UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

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

Commission file number: 1-14315

NCI BUILDING SYSTEMS, INC.

Delaware (State or other jurisdiction of incorporation or organization)		76-0127701 (I.R.S. Employer Identification No.)
10943 N. Sam Houston Parkway W. Houston, TX (Address of principal executive offices)		77064 (Zip 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. þ Yes o No

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

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.

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

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

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, $.01 par value—19,566,547 shares as of September 3, 2010

 

 

TABLE OF CONTENTS

		PAGE
Part I — Financial Information
Item 1. Unaudited Consolidated Financial Statements			3
Consolidated Balance Sheets August 1, 2010 and November 1, 2009			3
Consolidated Statements of Operations Fiscal Three and Nine Month Periods Ended August 1, 2010 and August 2, 2009			4
Consolidated Statements of Cash Flows Fiscal Nine Months Ended August 1, 2010 and August 2, 2009			5
Notes to Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			30
Item 3. Quantitative and Qualitative Disclosures About Market Risk			47
Item 4. Controls and Procedures			50
Part II — Other Information
Item 1. Legal Proceedings			51
Item 1A. Risk Factors			51
Item 6. Exhibits			51
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

Item 1.		Unaudited Consolidated Financial Statements.

NCI BUILDING SYSTEMS, INC.

(In thousands, except share data)
(2009 As Adjusted (Note 2))

		August 1,				November 1,
		2010				2009
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	53,643			$	90,419
Restricted cash, current			2,838				5,154
Accounts receivable, net			81,834				82,889
Inventories, net			105,311				71,537
Deferred income taxes			19,428				18,787
Income tax receivable			13,523				27,622
Investments in debt and equity securities, at market			3,500				3,359
Prepaid expenses and other			13,550				14,494
Assets held for sale			6,304				4,963
Total current assets			299,931				319,224
Property, plant and equipment, net			219,202				232,510
Goodwill			5,200				5,200
Intangible assets, net			26,827				28,370
Restricted cash, net of current portion			—				7,825
Other assets			17,420				21,389
Total assets		$	568,580			$	614,518
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt		$	––			$	14,164
Note payable			723				481
Accounts payable			71,728				71,252
Accrued compensation and benefits			30,917				37,215
Accrued interest			1,621				776
Other accrued expenses			46,397				54,797
Total current liabilities			151,386				178,685
Long-term debt			136,301				136,085
Deferred income taxes			18,749				18,848
Other long-term liabilities			7,077				8,007
Total long-term liabilities			162,127				162,940
Series B cumulative convertible participating preferred stock			247,993				222,815
Stockholders’ equity:
Common stock, $.01 par value, 100,000,000 shares authorized; 19,566,547 and 18,082,029 issued and outstanding			909				904
Additional paid-in capital			266,326				288,093
Accumulated deficit			(251,501	)			(230,060	)
Accumulated other comprehensive loss			(8,660	)			(8,859	)
Total stockholders’ equity			7,074				50,078
Total liabilities and stockholders’ equity		$	568,580			$	614,518

See accompanying notes to consolidated financial statements.

NCI BUILDING SYSTEMS, INC.

(In thousands, except per share data)
(Unaudited)
(2009 As Adjusted (Note 2))

		Fiscal Three Months Ended								Fiscal Nine Months Ended
		August 1,				August 2,				August 1,				August 2,
		2010				2009				2010				2009
Sales		$	245,292			$	237,860			$	629,072			$	721,944
Cost of sales, excluding lower of cost or market adjustment and asset impairments (recovery)			194,999				176,565				504,765				566,053
Lower of cost or market adjustment			—				––				—				39,986
Asset impairments (recovery)			(64	)			26				849				5,944
Gross profit			50,357				61,269				123,458				109,961
Selling, general and administrative expenses			48,730				49,829				142,367				159,533
Goodwill and other intangible asset impairment			—				––				—				622,564
Restructuring charge			551				1,213				1,904				7,488
Income (loss) from operations			1,076				10,227				(20,813	)			(679,624	)
Interest income			32				81				69				360
Interest expense			(4,424	)			(6,568	)			(13,638	)			(19,638	)
Debt extinguishment and refinancing costs			—				(401	)			(174	)			(1,030	)
Other income (expense), net			(204	)			1,093				1,579				1,569
Income (loss) before income taxes			(3,520	)			4,432				(32,977	)			(698,363	)
Provision (benefit) for income taxes			(221	)			1,825				(11,536	)			(49,418	)
Net income (loss)		$	(3,299	)		$	2,607			$	(21,441	)		$	(648,945	)
Convertible preferred stock dividends and accretion			8,637				—				25,178				—
Convertible preferred stock beneficial conversion feature			4,583				—				246,052				—
Net income (loss) applicable to common shares		$	(16,519	)		$	2,607			$	(292,671	)		$	(648,945	)
Earnings (loss) per share:
Basic		$	(0.90	)		$	0.65			$	(16.10	)		$	(166.67	)
Diluted		$	(0.90	)		$	0.65			$	(16.10	)		$	(166.67	)
Weighted average number of common shares outstanding:
Basic			18,274				3,899				18,184				3,894
Diluted			18,274				3,899				18,184				3,894

See accompanying notes to consolidated financial statements.

NCI BUILDING SYSTEMS, INC.

(In thousands)
(Unaudited)
(2009 As Adjusted (Note 2))

		Fiscal Nine Months Ended
		August 1,				August 2,
		2010				2009
Cash flows from operating activities:
Net loss		$	(21,441	)		$	(648,945	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization			26,017				25,298
Non-cash interest expense on Convertible Notes			—				6,297
Share-based compensation expense			3,578				3,789
Debt extinguishment and refinancing costs			174				1,030
Gain on embedded derivative			(930	)			—
(Gain) loss on sale of property, plant and equipment			138				(771	)
Lower of cost or market reserve			—				39,986
Provision for doubtful accounts			131				1,224
Benefit for deferred income taxes			(580	)			(24,576	)
Asset impairments, net			849				5,944
Impairment of goodwill and intangible assets			—				622,564
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable			924				81,080
Inventories			(33,774	)			75,321
Income tax receivable			15,016				(26,590	)
Prepaid expenses and other			1,424				(1,662	)
Accounts payable			649				(35,036	)
Accrued expenses			(13,868	)			(48,550	)
Other, net			948				(803	)
Net cash (used in) provided by operating activities			(20,745	)			75,600
Cash flows from investing activities:
Capital expenditures			(11,258	)			(17,877	)
Proceeds from sale of property, plant and equipment			760				537
Net cash used in investing activities			(10,498	)			(17,340	)
Cash flows from financing activities:
Decrease (increase) in restricted cash			10,141				(13,224	)
Proceeds from ABL Facility			241				—
Payments on ABL Facility			(246	)			—
Payment of convertible notes			(59	)			—
Payments on long-term debt			(13,885	)			(690	)
Payment of refinancing costs			(50	)			(5,513	)
Payments on note payable			(1,289	)			(1,213	)
Proceeds from stock options exercised			—				12
Purchase of treasury stock			(381	)			(451	)
Net cash (used in) provided by financing activities			(5,528	)			(21,079	)
Effect of exchange rate changes on cash and cash equivalents			(5	)			(6	)
Net (decrease) increase in cash and cash equivalents			(36,776	)			37,175
Cash and cash equivalents at beginning of period			90,419				68,201
Cash and cash equivalents at end of period		$	53,643			$	105,376

See accompanying notes to consolidated financial statements.

NCI BUILDING SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 1, 2010
(Unaudited)
(2009 As Adjusted (Note 2))

NOTE 1 — BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements for NCI Building Systems, Inc. and its subsidiaries (the “Company,” “we,” “us,” and “our”) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, which consist of normal recurring entries except as otherwise disclosed, necessary for a fair presentation have been made. Operating results for the fiscal three and nine month periods ended August 1, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending October 31, 2010. Our sales and earnings are subject to both seasonal and cyclical trends and are influenced by general economic conditions, interest rates, the price of steel relative to other building materials, the level of nonresidential construction activity, roof repair and retrofit demand and the availability and cost of financing for construction projects.

On March 5, 2010, the Company effected a reverse stock split in which each five shares of the Company’s common stock, par value $0.01 (the “Common Stock” and shares thereof, the “Common Shares”), was reclassified and combined into one share of Common Stock (the “Reverse Stock Split”). As such, we have retrospectively adjusted basic and diluted earnings per share, Common Stock, stock options, Common Stock equivalents and prices per share information for the Reverse Stock Split in all periods presented.

We use a four-four-five week calendar each quarter with year end on the Sunday closest to October 31. The year end for fiscal 2010 is October 31, 2010.

Certain reclassifications have been made to prior period amounts in our consolidated balance sheets and consolidated statements of income to conform to the current presentation. These reclassifications were the result of further integration of Robertson-Ceco II Corporation (“RCC”) and the rationalization of our operations. The net effect of these reclassifications was not material to our consolidated financial statements.

For further information, refer to the consolidated financial statements and footnotes thereto included in our Current Report on Form 8-K dated April 23, 2010 for the fiscal year ended November 1, 2009 filed with the Securities and Exchange Commission (the “SEC”).

NOTE 2 — ACCOUNTING PRONOUNCEMENTS

Adopted Accounting Pronouncements

Debt with Conversion and Other Options and Earnings per Share Adoption

On November 2, 2009, we adopted ASC Subtopic 470-20, Debt with Conversion and Other Options, which clarifies the accounting for convertible debt instruments that may be settled entirely or partially in cash upon conversion. This standard has been applied retrospectively to fiscal years 2005 through 2009 as it relates to our now retired 2.125% Convertible Senior Subordinated Notes (the “Convertible Notes”). This standard changed the accounting for certain convertible debt instruments, including our Convertible Notes. Under the new rules, an entity shall separately account for the liability and equity components of the instrument in a manner that reflects the issuer’s economic interest cost or the issuer’s nonconvertible debt (unsecured debt) borrowing rate when interest cost is recognized. This results in the bifurcation of a component of the debt, classification of that component in equity and the accretion of the resulting discount on the debt to be recognized as part of interest expense. Once adopted, this standard requires retrospective application to the terms of the instrument as it existed for all periods presented.

The effect of this standard for our Convertible Notes is that the equity component has been included in the paid-in-capital section of stockholders’ equity on our consolidated balance sheet and the value of the equity component is treated as an original issue discount for purposes of accounting for the debt component of the Convertible Notes. Higher interest expense is recorded by recognizing the

accretion of the discounted carrying value of the Convertible Notes to their face amount as interest expense over the term of the Convertible Notes using an effective interest rate method. Income taxes have been recorded on the foregoing adjustments. While this accounting pronouncement does not change the economic substance or cash flow requirements for the Convertible Notes, the amount reported as interest expense in our historical consolidated statement of operations increased due to the accretion of the discounted carrying value of the Convertible Notes to their face amount. The impact of adopting this standard has resulted in the reported interest expense on our Convertible Notes increasing from 2.125% to 7.5%. See Note 10 — Debt and Note Payable.

We capitalize interest on capital invested in projects in accordance with Financial Accounting Standards Board (“FASB”) guidance codified under ASC Topic 835, Interest. As a result of adopting ASC Subtopic 470-20, Debt with Conversion and Other Options, capitalized interest for fiscal 2009 increased by $0.2 million. Upon commencement of the asset’s operations, capitalized interest, as a component of the total cost of the asset, is amortized over the estimated useful life of the asset.

In June 2008, the FASB issued guidance that has been codified under ASC Subtopic 260-10, Earnings per Share. This pronouncement provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are “participating securities” and, therefore, should be included in computing earnings per share using the two-class method. We adopted this standard on November 2, 2009. All prior period earnings per share data have been adjusted retrospectively to conform to the provisions of this pronouncement. See Note 8 — Earnings Per Common Share.

The following table sets forth the effect of the retrospective application of the Debt with Conversion and Other Options guidance and the Earnings per Share guidance on certain line items of our consolidated financial statements (in thousands, except per share data):

Consolidated Statements of Operations:

		Fiscal Three Months Ended								Fiscal Nine Months Ended
		August 2, 2009								August 2, 2009
		Originally				As				Originally				As
		Reported				Adjusted				Reported				Adjusted
Cost of sales, excluding lower of cost or market adjustment and asset impairments		$	177,333			$	176,565			$	568,773			$	566,053
Gross profit			61,080				61,269				108,819				109,961
Selling, general and administrative expenses			49,603				49,829				158,564				159,533
Income (loss) from operations			10,264				10,227				(679,797	)			(679,624	)
Interest expense			(4,369	)			(6,568	)			(13,029	)			(19,638	)
Income (loss) before income taxes			6,646				4,432				(691,709	)			(698,363	)
Provision (benefit) for income taxes			2,675				1,825				(46,863	)			(49,418	)
Net income (loss)			3,971				2,607				(644,846	)			(648,945	)
Net income (loss) applicable to common shares		$	3,971			$	2,607			$	(644,846	)		$	(648,945	)
Earnings (loss) per share:
Basic			1.02				0.65				(165.62	)			(166.67	)
Diluted			1.02				0.65				(165.62	)			(166.67	)
Weighted average number of common shares outstanding:
Basic			3,899				3,899				3,894				3,894
Diluted			3,899				3,899				3,894				3,894

Consolidated Balance Sheets:

		November 1, 2009
		Originally				As
		Reported				Adjusted
Property, plant and equipment, net		$	231,840			$	232,510
Total assets			613,848				614,518
Deferred income tax liability			18,591				18,848
Total long-term liabilities			162,683				162,940
Additional paid-in capital			263,620				288,093
Retained earnings			(206,000	)			(230,060	)
Total stockholders’ equity			49,665				50,078
Total liabilities and stockholders’ equity			613,848				614,518

Fair Value Measurements and Disclosures Adoption

In September 2006, the FASB issued guidance that has been codified under ASC Subtopic 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”). This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. We adopted this standard on November 3, 2008 for financial assets and financial liabilities carried at fair value and non-financial assets and liabilities that are recognized or disclosed at fair value on a recurring basis. The adoption of this standard did not have a material impact on our consolidated financial statements. See Note 13 — Fair Value of Financial Instruments and Fair Value Measurements.

In February 2008, the FASB issued additional guidance codified under ASC 820-10. This additional guidance partially delayed the effective date for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We adopted the additional guidance in this standard on November 2, 2009 for nonrecurring, non-financial assets and liabilities that are recognized or disclosed at fair value. The adoption of this standard did not have a material impact on our consolidated financial statements. See Note 13 — Fair Value of Financial Instruments and Fair Value Measurements.

Multiple-Deliverable Revenue Arrangements Adoption

In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements — a consensus of the FASB Emerging Issues Task Force, which provides guidance on whether multiple deliverables exist, how the arrangement should be separated and the consideration allocated. This update requires an entity to allocate revenue in an arrangement using estimated selling prices of deliverables if a vendor does not have vendor-specific objective evidence or third-party evidence of selling price. This update is effective for the first annual reporting period beginning on or after June 15, 2010 and may be applied retrospectively for all periods presented or prospectively to arrangements entered into or materially modified after the adoption date. Early adoption is permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption. We early adopted this update on November 2, 2009. The adoption of this update did not have a material impact on our consolidated financial statements.

Improving Disclosures about Fair Value Measurements Adoption

In January 2010, the FASB issued ASU No. 2010-06, Improving Disclosures about Fair Value Measurements. This update amends FASB ASU 820-10-50 to require new disclosures concerning (1) transfers into and out of Levels 1 and 2 of the fair value measurement hierarchy, and (2) activity in Level 3 measurements. In addition, this update clarifies certain existing disclosure requirements regarding the level of disaggregation and inputs and valuation techniques. Finally, this update makes conforming amendments to the guidance on employers’ disclosures about postretirement benefit plan assets. We adopted this update on May 2, 2010, except for the requirement to separately disclose activity in Level 3 measurements which is effective for our fiscal year ended October 28, 2012. With the exception of additional fair value measurement disclosures, the adoption of this update did not have a material impact on our consolidated financial statements. See Note 13 — Fair Value of Financial Instruments and Fair Value Measurements.

Recent Accounting Pronouncements

In December 2008, the FASB issued guidance that has been codified under ASC Subtopic 715-20, Defined Benefit Plans — General. This standard provides guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The disclosures about plan assets required by this standard are effective for our 2010 fiscal year and are not required for earlier periods presented for comparative purposes. We will adopt the disclosure provisions required by this standard in our consolidated financial statements as of and for the period ended October 31, 2010.

NOTE 3 — PLANT RESTRUCTURING AND ASSET IMPAIRMENT

As a result of the market downturn which began in fiscal 2008, we implemented a phased process to resize and realign our manufacturing operations. The purpose of these activities was to close some of our least efficient facilities and to retool certain of these facilities to

allow us to better utilize our assets and expand into new markets or better provide products to our customers, such as insulated panel systems.

In November 2008, we approved the Phase I plan to close three of our engineered building systems manufacturing plants and retool one of these facilities. In addition, as part of the Phase I restructuring, we implemented a general employee reduction program (“General”). In a continuing effort to rationalize our least efficient facilities, in February 2009, we approved the Phase II plan to close one of our facilities within the engineered building systems segment, and in April 2009, we approved the Phase III plan to close or idle three of our manufacturing facilities within the engineered building systems segment and two facilities within the metal components segment. In addition, manufacturing at one of our metal components facilities was temporarily suspended and the facility currently functions as a distribution and customer service site. As part of the Phase III plan, we also increased General. As a result of actions taken in our restructuring, certain facilities are being actively marketed for sale and in the fourth quarter of fiscal 2009 were classified as held for sale in the Consolidated Balance Sheet. During the first quarter of fiscal 2010, we recorded an additional $1.0 million impairment for the Lockeford facility which is one of the facilities classified as held for sale as a result of deteriorating market conditions.

The following table summarizes our restructuring plan costs and charges related to the General, Phase I, Phase II and Phase III restructuring plans during each of the periods presented (in thousands):

										Fiscal Three Months Ended
																						Cost				Remaining				Total
																						Incurred				Anticipated				Anticipated
		Fiscal 2008				Fiscal 2009				January 31, 2010				May 2, 2010				August 1, 2010				to Date				Cost				Cost
General
Severance		$	87			$	2,987			$	2			$	16			$	—			$	3,092			$	—			$	3,092
Asset Relocation			—				—				—				—				—				—				—				—
Other Cash Costs			—				57				23				50				15				145				—				145
Asset Impairments (Recovery)			—				1,234				—				4				—				1,238				—				1,238
Total General Program			87				4,278				25				70				15				4,475				—				4,475
Repurposing and Plant Closing Phase I
Severance		$	106			$	1,016			$	58			$	—			$	44			$	1,224			$	—			$	1,224
Asset Relocation			—				303				—				—				—				303				—				303
Other Cash Costs			—				199				122				80				83				484				47				531
Asset Impairments (Recovery)			157				1,634				1,029				—				(58	)			2,762				—				2,762
Total Repurposing and Plant Closing Phase I			263				3,152				1,209				80				69				4,773				47				4,820
Plant Closing Phase II
Severance		$	—			$	399			$	—			$	—			$	—			$	399			$	—			$	399
Asset Relocation			—				22				—				—				—				22				—				22
Other Cash Costs			—				442				—				—				—				442				—				442
Asset Impairments (Recovery)			—				30				—				—				—				30				—				30
Total Plant Closing Phase II			—				893				—				—				—				893				—				893
Plant Closing Phase III
Severance		$	—			$	2,349			$	10			$	—			$	—			$	2,359			$	—			$	2,359
Asset Relocation			—				219				—				26				—				245				122				367
Other Cash Costs			—				1,060				309				662				409				2,440				301				2,741
Asset Impairments (Recovery)			—				3,393				—				(120	)			(5	)			3,268				—				3,268
Total Plant Closing Phase III			—				7,021				319				568				404				8,312				423				8,735
Total All Programs		$	350			$	15,344			$	1,553			$	718			$	488			$	18,453			$	470			$	18,923
Restructuring by Segment
Engineered Building Systems			61				7,522				415				673				401				9,072				317				9,389
Metal Components			106				1,216				109				156				150				1,737				153				1,890
Metal Coil Coating			—				103				—				—				—				103				—				103
Corporate			27				211				—				—				—				238				—				238
Total		$	194			$	9,052			$	524			$	829			$	551			$	11,150			$	470			$	11,620
Asset Impairments (Recovery) by Segment(1)
Engineered Building Systems			157				4,316				1,029				(120	)			15				5,397				—				5,397
Metal Components			—				766				—				4				(78	)			692				—				692
Metal Coil Coating			—				—				—				—				—				—				—				—
Corporate			—				1,209				—				—				—				1,209				—				1,209
Total		$	157			$	6,291			$	1,029			$	(116	)		$	(63	)		$	7,298			$	—			$	7,298

The following table summarizes our restructuring liability related to the General, Phase I, Phase II and Phase III restructuring plans (in thousands):

		Employee or
		severance
		costs				Other costs				Total
Balance at November 1, 2009		$	1,387			$	—			$	1,387
Costs incurred			130				1,774				1,904
Cash payments			(1,406	)			(1,774	)			(3,180	)
Other adjustments (1)			17				—				17
Balance at August 1, 2010		$	128			$	—			$	128

On February 27, 2009, our 401(k) profit sharing plan (“Savings Plan”) was amended, effective January 1, 2009, to make the matching contributions fully discretionary and future contributions temporarily suspended. Additional amounts may be contributed depending upon our annual return on assets.

NOTE 4 — RESTRICTED CASH

On May 21, 2009, we entered into a cash collateral agreement with our agent bank to obtain letters of credit secured by cash collateral. The restricted cash is invested in a cash bank account securing our agent bank. As of August 1, 2010, we had restricted cash in the amount of $2.8 million as collateral related to our $2.7 million of letters of credit. Restricted cash is classified as current as the underlying letters of credit expire prior to September 2010. The letters of credit have either automatically renewed or will be renewed upon expiration.

NOTE 5 — INVENTORIES

The components of inventory are as follows (in thousands):

		August 1, 2010				November 1, 2009
Raw materials		$	74,839			$	48,081
Work in process and finished goods			30,472				23,456
		$	105,311			$	71,537

In the nine month period ended August 2, 2009, we recorded a raw material inventory adjustment to adjust our inventory to the lower of cost or market in the amount of $(40.0) million because our inventory on hand at that time exceeded our estimated net realizable value less normal profit margins. All inventory with a lower of cost or market adjustment was fully utilized by July 2009.

NOTE 6 — GOODWILL AND OTHER INTANGIBLE ASSETS

Our goodwill balance and changes in the carrying amount of goodwill by operating segment are as follows (in thousands):

		Metal								Engineered
		Coil				Metal				Building
		Coating				Components				Systems				Total
Balance as of November 2, 2008		$	98,959			$	147,240			$	370,427			$	616,626
Impairments			(59,854	)			(116,132	)			(332,904	)			(508,890	)
Balance as of February 1, 2009		$	39,105			$	31,108			$	37,523			$	107,736
Impairments			(39,105	)			(31,108	)			(32,323	)			(102,536	)
Balance as of August 1, 2010, November 1, 2009 and August 2, 2009		$	—			$	—			$	5,200			$	5,200

Based on lower than projected sales volumes in the first quarter of fiscal 2009 and due to a revised lower outlook for nonresidential construction activity in 2009, management reduced the Company’s cash flow projections for fiscal year 2009. We concluded that this reduction was an impairment indicator requiring us to perform an interim goodwill impairment test for each of our six reporting units as of February 1, 2009. As a result of this impairment indicator, we updated the first step of our goodwill impairment test in the first quarter of fiscal 2009. The first step of our goodwill impairment test determines fair value of the reporting unit based on a blend of estimated discounted cash flows, publicly traded company multiples and acquisition multiples reconciled to our recent publicly traded stock price, including a reasonable control premium. The result from this model was then weighted and combined into a single estimate of fair value. We determined that our carrying value exceeded our fair value at most of our reporting units in each of our operating segments, indicating that goodwill was potentially impaired. As a result, we initiated the second step of the goodwill impairment test, which involves calculating the implied fair value of our goodwill by allocating the fair value of the reporting unit to all assets and liabilities other than goodwill and comparing it to the carrying amount of goodwill. The fair value of each of the reporting unit’s assets and liabilities were determined based on a combination of prices of comparable businesses and present value techniques.

As of February 1, 2009, we estimated the market implied fair value of our goodwill was less than its carrying value by approximately $508.9 million, which was recorded as a goodwill impairment charge in the first quarter of fiscal 2009. This charge was an estimate based on the result of the preliminary allocation of fair value in the second step of the goodwill impairment test. However, due to the timing and complexity of the valuation calculations required under the second step of the test, we were not able to finalize our allocation of the fair value until the second quarter of fiscal 2009 with regard to property, plant and equipment and intangible assets in which their respective values are dependent on property, plant and equipment. This finalization was included in our goodwill impairment charge of $102.5 million that was recorded in the second quarter of fiscal 2009 as discussed further below.

Further declines in cash flow projections and the corresponding implementation of the Phase III restructuring plan caused management to determine that there was an indicator requiring us to perform another interim goodwill impairment test for each of our reporting units with goodwill remaining as of May 3, 2009. As a result of this impairment indicator, we again performed the first step of our goodwill impairment test in the second quarter of fiscal 2009. The results showed that our carrying value exceeded our fair value at most of our reporting units with goodwill remaining, indicating that goodwill was potentially impaired. We therefore initiated the second step of the goodwill impairment test. As of May 3, 2009, we determined the market implied fair value of our goodwill was less than the carrying value for certain reporting units by approximately $102.5 million, which was recorded as a goodwill impairment charge in the second quarter of fiscal 2009. As of August 1, 2010 and November 1, 2009, the remaining goodwill was $5.2 million.

As a result of the aforementioned goodwill impairment indicators and in accordance with ASC Subtopic 350-20, we performed an impairment analysis on our indefinite lived intangible asset related to tradenames of our subsidiary, RCC in our engineered building systems segment to determine the fair value in the first and second quarters of fiscal year 2009. Based on changes to our projected cash flows in the first quarter of fiscal 2009 and based on the lower projected cash flows and the related Phase III restructuring plan in the second quarter of fiscal 2009, we determined the carrying value exceeded the future fair value attributable to the indefinite lived intangible asset, and therefore we recorded impairment charges of $8.7 million in the first quarter of fiscal 2009 and $2.4 million in the second quarter of fiscal 2009 related to the indefinite lived intangible asset.

NOTE 7 — SHARE-BASED COMPENSATION

Our 2003 Long-Term Stock Incentive Plan (“Incentive Plan”) is an equity-based compensation plan that allows us to grant a variety of types of awards, including stock options, restricted stock, restricted stock units, stock appreciation rights, performance share awards, phantom stock awards and cash awards. On December 11, 2009, our board of directors approved the right of employees and officers to receive grants of 1.5 million shares of restricted stock and the right of officers to receive grants of 1.8 million stock options, both of which were conditioned upon shareholder approval. Our majority stockholder, had informed the Company in writing of its intention to vote in favor of the amendment and restatement of the Incentive Plan. Based on the approval of our board of directors and our majority stockholder, we determined that the finalization of stockholder vote to approve the amendment and restatement of the Incentive Plan was perfunctory and we established a grant date of December 11, 2009 for the restricted stock and stock option awards. As discussed in Note 11 — Series B Cumulative Convertible Participating Preferred Stock, at January 31, 2010, the Company did not have sufficient common shares available to settle the restricted stock and stock option awards, and thus, we classified a portion of the awards as liability awards in accordance with ASC Subtopic 718-10, Compensation-Stock Compensation (“ASC 718-10”). ASC 718-10 requires that liability

awards be remeasured at fair value at each reporting date with changes in fair value recognized in earnings. For the nine month period ended August 1, 2010, the changes in fair value were immaterial. On March 5, 2010, the Company effected a Reverse Stock Split at an exchange ratio of 1-for-5 which caused the shares to become available and resulted in all restricted stock and stock option awards being classified as equity awards. As such, on March 5, 2010, all liability awards were reclassified to equity awards and remeasured using a valuation date of March 5, 2010. The total unrecognized compensation cost related to the share-based compensation arrangements reclassified from liability awards to equity awards was $9.9 million.

During the first quarter of fiscal 2010, our board of directors unanimously adopted a resolution to submit to a vote of our stockholders a proposal to approve an amendment and restatement of our Incentive Plan to increase the number of shares of Common Stock reserved for issuance under the Incentive Plan by 5.7 million shares of Common Stock (after giving effect to the Reverse Stock Split). On February 19, 2010, the stockholders approved the amendment and restatement of the Company’s Incentive Plan. The amendment and restatement of the Incentive Plan increased the number of Common Shares reserved for issuance under the Incentive Plan by 5.7 million to a total of 6.4 million Common Shares (in each case, after giving effect to the Reverse Stock Split), increased the maximum number of shares that may be granted to an individual in any fiscal year to 0.9 million and extended the effective date of the Incentive Plan to 10 years after the date the Compensation Committee of the Company’s board of directors approved the amendments.

As of August 1, 2010, and for all periods presented, our share-based awards under this plan have consisted of restricted stock grants and stock option grants, neither of which can be settled through cash payments. Both our stock options and restricted stock awards contain only service condition requirements and typically vest over four years, although from time to time certain individuals have received special one-time restricted stock awards that vest at retirement, upon a change of control or on termination without cause or for good reason, as defined by the agreements governing such awards. In addition, our December 11, 2009 stock option grants contain restrictions on the employees’ ability to exercise and sell the options prior to January 1, 2013, or if earlier, the employees’ death, disability, or qualifying termination (as defined in the Incentive Plan), or upon a change in control of the Company.

The fair value of each option award is estimated as of the date of grant or the remeasurement date using a Black-Scholes-Merton option pricing formula. Expected volatility is based on normalized historical volatility of our stock over a preceding period commensurate with the expected term of the option and adjusted to exclude the increased volatility associated with the refinancing the Company experienced in fiscal 2009 because this volatility is not relevant to the expected future volatility of the stock. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected dividend yield was not considered in the option pricing formula since we do not currently pay dividends on our Common Stock and have no current plans to do so in the future.

The weighted average assumptions for the equity awards granted on December 11, 2009 are noted in the following table:

Expected volatility			46.05	%
Expected term (in years)			5.75
Risk-free interest rate			2.44	%

The weighted average assumptions for the liability awards at the December 11, 2009 grant date and the subsequent reclassification to equity awards remeasured on March 5, 2010 are noted in the following table:

		December 11, 2009				March 5, 2010
Expected volatility			46.05	%			47.01	%
Expected term (in years)			5.75				5.52
Risk-free interest rate			2.44	%			2.49	%

The weighted average grant-date fair value of options granted during the nine month period ended August 1, 2010 was $4.29. There were no options granted during the three month period ended August 1, 2010.

The following is a summary of stock option transactions during the nine months ended August 1, 2010 (in thousands, except weighted average exercise prices and weighted average remaining life):

						Weighted				Weighted
						Average				Average				Aggregate
		Number of				Exercise				Remaining				Intrinsic
		Shares				Price				Life				Value
Balance November 1, 2009			130			$	140.65
Granted			1,782				8.85
Cancelled			(10	)			(113.26	)
Exercised			—				—
Balance August 1, 2010			1,902			$	17.33			9.0 years				$	1,105
Exercisable at August 1, 2010			120			$	142.96			3.6 years					—

There were no options exercised during the first nine months of fiscal 2010. The following summarizes additional information concerning outstanding options at August 1, 2010 (in thousands, except weighted average remaining life and weighted average exercise prices):

Options Outstanding
				Weighted Average				Weighted Average
Number of Options				Remaining Life				Exercise Price
	1,803			9.3 years				$	9.76
	43			3.6 years					136.32
	48			4.1 years					161.68
	8			5.4 years					225.21
	1,902			9.0 years				$	17.33

The following summarizes additional information concerning options exercisable at August 1, 2010 (in thousands, except weighted average exercise prices):

Options Exercisable
				Weighted Average
Number of Options				Exercise Price
	22			$	84.55
	43				136.32
	48				161.67
	7				225.22
	120			$	142.96

The fair value of restricted stock awards classified as equity awards is based on the Company’s stock price as of the date of grant. The fair value of restricted stock awards previously classified as liability awards on March 5, 2010 is based on the Company’s stock price as of March 5, 2010, the date the contingency was resolved. In addition, certain of our December 11, 2009 restricted stock grants contain restrictions on the employees’ ability to sell their shares prior to January 1, 2013, or if earlier, the employees’ death, disability, or qualifying termination (as defined in the Incentive Plan), or upon a change in control of the Company. Restricted stock transactions during the nine months ended August 1, 2010 were as follows (in thousands, except weighted average grant prices):
						Weighted Average
		Number of Shares				Grant Price
Balance November 1, 2009			204			$	80.57
Granted			1,499				9.10
Distributed			—				—
Forfeited			(4	)			9.10
Balance August 1, 2010			1,699			$	17.69

The total pre-tax share-based compensation cost that has been recognized in results of operations was $1.4 million and $1.3 million for the three months ended August 1, 2010 and August 2, 2009, respectively, and $3.6 million and $3.8 million for the nine months ended August 1, 2010 and August 2, 2009, respectively. Of these amounts, $1.4 million and $1.1 million for the three months ended August 1, 2010 and August 2, 2009, respectively, and $3.5 million and $3.4 million for the nine months ended August 1, 2010 and August 2, 2009, respectively, were included in selling, general and administrative expense, with the remaining costs in each period in cost of goods sold. The total income tax benefit recognized in results of operations for share-based compensation arrangements was $0.5 million for both the three months ended August 1, 2010 and August 2, 2009, and $1.4 million and $1.5 million for the nine months ended August 1, 2010

and August 2, 2009, respectively. As of August 1, 2010 and August 2, 2009, there was approximately $19.6 million and $11.4 million, respectively, of total unrecognized compensation cost related to share-based compensation arrangements and this cost is expected to be recognized over a weighted-average remaining period of 3.8 years and 3.6 years, respectively.

There was no cash received from option exercises during the first nine months of fiscal 2010. Cash received from option exercises was insignificant during the first nine months of fiscal 2009.

NOTE 8 — EARNINGS (LOSS) PER COMMON SHARE

Basic earnings (loss) per common share is computed by dividing net income (loss) allocated to common shares by the weighted average number of common shares outstanding. Diluted earnings (loss) per common share considers the dilutive effect of common stock equivalents. The reconciliation of the numerator and denominator used for the computation of basic and diluted earnings (loss) per share is as follows (in thousands, except per share data):

		Fiscal Three Months Ended								Fiscal Nine Months Ended
		August 1, 2010				August 2, 2009				August 1, 2010				August 2, 2009
Numerator for Basic and Diluted Earnings (Loss) Per Share
Net income (loss) allocated to common shares (1)		$	(16,519	)		$	2,607			$	(292,671	)		$	(648,945	)
Denominator for Diluted Earnings (Loss) Per Share
Weighted average common shares outstanding for basic earnings (loss) per share			18,274				3,899				18,184				3,894
Common stock equivalents:
Employee stock options			—				—				—				—
Unvested restricted stock awards			—				—				—				—
Adjusted weighted average shares and assumed conversions for diluted earnings (loss) per share assuming dilution			18,274				3,899				18,184				3,894
Earnings (loss) per share:
Basic		$	(0.90	)		$	0.65			$	(16.10	)		$	(166.67	)
Diluted		$	(0.90	)		$	0.65			$	(16.10	)		$	(166.67	)

As discussed in Note 2, we adopted guidance that has been codified under ASC Subtopic 260-10, Earnings Per Share (“ASC 260-10”) on November 2, 2009. This pronouncement provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are “participating securities” and, therefore, should be included in computing earnings per share using the two-class method. The calculation of earnings per share for Common Stock presented here has been reclassified to exclude the income, if any, attributable to the unvested restricted stock awards from the numerator and exclude the dilutive impact of those shares from the denominator. There was no income amount attributable to unvested restricted stock for the three and nine month periods ended August 1, 2010 as the restricted stock does not share in the net losses. However, in periods of net income, a portion of this income will be allocable to the restricted stock. All prior period earnings per share data have been adjusted retrospectively to conform to the provisions of this pronouncement.

In connection with an Exchange Offer in October 2009 (the “Exchange Offer”), we issued 14.0 million shares of Common Stock. In addition to the Exchange Offer, our 2009 refinancing transaction included the issuance of $250.0 million in shares of a newly created series of our preferred stock, par value $1.00 per share, designated the Series B Cumulative Convertible Participating Preferred Stock (“Convertible Preferred Stock,” and shares thereof, “Preferred Shares”) which required the use of the “two-class” method in determining diluted earnings per share, but did not increase the weighted average number of Common Shares outstanding. As of August 1, 2010 and November 1, 2009, the Preferred Shares were convertible into 43.0 million and 39.2 million shares of Common Stock, respectively.

For both the three and nine month periods ended August 1, 2010 and August 2, 2009, all options and unvested restricted shares were anti-dilutive and, therefore, not included in the diluted loss per share calculation.

NOTE 9 — WARRANTY

We sell weathertightness warranties to our customers for protection from leaks in our roofing systems related to weather. These warranties range from two years to 20 years. We sell two types of warranties, standard and Single Source™, and three grades of coverage for each. The type and grade of coverage determines the price to the customer. For standard warranties, our responsibility for leaks in a roofing system begins after 24 consecutive leak-free months. For Single Source™ warranties, the roofing system must pass our inspection before warranty coverage will be issued. Inspections are typically performed at three stages of the roofing project: (i) at the project start-up; (ii) at the project mid-point; and (iii) at the project completion. These inspections are included in the cost of the warranty. If the project requires or the customer requests additional inspections, those inspections are billed to the customer. Upon the sale of a warranty, we record the resulting revenue as deferred warranty revenue, which is included in other accrued expenses in our consolidated balance sheets. We recognize deferred warranty revenue over the warranty coverage period in a manner that matches our estimated expenses relating to the warranty. Additionally, we maintain an accrued warranty at RCC in which the balance was $3.2 million at August 1, 2010. RCC’s accrued warranty programs have similar terms and characteristics to our other warranty programs although this warranty is not amortized in the same manner as our other warranty programs.

The following table represents the rollforward of our acquired accrued warranty obligation and deferred warranty revenue activity for each of the fiscal nine months ended (in thousands):

		Fiscal Nine Months Ended
		August 1, 2010				August 2, 2009
Beginning balance		$	16,116			$	16,485
Warranties sold			2,028				1,894
Revenue recognized			(1,024	)			(904	)
Costs incurred			(313	)			(233	)
Adjustment (1)			—				(1,313	)
Other			(119	)			(117	)
Ending balance		$	16,688			$	15,812

NOTE 10 — DEBT AND NOTE PAYABLE

Debt is comprised of the following (in thousands):

		August 1, 2010				November 1, 2009
Amended and Restated Term Loan Credit Agreement (due April 2014, interest at 8.0% at both August 1, 2010 and November 1, 2009)		$	136,301			$	150,000
Asset-Based Lending Facility (due April 2014, interest at 6.75% at August 1, 2010)			—				—
2.125% Convertible Senior Subordinated Notes, due November 2024			—				59
Industrial Revenue Bond			—				190
			136,301				150,249
Current portion of long-term debt			—				(14,164	)
Long-term debt, less current portion		$	136,301			$	$136,085

The scheduled maturity of our debt is as follows (in thousands):

August 2, 2010 to October 31, 2010		$	—
Fiscal 2010			—
Fiscal 2011			—
Fiscal 2012			—
Fiscal 2013 and thereafter			136,301
		$	136,301

Amended Credit Agreement

On October 20, 2009, we entered into the Amended Credit Agreement (the “Amended Credit Agreement”), pursuant to which we repaid $143.3 million of the $293.3 million in principal amount of term loans outstanding under such credit agreement and modified the terms and maturity of the remaining $150.0 million balance. The modified terms of the term loan require quarterly principal payments in an amount equal to 0.25% of the principal amount of the term loan then outstanding as of the last day of each calendar quarter and a final payment of approximately $136.3 million at maturity on April 20, 2014. We made a mandatory prepayment on the Amended Credit Agreement in May 2010 in connection with our refund received resulting from the carry back of the 2009 net operating loss. An additional $13.3 million in principal amount of the term loans under the Amended Credit Agreement was classified as current portion of long-term debt in our Consolidated Balance Sheet at November 1, 2009 as a result of this expected mandatory prepayment. As a result, we are not required to make the quarterly principal payments for the remaining term of the term loan, except as required by the mandatory prepayment provisions. At August 1, 2010 and November 1, 2009, outstanding amounts under our Amended Credit Agreement were $136.3 million and $150.0 million, respectively.

The Company’s obligations under the Amended Credit Agreement and any interest rate protection agreements or other permitted hedging agreement entered into with any lender under the Amended Credit Agreement are irrevocably and unconditionally guaranteed on a joint and several basis by each direct and indirect domestic subsidiary of the Company (other than any domestic subsidiary that is a foreign subsidiary holding company or a subsidiary of a foreign subsidiary).

The obligations under the Amended Credit Agreement and under any permitted hedging agreement and the guarantees thereof are secured by (i) all of the capital stock and other equity interests of all direct domestic subsidiaries owned by the Company and the guarantors, (ii) up to 65% of the capital stock of certain direct foreign subsidiaries of the Company or any guarantor (it being understood that a foreign subsidiary holding company or a domestic subsidiary of a foreign subsidiary will be deemed a foreign subsidiary) and (iii) substantially all other tangible and intangible assets owned by the Company and each guarantor, including liens on material real property, in each case to the extent permitted by applicable law and subject to certain exceptions. The liens securing the obligations under the Amended Credit Agreement, the permitted hedging agreements and the guarantees thereof are first in priority (as between the Amended Credit Agreement and the ABL Facility) with respect to stock, material real property and assets other than accounts receivable, inventory, certain deposit accounts, associated intangibles and certain other specified assets of the Company and the guarantors, subject to certain exceptions. Such liens are second in priority (as between the Amended Credit Agreement and the ABL Facility) with respect to accounts receivable, inventory, associated intangibles and certain other specified assets of the Company and the guarantors, subject to certain exceptions.

The Amended Credit Agreement contains a number of covenants that, among other things, limit or restrict our ability to dispose of assets, incur additional indebtedness, incur guarantee obligations, prepay other indebtedness, make dividends and other restricted payments, create liens, make investments, make acquisitions, engage in mergers, change the nature of our business and engage in certain transactions with affiliates.

The Amended Credit Agreement has no financial covenants until October 20, 2011, at which time the maximum consolidated leverage ratio of net indebtedness to EBITDA is 5 to 1. Net indebtedness is defined as consolidated debt less the lesser of cash or $50 million. This ratio steps down by 0.25 each quarter until October 28, 2012 at which time the maximum ratio is 4 to 1. The ratio continues to step down by 0.125 each quarter until November 3, 2013 to a ratio of 3.5 to 1, which remains the maximum ratio for each fiscal quarter thereafter. We will, however, not be subject to this financial covenant with respect to a specified period if certain prepayments or repurchases of the term loans under the Amended Credit Agreement are made in the specified period. At August 1, 2010 and November 1, 2009, our Amended Credit Agreement did not require any financial covenant compliance.

Term loans under the Amended Credit Agreement may be repaid at any time, without premium or penalty but subject to customary LIBOR breakage costs. We also have the ability to repurchase a portion of the term loans under the Amended Credit Agreement, subject to certain terms and conditions set forth in the Amended Credit Agreement. In addition, subject to certain exceptions, the Amended Credit Agreement requires mandatory prepayment and reduction in an amount equal to:

•

the net cash proceeds of (1) certain asset sales, (2) certain debt offerings and (3) certain insurance recovery and condemnation events;

•		50% of annual excess cash flow (as defined in the Amended Credit Agreement) for any fiscal year ending on or after October 31, 2010, unless a specified leverage ratio target is met; and
•		the greater of $10.0 million and 50% of certain tax refunds received by the Company resulting from the carry back of the 2009 net operating loss received by the Company.

The Amended Credit Agreement limits our ability to pay cash dividends, except in certain specified circumstances, on or prior to October 31, 2010 after which time we may pay any dividend in an amount not to exceed the available amount (as defined in the Amended Credit Agreement). The available amount is defined in the Amended Credit Agreement as the sum of 50% of the consolidated net income from August 2, 2009 to the end of the most recent fiscal quarter, less 100% of any negative consolidated net income amount, plus net proceeds of property or assets received as capital contributions, less the sum of all dividends, payments or other distributions of such available amounts, in each case subject to certain adjustments and exceptions as specified in the Amended Credit Agreement.

The term loan under the Amended Credit Agreement bears interest, at our option, at either LIBOR or Base Rate plus an applicable margin. We had selected LIBOR interest rates for the period from November 2, 2009 through August 1, 2010 during which the applicable margin was 6%. Overdue amounts will bear interest at a rate that is 2% higher than the rate otherwise applicable. “Base Rate” is defined as the highest of (i) the Wachovia Bank, National Association prime rate, (ii) the overnight Federal Funds rate plus 0.5%, and (iii) 3%. “LIBOR” is defined as the applicable London interbank offered rate (not to be less than 2%) adjusted for reserves. The applicable margin until October 30, 2011 will be 5.00% on Base Rate loans and 6.00% on LIBOR loans under the Amended Credit Agreement.

ABL Facility

On October 20, 2009, the subsidiaries of the Company, NCI Group, Inc. and RCC and the Company entered into the ABL Facility pursuant to a loan and security agreement that provided for a $125.0 million asset-based loan facility. The ABL Facility allows us an aggregate maximum borrowing of up to $125.0 million. Borrowing availability under the ABL Facility is determined by a monthly borrowing base collateral calculation that is based on specified percentages of the value of qualified cash, eligible inventory and eligible accounts receivable, less certain reserves and subject to certain other adjustments. At August 1, 2010 and November 1, 2009, our excess availability under the ABL Facility was $90.7 million and $70.4 million, respectively. The ABL Facility has a maturity of April 20, 2014 and includes borrowing capacity of up to $25 million for letters of credit and up to $10 million for swingline borrowings. There were no amounts outstanding under the ABL Facility at both August 1, 2010 and November 1, 2009. In addition, at August 1, 2010, letters of credit totaling approximately $8.1 million were outstanding under the ABL Facility. There were no letters of credit outstanding under the ABL Facility at November 1, 2009.

An unused commitment fee is paid monthly on the ABL Facility at an annual rate of 1% through May 1, 2010 and thereafter at 1% or, if the average daily balance of the loans and letters of credit obligations for a given month is higher than 50% of the maximum credit then available, 0.75%. The calculation is determined based on the amount by which the maximum credit exceeds the average daily principal balance of outstanding loans and letter of credit obligations. Additional customary fees in connection with the ABL Facility also apply.

The ABL Facility limits our ability to pay cash dividends, except in certain specified circumstances, prior to October 20, 2010. After that time, we may pay dividends in an aggregate amount not to exceed an amount equal to 50% of the adjusted consolidated net income from August 3, 2009 to the end of the most recent fiscal quarter and subject to there being no event of default and the satisfaction of either certain excess availability conditions or a fixed charge coverage ratio.

The obligations of the borrowers under the ABL Facility are guaranteed by us and each direct and indirect domestic subsidiary of the Company (other than any domestic subsidiary that is a foreign subsidiary holding company or a subsidiary of a foreign subsidiary) that is not a borrower under the ABL Facility. Our obligations under certain specified bank products agreements are guaranteed by each borrower and each other direct and indirect domestic subsidiary of the Company and the other guarantors. These guarantees are made pursuant to a guarantee agreement, dated as of October 20, 2009, entered into by the Company and each other guarantor with Wells Fargo Foothill, LLC, as administrative agent.

The obligations under the ABL Facility and the guarantees thereof are secured by a first priority lien on our accounts receivable, inventory, certain deposit accounts, associated intangibles and certain other specified assets of the Company, subject to certain exceptions, and a second priority lien on the assets securing the term loans under the Amended Credit Agreement on a first-lien basis.

The ABL Facility contains a number of covenants that, among other things, limit or restrict our ability to dispose of assets, incur additional indebtedness, incur guarantee obligations, engage in sale and leaseback transactions, prepay other indebtedness, modify organizational documents and certain other agreements, create restrictions affecting subsidiaries, make dividends and other restricted payments, create liens, make investments, make acquisitions, engage in mergers, change the nature of their business and engage in certain transactions with affiliates.

Under the ABL Facility, a “Dominion Event” occurs if either an event of default is continuing or excess availability falls below certain levels, during which period, and for certain periods thereafter, the administrative agent may apply all amounts in the Company’s, the borrowers’ and the other guarantors’ concentration accounts to the repayment of the loans outstanding under the ABL Facility, subject to the Intercreditor Agreement and certain specified exceptions. In addition, during such “Dominion Event”, we are required to make mandatory payments on our ABL Facility upon the occurrence of certain events, including the sale of assets and the issuance of debt, in each case subject to certain limitations and conditions set forth in the ABL Facility.

The ABL Facility includes a minimum fixed charge coverage ratio of one to one, which will apply if we fail to maintain a specified minimum level of borrowing capacity. The minimum level of borrowing capacity as of both August 1, 2010 and November 1, 2009 was $15.0 million.

Loans under the ABL Facility bear interest, at our option, as follows:

     (1) Base Rate loans at the Base Rate plus a margin. The margin was 3.50% through April 30, 2010 and thereafter ranges from 3.25% to 3.75% depending on the quarterly average excess availability under such facility, and

     (2) LIBOR loans at LIBOR plus a margin. The margin was 4.50% through April 30, 2010 and thereafter ranges from 4.25% to 4.75% depending on the quarterly average excess availability under such facility.

During an event of default, loans under the ABL Facility will bear interest at a rate that is 2% higher than the rate otherwise applicable. “Base Rate” is defined as the higher of the Wells Fargo Bank, N.A. prime rate and the overnight Federal Funds rate plus 0.5% and “LIBOR” is defined as the applicable London interbank offered rate adjusted for reserves.

Convertible Notes

As discussed in Note 2 — Accounting Pronouncements, on November 2, 2009, we adopted ASC 470-20 which clarifies the accounting for convertible debt instruments that may be settled entirely or partially in cash upon conversion. ASC 470-20 has been applied retrospectively to fiscal years 2005 through 2009 as it relates to our Convertible Notes. The debt and equity components recognized for our Convertible Notes were as follows (in thousands):

		August 1, 2010				November 1, 2009
Principal amount of Convertible Notes		$	—			$	59
Unamortized discount			—				—
Net carrying amount			—				59
Additional paid-in capital			24,473				24,473

In October 2009, we consummated the Exchange Offer to acquire $180 million aggregate principal amount of the Convertible Notes, which resulted in the tender offer of $179.9 million in principal amount of the Convertible Notes in exchange for 14.0 million shares of our Common Stock and $90 million in cash. On December 29, 2009, we redeemed the $58,750 principal amount of the Convertible Notes that remained outstanding after the closing of the Exchange Offer. The remaining unamortized discount was reversed upon the consummation of the Exchange Offer.

The amount of interest expense recognized and effective interest rate for the three and nine month periods ended August 1, 2010 and August 2, 2009 were as follows (in thousands):

		Fiscal Three Months Ended								Fiscal Nine Months Ended
		August 1, 2010				August 2, 2009				August 1, 2010				August 2, 2009
Contractual coupon interest		$	—			$	967			$	0.2			$	3,049
Amortization of discount on Convertible Notes			—				2,099				—				6,297
Interest expense		$	—			$	3,066			$	0.2			$	9,346
Effective interest rate			7.5	%			7.5	%			7.5	%			7.5	%

The debt extinguishment costs were determined based on the net of the inducement loss and the settlement gain. As the Convertible Notes were “Instrument C” as defined in ASC Subtopic 815-15, Embedded Derivatives, we applied the guidance in ASC Subtopic 470-20, Debt with Conversion and Other Options (“ASC 470-20”), for any inducement to convert, and then applied the guidance in ASC 470-20 on the conversion of an instrument that would normally settle the conversion spread in shares and the face amount in cash. As a result, we recorded a loss of $85.3 million, which was the net impact of the loss incurred through the induced conversion offset by the gain recorded for the extinguishment of the recognized liability under conversion accounting. In accordance with the original conversion terms of the Convertible Notes, the expected fair value of Common Stock issuable upon conversion is approximately $11.3 million (based on a $12.55 closing stock price for Common Stock as of October 19, 2009) as compared to the expected fair value of Common Stock issuable pursuant to the Exchange Offer of approximately $266.1 million ($176.1 million in Common Stock plus $90 million in cash paid). This resulted in an induced conversion charge of $254.8 million. Additionally, we also had to consider the original terms of the Convertible Notes, which required us to satisfy the accreted value of the obligation in cash and allowed us to satisfy the excess conversion value over the accreted value in either cash or shares. However, as of the date the Convertible Notes were converted, the stated conversion price of the Convertible Notes was less than the stock price. Based upon the stated conversion terms of the Convertible Notes and the stock price on the date the Convertible Notes were converted, the value of the Company’s cash settlement to the holders of the Convertible Notes would have been approximately $11.3 million. Upon settlement of a security with the characteristics of “Instrument C”, ASC 470-20-40-12 requires only the cash payment be considered in the computation of the gain or loss on the extinguishment of the recognized liability. As of the close of the market on October 19, 2009, each conversion feature was worth a value of approximately $62.53 ($12.55 closing stock price x conversion rate of 4.9824 shares per $1,000 of principal). Accordingly, the Company recognized a gain of $169.6 million which included $0.8 million of unamortized debt discount and a gain of $937.47 for each note. The change in conversion rate based on a $12.55 closing stock price for Common Stock as of October 19, 2009 resulted in a gain on extinguishment of the recognized liability of $169.6 million.

Insurance Note payable

The note payable is related to financed insurance premiums. As of August 1, 2010 and November 1, 2009, we had outstanding a note payable in the amount of $0.7 million and $0.5 million, respectively. Insurance premium financings are generally secured by the unearned premiums under such policies.

NOTE 11 — SERIES B CUMULATIVE CONVERTIBLE PARTICIPATING PREFERRED STOCK

The CD&R Equity Investment

On August 14, 2009, the Company entered into an Investment Agreement (as amended, the “Investment Agreement”), by and between the Company and Clayton, Dubilier & Rice Fund VIII, L.P. (“CD&R Fund VIII”), pursuant to which the Company agreed to issue and sell to CD&R Fund VIII, and CD&R Fund VIII agreed to purchase from the Company, for an aggregate purchase price of $250 million (less reimbursement to CD&R Fund VIII or direct payment to its service providers of up to $14.5 million in the aggregate of transaction expenses and a deal fee, paid to Clayton, Dubilier & Rice, Inc., the manager of CD&R Fund VIII, of $8.25 million), 250,000 shares of Convertible Preferred Stock. Pursuant to the Investment Agreement, on October 20, 2009 (the “Closing Date”), the Company issued and sold to CD&R Fund VIII and CD&R Friends & Family Fund VIII, L.P. (the “CD&R Funds”), and the CD&R Funds purchased from the Company, an aggregate of 250,000 Preferred Shares, representing approximately 39.2 million shares of Common Stock (after giving effect to the Reverse Stock Split) or 68.4% of the voting power and Common Stock of the Company on an as-converted basis as of the Closing Date (such purchase and sale, the “CD&R Equity Investment”).

Certain Terms of the Convertible Preferred Stock

In connection with the consummation of the CD&R Equity Investment, on October 19, 2009 we filed the Certificate of Designations, setting forth the terms, rights, powers, and preferences, and the qualifications, limitations and restrictions thereof, of the Convertible Preferred Stock.

Liquidation Value. Each Preferred Share has an initial liquidation preference of $1,000.

Rank. The Convertible Preferred Stock ranks senior as to dividend rights, redemption payments and rights upon liquidation to the Common Stock and each other class or series of our equity securities, whether currently issued or to be issued in the future, that by its terms ranks junior to the Convertible Preferred Stock, and junior to each class or series of equity securities of the Company, whether currently issued or issued in the future, that by its terms ranks senior to the Convertible Preferred Stock. We have no outstanding securities ranking senior to the Convertible Preferred Stock. Pursuant to the Certificate of Designations, the issuance of any senior securities of the Company requires the approval of the holders of the Convertible Preferred Stock.

Dividends. Dividends on the Convertible Preferred Stock are payable, on a cumulative daily basis, as and if declared by our board of directors, at a rate per annum of 12% of the sum of the liquidation preference of $1,000 per Preferred Share plus accrued and unpaid dividends thereon or at a rate per annum of 8% of the sum of the liquidation preference of $1,000 per Preferred Share plus any accrued and unpaid dividends thereon if paid in cash on the dividend payment date on which such dividends would otherwise compound. If dividends are not paid on the dividend payment date, either in cash or in kind, such dividends compound on the dividend payment date. Members of our board of directors who are not affiliated with the CD&R Funds have the right to choose whether such dividends are paid in cash or in-kind, subject to the conditions of the Amended Credit Agreement and ABL Facility which restrict our ability to pay cash dividends until the first quarter of fiscal 2011 under the Amended Credit Agreement and until October 20, 2010 under the ABL Facility, except for certain specified purposes.

The dividend rate will increase by 3% per annum above the rates described in the preceding paragraph upon and during certain defaults specified in the Certificate of Designations of the Convertible Preferred Stock (the “Certificate of Designations”) and, after June 30, 2011, will increase by up to 6% per annum above the rates described in the preceding paragraph upon and during any such specified default involving the Company’s failure to have a number of authorized and unissued shares of Common Stock reserved and available sufficient for the conversion of all outstanding Preferred Shares. The Company currently has sufficient authorized, unissued and reserved shares of Common Stock.

We have the right to choose whether dividends are paid in cash or in-kind. However, the first dividend payment which was scheduled to be paid on December 15, 2009, was required to be paid in cash by the Certificate of Designations but could not be paid in cash based on the terms of our Amended Credit Agreement and Asset-Based Lending Facility (“ABL Facility”) which restricts our ability to pay cash dividends until the first quarter of fiscal 2011 under the Amended Credit Agreement and until October 20, 2010 under the ABL Facility. As a result, the dividend for the period up to the December 15, 2009 dividend payment date compounded at a rate of 12% per annum.

In addition to any dividends declared and paid as described in the preceding paragraphs, holders of the outstanding Preferred Shares also have the right to participate equally and ratably, on an as-converted basis, with the holders of shares of Common Stock in all cash dividends and distributions paid on the Common Stock.

On June 15, 2010, the Dividend Payment Committee of our board of directors declared and paid to the holders of Convertible Preferred Stock, the CD&R Funds, a dividend of 7,971.8137 shares of Convertible Preferred Stock for the period from March 16, 2010 through June 15, 2010. On March 17, 2010, the Dividend Payment Committee of our board of directors declared and paid to the holders of Convertible Preferred Stock, the CD&R Funds, a dividend of 6,361.5815 shares of Convertible Preferred Stock for the period from December 16, 2009 through March 15, 2010.

If, at any time after the 30-month anniversary of the Closing Date, the trading price of the Common Stock exceeds 200% of the initial conversion price of the Convertible Preferred Stock (initially $1.2748 and, subsequent to the Reverse Stock Split, $6.3740, as adjusted for any stock dividends, splits, combinations or similar events) for each of 20 consecutive trading days (the “Dividend Rate Reduction Event”), the dividend rate (excluding any applicable adjustments as a result of a default) will become 0.00%. However, this does not preclude the payment of default dividends after the 30-month anniversary of the Closing Date. As a result of certain restrictions on dividend payments in our Amended Credit Agreement and ABL Facility, we expect the dividend for each quarter of fiscal 2010 to be paid in-kind, at a pro rata rate of 12% per annum. See Note 10—Debt and Note Payable for more information on our Amended Credit Agreement and ABL Facility.

Convertibility and Anti-Dilution Adjustments. To the extent that we have authorized but unissued shares of Common Stock, holders of Preferred Shares have the right, at any time and from time to time, at their option, to convert any or all of their Preferred Shares, in whole or in part, into fully paid and non-assessable shares of our Common Stock at the conversion price set forth in the Certificate of Designations. The number of shares of Common Stock into which a Preferred Share is convertible is determined by dividing the sum of the liquidation preference of $1,000 per Preferred Share and the accrued and unpaid dividends of such share as of the time of conversion by the conversion price in effect at the time of conversion.

The initial conversion price of the Convertible Preferred Stock was equal to $1.2748, and was $6.3740 as of August 1, 2010, as adjusted for the Reverse Stock Split. The conversion price is subject to adjustment as set forth in the Certificate of Designations and is subject to customary anti-dilution adjustments, including stock dividends, splits, combinations or similar events and issuance of our Common Stock at a price below the then-current market price and, within the first three years after the Closing Date, issuances of our Common Stock below the then applicable conversion price.

Milestone Redemption Right. The Company has the right, at any time on or after the tenth anniversary of the Closing Date, to redeem in whole, but not in part, all then-issued and outstanding shares of Convertible Preferred Stock in accordance with the procedures set forth in the Certificate of Designations. Any holder of Convertible Preferred Stock has the right, at any time on or after the tenth anniversary of the Closing Date, to require that the Company redeem all, but not less than all, of its shares of Convertible Preferred Stock in accordance with the procedures set forth in the Certificate of Designations. In each case, such right (the “Milestone Redemption Right”), is exercisable at a redemption price for each Preferred Share equal to the sum of the liquidation preference of $1,000 per Preferred Share and the accrued and unpaid dividends of such share as of the time of redemption.

Change of Control Redemption Right. Upon certain change of control events specified in the Certificate of Designations, including certain business combinations involving the Company and certain changes to the beneficial ownership of the voting power of the Company, so long as the CD&R Funds do not own 45% or more of the voting power of the Company and directors designated by the CD&R Funds are not entitled to cast a majority of the total number of votes that can be cast by the Company’s board of directors or by the directors constituting the quorum approving or recommending such change of control event, holders of Preferred Shares are able to require redemption by the Company, in whole but not in part, of the Convertible Preferred Stock (1) if redeemed after the fourth anniversary of the Closing Date, at a purchase price equal to the sum of the liquidation value of such Preferred Shares and the accrued and unpaid dividends thereon as of the redemption date or (2) if redeemed prior to the fourth anniversary of the Closing Date, at a purchase price equal to the sum of (a) the liquidation value of such Preferred Shares plus the accrued and unpaid dividends thereon as of the redemption date and (b) a make-whole premium equal to the net present value of the sum of all dividends that would otherwise be payable on and after the redemption date, to and including such fourth anniversary date, assuming that such dividends are paid in cash. In addition, upon change of control events pursuant to the Amended Credit Agreement or the ABL Facility, holders of Preferred Shares are able to require redemption by the Company, in whole but not in part, of the Convertible Preferred Stock, at a purchase price equal to 101% of the sum of the liquidation value of such Preferred Shares and the accrued and unpaid dividends thereon as of the redemption date.

In the event of a merger or other business combination resulting in a change of control in which the holders of shares of our Common Stock receive cash or securities of an unaffiliated entity as consideration for such shares, if the holder of Preferred Shares does not exercise the change of control redemption right described in the paragraph above or is not entitled to the change of control redemption right in connection with such event, such holder will be entitled to receive, pursuant to such merger or business combination, the consideration such holder would have received for its Preferred Shares had it converted such shares immediately prior to the merger or business combination transaction. In the event of a merger or other business combination not resulting in a change of control in which the holders of shares of our Common Stock receive cash or securities of an unaffiliated entity as consideration for such shares, holders of Convertible Preferred Stock shall have the option to exchange their Preferred Shares for shares of the surviving entity’s capital stock having terms, preferences, rights, privileges and powers no less favorable than the terms, preferences, rights, privileges and powers under the Certificate of Designations.

Vote. Holders of Preferred Shares generally are entitled to vote with the holders of the shares of our Common Stock on all matters submitted for a vote of holders of shares of our Common Stock (voting together with the holders of shares of our Common Stock as one class) and are entitled to a number of votes equal to the number of shares of Common Stock issuable upon conversion of such holder’s

Preferred Shares (without any limitations based on our authorized but unissued shares of our Common Stock) as of the applicable record date for the determination of stockholders entitled to vote on such matters.

Certain matters require the approval of the holders of a majority of the outstanding Preferred Shares, voting as a separate class, including (1) amendments or modifications to the Company’s Certificate of Incorporation, by-laws or the Certificate of Designations, that would adversely affect the terms or the powers, preferences, rights or privileges of the Convertible Preferred Stock, (2) authorization, creation, increase in the authorized amount of, or issuance of any class or series of senior securities or any security convertible into, or exchangeable or exercisable for, shares of senior securities and (3) any increase or decrease in the authorized number of Preferred Shares or the issuance of additional Preferred Shares, subject to certain exceptions.

In addition, in the event that the Company fails to fulfill its obligations to redeem the Convertible Preferred Stock in accordance with the terms of the Certificate of Designations following the exercise of the Milestone Redemption Right or change of control redemption rights described above, until such failure is remedied, certain additional actions of the Company shall require the approval of the holders of a majority of the outstanding Preferred Shares, voting as a separate class, including the adoption of an annual budget, the hiring and firing, or the changing of the compensation, of executive officers and the commitment, resolution or agreement to effect any business combination.

Restriction on Dividends on Junior Securities. The Company is prohibited from (i) paying any dividend with respect to our Common Stock or other junior securities, except for ordinary cash dividends in which the Convertible Preferred Stock participates and which are declared, paid or set aside after the base dividend rate for the Convertible Preferred Stock has been reduced to 0.00% as described above and dividends payable solely in shares of our Common Stock or other junior securities, or (ii) repurchasing or redeeming any shares of our Common Stock or other junior securities, unless, in each case, we have sufficient access to lawful funds immediately following such action such that we would be legally permitted to redeem in full all Preferred Shares then outstanding.

Accounting for Convertible Preferred Stock

In accordance with guidance that has been codified under ASC Topic 815, Derivatives and Hedging, and ASC Topic 480, Distinguishing Liabilities from Equity, we classified the Convertible Preferred Stock as mezzanine equity because the Convertible Preferred Stock (1) can be settled in cash or shares of our Common Stock, (2) contains change of control rights allowing for early redemption, and (3) contains Milestone Redemption Rights which allow the Convertible Preferred Stock to remain outstanding without a stated maturity date.

In addition, the Certificate of Designations, which is the underlying contract of the Convertible Preferred Stock, includes features that are required to be bifurcated and recorded at fair value. We classified the Convertible Preferred Stock as an equity host contract because of (1) the voting rights, (2) the participating dividends on Common Stock and mandatory, cumulative preferred stock dividends, and (3) the Milestone Redemption Right which allows the Convertible Preferred Stock to remain outstanding without a stated maturity date. We then determined that the conditions resulting in the application of the default dividend rate are not clearly and closely related to this equity host contract and we bifurcated and separately recorded these features at fair value. See Note 12—Derivative Instruments and Hedging Strategy.

The Convertible Preferred Stock, at execution, was recorded with a book value of $221.6 million which is the $250.0 million initial liquidation preference less $27.7 million of direct transaction costs and $0.6 million for the fair value, net of income tax, of the bifurcated embedded derivative liability related to the dividend default rate. The $28.4 million difference between the book value and the initial liquidation preference is accreted using the effective interest rate method from the execution of the contract to the Milestone Redemption Right date or 10 years. The accretion recorded during the three and nine month periods ended August 1, 2010 was $0.7 million and $2.0 million, respectively.

Because the dividends accrue and accumulate on a daily basis and the amount payable upon redemption of the Convertible Preferred Stock is the liquidation preference plus accrued and unpaid dividends, accrued dividends are recorded into Convertible Preferred Stock. Dividends are accrued at the 12% rate and increased the Convertible Preferred Stock by $8.0 million and $23.2 million during the three and nine month periods ended August 1, 2010, respectively. As a result, as of August 1, 2010, the book value of our Convertible Preferred Stock was $248.0 million.

In accordance with guidance that has been codified under ASC Subtopic 470-20, Debt with Conversion and Other Options, the Convertible Preferred Stock contains a beneficial conversion feature because it was issued with an initial conversion price of $1.2748 per Common Share equivalent (or $6.3740 as adjusted for the Reverse Stock Split) and the closing stock price per share of Common Stock just prior to the execution of the CD&R Equity Investment was $2.51 ($12.55 as adjusted for the Reverse Stock Split). The intrinsic value of the beneficial conversion feature cannot exceed the issuance proceeds of the Convertible Preferred Stock less the cash paid to the CD&R Funds, and thus is $241.4 million. At November 1, 2009, 1.8 million of the potentially 39.2 million shares of Common Stock issuable upon conversion of the Preferred Shares were authorized and unissued. At August 1, 2010, all of the potentially 43.0 million shares of Common Stock issuable upon conversion of the Preferred Shares, which includes paid-in-kind dividends, were authorized and unissued.

As of August 1, 2010 and November 1, 2009, the Preferred Shares were convertible into 43.0 million and 39.2 million shares of Common Stock, respectively, at an initial conversion price of $1.2748 (or $6.3740 as adjusted for the Reverse Stock Split). However, as of November 1, 2009, only approximately 1.8 million shares of Common Stock were authorized and unissued, and therefore the CD&R Funds were not able to fully convert the Preferred Shares. To the extent that the CD&R Funds had opted to convert their Preferred Shares, as of November 1, 2009, their conversion right was limited to conversion of that portion of their Preferred Shares into the approximately 1.8 million shares of Common Stock that were currently authorized and unissued. On March 5, 2010, we effected the Reverse Stock Split at an exchange ratio of 1-for-5. As of that date, the Preferred Shares held by the CD&R Funds were fully convertible into 40.6 million Common Shares. As a result, we recorded an additional beneficial conversion feature charge in the amount of $230.7 million in the second quarter of fiscal 2010 related to the availability of shares of Common Stock into which the CD&R Funds may convert their Preferred Shares. In addition, we recorded an additional $4.6 million and $10.6 million beneficial conversion feature charge in the three months ended August 1, 2010 and May 2, 2010, respectively, related to dividends that have accrued and are convertible into shares of Common Stock. In addition, we expect to recognize additional beneficial conversion feature charges on paid-in-kind dividends to the extent that the Preferred Shares are accrued. Our policy is to recognize beneficial conversion feature charges on paid-in-kind dividends based on a daily dividend recognition and the daily closing stock price of our Common Stock.

At any time prior to the Dividend Rate Reduction Event, if dividends are not paid in cash on the applicable dividend payment date, the rate at which such dividends are payable will be at least 12% per annum. Therefore, we accrue dividends daily based on the 12% rate and if and when we determine the dividends will be paid in cash on the applicable dividend payment date, we will record a subsequent benefit of the excess 4% accrual upon our board’s declaration of such cash dividend and reverse the beneficial conversion feature charge associated with such accrual.

At August 1, 2010 and November 1, 2009, we had Preferred Shares outstanding of 264,333 and 250,000, respectively. In addition, at August 1, 2010 and November 1, 2009, we had accrued but unpaid cash dividends and Preferred Stock dividends with a value of $9.9 million and $1.0 million, respectively. As of August 1, 2010 and November 1, 2009, the aggregate liquidation preference plus aggregate accrued dividends of the Convertible Preferred Stock was $274.3 million and $251.0 million, respectively.

NOTE 12 — DERIVATIVE INSTRUMENTS AND HEDGING STRATEGY

Interest Rate Risk

We are exposed to interest rate risk associated with fluctuations in the interest rates on our variable interest rate debt. In order to manage this risk, on June 15, 2006, we entered into a forward interest rate swap agreement (“Swap Agreement”) hedging a portion of our then $400 million Credit Agreement with a notional amount of $65 million on November 1, 2009. The Swap Agreement expired on June 17, 2010 and, therefore, there was no remaining notional amount outstanding on August 1, 2010. At inception, we designated the Swap Agreement as a cash flow hedge. The fair value of the Swap Agreement as of November 1, 2009, was a liability of approximately $2.2 million and was included in other accrued expenses in the Consolidated Balance Sheet. The fair value of the Swap Agreement excludes accrued interest and takes into consideration current interest rates and current creditworthiness of us or the counterparty, as applicable.

During the fourth quarter of fiscal 2009, in connection with our refinancing and Amended Credit Agreement, we modified the terms of our credit agreement to include a 2% LIBOR minimum market interest rate. At that time, based on the current expected LIBOR rates over the remaining term of the Swap Agreement, the forecasted market rate interest payments had effectively converted to fixed rate interest payments making the Swap Agreement both ineffective and the underlying hedged cash flow no longer probable. Therefore, during the fourth quarter of fiscal 2009, we reclassified to interest expense the remaining $3.1 million of deferred losses recorded to accumulated

other comprehensive income (loss) and all subsequent changes in fair market value were recorded directly to earnings. During the three and nine month periods ended August 1, 2010, we have reduced interest expense by $0.4 million and $1.2 million, respectively, as a result of the changes in fair value of the hedge.

Embedded Derivative Bifurcated From Convertible Preferred Stock (See Note 11)

The terms of the Convertible Preferred Stock include a default dividend rate of 3% per annum if, with certain exceptions, we fail to (1) pay holders of Convertible Preferred Stock, in cash on an as-converted basis, dividends paid on shares of our Common Stock; (2) following the date that there are no Convertible Notes outstanding, pay, in cash or in kind, any dividend (other than dividends payable pursuant to the preceding clause (1)) payable to holders of Preferred Shares pursuant to the Certificate of Designations, on the applicable quarterly dividend payment date; (3) after June 30, 2010, reserve and keep available for issuance the number of shares of our Common Stock equal to 110% of the number of shares of Common Stock issuable upon conversion of all outstanding shares of Convertible Preferred Stock; (4) maintain the listing of our Common Stock on the New York Stock Exchange or another U.S. national securities exchange; (5) comply with our obligations to convert the Convertible Preferred Stock in accordance with our obligations under the Certificate of Designations; (6) redeem the Convertible Preferred Stock in compliance with the Certificate of Designations; or (7) comply with any dividend payment restrictions with respect to junior securities dividends. If, at a time when a 3% per annum default dividend rate is in effect after June 30, 2011, we fail to reserve and keep available authorized common shares pursuant to the terms of the Certificate of Designations the default dividend rate shall increase to 6% until such default is no longer continuing. The default dividend represents an embedded derivative which is bifurcated from the CD&R Equity Investment host contract (i.e., the Certificate of Designations). See Note 11—Series B Cumulative Convertible Participating Preferred Stock for further discussion of the Convertible Preferred Stock.

To determine the Level 3 fair value of the embedded derivative, we used a probability-weighted discounted cash flow model and assigned probabilities for each qualified default event. At November 1, 2009, we recorded the fair value of the embedded derivative of $1.0 million in other accrued liabilities on the Consolidated Balance Sheet. The majority of the value of the derivative was derived from the default dividend rate. As discussed further in Note 11, on December 14, 2009, the CD&R Funds, our majority equity holders expressed their intention to vote in favor of the proposed Reverse Stock Split, which became effective on March 5, 2010. Based upon these events we reevaluated the assigned probabilities used previously in the probability-weighted discounted cash flow model. As a result, we have recorded a $0.9 million decrease in fair value of the embedded derivative during the nine months ended August 1, 2010 which was recorded in other income and expense during the nine month period.

At August 1, 2010 and November 1, 2009, the fair value carrying amount of our derivative instruments were recorded as follows (in thousands):

		Liability Derivatives
						August 1, 2010				November 1, 2009
		Balance Sheet Location				Fair Value				Fair Value
Derivatives not designated as hedging instruments under ASC 815:
Interest rate contract		Other accrued expenses				$	—			$	2,208
Embedded derivative		Other accrued expenses					111				1,041
Total derivatives						$	111			$	3,249

The effect of derivative instruments on the Consolidated Statement of Operations for the three and nine month periods ended August 1, 2010 and August 2, 2009 was as follows (in thousands):

Location of Loss

Amount of Loss Reclassified from

Reclassified from Accumulated

OCI into Loss (Effective Portion)

Derivative in ASC 815 Cash

OCI into Loss

Fiscal Three Months Ended

Fiscal Nine Months Ended

Flow Hedging Relationship

(Effective Portion)

August 1, 2010

August 2, 2009

August 1, 2010

August 2, 2009

Interest rate contract

Interest expense

$

—

$

(878

)

$

—

$

(1,756

)

The effect of derivative instruments not designated as hedging instruments on the Consolidated Statement of Operations for the three and nine month periods ended August 1, 2010 and August 2, 2009 was as follows (in thousands):

		Amount of Income Recognized								Amount of Income Recognized
		in Income (Loss) on Derivatives								in Income (Loss) on Derivatives								Location of Income
Derivatives Not Designated as Hedging		Fiscal Three Months Ended								Fiscal Nine Months Ended								Recognized in Income
Instruments Under ASC 815		August 1, 2010				August 2, 2009				August 1, 2010				August 2, 2009				(Loss) on Derivatives
Interest rate contract		$	413			$	—			$	1,248			$	—			Interest expense
Embedded derivative		$	7			$	—			$	930			$	—			Other income, net

NOTE 13 — FAIR VALUE OF FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, trade accounts receivable and accounts payable approximate fair value as of August 1, 2010 and November 1, 2009 because of the relatively short maturity of these instruments. The fair values of the remaining financial instruments not currently recognized at fair value on our consolidated balance sheets at the respective fiscal period ends were:

		August 1, 2010								November 1, 2009
		Carrying								Carrying
		Amount				Fair Value				Amount				Fair Value
		(in thousands)								(in thousands)
2.125% Convertible Senior Subordinated Notes		$	—			$	—			$	59			$	97
Amended Credit Agreement		$	136,301			$	132,898			$	150,000			$	138,000

The fair value of the Convertible Notes was determined from the market rates on the redemption date prior to our fiscal period end. The fair value of the Amended Credit Agreement was based on recent trading activities of comparable market instruments.

Fair Value Measurements

ASC 820-10 clarifies that fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants based on the highest and best use of the asset or liability. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. ASC 820-10 requires us to use valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized as follows:

     Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets.

     Level 2: Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market-corroborated inputs.

     Level 3: Unobservable inputs for which there is little or no market data and which require us to develop our own assumptions about how market participants would price the assets or liabilities.

The following table summarizes information regarding our financial assets and liabilities that are measured at fair value as of August 1, 2010 and November 1, 2009 (in thousands):

		Assets and Liabilities Measured at Fair Value as of
						August 1, 2010
		Level 1				Level 2				Level 3				Total
Assets:
Short-term investments in deferred compensation plan(1)		$	3,500			$	—			$	—			$	3,500
Assets held for sale			—				6,304				—				6,304
Total assets		$	3,500			$	6,304			$	—			$	9,804
Liabilities:
Deferred compensation plan liability		$	3,688			$	—			$	—			$	3,688
Interest rate contract			—				—				—				—
Embedded derivative			—				—				111				111
Total liabilities		$	3,688			$	—			$	111			$	3,799

		Assets and Liabilities Measured at Fair Value as
		of November 1, 2009
		Level 1				Level 2				Level 3				Total
Assets:
Short-term investments in deferred compensation plan(1)		$	3,359			$	—			$	—			$	3,359
Assets held for sale			—				4,963				—				4,963
Total assets		$	3,359			$	4,963			$	—			$	8,322
Liabilities:
Deferred compensation plan liability		$	(3,480	)		$	—			$	—			$	(3,480	)
Interest rate contract			—				(2,208	)			—				(2,208	)
Embedded derivative			—				—				(1,041	)			(1,041	)
Total liabilities		$	(3,480	)		$	(2,208	)		$	(1,041	)		$	(6,729	)

The following table summarizes the activity in Level 3 financial instruments during the nine months ended August 1, 2010:

		August 1,
		2010
Beginning balance		$	(1,041	)
Realized gains (losses) (1)			930
Ending balance		$	(111	)

As of August 1, 2010 and November 1, 2009, the fair value of our Level 3 embedded derivative was $0.1 million and $1.0 million, respectively. To estimate its fair value, we used an income approach. The significant inputs for the valuation model include the following:

		August 1, 2010				November 1, 2009
Risk-free interest rate			1.1% - 3.6	%			0.3% - 3.6	%
Discount rate			6.2% - 9.8	%			6.1% - 9.8	%
Credit spread			5.1% - 6.3	%			5.1% - 6.2	%
Probability of failure to have common shares authorized by June 30, 2010			—				1.0	%