Snyder's-Lance, Inc.
LANCE INC (Form: 10-Q, Received: 10/31/2008 16:22:12)
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended September 27, 2008
Commission File Number 0-398
LANCE, INC.
(Exact name of registrant as specified in its charter)
     
North Carolina
(State or other jurisdiction of
incorporation or organization)
  56-0292920
(I.R.S. Employer Identification No.)
     
14120 Ballantyne Corporate Place    
Suite 350    
Charlotte, North Carolina   28277
(Address of principal executive offices)   (Zip Code)
704-554-1421
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check One):
             
Large accelerated filer þ   Accelerated filer o   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). Yes o No þ
The number of shares outstanding of the registrant’s $0.83-1/3 par value Common Stock, its only outstanding class of Common Stock as of October 27, 2008, was 31,514,167 shares.
 
 

 


 

LANCE, INC. AND SUBSIDIARIES
INDEX
         
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  EX-31.1
  EX-31.2
  EX-32

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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited)
For the Quarters and Nine Months Ended September 27, 2008 and September 29, 2007

(in thousands, except share and per share data)
                                 
    Quarter Ended     Nine Months Ended  
    September 27,     September 29,     September 27,     September 29,  
    2008     2007     2008     2007  
Net sales and other operating revenue
  $ 225,587     $ 198,052     $ 637,169     $ 577,515  
 
                               
Cost of sales and operating expenses:
                               
Cost of sales
    143,040       115,692       400,192       328,104  
Selling, general and administrative
    72,337       70,253       219,762       211,336  
Other (income)/expense, net
    (536 )     522       (379 )     1,405  
 
                       
Total costs and expenses
    214,841       186,467       619,575       540,845  
 
                       
 
                               
Income from continuing operations before interest and income taxes
    10,746       11,585       17,594       36,670  
 
                               
Interest expense, net
    708       550       2,173       1,768  
 
                       
 
                               
Income from continuing operations before income taxes
    10,038       11,035       15,421       34,902  
 
                               
Income tax expense
    3,229       3,448       5,258       12,174  
 
                       
Net income from continuing operations
    6,809       7,587       10,163       22,728  
 
                               
(Loss)/income from discontinued operations
          (146 )           45  
Income tax (benefit)/expense
          (54 )           16  
 
                       
Net (loss)/income from discontinued operations
          (92 )           29  
 
                         
 
                               
Net income
  $ 6,809     $ 7,495     $ 10,163     $ 22,757  
 
                       
 
                               
Basic earnings per share:
                               
From continuing operations
  $ 0.22     $ 0.24     $ 0.33     $ 0.74  
From discontinued operations
        $           $  
 
                       
Basic earnings per share
  $ 0.22     $ 0.24     $ 0.33     $ 0.74  
 
                       
 
                               
Weighted average shares outstanding — basic
    31,243,000       31,034,000       31,176,000       30,921,000  
 
Diluted earnings per share:
                               
From continuing operations
  $ 0.21     $ 0.24     $ 0.32     $ 0.72  
From discontinued operations
        $           $  
 
                       
Diluted earnings per share
  $ 0.21     $ 0.24     $ 0.32     $ 0.72  
 
                       
 
                               
Weighted average shares outstanding — diluted
    31,911,000       31,693,000       31,765,000       31,506,000  
See Notes to the Condensed Consolidated Financial Statements (Unaudited).

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LANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
As of September 27, 2008 (Unaudited) and December 29, 2007

(in thousands, except share data)
                 
    September 27,     December 29,  
    2008     2007  
ASSETS
               
Current assets
               
Cash and cash equivalents
  $ 981     $ 8,647  
Accounts receivable, net
    79,006       64,081  
Inventories
    45,277       38,659  
Deferred income taxes
    9,158       9,335  
Prepaid expenses and other current assets
    11,500       12,367  
 
           
Total current assets
    145,922       133,089  
 
               
Other assets
               
Fixed assets, net
    212,733       205,075  
Goodwill and other intangible assets, net
    86,619       69,127  
Other noncurrent assets
    5,594       5,712  
 
           
Total assets
  $ 450,868     $ 413,003  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities
               
Accounts payable
  $ 26,649     $ 21,169  
Other payables and accrued liabilities
    55,434       53,468  
Short-term debt
    7,938        
 
           
Total current liabilities
    90,021       74,637  
 
               
Other liabilities
               
Long-term debt
    74,000       50,000  
Deferred income taxes
    28,718       26,874  
Other noncurrent liabilities
    13,252       14,395  
 
           
Total liabilities
    205,991       165,906  
 
           
 
               
Commitments and contingencies
               
 
               
Stockholders’ equity
               
Common stock, 31,510,432 and 31,214,743 shares outstanding, respectively
    26,258       26,011  
Preferred stock, no shares outstanding
           
Additional paid-in capital
    47,732       41,430  
Retained earnings
    158,436       163,356  
Accumulated other comprehensive income
    12,451       16,300  
 
           
Total stockholders’ equity
    244,877       247,097  
 
           
Total liabilities and stockholders’ equity
  $ 450,868     $ 413,003  
 
           
See Notes to the Condensed Consolidated Financial Statements (Unaudited).

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LANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Unaudited)
For the Nine Months Ended September 27, 2008 and September 29, 2007

(in thousands, except share data)
                                                 
                    Additional           Accumulated Other    
    Shares   Common Stock   Paid-in
Capital
  Retained Earnings   Comprehensive
Income
  Total
Balance, December 30, 2006
    30,855,891     $ 25,714     $ 32,129     $ 159,329     $ 5,228     $ 222,400  
 
                                               
Comprehensive income:
                                               
Net income
                      22,757             22,757  
Foreign currency translation adjustment
                            10,315       10,315  
Net unrealized gains on derivatives, net of $101 tax effect
                            203       203  
Actuarial gains recognized in net income, net of $73 tax effect
                            (152 )     (152 )
 
                                               
Total comprehensive income
                                            33,123  
 
                                               
 
                                               
Cash dividends paid to stockholders
                      (14,878 )           (14,878 )
 
                                               
Stock options exercised, including $997 excess tax benefit
    262,316       216       4,384                   4,600  
 
                                               
Cumulative adjustment from adoption of FIN 48
                      61             61  
 
                                               
Equity-based incentive expense previously recognized under a liability plan
    54,900       46       1,220                   1,266  
 
                                               
Amortization of nonqualified stock options
                507                   507  
 
                                               
Issuances and amortization of restricted stock and units, net of forfeitures
    28,100       23       2,149                   2,172  
     
Balance, September 29, 2007
    31,201,207     $ 25,999     $ 40,389     $ 167,269     $ 15,594     $ 249,251  
     
 
                                               
Balance, December 29, 2007
    31,214,743     $ 26,011     $ 41,430     $ 163,356     $ 16,300     $ 247,097  
 
                                               
Comprehensive income:
                                               
Net income
                      10,163             10,163  
Foreign currency translation adjustment
                            (3,558 )     (3,558 )
Net unrealized losses on derivatives, net of $136 tax effect
                            (209 )     (209 )
Actuarial gains recognized in net income, net of $48 tax effect
                            (82 )     (82 )
 
                                               
Total comprehensive income
                                            6,314  
 
                                               
 
                                               
Cash dividends paid to stockholders
                      (15,083 )           (15,083 )
 
                                               
Stock options exercised, including $360 excess tax benefit
    135,567       113       2,179                   2,292  
 
                                               
Equity-based incentive expense previously recognized under a liability plan
    39,250       33       876                   909  
 
                                               
Amortization of nonqualified stock options
                829                   829  
 
                                               
Issuances and amortization of restricted stock and units, net of forfeitures
    120,872       101       2,418                   2,519  
     
Balance, September 27, 2008
    31,510,432     $ 26,258     $ 47,732     $ 158,436     $ 12,451     $ 244,877  
     
See Notes to the Condensed Consolidated Financial Statements (Unaudited).

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LANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 27, 2008 and September 29, 2007

(in thousands)
                 
    Nine Months Ended  
    September 27,
2008
    September 29,
2007
 
Operating activities
               
Net income
  $ 10,163     $ 22,757  
Adjustments to reconcile net income to cash from operating activities:
               
Depreciation and amortization
    23,917       21,839  
Stock-based compensation expense
    3,348       2,680  
Gain on sale of fixed assets
    (333 )     (839 )
Changes in operating assets and liabilities, excluding business acquisition:
               
Accounts receivable
    (14,201 )     (6,625 )
Inventory
    (5,708 )     (2,615 )
Accounts payable
    5,046       3,527  
Other assets and liabilities
    4,869       1,722  
 
           
Net cash from operating activities
    27,101       42,446  
 
           
 
               
Investing activities
               
Purchases of fixed assets
    (30,616 )     (28,299 )
Proceeds from sale of fixed assets
    2,737       6,895  
Business acquisition, net of cash acquired
    (23,931 )      
Purchase of investment
          (2,090 )
 
           
Net cash used in investing activities
    (51,810 )     (23,494 )
 
           
 
               
Financing activities
               
Dividends paid
    (15,083 )     (14,878 )
Issuance of common stock
    2,292       4,600  
Net proceeds from debt
    32,131        
Repayments of acquired debt from business acquisition
    (2,239 )      
 
           
Net cash from/(used in) financing activities
    17,101       (10,278 )
 
           
 
               
Effect of exchange rate changes on cash
    (58 )     135  
 
           
 
               
(Decrease)/increase in cash and cash equivalents
    (7,666 )     8,809  
Cash and cash equivalents at beginning of period
    8,647       5,504  
 
           
Cash and cash equivalents at end of period
  $ 981     $ 14,313  
 
           
 
               
Supplemental information:
               
Cash paid for income taxes, net of refunds of $58 and $7, respectively
  $ 1,982     $ 10,397  
Cash paid for interest
  $ 2,307     $ 2,193  
See Notes to the Condensed Consolidated Financial Statements (Unaudited).

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LANCE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
1.   The accompanying unaudited condensed consolidated financial statements of Lance, Inc. have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and 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. These condensed financial statements should be read in conjunction with the audited financial statements and notes included in our Form 10-K for the year ended December 29, 2007 filed with the Securities and Exchange Commission (the “SEC”) on February 22, 2008. In our opinion, these condensed consolidated financial statements reflect all adjustments (consisting of only normal, recurring accruals) necessary to present fairly our condensed consolidated financial position as of September 27, 2008 and December 29, 2007 and the condensed consolidated statements of income for the quarters and nine months ended September 27, 2008 and September 29, 2007 and the condensed consolidated statements of stockholders’ equity and comprehensive income and cash flows for the nine months ended September 27, 2008 and September 29, 2007. Prior year amounts shown in the accompanying condensed consolidated financial statements have been reclassified for consistent presentation.
 
2.   The consolidated results of operations for the quarter and nine months ended September 27, 2008 are not necessarily indicative of the results to be expected for the year ending December 27, 2008.
3.   Preparing financial statements requires management to make estimates and judgments about future events that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities. Examples include customer returns and promotions, provisions for bad debts, inventory valuations, useful lives of fixed assets, hedge transactions, supplemental retirement benefits, intangible asset valuations, incentive compensation, income taxes, insurance, post-retirement benefits, contingencies and legal proceedings. Actual results may differ from these estimates under different assumptions or conditions.
4.   On March 14, 2008, we acquired 100% of the outstanding common stock of Brent & Sam’s, Inc. Brent & Sam’s is a producer of private brand premium gourmet cookies with operations in North Little Rock, Arkansas. This acquisition enhances our product portfolio and extends our product offering into the premium private brand category. We paid approximately $23.9 million to acquire Brent & Sam’s, net of cash acquired of $0.2 million, mostly funded from borrowings under our existing Credit Agreement. Since the acquisition date, we have repaid all of the $2.2 million assumed debt. Approximately $19.9 million of the acquisition price was assigned to goodwill and other intangible assets.
5.   We own a non-controlling equity interest in Late July Snacks, LLC, an organic snack food company. We also manufacture products for Late July. During the first nine months of 2008, non-branded sales to Late July were approximately $3.3 million. As of September 27, 2008, accounts receivable due from Late July totaled $0.9 million.
6.   The following tables provide a reconciliation of the common shares used for basic earnings per share and diluted earnings per share:
                                 
    Quarter Ended     Nine Months Ended  
    September 27,     September 29,     September 27,     September 29,  
(in thousands)   2008     2007     2008     2007  
Weighted average number of common shares used for basic earnings per share
    31,243       31,034       31,176       30,921  
Effect of potential dilutive shares
    668       659       589       585  
 
                       
Weighted average number of common shares and potential dilutive shares used for diluted earnings per share
    31,911       31,693       31,765       31,506  
 
                       
Anti-dilutive shares excluded from the above reconciliation
    100             367       15  
 
                       

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LANCE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
7.   During the first quarter of 2008, we granted approximately 175,000 vested nonqualified stock options, 19,500 restricted shares and 19,750 shares of common stock related to a long-term incentive plan for key employees that were previously accounted for as a liability. This resulted in an increase in equity and a decrease in accrued liabilities of $0.9 million during the first quarter of 2008. During the first quarter of 2007, we granted 114,000 vested nonqualified stock options, 27,450 restricted shares and 27,450 of common stock related to a long-term incentive plan for key employees that were previously accounted for as a liability. This resulted in an increase in equity and a decrease in accrued liabilities of $1.3 million during the first quarter of 2007.
8.   Sales to our largest customer, Wal-Mart Stores, Inc., were 20% of revenue for both quarters and nine months ended September 27, 2008 and September 29, 2007. Accounts receivable at September 27, 2008 and December 29, 2007 included receivables from Wal-Mart Stores, Inc. totaling $19.9 million and $14.7 million, respectively.
9.   In accordance with FIN 48, “ Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement 109, ” we have recorded gross unrecognized tax benefits as of September 27, 2008 totaling $1.1 million and related interest and penalties of $0.3 million in other noncurrent liabilities of the condensed consolidated balance sheet. Of this amount, $1.2 million would affect the effective tax rate if subsequently recognized. Various taxing authorities’ statutes of limitations related to the computation of our unrecognized tax benefits have expired since the beginning of 2008 and reduced the unrecognized tax benefit amount by $0.4 million. Additional statutes of limitations will likely expire before the end of 2008 and may result in a potential $0.1 reduction in the unrecognized tax benefit amount. We classify interest and penalties associated with income tax positions within income tax expense. The interest and penalty component of the unrecognized tax benefits as of September 27, 2008 was $0.3 million.
 
    We have open years for income tax audit purposes in our major taxing jurisdictions according to statutes as follows:
         
Jurisdiction   Open years  
US federal
  2005 and forward
Canada federal
  2003 and forward
Ontario provincial
  2003 and forward
Massachusetts
  2001 and forward
North Carolina
  2005 and forward
Iowa
  2005 and forward
10.   At September 27, 2008 and December 29, 2007, we had $0.4 million and $0.5 million, respectively, of assets held for sale included in other current assets on the condensed consolidated balance sheets. During the third quarter of 2008, we sold a facility in Ontario, Canada, related to the previously announced consolidation of Canadian sugar wafer facilities.
11.   The principal raw materials used in the manufacture of our products are flour, vegetable oil, sugar, potatoes, peanuts, other nuts, cheese and seasonings. The principal supplies used are flexible film, cartons, trays, boxes, and bags. These raw materials and supplies are generally available in adequate quantities in the open market either from sources in the United States or from other countries.
 
    We utilize the dollar value last-in, first-out (“LIFO”) method of determining the cost of approximately one third of our inventories. Because inventory valuations under the LIFO method are based on annual determinations, the interim LIFO valuations require management to estimate year-end costs and levels of inventories. The variation between estimated year-end costs and levels of LIFO inventories compared to the actual year-end amounts may materially affect the results of operations for the full year. Inventories consist of:
                 
    September 27,     December 29,  
(in thousands)   2008     2007  
Finished goods
  $ 22,626     $ 21,910  
Raw materials
    12,426       7,701  
Supplies, etc.
    15,848       14,297  
 
           
Total inventories at FIFO cost
    50,900       43,908  
Less adjustments to reduce FIFO cost to LIFO cost
    (5,623 )     (5,249 )
 
           
Total inventories
  $ 45,277     $ 38,659  
 
           

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LANCE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
12.   Our Board of Directors adopted a Preferred Shares Rights Agreement on July 14, 1998. The rights granted under this agreement were designed to protect all of our stockholders and ensure they receive fair and equal treatment in the event of an attempted takeover or certain takeover tactics. None of these rights were redeemed and all expired on July 14, 2008 in accordance with the terms of the Rights Agreement.

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LANCE, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements and Risk Factors
We, from time to time, make “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements about our estimates, expectations, beliefs, intentions, or strategies for the future, and the assumptions underlying such statements. We use the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “forecasts,” “may,” “will,” “should,” and similar expressions to identify our forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or our present expectations. Factors that could cause these differences include, but are not limited to, those set forth under Part II, Item 1A — Risk Factors of this Form 10-Q and Item 1A — Risk Factors in our Annual Report on Form 10-K for the year ended December 29, 2007.
Caution should be taken not to place undue reliance on our forward-looking statements, which reflect our management’s expectations only as of the time such statements are made. We undertake no obligation to update publicly or revise any forward-looking statement, whether due to new information, future events or otherwise.
Results of Operations
Management’s discussion and analysis of our financial condition and results of operations are based upon the condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments about future events that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Future events and their effects cannot be determined with absolute certainty. Therefore, management’s determination of estimates and judgments about the carrying values of assets and liabilities requires the exercise of judgment in the selection and application of assumptions based on various factors, including historical experience, current and expected economic conditions and other factors believed to be reasonable under the circumstances. We routinely evaluate our estimates, including those related to customer returns and promotions, provisions for bad debts, inventory valuations, useful lives of fixed assets, hedge transactions, supplemental retirement benefits, intangible asset valuations, incentive compensation, income taxes, insurance, post-retirement benefits, contingencies and legal proceedings. Actual results may differ from these estimates under different assumptions or conditions.
Quarter Ended September 27, 2008 Compared to Quarter Ended September 29, 2007
                                                 
                                    Favorable/
    Quarter Ended   (Unfavorable)
(dollars in thousands)   September 27, 2008   September 29, 2007   Variance
     
Revenue
  $ 225,587       100.0 %   $ 198,052       100.0 %   $ 27,535       13.9 %
Cost of sales
    143,040       63.4 %     115,692       58.4 %     (27,348 )     (23.6 %)
     
Gross margin
    82,547       36.6 %     82,360       41.6 %     187       0.2 %
Selling, general and administrative
    72,337       32.1 %     70,253       35.5 %     (2,084 )     (3.0 %)
Other (income)/expense, net
    (536 )     (0.2 %)     522       0.3 %     1,058       202.7 %
     
Earnings before interest and taxes
    10,746       4.8 %     11,585       5.8 %     (839 )     (7.2 %)
Interest expense, net
    708       0.3 %     550       0.3 %     (158 )     (28.7 %)
Income tax expense
    3,229       1.4 %     3,448       1.7 %     219       6.4 %
     
Income from continuing operations
  $ 6,809       3.0 %   $ 7,587       3.8 %   $ (778 )     (10.3 %)
     
For the third quarter of 2008, revenue increased $27.5 million or 14%, but income from continuing operations decreased $0.8 million compared to the third quarter of 2007. The results of operations were significantly impacted by unprecedented increases in our ingredient and energy costs, which worsened during the quarter due to flood and hurricane-related issues. Price increases did not fully offset the increases in these costs. During the first quarter of 2008, we acquired Brent & Sam’s, a producer of private brand premium gourmet cookies located in North Little Rock, Arkansas. The addition of Brent & Sam’s increased revenue by 2% compared to the third quarter of 2007, but did not have a significant impact on our income from operations.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Branded product revenue increased $11.0 million or 9% compared to the third quarter of last year. Approximately 6% of this percentage growth was due to higher volume and favorable product mix, and 3% was due to price increases, net of promotional allowances. From a product line perspective, Lance ® home pack sandwich crackers and Cape Cod ® potato chips product revenue experienced strong growth, which was partially offset by declines in certain salty snacks and cakes. Branded product revenue represented 60% and 64% of total revenue for the third quarter of 2008 and 2007, respectively.
From a trade channel perspective and consistent with our overall strategy, sales to grocery stores/mass merchandisers, distributors, and club stores generated the majority of the growth in branded product revenues. These increases in revenue were partially offset by anticipated declines in less profitable trade channels with higher service costs.
Non-branded product revenue, which includes private brands and contract manufacturing, increased $16.5 million or 22% compared to the third quarter of 2007. Approximately 15% of this percentage growth was due to price increases, 6% was due to the addition of Brent & Sam’s, and 4% was the result of increased volume with new and existing customers and new product offerings. These increases were partially offset by a 3% decline in revenue from certain contract manufacturing customers. Non-branded product revenue represented 40% and 36% of total revenue for the third quarter of 2008 and 2007, respectively.
Gross margin increased $0.2 million but decreased 5% as a percentage of revenue compared to the third quarter of 2007. Similar to last quarter, higher ingredient costs for vegetable oils and flour significantly impacted gross margin during the third quarter of 2008. Additionally, higher ingredient costs for potatoes, peanuts, and higher natural gas rates negatively impacted gross margin compared to the same quarter last year. In the aggregate, these higher ingredient and energy costs reduced gross margin approximately 10% as a percentage of revenue as compared to the third quarter of 2007. In addition, there was a shift in product mix to a larger percentage of non-branded revenue, which reduced gross margin as a percentage of revenue by 3%. These increases in costs were offset by a 7% increase in gross margin as a percentage of revenue due to price increases and a 1% increase from improved manufacturing efficiencies compared to the third quarter of 2007.
Selling, general and administrative costs increased $2.1 million, but decreased 3% as a percentage of revenue compared to the third quarter of 2007. Strategic growth and infrastructure initiatives generated $1.9 million in higher employee, information technology and depreciation costs. Transportation related fuel costs and third-party freight costs increased $2.5 million driven by an increase in fuel rates compared to the third quarter of 2007. Selling costs, such as commissions and sales development costs, increased $1.0 million compared to the third quarter of 2007 due to increased revenue. These cost increases in the third quarter of 2008 were partially offset by $3.3 million of reductions in medical and casualty claims as well as lower advertising costs as compared to the third quarter of 2007.
Other income during the third quarter of 2008 was $1.1 million favorable as compared to the third quarter of 2007 resulting from lower foreign currency exchange losses and higher net gains on the sale of fixed assets.
Interest expense increased $0.2 million primarily due to additional debt incurred because of the acquisition of Brent and Sam’s, offset somewhat by favorable interest rates compared to prior year.
Nine Months Ended September 27, 2008 Compared to Nine Months Ended September 29, 2007
                                                 
                                    Favorable/
    Nine Months Ended   (Unfavorable)
(dollars in thousands)   September 27, 2008   September 29, 2007   Variance
     
Revenue
  $ 637,169       100.0 %   $ 577,515       100.0 %   $ 59,654       10.3 %
Cost of sales
    400,192       62.8 %     328,104       56.8 %     (72,088 )     (22.0 %)
     
Gross margin
    236,977       37.2 %     249,411       43.2 %     (12,434 )     (5.0 %)
Selling, general and administrative
    219,762       34.5 %     211,336       36.6 %     (8,426 )     (4.0 %)
Other (income)/expense, net
    (379 )     (0.1 %)     1,405       0.2 %     1,784       127.0 %
     
Earnings before interest and taxes
    17,594       2.8 %     36,670       6.3 %     (19,076 )     (52.0 %)
Interest expense, net
    2,173       0.3 %     1,768       0.3 %     (405 )     (22.9 %)
Income tax expense
    5,258       0.8 %     12,174       2.1 %     6,916       56.8 %
     
Income from continuing operations
  $ 10,163       1.6 %     22,728       3.9 %   $ (12,565 )     (55.3 %)
     

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LANCE, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
For the nine months ended September 27, 2008, revenue increased $59.7 million or 10%, but income from continuing operations decreased $12.6 million compared to the first nine months in 2007. The results of operations were significantly impacted by unprecedented increases in our ingredient and energy costs, which were not fully offset by price increases. Since March 14, 2008, Brent & Sam’s has been included in our results of operations and represents approximately 2% of the increased revenue compared to 2007. Brent & Sam’s did not have a significant impact on our income from operations for the first nine months of 2008.
Branded product revenue increased $24 million or 7% compared to the first nine months of 2007. Approximately 4% of this percentage growth was due to higher volume and favorable product mix and 3% was due to price increases. From a product line perspective, Lance ® home pack sandwich crackers and Cape Cod ® potato chips product revenue experienced strong growth, which was partially offset by declines in certain salty snacks and cakes. Branded product revenue represented 61% and 64% of total revenue for the first nine months of 2008 and 2007, respectively.
From a trade channel perspective and consistent with our overall strategy, sales to grocery stores/mass merchandisers, distributors, and club stores generated the majority of the growth in branded product revenues. These increases in revenue were partially offset by anticipated declines in less profitable trade channels with higher service costs.
Non-branded product revenue, which includes private brands and contract manufacturing, increased $35.6 million or 17% compared to the first nine months of 2007. Approximately 12% of this percentage growth was due to price increases, 4% was due to the addition of Brent & Sam’s, and 4% was the result of higher volume from private brand sales from new and existing customers and new product offerings. Volume declines from certain contract manufacturing customers and unfavorable product mix reduced non-branded revenue by 3%. Non-branded product revenue represented 39% and 36% of total revenue for the first nine months of 2008 and 2007, respectively.
Gross margin decreased $12.4 million or 6% as a percentage of revenue compared to the first nine months of 2007. The impact of higher ingredient costs, higher natural gas rates, and unfavorable foreign exchange rates reduced gross margin approximately 9% as a percentage of revenue. In addition, there was a shift in product mix to a larger percentage of non-branded revenue which reduced gross margin as a percentage of revenue by approximately 2%. Also, as a result of the consolidation of our Canadian facilities during 2008, there were incremental costs that accounted for an additional 1% decline in gross margin as a percentage of revenue. This decline was partially offset by a 6% increase in gross margin as a percentage of revenue, due to price increases compared to the first nine months of 2007. Additional price increases were implemented late in the third quarter of 2008 to further offset significantly higher ingredient costs.
Selling, general and administrative costs increased $8.4 million, but decreased 2% as a percentage of revenue compared to the first nine months of 2007. Strategic growth and infrastructure initiatives generated $5.9 million in higher employee, information technology and depreciation costs. Transportation related fuel costs and third party freight increased $4.3 million as a result of an increase in fuel rates as compared to the first nine months of 2007. Selling costs, such as commissions, travel, media research, displays and bad debt expense increased $5.2 million compared to the prior year, partially as a result of increased revenue. These cost increases in the first nine months of 2008 were partially offset by $7.0 million of reductions in advertising costs, medical and casualty claims, and professional fees as well as improved shipping efficiencies as compared to the first nine months of 2007.
Other income during the first nine months of 2008 was $1.8 million favorable as compared to the first nine months of 2007 due to lower foreign currency exchange losses and higher net gains on sales of fixed assets.
Interest expense increased $0.4 million, compared to the first nine months of 2007, primarily due to the additional debt incurred as a result of the acquisition of Brent and Sam’s offset somewhat by lower interest rates. During the first nine months of 2008, approximately $0.2 million of interest was capitalized as part of a significant information system implementation.
Compared to the first nine months of 2007, the effective tax rate decreased from 34.9% to 34.1% due to a combination of lower earnings and the impact of accounting for uncertain tax positions. We expect the full year effective tax rate to be approximately 35%.

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LANCE, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources
Liquidity
The principal sources of liquidity for operations during the first nine months of 2008 were provided by operating activities, cash on hand, and proceeds from debt. Despite the current economic environment, cash flow from operating activities, cash on hand and approximately $65 million available from existing borrowing facilities are believed to be sufficient for the foreseeable future to enable us to meet obligations, fund capital expenditures and pay cash dividends to our stockholders.
Operating Cash Flows
Net cash from operating activities was $27.1 million and $42.4 million for the first nine months of 2008 and 2007, respectively. The decrease was due to lower net income and higher levels of working capital. Working capital, excluding cash and short-term debt, increased $13.1 million predominately from increased accounts receivable as a result of revenue growth and increased inventory due to higher ingredient costs.
Investing Cash Flows
Net cash used in investing activities was $51.8 million for the first nine months of 2008. On March 14, 2008, we acquired Brent and Sam’s, Inc. for approximately $23.9 million, net of cash acquired of $0.2 million. Capital expenditures for fixed assets, principally manufacturing equipment, delivery vans for field sales representatives, and information system implementation costs, totaled $30.6 million during the first nine months of 2008, partially funded by proceeds from the sale of assets of $2.7 million. Capital expenditures are expected to continue at a level sufficient to support our strategic and operating needs. Capital expenditures for fiscal 2008 are projected to be between $37 million and $40 million and funded by net cash flow from operating activities, cash on hand and borrowing facilities.
Net cash used in investing activities during the first nine months of 2007 represented capital expenditures of $28.3 million and a purchase of a noncontrolling equity interest in an organic snack food company for $2.1 million Proceeds from the sale of fixed assets were $6.9 million. For the full year ended December 29, 2007, capital expenditures for purchases of fixed assets were $39.5 million.
Financing Cash Flows
During the first nine months of 2008, net cash from financing activities was impacted by $24.0 million of additional borrowings under our existing Credit Agreement for the acquisition of Brent & Sam’s. As part of the acquisition, we assumed and repaid $2.2 million of Brent & Sam’s debt. We also made net short-term borrowings of $8.1 million during the first nine months of 2008.
During the first nine months of 2008 and 2007, we paid dividends of $0.48 per share totaling $15.1 million and $14.9 million, respectively. In addition, we received cash and related tax benefits of $2.3 million and $4.6 million during the first nine months of 2008 and 2007, respectively, from stock option exercises. On October 30, 2008, the Board of Directors declared a quarterly cash dividend of $0.16 per share, payable on November 20, 2008 to stockholders of record on November 10, 2008.
Debt
Additional borrowings available under all existing credit facilities totaled $64.9 million as of September 27, 2008. We have complied with all financial covenants contained in the credit facilities. We also maintain standby letters of credit in connection with our self-insurance reserves for casualty claims. The total amount of these letters of credit was $17.7 million as of September 27, 2008.
Contractual Obligations
Purchase commitments for inventory increased from $58.9 million as of December 29, 2007, to approximately $97.2 million as of September 27, 2008 due to the increased cost of certain raw materials and the duration of purchase contracts.
Market Risks
The principal market risks that may adversely impact results of operations and financial position are changes in raw material prices, energy costs, interest and foreign exchange rates and credit risks. We selectively use derivative financial instruments to manage these risks. There are no market risk sensitive instruments held for trading purposes.

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LANCE, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
At times, we may enter into commodity futures and option contracts to manage fluctuations in prices of anticipated purchases of ingredients and fuel. Our policy is to use these commodity derivative financial instruments only to the extent necessary to manage these exposures. We do not use these financial instruments for trading purposes. As of September 27, 2008, there were no outstanding commodity futures or option contracts. For the first nine months of 2008, increases in ingredients costs reduced our gross margin by $48.4 million as compared to the first nine months of 2007. Energy costs, including gasoline, diesel, and natural gas increased $6.6 million for the first nine months of 2008 as compared to the same period last year. Through the use of forward purchase contracts, most of our ingredient costs have been determined for the remainder of 2008 and a portion of 2009.
Our variable-rate debt obligations incur interest at floating rates based on changes in the Eurodollar rate, Canadian Bankers’ Acceptance discount rate, Canadian prime rate and U.S. base rate interest. To manage exposure to changing interest rates, we selectively enter into interest rate swap agreements to maintain a desirable proportion of fixed to variable rate debt. In November 2006, we entered into an interest rate swap agreement on $35 million of debt in order to fix the interest rate at 5.5%, including applicable margin. The fair value of the interest rate swap liability as determined by a third-party financial institution was $1.4 million on September 27, 2008. In July 2008, we entered into an interest rate swap agreement on an additional $15 million of debt in order to fix the interest rate at 4.4%, including applicable margin. The fair value of the interest rate swap liability as determined by a third-party financial institution was $0.1 million on September 27, 2008. These swaps are accounted for as cash flow hedges. While these swaps fixed a portion of the interest rate at a predictable level, pre-tax interest expense would have been $0.2 million lower without these swaps during the first nine months of 2008.
We have exposure to credit risks related to our accounts receivable. We perform ongoing credit evaluations of our customers to minimize the potential exposure. For the first nine months of 2008 and 2007, net bad debt expense was $0.4 million and $0.1 million, respectively. Allowances for doubtful accounts were $0.8 million and $0.5 million at September 27, 2008 and December 29, 2007, respectively.
Through the operations of our Canadian subsidiary, there is an exposure to foreign exchange rate fluctuations, primarily between U.S. dollars and Canadian dollars. A majority of the revenue of our Canadian operations is denominated in U.S. dollars and a substantial portion of the operations’ costs, such as raw materials and direct labor, are denominated in Canadian dollars. We have entered into a series of forward contracts to mitigate a portion of this foreign exchange rate exposure. These contracts have maturities through December 2009. As of September 27, 2008, the fair value of the asset related to the forward contracts as determined by a third party financial institution was $0.4 million. During the first nine months of 2008, foreign exchange rate fluctuations negatively impacted the results of operations by $1.9 million compared to the first nine months of 2007.
Due to foreign currency fluctuations during the first nine months of 2008 and 2007, we recorded losses of $3.6 million and gains of $10.3 million, respectively, in other comprehensive income because of the translation of the subsidiary’s financial statements into U.S. dollars.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The principal market risks to which we are exposed that may adversely impact results of operations and financial position include changes in raw material prices, energy costs, interest and foreign exchange rates and credit risks. Quantitative and qualitative disclosures about these market risks are included under “Market Risks” in Item 2 above, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Item 4. Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) of the Securities and Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective for the purpose of providing reasonable assurance that the information required to be disclosed in the reports we file or submit under the Exchange Act (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

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LANCE, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
There have been no changes in our internal control over financial reporting during the quarter ended September 27, 2008 that have materially affected, or that are reasonably likely to materially affect, our internal controls over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Lance, Inc. was one of several companies sued in August 2005 in the Superior Court for the State of California for the County of Los Angeles by the Attorney General of the State of California for alleged violations of California Proposition 65. California Proposition 65 is a state law that, in part, requires companies to warn California residents if a product contains chemicals listed within the statute. All of the parties, including Lance, Inc., have reached agreements with the Attorney General of California on terms of settlement. Our agreement was approved by the court in August 2008 and did not have a material adverse effect upon our consolidated financial statements taken as a whole.
In addition, we are subject to routine litigation and claims incidental to our business. In our opinion, such routine litigation and claims should not have a material adverse effect upon our consolidated financial statements taken as a whole.
Item 1A. Risk Factors
Except for the risk factors set forth below, there have been no material changes to the factors disclosed in Item 1A — Risk Factors in our Annual Report on Form 10-K for the year ended December 29, 2007.
Current economic conditions could adversely impact our business and results of operations.
The recent instability in the financial markets and the overall U.S. economy may impact our ability or cost to incur additional debt in the future and may weaken the ability of our customers, suppliers and other business partners to perform under contractual obligations or in the normal course of business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Our Credit Agreement dated October 20, 2006, restricts our payment of cash dividends and repurchases of common stock if, after payment of any dividends or any repurchases of common stock, our consolidated stockholders’ equity would be less than $125.0 million. At September 27, 2008, our consolidated stockholders’ equity was $244.9 million.
Item 6. Exhibits
Exhibit Index
     
No.   Description
 
   
3.1
  Restated Articles of Incorporation of Lance, Inc. as amended through April 17, 1998, incorporated herein by reference to Exhibit 3 to the Registrant’s Quarterly Report on Form 10-Q for the twelve weeks ended June 13, 1998 (File No. 0-398).
 
   
3.2
  Articles of Amendment of Lance, Inc. dated July, 14 1998 designating rights, preferences and privileges of the Registrant’s Series A Junior Participating Preferred Stock, incorporated herein by reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 26, 1998 (File No. 0-398).
 
   
3.3
  Bylaws of Lance, Inc., as amended through November 1, 2007, incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on November 7, 2007 (File No. 0-398).
 
   
31.1
  Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a), filed herewith.
 
   
31.2
  Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a), filed herewith.
 
   
32
  Certification pursuant to Rule 13a-14(b), as required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
Items 3, 4 and 5 are not applicable and have been omitted.

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LANCE, INC. AND SUBSIDIARIES
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused the report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  LANCE, INC.
 
 
  By:   /s/ Rick D. Puckett   
    Rick D. Puckett   
    Executive Vice President, Chief Financial Officer, Treasurer and Secretary   
 
Dated: October 31, 2008

16

LANCE, INC. AND SUBSIDIARIES
EXHIBIT 31.1
MANAGEMENT CERTIFICATION
I, David V. Singer, certify that:
1.   I have reviewed this quarterly report on Form 10-Q of Lance, Inc.;
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.   The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
  a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.   The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
     
Date: October 31, 2008
   
 
   
 
   
/s/ David V. Singer     
 
David V. Singer
President and Chief Executive Officer
   

 

LANCE, INC. AND SUBSIDIARIES
EXHIBIT 31.2
MANAGEMENT CERTIFICATION
I, Rick D. Puckett, certify that:
1.   I have reviewed this quarterly report on Form 10-Q of Lance, Inc.;
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.   The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
  a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.   The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
     
Date: October 31, 2008
   
 
   
 
   
/s/ Rick D. Puckett     
 
Rick D. Puckett
Executive Vice President, Chief Financial Officer,
Treasurer and Secretary
   

 

LANCE, INC. AND SUBSIDIARIES
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Lance, Inc. (the “Company”) on Form 10-Q for the period ended September 27, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, David V. Singer, President and Chief Executive Officer of the Company, and Rick D. Puckett, Executive Vice President, Chief Financial Officer, Treasurer and Secretary of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
  (1)   The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
  (2)   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
A signed original of this written statement required by Section 906 has been provided to Lance, Inc. and will be retained by Lance, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
 
             
 
/s/ David V. Singer        /s/ Rick D. Puckett     
 
David V. Singer
President and Chief Executive Officer
October 31, 2008
     
 
Rick D. Puckett
Executive Vice President, Chief Financial Officer,
Treasurer and Secretary
October 31, 2008