment by the Company have been determined to be the same as the Company’s operating segments in accordance with the criteria in SFAS No. 142 for determining reporting units (see Note E). The discounted cash flow calculations also include a terminal value calculation that is based upon an expected long-term growth rate for the applicable reporting unit. The Company believes that its procedures for estimating gross future cash flows, including the terminal valuation, are reasonable and consistent with market conditions at the time of estimation.

Goodwill is considered to be potentially impaired when the net book value of a reporting unit exceeds its estimated fair value as determined in accordance with the Company’s valuation procedures. The Company believes that its assumptions used to determine the fair value for the respective reporting units are reasonable. If different assumptions were to be used, particularly with respect to estimating future cash flows, there could be the potential that an impairment charge could result. Actual operating results and the related cash flows of the reporting units could differ from the estimated operating results and related cash flows. Based on the Company’s estimates at June 28, 2008, the impact of reducing the Company’s fair value estimates by 10% would have no impact on the Company’s goodwill assessment for any of its reporting units, with the exception of the Company’s home technology products reporting unit (“HTP”). Assuming a 10% reduction in the Company’s fair value estimates, the carrying value of HTP may exceed its fair value, which could require the Company to perform additional testing under SFAS No. 142 to determine if there was a goodwill impairment for HTP.

In accordance with SFAS No. 144, the Company evaluates the realizability of non indefinite-lived and non-goodwill long-lived assets, which primarily consist of property and equipment and intangible assets (the “SFAS No. 144 Long-Lived Assets”), on an annual basis, or more frequently when events or business conditions warrant it, based on expectations of non-discounted future cash flows for each subsidiary having a material amount of SFAS No. 144 Long-Lived Assets.

The Company performs the evaluation as of the first day of its fiscal fourth quarter and more frequently if impairment indicators are identified, for the impairment of long-lived assets, other than goodwill, based on expectations of non-discounted future cash flows compared to the carrying value of the subsidiary in accordance with SFAS No. 144. If the sum of the expected non-discounted future cash flows is less than the carrying amount of the SFAS No. 144 Long-Lived Assets, the Company would recognize an impairment loss. The Company’s cash flow estimates are based upon historical cash flows, as well as future projected cash flows received from subsidiary management in connection with the annual Company wide planning process, and include a terminal valuation for the applicable subsidiary based upon a multiple of earnings before interest expense, net, depreciation and amortization expense and income taxes (“EBITDA”). The Company estimates the EBITDA multiple by reviewing comparable company information and other industry data. The Company believes that its procedures for estimating gross future cash flows, including the terminal valuation, are reasonable and consistent with market conditions at the time of estimation.

The Company’s businesses are currently experiencing a difficult market environment due primarily to weak residential new construction, remodeling and residential air conditioning markets and increased commodity costs, and expect these trends to continue through 2009. The Company has evaluated the carrying value of reporting unit goodwill and long-lived assets and has determined that despite the current difficult market environment, no impairment existed at the time these financial statements were completed.

Fair Value

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 was effective for the Company beginning January 1, 2008, including interim periods within the year ending December 31, 2008. SFAS No. 157 replaces multiple existing definitions of fair value with a single definition, establishes a consistent framework for measuring fair value and expands financial statement disclosures regarding fair value measurements. SFAS No. 157 applies only to fair value measurements that already are required or permitted by other accounting standards and does not require any new fair value measurements.

The adoption of SFAS No. 157 for the Company’s financial assets and liabilities in the first quarter of 2008 did not have a material impact on the Company’s financial position or results of operations. As of June 28, 2008, the Company did not have any significant financial assets or liabilities carried at fair value.

In February 2008, the FASB issued FASB Staff Position (“FSP”) SFAS No. 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Its Related Interpretive Accounting Pronouncements That Address Leasing Transactions” (“FSP No. 157-1”), and FSP SFAS No. 157-2, “Effective Date of FASB Statement No. 157” (“FSP No. 157-2”). FSP No. 157-1 removes leasing from the scope of SFAS No. 157. FSP No. 157-2 delays the effective date of SFAS No. 157 from 2008 to 2009 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).

The Company’s non-financial assets and liabilities that meet the deferral criteria set forth in FSP No 157-2 include, among others, goodwill, intangible assets, property and equipment, net and other long-term investments. The Company does not expect that the adoption of SFAS No. 157 for these non-financial assets and liabilities will have a material impact on its financial position or results of operations.

The Company also adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115” (“SFAS No. 159”) on January 1, 2008. SFAS No. 159 permits entities to choose to measure eligible assets and liabilities at fair value with changes in value recognized in earnings. Fair value treatment may be elected either upon initial recognition of an eligible asset or liability or, for an existing asset or liability, if an event triggers a new basis of accounting. The Company did not elect to re-measure any of its existing financial assets or liabilities under the provisions of SFAS No. 159, therefore, the adoption of SFAS No. 159 did not have a material impact on the Company’s financial position or results of operations.

Long-term payable to affiliate

At June 28, 2008 and December 31, 2007, the Company had approximately $39.14 million and $43.2 million, respectively, recorded on the accompanying unaudited condensed consolidated balance sheet related to a long-term payable to affiliate. This payable primarily relates to deferred taxes related to NTK Holdings which have been transferred to Nortek.

The following table presents a summary of the activity in the long-term payable to affiliate for the first six months ended June 28, 2008:

(Amounts in millions)

Balance at December 31, 2007	$	43.2
Deferred taxes transferred to Nortek		(4.1	)
Balance at June 28, 2008	$	39.1

New Accounting Pronouncements

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. SFAS No. 162 is effective sixty days following the SEC’s approval of PCAOB amendments to AU Section 411, “The Meaning of Presented Fairly in Conformity With Generally Accepted Accounting Principles”. The Company is currently evaluating the potential impact, if any, of the adoption of SFAS No. 162 on its consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosure about Derivative Instruments and Hedging Activities – An Amendment of FASB Statement No. 133 (“SFAS No. 161”). SFAS No. 161 requires additional disclosures about an entity’s derivative and hedging activities in order to improve the transparency of financial reporting. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company expects to adopt the provisions of SFAS No. 161 on January 1, 2009 and is currently evaluating the impact of adopting SFAS No. 161 on its consolidated financial statements.

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 requires that noncontrolling (or minority) interests in subsidiaries be reported in the equity section of the company’s balance sheet, rather than in a mezzanine section of the balance sheet between liabilities and equity. SFAS No. 160 also changes the manner in which the net income of the subsidiary is reported and disclosed in the controlling company’s income statement. SFAS No. 160 also establishes guidelines for accounting for changes in ownership percentages and for deconsolidation. SFAS No. 160 is effective for financial statements for fiscal years beginning on or after December 1, 2008 and interim periods within those years. The Company expects to adopt SFAS No. 160 effective January 1, 2009 and does not believe that the adoption will have a material impact on its financial position or results of operations.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) replaces SFAS No. 141, “Business Combinations”, but retains the requirement that the purchase method of accounting for acquisitions be used for all business combinations. SFAS No. 141(R) expands on the disclosures previously required by SFAS No. 141, better defines the acquirer and the acquisition date in a business combination, and establishes principles for recognizing and measuring the assets acquired (including goodwill), the liabilities assumed and any noncontrolling interests in the acquired business. SFAS No. 141(R) also requires an acquirer to record an adjustment to income tax expense for changes in valuation allowances or uncertain tax positions related to acquired businesses. SFAS No. 141(R) is effective for all business combinations with an acquisition date in the first annual period following December 15, 2008; early adoption is not permitted. The Company will adopt this statement in fiscal year 2009. Based upon current accounting principles, approximately $14.4 million of the Company’s unrecognized tax benefits as of June 28, 2008, would reduce goodwill if recognized. This amount is expected to be approximately $10.0 million at January 1, 2009, the date of adoption. Under the provisions of SFAS No. 141(R), if these amounts are recognized after December 31, 2008, they would be recorded through the Company’s tax provision and reduce the Company’s effective tax rate, rather than goodwill. The Company is currently evaluating the impact of adopting SFAS No. 141(R) on its consolidated financial statements.

(B)

On May 20, 2008, the Company sold $750.0 million of its 10% Senior Secured Notes due December 1, 2013 (the “10% Senior Secured Notes”) at a discount of approximately $7.8 million, which is being amortized over the life of the issue. Net proceeds from the sale of the 10% Senior Secured Notes, after deducting underwriting commissions and expenses, amounted to approximately $721.7 million. The 10% Senior Secured Notes, which are guaranteed on a senior secured basis by substantially all of the Company’s subsidiaries located in the United States, were issued and sold in a private Rule 144A offering to institutional investors. On August 11, 2008, the Company filed a registration statement with the SEC to exchange the 10% Senior Secured Notes for registered notes.

Interest on the 10% Senior Secured Notes accrues at the rate of 10% per annum and is payable semi-annually in arrears on June 1 and December 1, commencing on December 1, 2008, until maturity. Interest on the 10% Senior Secured Notes accrues from the date of original issuance or, if interest has already been paid, from the date it was most recently paid. Interest is computed on the basis of a 360-day year comprised of twelve 30-day months.

Prior to June 1, 2011, the Company may redeem up to 35% of the aggregate principal amount of the 10% Senior Secured Notes with the net cash proceeds from certain equity offerings at a redemption price of 110.0% plus accrued and unpaid interest, provided that at least 65% of the original aggregate principal amount of the 10% Senior Secured Notes remains outstanding after the redemption. After June 1, 2011 the 10% Senior Secured Notes are redeemable at the option of the Company, in whole or in part, at any time and from time to time, on or after June 1, 2011 at 105.0%, declining to 102.5% on June 1, 2012 and further declining to 100.0% on June 1, 2013. In addition, the 10% Senior Secured Notes contain a call provision whereby not more than once during any twelve-month period the Company may redeem the 10% Senior Secured Notes at a redemption price equal to 103.0% plus accrued and unpaid interest, provided that the aggregate amount of these redemptions does not exceed $75.0 million.

The 10% Senior Secured Notes are secured by a first-priority lien on substantially all of the Company’s and its domestic subsidiaries’ tangible and intangible assets, except those assets securing the Company’s new five-year $350.0 million senior secured asset-based revolving credit facility (the “ABL Facility”) on a first-priority basis. The 10% Senior Secured Notes have a second-priority lien on the ABL Facility’s first-priority collateral and rank equally with all existing and future senior secured indebtedness of the Company. If the Company experiences a change in control, each holder of the notes will have the right to require the Company to purchase the notes at a price equal to 101% of the principal amount thereof. In addition, a change of control may constitute an event of default under the Company’s new ABL Facility and would also require the Company to offer to purchase its 8 1/2% senior subordinated notes at 101% of the principal amount thereof, together with accrued and unpaid interest.

The indenture governing the 10% Senior Secured Notes contains certain restrictive financial and operating covenants including covenants that restrict, among other things, the payment of cash dividends, the incurrence of additional indebtedness, the making of certain investments, mergers, consolidations and sale of assets (all as defined in the indenture and other agreements).

In connection with the offering of the 10% Senior Secured Notes, the Company also entered into the ABL Facility, of which $50.0 million was drawn at closing and approximately $35.0 million remains outstanding at June 28, 2008. The Company incurred fees and expenses of approximately $11.2 million, which are being recognized as non-cash interest expense over the term of the ABL Facility. The ABL Facility replaced the Company’s existing $200.0 million revolving credit facility that was to mature on August 27, 2010 and consists of a $330.0 million U.S. Facility (with a $60.0 million sublimit for the issuance of U.S. standby letters of credit and a $20.0 million sublimit for U.S. swingline loans) and a $20.0 million Canadian Facility.

There are limitations on the Company’s ability to incur the full $350.0 million of commitments under the ABL Facility. Availability is limited to the lesser of the borrowing base and $350.0 million, and the covenants under the 8 1/2% senior subordinated notes do not currently allow the Company to incur up to the full $350.0 million. The borrowing base at any time will equal the sum (subject to certain reserves and other adjustments) of:

·	85% of the net amount of eligible accounts receivable;

·	85% of the net orderly liquidation value of eligible inventory; and

·	available cash subject to certain limitations as specified in the ABL Facility.

The interest rates applicable to loans under the Company’s ABL Facility are, at the Company’s option, equal to either an adjusted LIBOR rate for a one, two, three or six month interest period (or a nine or twelve month period, if available) or an alternate base rate chosen by the Company, plus an applicable margin percentage. The alternate base rate will be the greater of (1) the prime rate or (2) the Federal Funds rate plus 0.50% plus the applicable margin, which is determined based upon the average excess borrowing availability for the previous fiscal quarter. Interest shall be payable at the end of the selected interest period, but no less frequently than quarterly.

If at any time the aggregate amount of outstanding loans, unreimbursed letter of credit drawings and undrawn letters of credit under the Company’s ABL Facility exceeds the lesser of (i) the commitment amount and (ii) the borrowing base, the Company will be required to repay outstanding loans and cash collateralize letters of credit in an aggregate amount equal to such excess, with no reduction of the commitment amount. If the amount available under the Company’s ABL Facility is less than 15% of the lesser of the commitment amount or the borrowing base or an event of default has occurred, the Company will be required to deposit cash from its material deposit accounts (including all concentration accounts) daily in a collection account maintained with the administrative agent under the Company’s ABL Facility, which will be used to repay outstanding loans and cash collateralize letters of credit. Additionally, the Company’s ABL Facility requires that if excess availability (as defined) is less than the greater of $40.0 million and 12.5% of the borrowing base, the Company will comply with a minimum